America Abroad

By Strobe Talbott

Around the world the U.S. is confronted by the plight of poor but friendly countries that have borrowed heavily and spent unwisely. A traditional American approach has been to make new loans so that the debtors can repay old ones. Debt forgiveness, by any name, has always been anathema, since most of the borrowed money comes from private banks whose directors and shareholders are not in the forgiveness business.

The Bush Administration has worked out a formula to help ease the burden on some borrowers while maintaining the confidence, and therefore the cooperation, of lenders. Announced by Treasury Secretary Nicholas Brady in March and endorsed by the World Bank and the International Monetary Fund, as well as at the economic summit in Paris last week, the plan calls for "reducing" -- in fact, forgiving -- some principal and interest, thus freeing borrowers' resources for growth. The banks end up holding IOUs that have a lower face value but a higher chance of being repaid. The increased prospect of the debtor nations' economic and political stability becomes reassuring collateral.

Senator Bill Bradley is a Democrat who has been hammering away at the importance of the Third World debt issue for years. He praises the Bush Administration for realizing that "the answer to the problem of too much debt is not more debt but less." That may sound like mere common sense, but Republicans must overcome a distrust of giveaways and interference in the private sector. "It is an ideological breakthrough," says former Assistant Secretary of State Robert Hormats.

The first test case for the Brady plan is appropriately Mexico, whose economic distress is fully matched both by its strategic significance to the U.S. and by the avowed commitment of its leadership to reform. Mexico has drastically cut spending and started selling inefficient state enterprises. Still, the economy is stagnant. No wonder. The equivalent of about $13 billion a year that might otherwise go to internal investment or the purchase of imports is being siphoned off to service Mexico's nearly $100 billion debt. Under quiet prodding from Washington, the Mexican government and a consortium of international banks have been negotiating an agreement to ease the terms of repayment. Next in line for debt relief are three other democracies whose future growth could be in jeopardy: Venezuela, the Philippines and Costa Rica.

Welcome as the Brady plan is, it may end up being foiled for the most ironic of reasons: the U.S.'s mismanagement of its own economy. Under the arch- Republican Ronald Reagan, the U.S. spent so much more than it collected in revenues that it became the world's No. 1 debtor. Says C. Fred Bergsten, the director of the Institute for International Economics in Washington: "The richest country in the world is competing with the poorest for the pool of available capital. American indebtedness tends to drive up U.S. interest rates, which in turn drives up the cost of loans to other nations, which threatens to wipe out the benefits that Nick Brady has made possible." Meanwhile, the U.S. trade deficit is provoking protectionism, which would make it harder for developing countries to work off their debts by exporting their products to a key market. If the U.S. is really going to help, debt reduction must begin at home. Otherwise, the promise of the Brady plan -- along with much of the rest of America's influence abroad -- will be squandered. That, truly, would be unforgivable.