Charging ahead: America's biggest new export—credit cards—could bring down the world economy

Washington Monthly, May, 2003 by Joshua Kurlantzick

Yet the hard truth is that no one really knows what the impact of this consumer spending will be. These benefits could be outweighed by the potentially destructive impact of unleashing easy credit and American-style personal spending in developing nations with nascent systems of credit checks, unsustainable trade imbalances, and weak and opaque banking systems. In the United States, though financial companies have more leeway to lend to lower-income consumers than they used to, they are still subject to a range of state and federal regulations. Banks, credit card issuers, and other consumer lenders can also utilize America's well-developed system of credit checks to discover which potential customers are bad credit risks. Consequently, US. lenders generally are able to avoid lending or offering credit cards to high-risk clients.

Most developing countries lack the regulations and credit-checking services to deal with their rising numbers of consumer loans, credit cards, and mortgages. In Mexico, for instance, few banks require card recipients to show any credit history; minimum income, or even knowledge of how to use a card. As one Mexico City taxi driver told The Financial Times, "There's always someone offering me free credit." In Hong Kong, the lack of regulations has allowed credit card companies to aggressively target university students, helping the students obtain a credit card in minutes with nothing more than a photo identification. (Last May, Hong Kong's Consumer Council, a research and advocacy organization, chastised the government for allowing banks and other card issuers to use misleading tactics in their campaigns for students.)

Widespread corrupt practices, meanwhile, have led merchants in other countries to shun plastic altogether. When I traveled to Argentina in the winter of 2001-2002, I often found k difficult to convince retailers to take my American Express, the supposed gold standard of credit cards. Retailers had become so used to seeing fraudulent cards and other forms of questionable scrip issued by Buenos Aires banks and even provincial officials that they no longer trusted anything but cash. Meanwhile, the national government was taking virtually no steps to investigate any of the cards. Most merchants simply adopted a policy summed up by a sign in one cafe: "Se Acepta Dolares."

As a result of so much fraud and so much easy credit, many lenders in the developing world have found themselves overwhelmed with bad consumer loans and huge numbers of personal bankruptcies. To take just one example, 2.5 million South Koreans have fallen into arrears on their credit-card payments, in a nation of only 48 million people. In February, South Korean banks estimated that nearly 8 percent of credit card bills in the country were outstanding for a month or more, roughly double the percentage in the United States, and last year South Korea suffered its largest number of personal bankruptcies ever. According to banking industry statistics, personal bankruptcies are also rising in China, Mexico, Argentina, Chile, Brazil, and Thailand. In Hong Kong, personal bankruptcies are soaring by more than 100 percent per year. Even small, isolated countries like Bolivia have been affected by the rolling wave of easy credit and bankruptcy.