issue 312 - May 1999
Third World debt is one big square on the life-and-death board game known as the world economy.
Ellen Frank argues that the dice are loaded and the game is fixed.
When the Federal Reserve Bank (the Fed) last September arranged a $3.6 billion bailout of Long Term Capital Management (LTCM) a Connecticut-based hedge fund critics of the US financial establishment cried foul. The bailout contrasted strikingly with IMF treatment of indebted firms in Asia. When indebted businesses in Asia were unable to repay foreign loans, US and IMF officials insisted that they be forced to close and their assets sold off to creditors. Bailing out ailing businesses with endless lines of bank credit was, US officials claimed, the essence of crony capitalism and the cause of all Asias problems. Reducing expectations of bailouts, declared the IMF, must be step number one in restructuring Asias financial markets.
To Japanese officials, the LTCM bailout was a clear case of the US ignoring its own principles. Representative Bruce Vento (Democrat, Minnesota), in a Congressional investigation of the LTCM bailout, said that there seem to be two rules, a double standard. But this view is incorrect. Where bailouts are concerned, there is only one standard. Whether in Korea, Thailand, Connecticut or Brazil, US- and IMF-organized bailouts conform to the same guiding principle: whatever happens, whoever is at fault, the wealth of Western creditors must be protected and enhanced.
Until 1997, Western creditors were bullish on Asia and emerging markets generally. They poured billions into stocks, banks and businesses in Thailand, Brazil, Indonesia, Korea, Argentina, expecting mega-returns and a piece of the action as the former Third World embraced free-market capitalism. Beginning in 1997, though, Western investors began to worry that they might have over-lent. They pulled out of Thailand first, selling baht for dollars; as the bahts value collapsed, worry turned to panic. Soon, international financial operators were selling won, ringgit, rupiah and rubles in an effort to cut potential losses and get their funds safely back to Europe and the US. In the ensuing capital flight, Asian stock prices plunged and the value of Asian currencies collapsed. Local businesses that had taken out dollar-denominated loans couldnt afford the dollar payments to Western creditors.
For a time, local governments tried to stave off default by lending their reserves of foreign currency to indebted firms. South Korea used up some $30 billion in this way. But this money soon ran out. Western banks refused to make new loans or roll over old debts. Asian businesses defaulted, cutting output and laying off workers. As the economies worsened, panic intensified. Asian currencies lost 35 to 85 per cent of their foreign-exchange value, driving up prices on imported goods and pushing down the standard of living. Businesses large and small were driven to bankruptcy by the sudden drying up of credit; within a year, millions of workers had lost jobs while prices of basic foodstuffs soared.
As the crisis unfolded, IMF officials flew to Asia to arrange a bailout, agreeing ultimately to loan $120 billion to Thailand, Indonesia and South Korea. When announcing these loans, the press used terms like emergency assistance and international rescue package, leading the casual reader to presume that the money will be spent on food for the hungry, or aid to the jobless. In fact, the money is used to help countries pay back their debts to international banks and brokerage houses. Which international banks and brokerage houses? The same ones who made speculative loans in the first place, then panicked and brought about the collapse of the Asian economies. The IMF rescue packages are intended only to rescue the Western creditors.
The Western financial industry, moreover, has been lobbying heavily for even more secure protection from future losses. One plan, put forward last year by the US and UK Treasuries, envisions a $90 billion fund of public money, supposedly to avert currency crises. The idea is that G7 governments will, henceforth, underwrite the finance industrys speculative ventures into emerging markets before, rather than after, they turn sour. In this way, when bankers and fund managers grow bored with a particular market, withdraw their funds and send the currency into a tailspin, they can collect on their losses immediately, without the tedious and time-consuming delays generated by IMF negotiations.
The industry has also been working overtime to squelch defensive government action against their speculative attacks. At a recent conference in New York City, economist Jagdish Bhagwati noted that the IMF and the US Government, despite repeated crises and heavy criticism, have intensified pressures on countries to lift exchange controls. The IMF recently proposed changing its Articles of Agreement so as to require countries to permit even more freedom for financial speculators. Echoing this sentiment, US Treasury official Lawrence Summers decried efforts by Malaysia, Hong Kong and others to curb foreign lending, calling capital controls a catastrophe and urging countries to open up to foreign financial service providers, and all the competition, capital and expertise they bring with them.
