International debt and the developing countries / edited by Gordon W. Smith and John T. Cuddington

During the decade ending in 1983, developing countries' outstanding international debt increased fivefold to $810 billion. In some ways this massive flow of capital represents a remarkable success, unimaginable only twenty years ago. Equally unexpected was the prime role played by commercial banks in the whole process. The World Debt Tables (World Bank 1984) indicate that fully two-thirds of net flows from all private and official sources were intermediated by the international banking system.

Events of the last three years, however, have raised serious questions about the mechanisms that evolved in the 1970s for transferring resources. More than eighty reschedulings in the 1975-83 period, numerous arrears, moratoriums, and a rising number of nonperforming loans demonstrate the inability of many countries to service their debts according to the terms originally contracted. Restoring creditworthiness following repayment difficulties has usually implied a period of rather severe economic austerity in the borrowing country. In some cases, the political and social costs, as well as the economic costs, of such austerity measures have been high.

In the wake of the recent crises, the prospects are dim for the immediate resumption of net resource transfers from rich to poor countries through traditional means. Indeed, for some countries negative resource flows over the next few years are a distinct possibility. A severe reduction in net capital inflows, let alone the imposition of a net capital outflow over an extended period, could have profound consequences for the economic development prospects of debtor countries.