CHARLES PONZI attained immortality in the 1920s through a financing concept now known as the Ponzi Scheme, in which the Boston financier attracted millions of dollars by promising investors a 50 per cent profit in 90 days.

"Widows, orphans and even staid financiers, rushed to press their money into his eager palm," according to Life magazine. Ponzi, who kept his investors' money in wastepaper baskets, paid off his investors promptly — sometimes in 45 days instead of the promised 90 days. "In a few months he took in $15 million and became the best-known financier in the country. Then the bubble burst. It was discovered that Ponzi was not making a fortune by juggling International Postal Union reply coupons, as he said, but was simply paying off his early investors with money collected from late-comers." When Ponzi was arrested, he owed approximately $7 million to gullible investors but had only $4 million in assets. No one knew the exact numbers because Ponzi never kept any books.

Ponzi died destitute in 1949 in a Rio de Janeiro charity ward, but his technique — also known as borrowing from Peter to pay Paul — did not die with him. This technique has been alive and well, reaching unheard-of heights in Third World financial markets.

Third World governments have been close to default on their foreign loans since capital transfers began after World War II, with new loans being used to pay back old loans. In 1965, a senior vice president at First National City Bank castigated Argentina, Bolivia, Brazil, Chile, and Uruguay for playing fast and loose with their treasuries, leading them to "year after year [come] back to Washington for bailout loans and foreign debt stretch-outs." In 1969, the Pearson Commission, pointing to a series of debt crises throughout the late 1950s and the 1960s, warned the world the day of reckoning was fast approaching.

FOR EVERY EASY LENDER from the rich countries, there was an eager borrower in the Third World, dreaming up ways to raid the treasure trove of easy money.

Once the dust settled from the whirlwind of lending and borrowing, it became embarrassingly clear that no one really knew where all the money had gone. Money is notoriously difficult to trace, especially when lent to what one banker called the "big pot" — the treasuries of borrowing governments — from whence it can be stolen or stirred up and dished out in an infinite number of ways.

But this much is clear: through borrowing and loan guarantees, Third World governments are responsible for over 80 per cent of the Third World's debt. The remaining 20 per cent is made up of private debts, incurred by private individuals or corporations in the Third World, for which the Third World's citizenry is not liable.

Throughout the 1970s, most of Latin America's debt stemmed from the rapidly expanding role of the state, whose external debt grew almost ten times from 1973 to 1983, two and a half times that of the private sector. The same lopsided growth in public sector debts occurred in Africa and Asia as well.

Sharing the lenders' view of them as good credit risks, Third World governments had unconstrained visions of cornucopia. Commodity prices were at an all-time high and the Club of Rome, an influential think-tank, had come out with its widely publicized report, Limits to Growth, predicting that the world would soon run out of resources. Believing the Club of Rome's world computer projections, the resource-rich Third World talked of OPEC-like cartels for coffee, bauxite, and other commodities.

Their natural riches aside, borrowing Third World governments were often offered money at interest rates too low to refuse. By the late 1970s, real interest rates had become negative, with inflation exceeding interest rates, allowing borrowing countries to pay back less in real terms than they actually borrowed.

Many borrowing governments decided to capitalize on the glut of petrodollars to propel their countries into the ranks of industrial giants. Brazil's President-General, Ernesto Geisel, brought state companies together with European and Japanese groups to draw up an ambitious development plan for basic industries: aluminum refineries in the Amazon, a copper refinery in the northeast, steel mills, hydroelectric power stations, railways, capital goods factories, petrochemical complexes and a vast comprehensive nuclear power program, from uranium mines to refineries to nine large nuclear plants.

With abundant foreign finance, Brazilian thinking went, Brazil would grow rapidly, precisely when almost every other country was facing recession. The thinking was similar in Africa, where new capital cities were rising out of nowhere, where elaborately equipped airports with almost no traffic were being built, and where steel plants without a source of raw material were being constructed. And in Asia, where roads were being built for people who owned neither cars nor shoes to protect their feet from the burning tarmac.

As documented in the Journal of Economic Growth, after 30 years, and almost $2 trillion of capital that has been given or lent, many Third World countries now look — on paper — more industrialized than many industrialized countries. Using World Bank measures of industry's share of the nation's output, Zimbabwe, Botswana, and the People's Republic of the Congo look more industrialized than Japan; Zaire looks more industrialized than the United States; and Argentina more industrialized than every country in the European community.

By the same token, Third World countries look less agricultural than many Western countries. In Zimbabwe, agriculture's share of the country's 1985 national output was smaller than Finland's in 1965. In 1986, agriculture contributed more proportionately to output in Portugal than in Gabon; more to Spain's output than to Botswana's; more to Greece's than Peru's; more to Denmark's than to Trinidad and Tobago's.

The statistics also defy common sense and a century of research that show the poor spend a higher percentage of their incomes and invest less than the rich. Yet West Germany invested relatively less than Togo, Nepal, Egypt, or Costa Rica; France less than Mali; and Britain less than Sri Lanka. All Western countries have investment ratios lower than that of tiny Lesotho in Southern Africa.

Looking only at the share of industry and investment in national output, Mexico seems more developed than the United States, Peru more developed than Sweden, and India more developed than Denmark.

Development, it turns out, could not be bought. In the 1960s Nicaragua, Bolivia, the Central African Republic, Zambia and Jamaica each had higher ratios of gross domestic investment to national output than the United States, but all experienced declining per capita incomes for the two decades that followed. The investment ratio for Africa as a whole has matched or exceeded that of the United States virtually every year since 1965. Yet Africa today is in tatters, its industry in steep decline, its agriculture unable to keep up with population growth. Only its debt and disease are on the increase.

Industrialization without prosperity and investment without economic growth have been a recipe for debt. Borrowed money — although at bargain-basement interest rates — went to marginal if not outright disastrous investments that would never generate the wealth needed to repay the loans.

The investment ratios of Third World countries have not been determined by how much and in what the public wanted to invest, and by what it could afford. Instead, a Third World nation's investment ratio has been determined by unrepresentative leaders, by the political goals of foreign aid and export credit, and by the historical blip called the oil crisis.

Though called investments, the borrowings more closely resembled expenditures, and the magnitude of these expenditures shocked the Third World's public, which had rarely been informed, let alone consulted, about the debts incurred by their governments. By 1990, the Third World's people would discover that they owed about $1 trillion to creditors in the rich countries.

Citizens groups and government bodies throughout the Third World are now trying to find out what their governments did with the money. They are discovering many patterns, and a wealth of anecdotal evidence. But many pieces of the puzzle remain to be found.

Brazilian congressional attempts to track the money and identify the signatories to loan contracts have been thwarted by elusive documents. Everywhere, the absence of good records hampers a thorough review of the decade of debt buildup. Latin America, whose state enterprises received about $80 to $100 billion in foreign loans over the 1970s — the equivalent of one-quarter of the region's external debt — yields remarkably little public information: even records of such things as sales, profits, subsidies, and expenditures on investment are generally hidden or — as with Ponzi — nonexistent. On the other side of the world, the Philippine Commission on Good Government, aided in part by American courts and Swiss laws, has been tracing some $10 billion that the Marcos family allegedly moved out of the Philippines into New York real estate and Swiss bank accounts.

Through investigative efforts such as these, through the self-analysis of the borrowers and the post-mortems of now repentant bankers, much is now known about where the money went.