Journal Issue


International Monetary Fund. External Relations Dept.
Published Date:
December 1988
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US external debt

Jahangir Amuzegar’s article on the United States’ external debt (Finance & Development, June 1988) was highly instructive and prompts me to make the following comments:

The external debt of a market economy country lacking foreign exchange controls must be considered in gross terms, as assets and claims are owned by nationals and foreigners, privately and independently, except for government-held assets. Therefore, debts cannot be economically offset by assets. Hence, the gross external debt of the United States should be compared to the net external debts of such countries with foreign exchange controls as Brazil and Mexico. On that basis, the United States’ external debt constitutes a world record—over 30 percent of the GNP—and is cause for well-grounded concern.

The United States could default if holders (including the States) demanded gold or convertible currencies for their holdings, as was the case in Switzerland and France in the 1960s.

Moreover, if those holders turned their financial assets in the United States into real assets, there would be an obvious surplus of liquid assets, which could unleash all kinds of powerful chain reactions and reduce the assets of American residents.

The author would have been right to affirm unconditionally that “world trade and payments no longer denominated in dollars” are increasing and, consequently, American companies and, particularly, American banks, have been registering increasing losses for two decades.

Finally, the author highlights the fact that “politically, as the foreign debt grows, vested interests and injured economic groups could exert pressure” in order to defend their interests. In that regard, I would mention such public entities as the European Monetary System and the Bank of Japan, which are substantial creditors of the United States.

Nicolas Bardos-Feltoronyi

Brussels, Belgium

Jahangir Amuzegar replies:

The suggestion that market and nonmarket economies should follow different procedures for the calculation of their foreign debt is somewhat puzzling and scantily convincing for several reasons. First, conceptually, economically, and statistically a debt is a liability, and should always be offset against assets to show net worth. This accounting practice has nothing to do with economic ideology or particular exchange regimes. Second, even at the miscalculated “30 percent of GNP” the US foreign debt would not be a “world record” by a long shot. Third, the assertion that United States’ creditors could demand gold or “convertible currency” for their asset settlement is without foundation. Present US dollar obligations are not gold backed. And, finally, even if, as the writer hypothesizes, foreign holders of US assets were to turn their financial holdings into “real assets” (real estate ?), how and in what way could they “reduce the assets of American residents?”

Reasons for capital flight

The article by Moshin S. Khan and Nadeem Ul Haque on ‘Capital Flight from Developing Countries,’ (Finance & Development, March 1987), is highly informative. The authors have cited many reasons for capital flight; however, they have overlooked a few.

First, developing countries have a limited capacity to absorb capital. This was observed during the oil boom of the 1970s in countries such as Gabon, which had an enormous amount of petrodollars. Although this phenomenon has disappeared today, the capacity to absorb capital is still limited resulting from an uneven distribution of resources among the various sectors of the national economies. Available capital or resources are underutilized in some sectors, and if this capital is not squandered, it will be exported.

Second, political and social conditions also produce capital flight, and this is implicit in assessments of risks and in foreign incentives. Capital flight from the developing countries is also linked to the search for sanctuary by refugees and exiles.

Djeumo Jonas Emmanuel

Yaoundé, Cameroon

Mohsin Khan and Nadeem Ul Haque respond:

It is certainly true that the limited capacity to absorb large-scale foreign exchange inflows may cause capital to be exported in some countries, particularly the oil-exporting countries. However, the countries where capital flight has been a significant problem are mainly debtors, importing more capital than is flowing out. Capital flight is, therefore, not necessarily related to the country’s inability to absorb capital, but rather is a function of the whole host of factors, including political and social risk, and the search for “safe havens” or sanctuary, that are captured in the term “expropriation risk” that we use in our paper.

Photo credits: Photographs on pages 8 (Guerrero), 27 (Weigel), 31, 36, and 48 by M. lannacci; pages 11 and 45 by D. Zara; pages 27 (Pfeffermann) and 55 (Fitzgerald) by G. Franchini; pages 4 and 18 by R. Townsend; and page 8 (Blejer) by P. Reid-Hughes. Fund publications advertisements designed by IMF Graphics Section.

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