issue 189 - November 1988
Several pounds of flesh
Never before in history have the poor financed the rich on such a
lavish scale. Susan George reveals the dynamic behind the debt trap.
A joke: President Reagan asks God whether there will ever be Communism in the United States and is told 'Yes, but not in your lifetime'. General Secretary Gorbachev asks God whether Capitalism will ever come to the Soviet Union, and gets the same answer. Finally President Sarney asks whether Brazil will ever be able to pay back its debts. 'Yes', says God, 'but not in my lifetime.'
God, as usual, is right. Between 1982 and 1987, Brazil paid back some $70 billion to its public and private creditors - averaging well over a billion dollars a month - and its only reward was to be $20 billion deeper in debt than in 19821 Brazil holds dubious first-place honours among Third World debtors, with $115-billion in loans outstanding. It is a mathematical impossibility for this debt to be reimbursed in God's lifetime, much less Sarney's. Yet Brazil is still expected to send northwards another $60-billion in debt repayment between 1987-89 if we can trust the forecasts of the World Bank.2
The rest of Latin America has fared no better than Brazil. Since 1982 the continent has remitted $145-billion net (repayments minus aid and new loans) to the creditor nations. In the five years between 1982-87 Third World countries as a group, including the most impoverished and crisis-ridden in Africa, sent us $220 billion more than we sent them3 (see box). Never before in history have the poor financed the rich on such a lavish scale.
The so-called debt crisis is clearly not a crisis for everyone. Who exactly is reaping the benefits of this bonanza? Obviously not ordinary Latin Americans: they call the 1980s 'the lost decade'. Their countries' economies are in shreds, they themselves are suffering as never before. Nor are Northern industries profiting: they have forfeited at least $30 billion in exports every year since the debt crisis erupted in 1982. Consequently Northern workers also get the short end of the stick. Experts claim that at least two million US jobs have been lost because Latin America can no longer buy North American products - nor European ones for that matter. Northern taxpayers are also losing, but few of them know that they are already 'bailing out the banks'. Public loans - your money and mine - are now routinely used by indebted governments to pay interest on their private bank debt4.
It is the banks that are benefitting handsomely whilst economies as a whole stagnate in both North and South. All too often, banks are even repaid twice: once in interest, and again with loans smuggled out of poor countries then re-cycled back to the North by corrupt Third World elites anxious to secure personal fortunes.
The notion of a 'debt crisis' is fired by fears of Third World countries refusing to repay their loans. Many people (especially bankers!) claim that default by a major debtor government like Mexico or Brazil could set off financial shock-waves that would make the Black Monday stock market crash of October 1987 look like a hiccup. If they are right, Third World default could one day lead to a banking collapse and the loss of all our savings. But this argument no longer holds water.
True the banks made hundreds of imprudent loans in the 1970s and early 1980s; they could hardly get rid of their money fast enough and virtually begged Third World governments to take it off their hands. The governments were only too pleased to oblige. They bought tanks and fighter planes, nuclear plants, huge dams, and a host of other unproductive projects - whilst billions were stolen and often smuggled out of the country. As a result the banks found themselves in a quandary - they had lent vast sums of money which could neither be repaid nor return interest. In August 1982, panic broke out in banking circles when Mexico threatened to default.
By 1987 the banks had muddled through - with considerable help from governments, the International Monetary Fund (IMF) and the World Bank. Since the Mexican panic they have made themselves less vulnerable through a variety of stratagems.
The banks have set aside billions in 'loan loss provisions' against possible future bad debts, essentially transferring their money from one pocket to another. Their 1987 balance sheets took a hit from defaults, but have bounced back nicely in 1988.
Major banks have also swapped about eight billion dollars in debt for shares in profitable Third World companies. These 'debt-equity swaps' merely push the debtor-country's financial problems into the future because profits from the purchased companies will eventually be remitted to the North. Meanwhile the country loses control over vital assets, as Mexico did when it exchanged some shares in one of its biggest manufacturing companies - Grupo Alfa, against a reduction of several hundred million dollars in its debts.
Moreover commercial banks today mainly lend to well-heeled borrowers in their own countries. Third World loans represent a mere six per cent of their total portfolios5. The 'crisis' is now a crisis for at most two or three large US banks, which have good reason to believe they can count on government help if desperate.
