Simply... Voodoo Economics

World Bank

new internationalist
issue 214 - December 1990

[image, unknown] [image, unknown]
Voodoo Economics

A thumbnail sketch of the global finance system and
just where the World Bank fits in.



The 1930s was a decade of terrible financial turbulence with bankruptcies massive unemployment, hunger marches, rampaging inflation and the rise of fascism. Faced with economic chaos governments tried to recover by boosting exports, even if they had to devalue their currency and slash imports. Global Trade skidded to a halt. Between 1929 and 1932 the total value of international trade fell by more than 60 per cent. With currencies constantly being devalued people lost confidence in paper money and began to demand payment in gold. Nations without gold reserves soon abandoned the gold standard which caused even greater confusion. The result was the 'Great Depression'.



War is good business

Weapons production for World War Two started the mills and factories humming again. When the end of the conflict in sight the Allies (especially the Americans and British) were determined to smooth the way for continued economic growth and avoid another depression. At a 1944 meeting in Bretton Woods, New Hampshire, they hammered out a framework for economic stability. It was agreed that member states should fix the value of their currencies in either gold or the US dollar equivalent.

The conference set up both the International Monetary Fund (IMF) and the International Bank for Reconstruction and Development (IBRD) - otherwise known as the World Bank. The IMF's job was to maintain stable exchange rates, reduce barriers to free trade and help members deal with temporary trade deficits. The Bank was to finance long-term development projects, initially in war-ravaged Europe and Japan. In 1946 the General Agreement on Tariffs and Trade (GATT) was formed to run the international trading system and to settle trade disputes between member states.



Boom and gloom

Nervous about Soviet expansionism, the US launched the Marshall Plan to help rebuild Europe and Japan as bulwarks against the spread of communism. From 1948-52 nearly $12 billion (five per cent of the US GNP) went into post-war reconstruction. The IMF and the World Bank threw in another $3 billion. The 'Fled Scare' and the Korean War helped boost US military spending and heat up the US economy even more.

This was America's golden decade of consumerism: TV dinners, giant tin-tailed Chevrolets and cavernous refrigerators. By the late 1950s Europe and Japan had recovered from the wartime bombing. Modern factories supplied local markets and began to look overseas for export opportunities. Naturally this included the ex-colonies with which industrial powers had a special relationship. Western-based multinational corporations expanded into Asia, Latin America and parts of Africa. Meanwhile the US flooded sensitive Third World countries with aid to undercut the success of Castro's Cuba. This was the era of 'Pax Americana'.




By the 1960s much of the Third World had won political independence from former colonial rulers. But not without a fight. The French fought bitter wars in Vietnam and Algeria, the Portuguese dug in against liberation forces in Angola and Mozambique and the British fought rearguard actions in Kenya and Aden. But political sovereignty did not bring economic independence. Even Latin America (which achieved independence more than a century earlier) was caught in a global economic system established over centuries of colonial pillage. Raw materials were exported at cut-rate prices while manufactured goods were imported from ex-colonial powers.

As the decade progressed the World Bank, USAID and other Western aid agencies pumped billions into the Third World in the name of development. The money was earmarked for big projects like roads, power grids, dams and ports, all of which were to pave the way to future prosperity. With such vast sums floating around, corruption, aided and abetted by cynical Western business began to flourish.



False promises

The price the Third World received for basic exports went up and down like a rollercoaster; most of the time it was too low to cover the cost of manufactured imports. Then OPEC (the Organization of Petroleum Exporting Countries) discovered the power of collective action. In 1973, OPEC agreed the price of oil (the lifeblood of Western society) was too cheap. Within a year the oil-exporting nations quadrupled the price. Arab oil dollars were then deposited in Western banks which were desperate to reinvest them.

And Third World leaders were keen to oblige: interest rates were low and terms easy. Money was needed to cushion the blow of high oil prices and pay for grandiose mega-projects whether a nuclear reactor in the Phillippines or Mirage jets in Peru. Commercial bank loans to the Third World increased by 550 per cent from 1973-80.

The general economic buoyancy of the decade was reflected in the slow but steady rise in the price of Third World exports. In this up-beat atmosphere leaders like Michael Manley of Jamaica and Julius Nyerere of Tanzania called for a New International Economic Order, a Code of Conduct for multinational corporations and a Common Fund to insulate. Third World commodity producers from the vagaries of the global market. It was a heady time indeed. But not for long.



The debt trap

When OPEC bumped up oil prices again in 1979 the new economic doctrine of monetarism became fashionable. Inflation was fought with high interest rates, unemployment and a deliberate recession - which eventually triggered the debt crisis of the l980s. Third World commodity prices fell as Western markets collapsed; the rapid rise in interest rates doubled and in some cases tripled the cost of debt service. By 1985 the combined Third World debt hit a trillion dollars.

So where did all the money go? A lot was squandered on weapons, but much more was pocketed by local elites and diverted into overseas bank accounts. The capital flight from Mexico alone from 1979-83 is estimated at $90 billion - more than the entire Mexican debt. The recession made global money managers nervous. New loans were being contracted simply to meet interest payments on past debt.

When Mexico refused to service its debt in 1982 the IMF jumped into the fray with the first of its 'structural adjustment' loans (SAPs). To pay foreign creditors, debtor countries were advised to boost exports and cut local consumption to increase foreign exchange earnings. As more countries were forced to take the IMF medicine, the World Bank also entered the structural adjustment business. By 1988, nearly a third of World Bank loans had strict Conditions attached.




By 1990 SAPs were in place across much of the Third World. The result was a massive haemorrhage of wealth from the poor nations to the rich - an estimated $50 billion in 1985 alone. Co-operation between the IMF and the World Bank has meant that Third World nations continue to pay the interest on their debts even as they accumulate new ones. The social effects have been devastating: increased malnutrition, illiteracy, infant mortality and poverty. UNICEF estimates a half million children died in 1988 alone as a result of debt-induced austerity measures.

World Bank and IMF staff now exert more power in some Third World countries than government ministers. There is little proof their policies do anything more than help bankers collect interest. In fact competition for scarce export markets holds down prices and depresses wages. The main winners have been Western consumers and multinational corporations who benefit from both low commodity prices and low Third World wages. Resentment is growing in the poor nations as World Bank/IMF policies increase the drain of wealth from South to North and reinforce the inequality of the global system.


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