The Multinational Monitor


I N T E R N A T I O N A L   F I N A N C E

The Victims of Austerity

by Samantha Sparks

The Third World's current foreign debt crisis officially entered its fifth year last month, and there is every indication that this anniversary will not be its last.

Since 1982, when Mexico announced it was unable to meet its debt obligations, the debt burden in the developing world has climbed to one trillion dollars. Yet remarkably little has been done to alter the funda mental economic conditions that brought it on.

In the wake of a world-wide recession, record drops in commodity prices and stiff protectionist barriers to trade, growing numbers of experts believe the Third World will never be able to fully repay its lenders.

Ironically, the picture now appears somewhat brighter for the commercial banks, as they con tinue to build shareholders' confidence by in creasing their reserves against debtor default. If Citicorp's stock performance is any indication, the commercial banks may end up making money by tacitly admitting the truly bleak nature of the debt crisis.

Meanwhile, throughout the developing world, living conditions continue to deteriorate. A forthcoming study by the United Nations Children's Fund (UNICEF) offers an extensive look at the ways in which children - the most vulnerable members of society - have been affected by the Third World debt crisis.

The UNICEF report summarizes the human situation that will confront the world's finance ministers and commercial bankers when they gather in Washington, D.C. at the end of September for their semi-annual parley at the World Bank and International Monetary Fund (IMF).

"Adjustment is necessary" in order for developing countries to regain their footing after the negative economic shocks of the late 1970s and early 1980s, UNICEF observes.

As such, the children's agency says conditions in the Third World might be worse today if governments hadn't undertaken measures to bring expenditures into line with declining incomes.

However, only a radical reorientation of government priorities during the adjustment process will prevent irreversible setbacks in the well-being of future Third World generations, UNICEF warns.

Debt demands on many countries have already caused "permanent mental and physical damage" to children by channeling scarce government resources away from health and education programs, the report concludes.

UNICEF notes that two-thirds of the developing countries experienced "negative or negligible" growth between 1980 and 1985 - a situation at least in part attributable to their highlevels of foreign debt.

Malnutrition, disease, and poverty are on the rise, while programs in education and health and public services are down, according to the international children's advocacy group.

In a major, two-volume report entitled "Adjustment with a Human Face: Protecting the Vulnerable and Promoting Growth," UNICEF found that economic stabilization programs frequently worsen human living conditions in a country at the same time as they improve its external balance-of-payments account.

The UNICEF report, due to be released September 10 in London, was made available in draft form to the Monitor.

In addition to looking at the overall effects of adjustment on the developing world, the U.N. agency presents ten country case studies throughout Latin America, Sub-Saharan Africa and Asia.

The countries studied include Brazil, Chile, Jamaica and Peru in the Western Hemisphere; Botswana, Zimbabwe and Ghana in Africa; and the Philippines, South Korea and Sri Lanka in Asia.

UNICEF's scorecard for these countries - which represent a wide geographic, political, and economic range - is not promising.

Only two countries - South Korea and Zimbabwe - were able to prevent an increase in child malnutrition during their adjustment process, largely because these governments implemented specific, focused welfare programs, UNICEF said.

Botswana was the only country out of seven for which data were available that was able to increase the availability/intake of food during the early 1980s. (Data were missing for Zimbabwe, Jamaica and Chile on this score.)

Only South Korea experienced a decline in the number of people living below the poverty line. More people became poor in the five other countries for which data was available: Ghana, the Philippines, Chile, Jamaica and Peru.

Reflecting these trends, government spending on social needs declined in six of the 10 countries studied - Brazil, Chile, Peru, the Philippines, Ghana and Jamaica, UNICEF found.

Education was available to fewer people in all but the two countries - Zimbabwe and South Korea-that had special programs in place to protect their children during adjustment.

And the previous decade's steady decline in infant mortality rates slowed appreciably in all countries, and was actually reversed in Ghana and Brazil.

Overall, adjustment took its worst toll on Africa, then Latin America, according to UNICEF. On the other hand, Asian countries by and large were able to buffer the impact of economic adjustment through carefully focused programs.

"Three-quarters of Latin America and Africa experienced declining per capita incomes between 1980 and 1985," even though 70 countries in these regions had some sort of stabilization program in effect, according to UNICEF.

Most of these programs had the effect of "systematically reducing the incomes of the poor," the United Nations group states.

UNICEF cites critical statistics, showing that from a total of 138 developing countries with IMF-sponsored adjustment programs in place between 1980 and 1983, only 58 (or 42 percent) showed an improvement in real investment levels - one measure of domestic growth. And 80 of these countries experienced "negative or insignificant" results from the IMF programs.

The IMF has done a somewhat better job of improving the current account balances of its borrowers: 85 out of 152 countries showed improvement on this score between 1980 and 1984.

The conclusion of these and other statistics is that adjustment programs to date "tend to increase aggregate poverty," according to UNICEF.

This need not be so, the agency states. UNICEF makes clear that even the most hard-pressed government could afford to care for its children if it chose to make this a priority.

"Protection of the vulnerable and the promotion of growth is urgently needed and is a viable and efficient strategy," UNICEF contends.

Moreover, "most, if not all, programs aimed at protecting the poor during the adjustment process are relatively inexpensive in terms of total government expenditure."

Unless governments make the necessary changes in their economic policies, "the health and welfare of the whole future generation of a country" is at stake, with bleak implications for its future productive capacity, according to UNICEF.

UNICEF says Third World governments should reevaluate hefty defense expenditures - a sector of the economy found to be the mostprotected during periods of budget cuts. (Public service, education, and health programs have typically been the first to go.)

UNICEF lauds progress made during the early part of the decade in vaccination and rehydration programs, which have helped reduce the incidence and mortality rates of diseases such as measles and polio. Nevertheless, "the evidence of the rising malnutrition and other indicators of human deterioration show that there is still far to go."

Other recommendations include making policy changes more gradual by length ening the period of adjustment support. This change is already taking place at the IMF and the World Bank, both of which have formally recognized the need for longer-term economic policy support. Still, "there is a more urgent need to include the well-being of vulnerable groups into the objective of adjustment policies," UNICEF states.

One way to do this, the agency suggests, is to make "monitoring of the human dimension" as much a priority of policing agencies like the IMF as its traditional focus on monetary variables. If social indices received as much prominence as a country's external payments position, adjustment might indeed take on a more human face.

On the international front, further measures of support should include better "buffer mechanisms" for developing countries trying to pull themselves out of the red. This could be accomplished through an expansion of the IMF's present "compensatory financing facility" (a short-term account available to countries that lose substantial foreign exchange earnings because of a sharp drop in world market prices for exports), as well as "automatic debt relief" in some cases, according to UNICEF.

The bottom line, however, remains that the governments themselves need to set human conditions as a priority in their efforts to adjust. "Political leadership and community participation are the requirements for success in overcoming the unavoidable opposition such policies will encounter," UNICEF states.

The world's finance ministers would do well to keep this challenge in mind when they converge on Washington at the end of this month.

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