Foreign Policy Briefing No. 8

Government Loans for the Soviet Union: A Disservice to U.S. Taxpayers and Soviets Alike

By Karen LaFollette
April 26, 1991

Executive Summary

The world seems awash in mismanaged, unpayable government debts. At the International Monetary Fund and World Bank, officials are working to reschedule some $6 billion in delinquent loans by rolling them over into new and larger loans. The Bush administration is proceeding with efforts to forgive debts owed the U.S. government by the governments of Poland, sub-Saharan African nations, and our Latin American neighbors. Many of those debts are to the U.S. Export-Import Bank. Nearly $5 billion (or 48 percent) of outstanding Ex-Im Bank loans are delinquent or have been rescheduled, and losses totaled $2.3 billion between 1982 and 1988. And under the Brady Plan (named after U.S. Treasury secretary Nicholas Brady), many of those same governments have received, or are seeking, forgiveness of the debts they incurred to private banks.

What is the lesson here? Government-to-government loans, as well as private bank loans to governments, are managed by bureaucrats whose own money is not at stake and who necessarily make investment decisions according to political criteria. Thus, valuable resources are used to a variety of unproductive ends. For all the rhetoric about the need for further economic progress, the unprecedented levels of public and private loans to developing-country governments throughout the 1970s and 1980s promoted or led to graft, expansionist bureaucracies that frustrate private-sector activity, and debts that cannot be repaid.

Roundly ignoring that lesson, the Bush administration and other Western governments have been promoting debt-financed development, through government-to-government loans, for the Soviet Union. In September 1990 the Soviet central government sent observers to the IMF and World Bank annual meetings in Washington, D.C., and later indicated that it intended to seek membership in the two institutions. When President Bush, on December 12, proposed granting the Soviet Union “associate” status, which would entitle it to economic advice and technical assistance from the IMF and World Bank, it appeared that full membership and borrowing privileges would be only a matter of time. Indeed, on December 26 the Soviet news agency Tass reported that the Soviet Union was negotiating a time frame for entry into the World Bank and IMF.[1]

In January 1991 Moscow’s crackdown on the secessionist governments of Lithuania and Latvia led the United States and other major industrial (Group of Seven) nations to put on indefinite hold all plans for IMF and World Bank assistance to the Soviet Union. Nonetheless, the U.S. and other G-7 governments themselves continue to disburse unprecedented levels of government loans and loan guarantees to the Soviet regime of Mikhail Gorbachev. The aid presently flowing is directly underwriting the Soviet central government’s political and economic repression. In turn, if and when the political upheaval in the Soviet Union settles, the United States and other G-7 nations will most likely resume their efforts to place the Soviet economy under the tutelage and patronage of the IMF and World Bank. That will only prolong government retrenchment in the Soviet Union and “hook” the central government, or the governments of the republics, on the same kinds of subsidized loans that have financed big government throughout the developing world.

Read the Full Foreign Policy Briefing

Karen LaFollette is a research associate with the Institute for Political Economy in Washington, D.C., and coauthor of Meltdown: Inside the Soviet Economy.