The Debt Boomerang

new internationalist
issue 243 - May 1993

The debt boomerang
The Third World debt crisis is doing you harm – whether you live in
the North or the South. Susan George explains how a small elite is
making a killing at the expense of the world’s majority.

If the goals of managers in the official institutions that rule over Third World debt were to squeeze the debtors dry, to transfer enormous resources from South to North and to wage undeclared war on the poor continents and their people, then their policies have been an unqualified success.

If, however, their strategies were intended – as official institutions always claim – to promote development beneficial to all members of society, to preserve the planet’s unique environment and gradually to reduce the debt burden itself, then their failure is colossal.

The most obvious aspect of this failure – or success, depending on your point of view – is financial. Every single month, from the outset of the debt crisis in 1982 until the end of 1990, debtor countries in the South remitted to their creditors in the North an average six-and-a-half billion dollars in interest payments alone. If payments of the principle are included, then debtor countries have paid creditors at a rate of almost twelve-and-a-half billion dollars per month – as much as the entire Third World spends each month on health and education.

Moreover, the debt crisis has given creditor countries the chance to intervene in the management of dozens of debtors’ economies – using the International Monetary Fund (IMF) and the World Bank. Their job is simple: to make sure the debt is serviced. Since the average citizen of a low-income debtor country earns less than one fiftieth of the average citizen of a high-income creditor country, this process is like trying to extract blood from a stone.

To accumulate hard currency and service its debts a country must increase its exports and reduce government spending. Most debtor governments have accepted this and forced their people to co-operate with the draconian policies of the IMF and World Bank to ensure that debts are serviced. Much good has it done them. A decade has passed since the Third World debt crisis first erupted, yet in spite of harsh measures faithfully applied this crisis is today more intractable than ever.

Bureaucratic immunity
Debtor countries have deprived their people of basic necessities in order to provide the private banks and the public agencies of the rich countries with the equivalent of six Marshall Plans (the programme of assistance offered by the US to Europe after the Second World War).

Have these extraordinary outflows served to reduce the absolute size of the debt burden? Not a bit: in spite of paying out more than $1,300 billion between 1982 and 1990, the debtor countries as a group began the 1990s a full 61 per cent more in debt than they were in 1982. Sub-Saharan Africa’s debt increased by 113 per cent during this period.

The economic policies imposed on debtors by the major multilateral agencies and packaged as ‘structural adjustment’ have cured nothing at all. They have, rather, caused untold human suffering and widespread environmental destruction, emptying debtor countries of their resources, rendering them each year less able to service their debts, let alone invest in economic and human recovery.

The World Bank and the IMF structural adjusters have by now had plenty of time to make their measures work. But they have failed. Had they been corporate executives they would doubtless have been sacked long ago for incompetence. But no such accountability applies to these international bureaucrats acting on behalf of the creditor governments. They need never submit to the judgement of their victims. They answer only to their own equally unaccountable superiors and, at the top of the bureaucratic tree, to a Board of Governors reflecting the majority voting strength of the richest creditor countries. These lavishly compensated international civil ‘servants’ are consequently still to be found in Washington and throughout the Third World living exceedingly well.

There are other beneficiaries. For business corporations operating in debtor countries structural adjustment has enhanced profitability by reducing both wages and the power of the unions. For many international banks, debt service payments at unusually high interest rates in the early 1980s helped to fuel several years of record earnings. From the corporate or banking perspective the World Bank and the IMF pass the test with flying colours.

Third World elites don’t have much cause for complaint either. They have weathered the ‘lost decade of the 1980s’ with relative ease and have sometimes profited handsomely from it. They too benefit from plummeting wages. Their money is often in safe havens outside their own countries. Each time the IMF requires a devaluation of the national currency to encourage exports those whose holdings are in foreign currencies automatically become richer at home. And although public services may deteriorate or close down, rich people can afford private ones. So it is not surprising that Third World governments have failed to unite and to demand debt reductions.

The debtors’ lack of unity ensures the draining of their economies and a continuing South-to-North resource flow on a scale far outstripping any the colonial period could devise. The debtor governments have from time to time called for debt relief but have never collectively confronted the creditors. As a reward for docility the creditors have allowed most debtor-country elites to maintain their links to the world financial system, providing them with at least a trickle of fresh money and offering them frequent opportunities to purchase local assets at bargain prices through so-called ‘debt-for-equity swaps’ or privatization programmes.

Third World debt should not, therefore, be seen as a straightforwardly ‘national’ problem. Different social classes in debtor countries have vastly divergent interests and are unequally affected. Although debt has visited unprecedented pain on the vast majority of Third World people, the crisis is not necessarily a crisis for everyone.

While the topmost layers of Third World societies remain largely insulated from debt distress, ordinary people in the South sacrifice to pay back loans they never asked for, or which they even fought against and from which they derive no gain. Knowledge of their plight is by now fairly widespread in the developed, creditor countries, thanks to the efforts of thousands of concerned people patiently explaining the human and ecological consequences of the debt crisis in the Third World.

Fallout in the North
Yet the pressures exerted by dozens of non-governmental organizations in both North and South have so far failed to alter basic debt-management policies. Although the Fund and the Bank now claim they seek to ‘mitigate the social costs of adjustment’, official response to the crisis advances at a calculated snail’s pace, inching from one feeble and ineffective ‘Plan’ to the next while leaving the status quo essentially untouched.Until now those in the North who have tried to change the debt management strategies have rightly based their arguments on ethical and humanitarian grounds.

