New Internationalist

Keynote

Issue 312

new internationalist
issue 312 - May 1999

D E B T
K E Y N O T E

The dictatorship of DEBT : a fugitive from Hurricane Mitch and structural adjustment in Nicaragua
NIGEL DICKINSON / STILL PICTURES

Third World debt enriches the powerful at the expense of the
world's poor majority. David Ransom calls for a new beginning.

Had someone in any way typical of the Uruguayan population ever actually asked for a loan from the international bank in Montevideo where I once worked, I’m quite certain they would never have got it. The mere look of them would have been enough. A part-time clerk wants an advance! A labourer with no collateral expects credit! A woman from the barrios seeks an unsecured loan! A gaucho (cowboy) with just a horse to his name needs to borrow! From the bank? Contemptuous ridicule would have been unconfined – which is doubtless why I never saw such a person step through the door.

So quite how it happened that by 1990 every single man, woman and child in Uruguay had become liable for debts equivalent to their entire annual income – without even asking for them, let alone receiving any of the cash – is at first sight something of a mystery.

Take a closer look, however, and you’ll find that the explanation is simple. In 1973 there was a military coup in Uruguay and it ushered in a very nasty little dictatorship that for a while imprisoned proportionally more people than anywhere else on earth. The Uruguayan economy had gone belly-up and powerful people who owed large sums of money to international banks were facing ruin. So the generals decreed that it was ‘in the national interest’ to bail them out by borrowing from exactly the same banks, only this time in the name of the Uruguayan people.

The banks were desperate to lend. The Organization of Oil Producing and Exporting Countries (OPEC) had just agreed a sharp oil-price hike and as a result were collecting a vast extra income of dollars which they deposited with the banks. So large was the quantity of these ‘petrodollars’ that the banks didn’t know quite how to recycle them at their usual levels of profit. Dictatorships that could exact repayments from their cowering populations with relative ease must have seemed like a pretty good bet for a secure and handsome return.

A bed of nails behind the bank in Mumbai
PAUL SMITH / PANOS PICTURES

This combination of dictatorship, foreign loans and the transfer of private liabilities on to public backs was not confined to Uruguay. For 20 years, between the mid-1960s and mid-1980s, despotism pervaded Latin America and employed an ingenious variety of scams wherever it went. Sometimes the money was borrowed for grandiose projects, sometimes it was simply filched, usually both – and always in the interests of political power that had quite openly been usurped.

Similar, too, was the experience across Africa and Asia. From Mobutu in Zaire to Suharto in Indonesia and Marcos in the Philippines, tawdry despots with powerful friends and large appetites for personal wealth were financed with enthusiasm by the international banking fraternity. Indeed, it seemed to work so well that the credit lines became almost limitless – particularly if the governments in question were fighting on the right side of the Cold War and buying large quantities of armaments from Northern suppliers. Third World debt rose from less than $100 billion in 1970 to some $600 billion in 1980.

Eventually, however, governments began to run into financial trouble themselves. The loans they had raised and squandered on daft projects or salted away in private bank accounts became so large that their subject countries ran out of foreign exchange and tax revenues with which to pay them back. There was a real danger of ‘default’.

When this was being considered by Mexico in 1982 the American Government stepped in to protect the interests of the US private banks that held most of the Mexican debt. The International Monetary Fund (IMF) and World Bank were instructed to step in alongside the US Government and bail out the private banks. The transfer of private debt into public liability was thereby complete – and the Third World debt crisis had begun.

Do as you're told: a billboard in Accra, Ghana, issues the instructions.
RON GILING / STILL PICTURES

Private banks were now free to move on to fresh pastures, like ‘booming’ Southeast Asia and China. Where, of course, exactly the same thing would eventually happen all over again.

Ironic that this, the most colossal of all ‘nationalizations’, should have passed by unremarked and at a time when ‘privatization’ was an article of economic faith. Odd, too, that unlike earlier nationalizations intended – in theory at least – to increase public control over private interests, this one had precisely the opposite effect. It subjected the people of these countries to a dictatorship so complete that eventually dictators themselves became redundant.

All of this rested on a crude threat. Unless debtor governments agreed to certain conditions, then they would be cast into the outer financial darkness and new loans would be withheld. These conditions were originally cobbled together for the ‘Baker’ and ‘Brady’ plans in Mexico, named after the two US Treasury Secretaries who devised them. They were then touted around the world as the paradigm of financial probity and became known as ‘structural adjustment’. Their main purpose was to ‘liberalize’ the country in question: devalue its currency, open it up to world markets, reduce government intervention and flog off as many of its assets as possible at bargain-basement prices.

