These countries have limited options, and none of them is satisfactory. The obvious option, further borrowing, is not at all attractive to the debtors themselves. Additional loans, even if they could be obtained, would quickly make the debt problem worse. At prevailing borrowing rates, it takes a trade surplus with western countries of at least 10 percent of the value of a loan just to pay the interest on it, and a much larger fraction if the loan is to be amortized. To create such a surplus, the authorities must suppress domestic consumption or slash public services. In countries where democratic forces can make political repression extremely problematic, this suppression of demand is not likely to be feasible. Even such oppressive regimes as South Korea and Chile are not finding it hard to repress their populations in the name of capital accumulation. Economists in both Hungary and Yugoslavia have urged that their countries avoid the burden of higher interest and amortization payments by pursuing a second option, the promotion of direct foreign investment, including the sale of domestic enterprises to foreign investors and the establishment of joint ventures between foreign firms and state firms (in Hungary) or cooperatively-owned firms (in Yugoslavia). Success in attracting foreign investment has been very limited so far. This is probably fortunate, since this alternative only promises "long-term pain for short-term gain." Foreign firms invest in a host country for three main reasons: to take advantage of low-wage labor to produce labor-intensive manufactures for re-export, to get access to or control over raw material supplies, or to capture a share of the host-country market. But neither Hungary or Yugoslavia has industrial regions with much unemployed labor, and neither is particularly well endowed with natural resources. And foreign investment to exploit domestic markets is perhaps the least attractive option. Such firms are likely to spend much of their initial investment on capital goods from the home country and to repatriate their substantial earnings and depreciation allowances. Many of their managers and technical personnel will come from the home country, so few good jobs are created. And judging from the Canadian experience, they will import an unusually large proportion of their material inputs. Thus the second option, to attract foreign investment, does little to alleviate the balance-of-payments problem that is as the root of the current crisis. A third option was pursued in Romania: squeeze the living standards of the workers to the point where the import of consumption goods is drastically reduced, expropriate the domestic surplus and use it to pay off foreign debts. The human welfare cost, however, is enormous and would not be politically acceptable in the liberalized Hungary or Yugoslavia of today. The ideal situation would be for the western industrial powers to cancel at least a considerable portion of the accumulated debts. Not surprisingly, their banks are reluctant to do this, though in fact they have done so as much by unloading large amounts of it on a rapidly-depreciating secondary market. (Yugoslavia's debt in September was being sold for 55 cents on the dollar.) An obvious solution, of course, would be to repudiate the debt, but this would conflict with the aim of both Hungary and Yugoslavia (and Poland, for that matter) to increase their economic integration with the west. As long as the Soviet economy wallows in the doldrums, these countries have few good alternatives to repudiation. Yugoslavia has made some small headway recently in reducing its debt exposure. Some enterprises have reportedly taken low-quality goods from the Soviet Union in exchange for Soviet trade debts, sold them at discount in western markets, and used the proceeds to repurchase Yugoslav debt on the secondary market at 45 percent discount. According to a Globe and Mail report (18 September 1989) this and other forms of direct buyback have reduced Yugoslavia's western bank debts by close to a billion dollars. However, this is a relatively small dent in the problem. The real danger is that Yugoslavia, Hungary, and Poland will attribute their debt-induced problems to their political and economic institutions. If they do, and alter the latter without solving the former, they risk trading their relatively egalitarian societies and comprehensive welfare systems for the stagnation, inequality, and appalling poverty of so much of Latin America. (These are the final paragraphs of Paul Phillips' February 1990 Monthly Review article "The Debt Crisis and Change in Eastern Europe." I went to the Columbia library at lunch and typed them in. As I don't have a scanner, this labor-intensive job is meant as an olive branch. I also want to plead guilty of staging an elaborate hoax. I've been spending much too much time with Alan Sokal. There is no such person as "Bruno Hladjz, the Inspector General of the Croatian navy". There is, however, a Second Avenue Deli in NYC, and a very good one it is at that.) Louis Proyect
