The New Mercantilists
ONE YEAR BEFORE MEXICO touched off the Third World’s debt crisis by suspending payments to foreign creditors, British Prime Minister Margaret Thatcher rose proudly to announce in the House of Commons that her government had just committed millions to the Mexican government to build the $2 billion Sicartsa steel plant:
We were delighted to get [the Sicartsa contract, which] will contribute about 28,000 man years of work. It will help a great deal with Davy’s … main manufacturing centre in Sheffield. It will also mean the provision of about 80,000 tonnes of British Steel Corporation steel … and a good deal of electrical work through GEC…. It is a very welcome contract and was won in the teeth of French, German and Japanese competition. We won it on price.
Mrs. Thatcher’s “win” came at the expense of the taxpayer. British exporters won the $596 million contract courtesy of $500 million in loan guarantees and an outright $57 million grant from the British government. “It was a gift that Mexico had neither to service nor to repay,” said Harvard Professor Philip Wellons in describing Sicartsa. The deal — more favorable than those offered Mexico by the French and the Japanese — could hardly be refused.
The only competition evident in the Sicartsa bidding war was between the Japanese, French and British governments to see who would dig deepest into its treasury to subsidize its exporters. In the end, Mrs. Thatcher dug deepest. Adam Smith may have turned in his grave.
Adam Smith, the father of economic liberalism, had two centuries earlier attacked the era’s dominant economic theory — mercantilism — which held that a country would get rich by subsidizing exports, restricting imports, and hence amassing gold, which was a currency of the day. Mercantilism operated through a web of decrees, tariffs, regulations, and royal patronage plums to shipyards and porcelain factories, tapestry works and arsenals; industrial growth under the mercantilists depended upon a politically administered national economic policy. Adam Smith’s landmark treatise, An Inquiry into the Wealth of Nations, flayed mercantilism for favoring a few industrialists at the expense of the working class and the economy as a whole.
Though utterly discredited in theory, mercantilism has never been stamped out. Today government agencies — called export credit agencies — promote mercantilism. Britain’s is called the Export Credits Guarantee Department, the U.S. has its Export-Import Bank, Canada has the Export Development Corporation, France the Banque de France and Coface, and Japan the Export-Import Bank of Japan. All industrialized countries have them.
The export credit agencies subsidize exports by using public funds to finance, insure, and otherwise guarantee payment to their country’s exporters — even when the purchaser is all but bankrupt. They have been so successful at promoting the Third World’s purchases of the industrialized countries’ exports that 15 per cent of the Third World’s outstanding debt is now owed to these agencies.
For decades, private commercial banks have serviced their exporting clients, and imposed on them the cold discipline of the private sector. But once the export credit agencies started guaranteeing commercial trade, prudent lending by the private sector gave way to a free-for-all.
The Pearson Commission, struck by the World Bank in the late 1960s to investigate Third World poverty, first noticed the problem. The private banks were becoming “less concerned about the borrowing country’s credit worthiness because of the facility of export credit insurance,” the Pearson Commission warned, explaining that imprudent use of export credits “involves very real dangers.” It found export credits to be an expensive form of external finance. Though the interest rates offered the borrower were favorable, the exported product would usually be marked up, by as much as 100 per cent.
To its horror, the Pearson Commission also discovered that export credits often financed projects whose only “feasibility study available is one prepared by the equipment supplier,” and that borrowing countries pushing reckless development schemes often favored export credit agencies because they enforced less “rigorous tests of economic desirability.”
More than one project rejected for financing by the World Bank Group on economic grounds has been promptly financed by an export credit. This is the most unfortunate aspect of export credit finance: it provides a temporarily painless way of financing projects conceived by over-optimistic civil servants, by politicians more concerned with immediate political advantage than with potential future economic problems, and by unscrupulous salesman for the manufacturers of capital equipment in developed countries.
All this, according to the Pearson Commission, created an excessive use of short-term export credits to finance long-term investments and a serious balance of payments problem for developing countries: “Since the mid-1950s, [this] has been a major reason for the need to reschedule the debts of a number of countries, notably Argentina, Brazil, Chile, Ghana, Indonesia, and Turkey.”
