Special report on debt crisis; global economic growth hampered by debt burden, but new initiatives offer some hope.

Global economic growth hampered by debt burden., but new initiatives offer some hope

Massive external debt-presently estimated at 1.3 trillion-remains at the heart of the continuing economic woes suffered by some 70 UN Member States. The General Assembly lamented this seven-year crisis of developing countries, noting the "serious social consequences" and "unsatisfactory rates of growth of output and development" that accompany the debt burden.

A 14-paragraph resolution (44/205), adopted on 22 December by 139 votes to I (United States), emphasized the need for a durable solution to the debt problems" in developing countries. The Second Committee (Economic and Financial) debated the debt crisis over a four-day period.

The Assembly stated it welcomed recent debt reduction initiatives. It also called for a "more open international trading system", enhanced diversification of developing countries' exports, increased external resources and lower interest rates in developed countries.

In developing countries, a rise in savings and investment, reduction of inflation, and improved efficiency were urged. Industrialized countries should have "coherent and coordinated policies", aimed at addressing the "imbalances in the world economy", the Assembly emphasized. A proposal for a UN debt advisory commission was deferred for consideration at the forty-fifth session. The debt crisis stands at the centre of stagnant growth in Africa and deteriorating growth in Latin America, Secretary-General Javier Perez de Cuellar reported (A/44/628) on 16 October. He cited the unprecedented rise in negative net resource transfers from developing countries to $33 billion in 1988, up from $26 billion in 1987. Banks must now "recognize their losses", he continued, while troubled debtor countries need reform and adjustment. Political stability threatened Debt-ridden nations may also experience a threat to their "social and political stability", the Assembly warned in its omnibus text on debt. Addressing the Assembly's Third Committee (Social, Humanitarian and Cultural) on 9 October, Antoine Blanca, Director-General for Development and International Economic Co-operation, said that in the present period, it had not always been possible to distinguish between social damages from the prolonged economic decline" of developing countries and "the social costs of adjustment programmes" that were implemented because of balance-of-payments difficulties. Adjustment measures, such as currency devaluation, price decontrols and elimination of public subsidies, have "brought unbearable social costs", he explained, adding that "the resulting social tension mounted to the point of explosion" in several cases.

Some progress seen

Debt is a severe problem for subSaharan African nations, as well as for 17 highly indebted, middle income countries. The more than 400 million people of Latin America are particularly affected as two thirds of total external debt is owed by their countries.

The Assembly cited recent initiatives aimed at reducing the amount of debt and debt servicing owed by developing countries, as well as debt relief measures, as a "conceptual advance and important contribution to the efforts aimed at dealing with the debt crisis".

Mr. Blanca called for action at both national and international levels to stimulate investment and growth. He said that "a just and lasting solution" to the debt problem could no longer be deferred. Proposals by the United States, France and Japan formed a sound basis" for reaching a political consensus" on the debt issue, he said.

In March 1989, United States Treasury Secretary Nicholas Brady proposed a new way to deal with what has been called the "debt overhang" of developing countries. A key feature is the reduction of external debt and debt service in countries undertaking sound economic reforms. The "Brady initiative", widely supported in both industrial and developing countries, urges international financial institutions and other official creditors to provide financial support for debt and debt-service reduction operations.

Both the World Bank and the International Monetary Fund (IMF) have adopted policies and operational guidelines to support this initiative. Several countries have negotiated debt and debt-service reduction with their commercial bank creditors, although agreements have not yet been finalized. Simplified schemes stressed Mr. Perez de Cuellar called for accelerated and simplified debt-reduction schemes, as well as more speed and flexibility in implementing the current debt strategy. Debt-reduction efforts also need a greater level of financing, he told the Second Committee on 1 November. Low-income countries are particularly in need of write-offs and interest rate reductions, he added. The Assembly emphasized that several measures are required if debt reduction is to reactivate economic growth and sustained development in the developing countries. There must be negotiation of financial packages to support growth-oriented adjustment programmes and a review by creditor Governments of tax, regulatory and accounting practices to create a supportive policy environment".

Also, the debt rescheduling process must be enhanced so that it takes into account development-oriented policies and programmes. Multilateral financial institutions must have adequate resources and there must be assistance to debtor developing countries faced with "large and bunched debts" to these institutions. Innovative debt-reduction approaches using secondary market discounts must be continued. All parties should work "towards a growth-oriented solution of the problems of external indebtedness of developing countries". UN

Debt representative named

On 8 December, former Prime Minister of Italy Bettino Craxi was named as the Secretary-General's Personal Representative on debt. Mr. Craxi is to meet during the year with Government leaders of both creditor and debtor countries, as well as heads of financial institutions and banks, to explore ways to promote a lessening of the debt burden.