International Debt and Economic Instability

The debt experience of the 1920s and 1930s was one of pervasive default. Half the outstanding Latin American debt was completely in default by 1949, and nearly half was serviced on an adjusted basis, having been written down as to principal and interest. Only a tiny 1.9 percent continued to be serviced on the tenns origmally contracted. By comparison, today's debt performance is dramatically successful. A great historical experiment is now underway in which involuntary debt service is being extracted at extraordinary costs to the debtors and to the trading interests of the creditor countries. The essential instruments are two: a return of government involvement in private debt collection that had gone out of fashion after nineteenth century gunboat diplomacy and the International Monetary Fund (IMF) as the administrator of the mugging. Even with this help, debt collection is not totally successful. The Baker plan turned out to be primarily a cover for commercial banks to reduce their share in debt rescheduling, leaving the bag to multilateral agencies with no net benefit to the debtors. Today lesser developed country (LDC) debts trade at deep discounts, suggesting that not all is well. The recommendations for action go in three directions. The Bradley-Lever approach is to recognize the problem, treat debts as a political issue, and strike a bargain that enhances growth and trade. Improved LDC growth performance would be a positive