54. Money Works Better Than Debt.

Money Works Better Than Debt.
Bob Komives
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Let's look at two graphs of possible outcomes from three hypothetical projects: A, B, and C. Project A is a resounding success. B is marginally successful. Project C is a failure. The graphs show the net national benefit or net national loss from each project. Where there is a net benefit, the wealth of the nation increases and the net-benefit line on the graph ends above the centerline. That is a successful project. Almost all projects will start out creating a net loss because resources are spent before benefits return. The project that never creates a net benefit is a failure.



Graph 1 assumes the three projects are paid for internally. Graph 2 assumes an international loan finances the same projects.



The two projects that bring net benefit without the loan (Graph 1) bring fewer benefits when financed by an international lender. Project B changes from a marginally successful project to a failure --producing a net loss. C is a failure in Graph 1 but worse in Graph 2. Why?

If U.S. America decides to lend U.S. dollars for a Guatemalan project, then Guatemala will have to pay back the principal plus interest (Graph 2). Guatemala will draw upon the project's benefits to pay back the principal --the one-time cost in resources of the project. Any benefits left over, less the amount needed to pay interest, are the project's net benefit or net loss. The interest is the price charged by the USA to Guatemala for the privilege of borrowing. The added charge reduces Guatemala's net benefit.

When, instead of seeking an international loan, Guatemala finances such projects internally (Graph 1), the entire excess of benefit over cost accrues to Guatemala. No extra national wealth is lost or exported.
Under internal financing, good projects are economically successful. Under external borrowing some very good projects are economically successful, but extra wealth must be exported to pay interest on the loan. They are less successful, less profitable, than projects financed internally. Projects that could be marginally beneficial when financed internally will likely become failures when financed with an international loan. For projects destined to fail, an international loan can turn mere failure into disaster.

:: Bob Komives, Fort Collins © 2006-2008 :: Plum Local IV :: 54. Money Works Better Than Debt.
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