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International Trade and Finance

Notes By 1978, the OPEC current account surpluses virtually disappeared as OPEC nations more closely
matched imports to exports. They quickly reappeared as a result of the effects of the Iranian revolution
on oil prices in 1979 and 1980. However, by 1982, they had dwindled once again.
The credit appetites of non-OPEC developing nations did not decline as the current account surpluses
of OPEC members fell in 1978 and again after 1980. As David P. Dod of the Federal Reserve Board’s
Division of International Finance pointed out (Federal Reserve Bulletin, September 1981) : “An increase
in public-sector and private borrowing combined has been necessary in view of economic policies in
developing countries that have contributed to higher, sustained deficits in the current account of
their balance of payments.” The underlying policies were extremely rapid money growth and huge
budget deficits continuing year after year. These policies produced inflation. With exchange rates
fixed or at least sticky, inflation reduced exports and increased imports, and thus acted to increase
current account deficits.
Non-OPEC developing countries had to borrow to finance their current account deficits or else abandon
the policies that were perpetuating the deficits. Not all of them perpetuated inflationary policies.
Some, especially in Asia, reduced money growth in the early 1980s. But some Latin American nations
pursued inflationary policies throughout the late 1970s and early 1980s. These countries had to borrow.
Banks in the United States and other developed free world countries were eager to lend to Eastern
bloc nations and LDCs in the late 1970s and early 1980s in part because they underestimated the
risks, but also because lending opportunities in their own markets were squeezed. Their own market
opportunities were squeezed because real wages increased unsustainably, especially in Western
Europe. European trade unions were able to raise nominal wage rates faster than prices were rising.
As a result, the demand for loans by businesses in Western Europe was dampened, and U.S. and
other multinational banks limited their lending activities in Western Europe and expanded them in
the United States and Eastern bloc nations and LDCs. And because the increased competition from
multinational banks in U.S. markets left many primarily domestically oriented U.S. banks with fewer
loan customers in the United States, many of these banks were impelled to begin or to step up their
lending to Eastern bloc nations and LDCs.

The ratio of wages to Gross Domestic Product in most major Western European countries
increased substantially in the late 1970s.

The Organization for Economic Cooperation and Development (OECD), in its External Debt of
Developing Countries 1982 Survey [hereafter, 1982 Survey], estimates that bank medium- and long-term
loans to non-OPEC developing countries increased from $69 billion at year-end 1977 to $182 billion
at year-end 1982, an increase of $113 billion. Other private lending to borrowers in these countries
increased from $20 billion to $46 billion. These loans do not include credits to finance exports to these
countries, which jumped from $45 billion to $105 billion during the same period.
Export credits aside, the new private credits to non-OPEC developing country borrowers were used
to finance private business investments and government construction and development plans,
including delivery of extended and upgraded education services. However, some of the new credits
were used to finance increased consumption. Not all of the investments that were made with the new
loans were sound, nor were all of the construction and development plans sensible. Further, parts of
some loans were dissipated in corruption. By the second half of 1982, it was clear that there were
problems.
Referring to the massive debt structure built up in recent years, Wall Street financial analyst Henry
Kaufman said (Washington Post, 19 September 1982) : “It has financed . . . not a large amount of
economic efficiency, but for a long while a large amount of inflation. But now we have it, it is there,
it has a maturity schedule and it has an interest payment.” A comprehensive analysis of what went
wrong would not help us to clarify whether the United States should help debtor nations to cope,
and, if so, how; nor would it provide guidance to the public and to policy makers, who must resolve

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