The real trouble is in the Third World. Countries like Brazil, Mexico or Tanzania can't simply write checks in cruzados, pesos or shillings and expect their creditors to be happy. Banks and governments want hard currency - dollars, pounds or marks - and the only way to earn them is to export. But world markets can absorb only so much coffee, copper and cotton, or for that matter T-shirts, motor-bikes and transistors. Commodity prices - at their lowest since the Great Depression of the 1930s - show no signs of looking up because countries must export more every year just to keep their revenues stable. The North receives a kind of colonial tribute in debt service, whilst getting its raw materials at rock-bottom prices.
Tanzania is caught in this trap: it had good rains in 1986 and its cotton crop doubled from the previous year. The government was overjoyed. But the same year cotton prices plummeted on the world market from 68 cents to 34 cents a pound. As former Tanzanian President Julius Nyerere explained, 'The result for our economy - and the income of the peasants - is similar to that of a natural disaster: half our crop, and therefore of our income, is lost. Our peasants and our nation have made the effort, but the country is not earning a single extra cent in foreign exchange. That is theft!'
Nyerere's lament could be repeated by nearly every Third World country for nearly every commodity. Something has got to give and that something has been the vast majority of Third World people. Their living standards are dropping out of sight as governments 'adjust' their economies in order to cope with the debts. 'Adjustment' is the polite, IMF word for grinding down whole nations and entire populations.
It goes like this: when the IMF devises an adjustment package - as it has done in over 50 countries - social service budgets are cut to the bone. Health, education, transport and other welfare spending goes by the board. Food subsidies are reduced or thrown out altogether and food prices may double or triple overnight. Governments are forced to prune state employment, while businesses can no longer obtain credit and therefore retrench. Consequently thousands of workers may be sacked from one day to the next.
The IMF prescription for debt-ridden economies - spend less, earn more - may sound healthy but a combination of all-out export drives and reduced government expenditure spells misery for the masses. Export crops replace food crops so food becomes more expensive. In Peru a worker with a minimum salary - already a privileged person - must work today seven times longer to earn the price of a kilo of rice and five times longer for a tin of powdered milk than she did in 1981. In Jamaica the cost of a market-basket of staple foods shot up by nearly 100 per cent between 1983 and 1986. A Brazilian lucky enough to earn the minimum wage must work four times longer now for a basic food ration than she would have done in 1959.
Food shortages translate into increased illness, even death. In the poor north-eastern part of Brazil infant mortality went up by 20 per cent between 1982 and 1984, even though the Brazilian government had made a special effort to establish more health-care facilities during the same period. These infants died because their mothers could not purchase adequate food and gave birth to babies under the viable weight threshold. According to the Brazilian government's own figures, two-thirds of the population now suffers from some degree of malnutrition and in the north-east nutritionists talk about an epidemic of dwarfism.
Polio had been almost eradicated in Brazil, but by 1986 the country had the highest incidence of polio in Latin America because it had to cut back spending on immunization. Now it is measles vaccine that is lacking.
Two US sociologists looked for connections between debt and life-expectancy in 73 countries. They discovered a definite debt-death link: a relationship between interest paid per capita and decrease in life expectancy. Their study shows that every $10 of interest payments per year and per person means 142 days less life on average than if life expectancy had continued to increase at pre-debt crisis rates. At the time of this study, which ceased in the early 1980s, average interest payments for the 73 countries were $27.50 per capita. This averages 387 days less of life for inhabitants of the indebted countries. How many of us would be prepared to give up a year or more of life to pay back a debt from which we never benefited, to satisfy the banks?6
Susan George researches and writes about the disparities between rich and poor. Her most recent book - A Fate Worse Than Debt - is published by Penguin.
1 OECD, Financing and External Debt of Developing Countries, 1986 & 1987 Surveys, Paris 1987 & 1988, Tables on Brazil.
2 World Bank, World Debt Tables, 1987-88 edition, Vol. 1, Table Box 1.
3 Calculated from data in OECD, op cit. Tables III.1 and V2.
4 Professor Jeffrey Sachs, Department of Economics, Harvard University, Testimony to the House Banking Committee of the UN Congress, 4 February 1987.
5 Roy Culpepper, The Debt Matrix, The North-South Institute Ottawa, Canada 1987.
6 Ralph R Sell and Steven J Kunitz, 'The Debt Crisis and the End of an Era in Mortality Decline' Studies in Comparative International Development, 1987.