“This rescheduling will be more difficult in the future if export credits are imprudently used,” predicted the Pearson Commission in 1969.
Imprudently used they were: export credit programs continued at full throttle throughout the 1970s. With the debt crisis of the 1980s frightening away commercial banks, export credits became an even more important source of external financing to the Third World and to Western exporters. While commercial banks abandoned the field after the Mexican debt crisis of 1982, the export credit agencies did not. Today, according to estimates by the National Foreign Trade Council, an American export industry association, one-third of the $30 billion a year in capital goods traded worldwide is financed through tied aid and export financing packages.
That support was not necessarily conditioned upon economic viability. British law, for example, permitted the Export Credits Guarantee Department to provide financial support for vote-getting and other political purposes; and its Aid and Trade Program permitted increasingly reckless governments to support exports to what one British trade official called “dodgy markets.” The Thatcher government even silenced an internal Treasury report arguing against export subsidies. A French study reached similar conclusions: “Export-credit subsidization wastes France’s scarce public resources in promotion of the wrong industries exporting the wrong products to the wrong markets.” As an industrial subsidy, export credits are unparalleled failures, creating coddled and uncompetitive enterprises that depend for their survival on continuing state subsidies.
Though harmful to the economy as a whole, export credits are boons to favored businesses. About two-thirds of Boeing Aircraft’s commercial jet sales abroad, mostly to the Third World, were guaranteed under the U.S. Export-Import Bank’s financing programs. In the business, the Ex-Im Bank became known as “Boeing’s Bank.” Boeing Chairman T.A. Wilson claimed these programs essential when testifying before the U.S. Congress in 1981: “Without the involvement of Ex-Im, commercial banks will not participate in loans to emerging nations.”
The export credit agencies’ analysis of the environmental viability of their projects showed even less concern than their economic analysis. Little wonder, then, that the environmental consequences of projects like Sicartsa were ignored. By 1980, raw sewage from the town and industrial effluents from the steel plant, which was using the nearby Balsas River as a sedimentation pit for its waste, had destroyed the river’s once rich estuary. Meanwhile toxic gases from the steel plant and dust particles blanketed the town of Lazaro Cardenas.
The U.S. Ex-Im Bank is the only agency to have anything that could remotely be considered an environmental review process. Yet even it doesn’t require that environmental factors be considered for all loans; projects found to be environmentally damaging need not be rejected; and the entire process can be modified in order to meet bid dates and “the pressures of competition.” Canada’s Export Development Corporation has never bothered to consider the environmental consequences of its loans. A former Minister for International Trade explained that “if EDC were required to apply environmental standards that other export credit agencies were not, or that the foreign buyer was unprepared to accept, the Canadian exporter would not be in a position to bid on a given transaction, and he would therefore lose the deal. Moreover, there would be no net benefit to the world environment. The same projects would still go ahead, but the successful bidders would be from countries other than Canada.”
Rather than scrutinizing their projects’ economic or environmental viability, the export credit agencies have instead concentrated on marketing their export promotion funds, designing a dazzling array of loan packages, credit lines, insurance programs, and loan guarantee schemes to make sure Third World purchasers have the necessary money to buy their countries’ goods and services.
For the markets that they consider “spoiled” — those already accustomed to receiving low-cost financing — the export credit agencies usually draw on more heavily subsidized funds to create what is known as “credit mixte” — a mix of greatly discounted financing with conventional export financing to produce what the Export Development Corporation calls “low blended interest rates.” The purpose, says EDC, is “to match … subsidized financing offered by competitors.” In Canada this greatly discounted financing is disbursed from a $13 billion fund known as the Canada Account when export contracts deemed to be in the “national interest” involve too much risk for even the Export Development Corporation.
Governments hand out export credits to create jobs in particular constituencies while patronizing their favorite firms. Mrs. Thatcher seized upon the opportunity to trumpet the jobs created by the Sicartsa deal in the British Parliament with great fanfare. The Canadian Export Development Corporation rarely announces a new deal without estimating the number of “person-years” of employment created.