The impact of Third World debt fallout in the North is much less well known – doubtless because the consequences of debt are far more serious and life-threatening in the South than in the North. But although people in the South are more grievously affected than those in the North, in both cases a tiny minority benefits while the overwhelming majority pays.

Northern taxpayers have carried commercial banks through the Third World debt crisis from the start and virtually all of them are blissfully unaware of the fact. We have paid Northern banks between $44 and $50 billion in tax relief on bad debts – enough to meet the entire Third World’s health spending for one year.

There is another less measurable cost: the strong correlation between debt and worldwide military conflict. Loans have frequently been employed by Third World governments to buy arms from Northern manufacturers for use against both internal and external opponents. Debt promoted the Gulf War. Saddam Hussein saw the invasion of Kuwait as one way of wiping out the colossal debts he owed both to that country and to the allies – much of it used to finance his arms build-up. George Bush granted massive debt forgiveness to an allied Arab nation like Egypt as a reward for staying on his side.

Third World debt is not the only cause of, say, increased illegal drug exports to the US and Europe, or of accelerated deforestation hastening the greenhouse effect. But it is, at very least, an aggravating factor. Debt-burdened Latin American governments become hooked on dollars from their coca-producing regions. This severely dampens their incentive to encourage legal crops. Increasing drug exports, in turn, escalate the costs of law enforcement and contribute to social breakdown in the North.

A stake in change
Such harmful effects did not suddenly spring fully armed from the head or the belly of the World Bank. They result from a set of policies aimed at promoting a capital-intensive, energy-intensive, unsustainable Western model of development which was favourable only to Third World elites, Northern banks and transnational corporations.

Not surprisingly, massive overborrowing coupled with high interest rates led to the debt crisis. This crisis in turn provided official debt managers in the 1980s and 1990s with a perfect lever to entrench the very development model which had caused the original problem. Relying on unbridled free market forces and export-led growth, they have devastated the unprotected: the poorest, most vulnerable groups and the environment.

They are still doing it and, quite simply, they have to be stopped.

Any standard of human decency or ethical imperative demands a change in debt management, but so does enlightened self-interest. Everyone outside the narrowest of elite circles has a stake in positive change. If enough people in the North realize that the Third World debt crisis is their crisis they may well insist on radically different policies, speak out and seek to join with similar forces in the South.

For this to happen we must first think for ourselves, recognize the modern mythology that prevents us from acting and then act. There are some obvious directions we can take to help the ‘natural majority’ to become effective. Workers, farmers, trade unionists, activists, parents, immigrants, taxpayers – we all have to make a common cause against the common danger.

We do not want to prescribe a programme but to state some principles:

First, those who borrowed were rarely elected by their peoples. They squandered money on arms or used it to further entrench their own power and privilege, counting on their poorer compatriots to make sacrifices to pay back the loans when due. Democratically elected governments should not be expected to assume the debt burdens of dictatorial predecessors.

Those who made the loans were either irresponsible or intentionally attempting to make the debtors subservient to their interests. The creditors have been richly rewarded and are in no danger if the debt is cancelled or converted to provide genuine development. They should play by normal rules and not expect the public to pay for their costly mistakes.

The debt has already been largely or entirely repaid. The North is, in fact, substantially in debt to the South and it has received, since 1982, the cheapest raw materials on record.

But cancellation and other debt reduction measures must not be used as an excuse or a pretext to further cut the debtor countries out of the benefits of the world economy. The guiding precepts should be popular participation in decision-making at every level, social equity and ecological prudence.

So long as the policies of the rich North represent a mixture of crude carrot-and-stick manoeuvres, coupled with basic contempt for the South, its problems and its peoples, we can expect more lethal North-South tensions, more powerful boomerangs hurtling back at us, a further forced retreat of the rich countries into Fortress America or Fortress Europe.

Alternatively, we could decide that it is time – high time – we began to live together on this improbable planet as homo sapiens with a good deal more sapiens.

Economist Susan George is a prolific writer, thinker and prominent campaigner on the subject of debt. Her books include How the Other Half Dies, A Fate worse than Debt, Ill Fares the Land and most recently The Debt Boomerang (Pluto, 1992).

The six boomerangs

environment Debt-induced poverty causes Third World people to exploit natural resources in the most profitable and least sustainable way, which causes an increase in global warming and a depletion of genetic bio-diversity. This ultimately harms the North too.


drugs The illegal drugs trade is the major earner for heavily indebted countries like Peru, Bolivia and Colombia. The social and economic costs of the drug-consuming boom in the North is phenomenal – $60 billion a year in the US alone.


taxes Governments in the North have used their tax-payers’ money to give banks tax concessions so that they can write off so-called ‘bad debts’ from Third World countries. But in most cases this has not reduced the actual debts of poor countries. By 1991 UK banks had gained from tax credits for more than half their exposure. The eventual total relief will amount to $8.5 billion.

unemployment Exports from rich countries to the Third World would be much higher if those countries were not strapped by debt, and this would stimulate manufacturing and employment in the North. The loss of jobs due to ‘lost exports’ is estimated to account for one fifth of total US unemployment.

immigration The International Labour Organization estimates that there are about 100 million legal or illegal immigrants and refugees in the world today. Many go to the richer countries of the North to flee poverty and the effects of IMF-imposed economic policies.

[image, unknown] Debt creates social unrest and war. Iraq invaded Kuwait in 1990 largely in retaliation for the latter’s insistence that Saddam’s regime repay a $12 billion loan.


For more information Third World First have produced The Debt Boomerang Pack in conjunction with Susan George and the Transnational Institute. It can be obtained from 217 Cowley Road, Oxford OX4 1XG, UK.

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