The theory was that this would increase prosperity so that debt would no longer be a problem. But the 1980s were the ‘lost decade’ for most of the Third World, and their economies didn’t grow. Third World debt doubled to almost $1,600 billion ($1.6 trillion) by 1990. An ever-increasing proportion of it was simply to pay off old debt and keep the system up and running.

The ‘conditionalities’ of structural adjustment meanwhile diverted government revenues away from things like education and healthcare, towards debt repayment and the promotion of exports. This gave the World Bank and IMF a degree of control that even the most despotic of colonial regimes rarely achieved. The situation has remained essentially unchanged ever since.

So we are left with a bizarre and degrading spectacle. Today in Ethiopia a hundred thousand children die annually from easily preventable diseases, while debt repayments are four times more than public spending on healthcare. In Tanzania, where 40 per cent of people die before the age of 35, debt payments are 6 times greater than spending on healthcare. From the whole of Africa, where one in every two children of primary-school age is not in school, governments transfer four times more to Northern creditors in debt payments than they spend on the health and education of their citizens.1

Truly dreadful things are being done in the name of debt repayment which would otherwise have to be recognized for what they are: the grossest abuse of even the most elementary requirements of human dignity.

The legitimacy of large chunks of Third World debt is doubtful for more subtle reasons, too. For example, natural disasters have a much more devastating impact on poor countries like Honduras or Bangladesh than on rich ones like the US or Japan. More people die, more livelihoods are destroyed and fewer people can afford any kind of insurance. So economic recovery is much more difficult and slow. It makes no sense at all for the reconstruction of such countries to be further delayed, and the devastation compounded, because they are paying out more to service foreign debts than they will ever receive in emergency aid.

The economics of debt are shot through with just as many flaws, though they tend to be dismissed as ‘unintended’ consequences. For example, a crude ‘adding-up problem’ arises when cash-strapped countries are all instructed by the IMF to promote commodity exports at the same time. The entirely predictable result is that the world price of commodities collapses and the environment is vandalized. Lasting damage is done to the world’s non-renewable resources without any economic gain for poor countries.

At some point you have to stop and ask yourself: what has really been achieved by all the years of ‘structural adjustment’, other than vast areas of economic devastation? The fiasco has become much more conspicuous because of the financial chaos that overtook Southeast Asia in 1997. Such theory as there was to structural adjustment relied heavily on the appeal of an ‘Asian Tiger’ economic model that has now simply disintegrated. The structure was adjusted – and then promptly collapsed.

Counting the cost of ecomonic chaos in a queue for rice in Jakarta, Indonesia.
CHRIS STOWERS / PANOS PICTURES

Meanwhile, Third World debt continues to increase relentlessly. By the end of 1997 it exceeded two trillion dollars – and to this will now have to be added several hundred billions more from the various crises in Southeast Asia, Russia and Brazil. There could be more to come. No-one seems to know where it will end, though everyone knows that it cannot continue.

And so apostasy has become the new orthodoxy. One by one the apostles of structural adjustment have renounced a religion they once proselytized with ruthless zeal. Even Jeffrey Sachs, the high priest from Harvard who made articles of faith out of free-market nostrums in Eastern Europe, now recants: ‘Many of the three billion of the world’s poorest live in countries whose governments have long since gone bankrupt under the weight of past credits from foreign governments, banks and agencies such as the World Bank and the IMF. These countries have become desperate wards of the IMF... Their debts should be cancelled outright and the IMF sent home.’2

In 1996 the IMF and World Bank finally conceded what they’d never been prepared to concede before: that perhaps some of the debts owed to them by the very poorest and most indebted countries in the world might eventually have to be written off. The Heavily Indebted Poor Country (HIPC) Initiative was born and a list of some 40 countries thought to fall into this category was drawn up.

The intended purpose of the HIPC Initiative is to reduce debt to a ‘sustainable’ level – what the IMF and World Bank dictate that a country can afford to pay. This level is fixed by a number of measures, including the size of debt repayments compared with exports or government revenues. These measures of ‘sustainability’ are, however, extremely severe: 20-25 per cent of export earnings for the HIPCs which is more than double the ratio applied to Germany after the Second World War.3 And the proposed ‘relief’ often makes little difference in practice, since for the most part it merely discounts debts that were not being paid anyway.

But there is another much more fundamental objection to the initiative. Far from dismantling structural adjustment, the HIPC Initiative actually strengthens it. Absolute compliance with its most stringent requirements must endure for six unbroken years before any actual ‘relief’ will be considered. As a result, no more than a handful of countries will have benefited in any way by the year 2000 – while a great many more of the HIPCs will be even more firmly in the grip of structural adjustment than they were before.