But beyond these job-creation claims, just about no one will defend the use of export credits, even those in charge of them. Robert Richardson, president and chief executive officer of Canada’s Export Development Corporation, in an article in the Canadian Financial Post, agreed that concessionary financing is not economical. “If other countries didn’t do it, we wouldn’t either,” he said. “Our approach is merely to match others.”
U.S. Ex-Im Bank officials agree. Citing trade warfare reasons, the Bush administration in 1990 launched a $500-million program to combine subsidized export credits with aid money. “We think it’s a lousy and costly way to do business,” said Eugene Lawson, vice-chairman of the Export-Import Bank, who announced the initiative. The purpose, he went on to explain, was to “attract the attention of our allies.” The initiative was designed to serve notice to America’s competitors — principally Japan and France — that the U.S. would use subsidized export and aid credits to fight for foreign markets, until everyone gave up the costly practice. According to one commercial banking lawyer, “trade has become akin to modern warfare, an all-out national effort in which the taxpayer is as much in the fray as the forces in the field.”
Only now are taxpayers in the industrialized countries beginning to recognize the scope of casualties from years of lending subsidized money to “dodgy markets.”
In 1990, the U.S. Export-Import Bank admitted that $3.5 billion, or more than one-third of its loan portfolio, was “delinquent.” To cover possible losses on those delinquent Third World debts, Congress forced the Ex-Im Bank to establish a $4.8 billion reserve, knocking Ex-Im’s equity position to a negative $4 billion. “It has gone into technical insolvency,” said former National Security Council member and debt consultant Norman Bailey. “Not that anybody gives a damn.”
As long as the bank has the full faith and credit of the United States Treasury, something that shows no signs of changing, it will be able to continue lending. Ex-Im’s chairman, John Macomber, tried to put a happy face on the bad debts, insisting that the accounting change “is not a write-off…. We continue to expect that all loans and guarantees will be paid in full.” The Ex-Im Bank is most exposed in Mexico, where it has issued $2.2 billion of loans and loan guarantees; next comes Brazil with $1.9 billion in outstanding debts; the Philippines with $1.25 billion; and Colombia with $952 million.
The U.S. Ex-Im Bank was following the lead of Britain’s Export Credits Guarantee Department, whose Third World loan losses had earlier forced it to set aside reserves against delinquent debts. The Export Credits Guarantee Department, whose successful efforts in winning the Sicartsa deal brought such exultation from Mrs. Thatcher in 1981, fell from her favor and was almost dismantled entirely in 1990. An angry riposte from the House of Commons trade and industry committee — which had been deluged with submissions by bankers and industrialists defending the Export Credits Guarantee Department’s services to exporters — saved the day for the mercantilists.
Canada’s auditor general — Parliament’s watchdog over the government’s financial management — recommended that Canada’s Export Development Corporation follow the practice of the U.S. Export-Import Bank and Britain’s Export Credits Guarantee Department. In his 1989 annual report to Parliament, Auditor General Kenneth Dye called the Export Development Corporation’s financial statements “misleading,” explaining that “loans receivable are overvalued because the Corporation’s estimate of the allowance for losses on loans is significantly understated.” The Export Development Corporation’s financial statement therefore, concluded Mr. Dye, “does not conform to generally accepted accounting principles.” A year later, Mr. Dye was still warning the Canadian Parliament that the EDC’s major asset — sovereign loans receivable to the tune of nearly $5 billion — was “overvalued” and the EDC’s accounts in need of “prompt remedial action.” As for the Canada Account, Mr. Dye could not identify an arm of the Canadian government that was responsible for it, even though it was costing the Canadian taxpayer millions.
The export credit agencies have their own way of pretending that their bad loans aren’t bad after all. Where the international development institutions “roundtrip” money, the export credit agencies “reschedule” debts. Through what is known as the Paris Club, a rendezvous of lending and borrowing nations formed in Paris in 1954 after Argentina asked its official creditors to discuss relief, the French finance ministry hosts regular sessions to renegotiate Third World debts to official lenders, including the export credit agencies. Under rescheduling, if a debtor falls behind on interest, a creditor may convert the interest to principal. If a debtor falls behind on principal, the government may adjust repayment dates or provide a repayment holiday.
