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Life After Debt
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17181 |
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Section : |
MODERN THOUGHT
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12 / 1990 |
2,643 Words |
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Norman A. Bailey
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The twofold purpose of this essay is to briefly review the evolution of what is commonly referred to as the debt crisis and to offer a projection of the future of relations between creditors and debtors and to determine relevant policy implications.
The debt crisis is a catchall term for a course of events that can be conveniently divided into four phases. It is often unrecognized that the first phase took place before this phenomenon came to the world's attention in August of 1982. During the 1970s the collapse of the international monetary system and two oil-price shocks (1973 and 1978/79) released a flood of rootless financial liquidity. The force of this inundation made its impact by 1980 and crested in 1981 and 1982. Combined with the Federal Reserve - induced recession of 1980 - 82, this process left in its wake a steadily widening circle of debtors and creditors in a badly overextended position-starting in Eastern Europe and quickly spreading to Latin America and elsewhere. Poland was actually the first country in which it became manifest during the spring of 1981.
Most economic observers and governments failed to appreciate the dimensions of the problem or its policy implications. In particular, the U.S. government adopted an attitude that was characterized by the following elements:
· An unwillingness to believe that bankruptcy would spread beyond Poland - and later, that it would spread beyond the progressively affected countries of Eastern Europe.
· A resultant refusal to engage in contingency planning of any kind.
· A preoccupation with domestic events and policies, especially the domestic economic and financial effects of the Federal Reserve's disinflationary program.
· Extreme hostility toward international financial institutions and their funding requests, especially with respect to the IMF.
· A refusal to recognize or consider the possibility that anything was wrong with the international monetary system.
· An inclination to politicize the crisis, facilitated by the fact that it was at first centered in communist Poland - which, at the time, was experiencing social and political upheaval and was later placed under martial law.
During the first half of 1982, debate within the U.S. government was entirely centered on the strategic and political implications of the Soviet bloc predicament. There was little concern and no institutional mechanism for dealing with the unfolding debt crisis despite increasingly insistent warnings, especially from the CIA, that it was spreading. The lack of an institutionalized process for discussing and deciding on international economic policy became so obvious that consideration eventually began of how such a coordination process could best be structured, leading to the formation of an appropriate interagency group.
Meanwhile, the preexisting International Monetary Group (IMG), which customarily discussed U.S. policy toward international financial institutions, received a proposal from the Federal
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