The HIPC Initiative, though it may be an important departure, is not the destination. The suspicion arises that its purpose is less to minimize than to maximize the ‘sustainable’ levels of debt repayment; that perhaps rich governments, their tools at the IMF and World Bank and their clients from the private banks, actually prefer debt bondage to remain in place, precisely because of the control it gives them over debtor countries.

If this is so, then the consequences will be felt by the poor into the indefinite future. What they want, and desperately need, is for despots, whether they come in the shape of dictators or delegations from the IMF, to get off their backs.

And debtor nations do have a great deal more power than they are encouraged to believe. What lenders fear above all else is the prospect of collective default. You can tell this from the history of Third World debt. When the system is threatened – as during the crisis of 1982 and before the HIPC initiative of 1996 – then creditors move fast to keep the game in play.

Those rules now have to be changed decisively in favour of the world’s poor majority, who have suffered enough. The campaign for an orderly, complete and unconditional cancellation of Third World debt is the best and probably only chance we have of reaching the UN target for poverty reduction by 2015 – and to avoid a bleaker nightmare of the kind that has already descended from the storm clouds of high finance on to the people of Indonesia, Russia and Brazil.

Can we afford it? Well, if several hundreds of billions of dollars could be found within months to fend off the crisis in Southeast Asia, a mere $200 billion to cancel the illegitimate debts of the world’s poorest people is clearly not beyond our means. So a new contract must be offered in all humility from the North to the South: unconditional debt cancellation where there is democratic control; the prospect of unconditional cancellation where it remains to be established. And, to start the ball rolling, cancellation for the HIPCs in the Jubilee Year 2000.

And let this contract be, for once, written in the South for the South. Let ‘civil society’, that enormous network of trade unions, human-rights groups, farmers, homeless and landless people who have struggled so long to free themselves from a truly dreadful dictatorship, take an active part in the process. Only then will there be an unequivocal break with the past or any assurance that the poor majority will be freed from the bondage of debt once and for all.

1 ‘Making debt relief work’, Oxfam position paper, April 1998.
2 The Independent, London, 1 February 1999.
3 We’ve been here before by Joseph Hanlon, 1998 (UK Jubilee 2000 Coalition).

Drop the debt:
There are 52 countries that the Jubilee 2000 Coalition believes should have their external debts cancelled to mark a fresh start for the new millennium. They are poor, often desperately so, and repayment is making them poorer still.

In 1996 there were 984 million people living in these countries. Each man, woman and child then had an average foreign debt of $377, and yearly income of just $425. Foreign debt was larger than annual income in 31 of them.

The World Bank and IMF classify 40 (not marked *) as ‘Heavily Indebted Poor Countries’ (HIPCs) that now qualify for debt-relief. Since the process began in 1996 no country has yet emerged from it, while the total of their debt has continued to grow. Other countries, like Indonesia, may be about to fall into the same category, as the effects of the Southeast Asian crisis spread and deepen.

1996

GNP per person $ Debt per person $ Debt as % of GNP

São Tome & Principe

315

2,008

637

Mozambique

89

336

376

Nicaragua

372

1,318

354

Guinea-Bissau

242

852

350

Somalia

92

290

315

Angola

320

983

307

Sudan

221

636

288

Congo, Rep

817

2,278

279

Guyana

829

2,039

246

Zambia

350

757

216

Liberia

351

753

215

Congo, Dem Rep

138

292

212

Côte d’Ivoire

662

1,332

201

Mauritania

545

985

181

Ethiopia

105

178

168

Tanzania

189

245

130

* The Gambia

324

411

127

Sierra Leone

205

259

126

Lao PDR

379

462

122

Yemen, Rep

353

424

120

Mali

292

339

116

Equatorial Guinea

608

705

116

Vietnam

318

364

114

Cameroon

634

715

113

Honduras

657

730

111

* Malawi

214

229

107

Madagascar

269

282

105

Togo

339

357

105

* Nigeria

279

281

101

Burundi

184

185

101

Ghana

354

354

100

* Jamaica

1,714

1,616

94

Central African Rep

315

281

89

Chad

177

156

88

Guinea

565

484

86

Bolivia

864

699

81

* Burma/Myanmar

115

92

80

Niger

213

169

79

Rwanda

165

129

78

Kenya

283

217

77

Benin

387

285

74

Senegal

584

426

73

* Zimbabwe

628

435

69

* Cambodia

318

215

68

* Morocco

1,290

789

61

Uganda

285

172

60

* Nepal

206

110

53

Bangladesh

264

134

51

Burkina Faso

248

127

51

* Peru

2,475

1,216

49

* Philippines

1,239

586

47

* Haiti

357

123

35

Source: World Bank, Jubilee 2000

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