Eugene Rotberg, a former treasurer of the World Bank, considers loan rescheduling to be a “financial charade.”
If someone owes you money and you say “You don’t have to pay it for ten years,” then ten years go by, and you don’t collect, and another ten years — well you may not wish to call that forgiveness for bookkeeping or political purposes, but you’re not getting paid. “Forgiveness” is a legal term that says, “You owed me the money — you no longer owe it.” The Paris Club says, “You owe me the money, you haven’t paid me, and I agree that you don’t have to pay me, but you still owe it.” Now I’m not going to talk about how many angels can dance on the head of a pin, but that is de facto forgiveness.
“The problem,” explains Canadian Auditor General Dye, “is that rescheduling is used as a shield to hide from public scrutiny losses the government has suffered or is likely to suffer on its sovereign loans. Paperwork disguises reality.”
But the public is beginning to grow wiser to reality, thanks to auditors general like Mr. Dye who now insist that more of these rescheduled export promotion loans be written down as bad loans, unlikely to be repaid. As such, bad loans are now showing up in the national debts of countries. Taxpayers, realizing they must now pay for the ill-considered loans of their export credit agencies, are losing their ardor for export subsidies.
The combined activities of the export credit agencies, the World Bank, the regional development banks, and the IMF—all instrument of public policy—are responsible for creating 40 per cent of the Third World’s debt. Add to them the national aid agencies and the figure for governments amounts to more than half.
Sources and Further Commentary
The contribution of the export credit agencies to the Third World’s debt — 15% of the $1.3 trillion — is calculated using figures from the World Bank’s Debt and International Finance Division, The World Debt Tables 1990-91 published by the World Bank; Financing and External Debt of Developing Countries: 1989 Survey published by the Organisation for Economic Co-operation and Development, Paris, 1990; External Debt Statistics: The Debt and Other External Liabilities of Developing, CMEA and Certain Other Countries and Territories at End-December 1986 and End-December 1987, OECD, Paris, 1988; Statistics on External Indebtedness: Bank and trade-related non-bank external claims on individual borrowing countries and territories published by the OECD, Paris and the Bank for International Settlements, Basle, New series, no. 3, July 1989; personal communication with the Institute of International Finance, Washington, D.C. The figure includes amounts owed to the export credit agencies for their various lines of credit, loans, and insurance schemes as well as commercial bank loans guaranteed by the export credit agencies (and which are therefore not included as part of commercial bank exposure).
It is interesting to note that the Canadian Export Development Corporation refused to release any details about the status of its loan to Argentina for the purchase of a CANDU nuclear reactor, even though the president of EDC stated before a parliamentary committee that it was being rescheduled under the Paris Club. Similarly, the British government refused to release details of the financial status of its financing (both through the Overseas Development Administration and the Export Credits Guaranteed Department) for the Sicartsa steel plant. The U.S. Export-Import Bank released detailed financial data on the status of their loan to the Philippine government for the Bataan nuclear reactor. See September 14, 1990 letter from EDC to Probe International; April 15, 1991 facsimile from the British High Commission in Ottawa to Probe International and July 5, 1991 letter from ECGD to Probe International; August 10, 1990 letter from the Export-Import Bank of the United States to Probe International.
Margaret Thatcher’s quotation can be found in the Hansard for the British House of Commons, October 26, 1981, page 562, or in Passing the Buck: Banks, Governments, and Third World Debt by Philip A. Wellons, Harvard Business School Press, 1987, which offers superb analysis of the role of the export credit agencies in international trade wars in general, and of Britain’s Export Credits Guarantee Department in Sicartsa in particular.
The official title for the Pearson Commission report is Partners in Development: Report of the Commission on International Development, Lester B. Pearson, Chairman, Praeger Publishers, New York, 1969.
For details of the role that export credit agencies played in promoting exports throughout the 1970s and 1980s see “Recent International Borrowing by Developing Countries” in Finance & Development, Washington, D.C., March 1987; “Export Credits and the Debt Crisis” by Miranda Xafa in Finance & Development, Washington, D.C., March 1987. The quote comparing trade to modern warfare is from “For No One’s Benefit: Canada’s Use of Foreign Aid to Subsidize Exports” by Richard C. Owens, in University of Toronto Faculty of Law Review, vol. 46, no. 1, Winter 1988. This article also quotes the author of the French report which condemns export credits: P. Messerlin, “Export-Credit Mercantilism à la Française” (1986) 9 The World Economy. The estimate of the importance to export credit in the 1990s is from “U.S. hits at rivals in tying aid to exports” in The Globe and Mail, Toronto, May 17, 1990.
For details of the importance of export credit to Boeing’s foreign business see Debt Trap: Rethinking the Logic of Development by Richard W. Lombardi, Praeger, New York, 1985.
The environmental problems caused by the Sicartsa steel complex can be found in Las Truchas: ¿inversión para la desigualdad? by Ivan Restrepo, Margarita Nolasco, Maria Pilar Garcia, Daniel Hiernaux, Elsa Laurelli, published by Centro de Ecodesarrollo and Ediciones Océano, Mexico City, 1984. For details on the environmental review procedures (or lack of them) of the export credit agencies see correspondence from the Canadian Minister for International Trade, August 9, 1990 to The Honourable Charles Caccia, Member of Parliament, Canada. For the U.S. Export-Import Bank see May 17, 1990 letter from John W. Wisniewski to Probe International and Federal Register vol. 44, no. 170/ Thursday, August 30, 1979/ Rules and Regulations, Export-Import Bank of the United States 12 CFR, Part 408, National Environmental Policy Act Procedures; Federal Register Part III, Department of State, Unified procedures Applicable to Major Federal Actions Relating to Nuclear Activities Subject to Executive Order 12114, November 13, 1979.
For further information on Canada’s Export Development Corporation and the Canada Account see the corporation’s 1990 Annual Report, and prospectuses issued regularly; “Controversy comes with demands of job as top man at EDC” by Andrew Cohen in The Financial Post, Toronto, February 20, 1990; “EDC helps Canadian suppliers, consultants stake export claim” by Kara Kuryllowicz in Pulp and Paper Journal, February 1990. In both his 1989 and 1990 reports to the Canadian House of Commons, the Auditor General criticized the Export Development Corporation for inadequately recognizing their sovereign risk. By late 1990, the Canadian government had added some $8.4 billion to the national debt, thereby acknowledging that many of the EDC’s loans were unlikely to be repaid. No sooner had the government done this than the value of claims paid out by EDC to exporters for losses from buyers who couldn’t pay jumped. See “Exporters left holding the bag” by Peter Morton in The Financial Post, Toronto, April 20, 1991. For details of how adding to EDC’s provisions against loan losses increased the national debt see “Ottawa’s debt rises $8B at stroke of pen” in The Financial Post, Toronto, October 30, 1990, as well as EDC’s 1990 Annual Report.
Further information on the U.S. Ex-Im Bank’s financial woes can be found in “Loan-loss reserve at Export-Import Bank established” by Eduardo Lachica in The Wall Street Journal, January 5, 1990; “Bank loss reserve” in The Globe and Mail, Toronto, January 5, 1990; “Look Whose Turn It Is To Bite The Bullet” by Lenny Glynn in Global Finance, New York, March 1990. The aggressive bid to promote U.S. exports is described in “U.S. hits at rivals in tying aid to exports” in The Globe and Mail, Toronto, May 17, 1990.
The near demise of Britain’s Export Credits Guarantee Department is described in the following articles: “Call for break-up of ECGD” in The Times, U.K., June 6, 1989; “ECGD sale may raise £100m” by Colin Narbrough in The Times, U.K., November 9, 1989; “Report opposes ECGD sale” by Colin Narbrough, in The Times, U.K., December 19, 1989; “British export credit agency spared axe” by Paul Melly in The Globe and Mail, Toronto, January 3, 1990.
For a terrific explanation of rescheduling, the role of the Paris Club, the contribution of public bodies to the Third World’s debt crisis, and Eugene Rotberg’s quotation, see “Look Whose Turn It Is To Bite The Bullet” by Lenny Glynn in Global Finance, New York, March 1990.