Critics of IMF and US policy have, of course, noted that the combination of free-flowing capital and bailout funds are a boon to banks and other creditors. Such IMF critics as financier George Soros and Harvards Jeffrey Sachs complain that the game of international speculation and bailout played by the Western financial establishment in which hot money rushes into a country, then pulls out, leaving behind a wrecked economy to be cleaned up by local governments and G7 taxpayers is a menace to world economic stability. For the Western financial establishment, however, the bailouts are not the real prize. Nor are the devastated economies of Asia an unfortunate side-effect of a financial scam. They are the whole point of the game. Asias bankrupt businesses, insolvent banks and jobless millions are the spoils of what economist Michel Chossudovsky aptly calls financial warfare. The gains to be won from these financial hit-and-runs are immense.
There are, first of all, the foreign-exchange reserves of the target countries. Countries accumulate currency reserves by running trade surpluses, often after year upon year of selling more abroad than they purchase. These surpluses are accumulated at great cost to the working populations, who labor hard to produce goods, destined to be consumed by foreigners. In 1997-98, Asian countries spent nearly $100 billion in accumulated reserves trying vainly as it turned out to prevent devaluation. Brazil, the latest country to fall, spent $36 billion defending the real against speculators. Thus, in little over a year, did the Western financial élite confiscate $136 billion of hard-won wealth from the emerging markets.
Next, there are the bargains to be had once the target countrys currency has collapsed and its firms are strapped for cash. Years of effort, for example, by the Korean élite to keep businesses firmly under control of state-supported conglomerates called chaebols were undone in a matter of months. By early 1998, as the IMF negotiated the terms of surrender, Citigroup, Goldman Sachs and other firms were snatching up ownership of Asian banks and industries. With currencies down 15-60 per cent and stock prices down 40-60 per cent, Asia is today a bargain-hunters paradise. Nor are assets the only bargains to be had. As a direct result of the destruction wrought by global financial interests, the prices of basic commodities have plummeted over the past year. Oil, copper, steel, lumber, paper pulp, pork, coffee and rice can now be bought up by Western firms dirt cheap, an important key to the continued profitability of US industry.
Then there is the higher tribute that countries, once in debt peonage to Western creditors, must pay on both old and new loans. South Korea, for example, under the terms of the IMF bailout, will pay interest on foreign loans that is 25-30 per cent higher than rates on comparable international loans this despite the fact that the loans have been guaranteed by the Korean Government. Since the crisis began, international lenders have doubled or tripled the interest rates they charge on emerging-market debt. What if such usurious interest cripples the economy and drives the country into default? Well, then they will become wards of the IMF, lender of last resort.
Next, there are the people themselves, engulfed in debt, impoverished and committed by their governments to an endless course of domestic austerity and debt repayment. Like the debt crisis of the 1980s, the Asian crisis has resulted in millions of newly unemployed, whose desperation will pull wages down worldwide. Like the debt crisis of the 1980s, the Asian crisis will turn entire countries into export platforms, where human labor is transformed into the foreign exchange needed to repay Asias $600 billion debt. In just this past year, Thai rice exports rose by 75 per cent, while Korea has managed to boost its exports and accumulate $41 billion in reserves for debt service. These figures, notes the World Bank, indicate that people in Asia are working harder and eating less.
Finally, there are the governments themselves, the ultimate prizes to be won. It is no accident that conditions imposed by the IMF, with their emphasis on altering state employment, welfare and pension systems, their insistence on reforming the legal and political systems of the target countries, entail a major loss of national sovereignty. Through IMF negotiations, national governments are transformed into local enforcement agents of transnational corporations and banks. IMF officials are quick to point out that the usurped governments often were not paragons of democracy and virtue. This of course is true. But the motives of the IMF are themselves profoundly undemocratic, intended to seize sovereignty and fix the rules of the game and to protect and expand, at all cost, the wealth of the international financial élite.
Ellen Frank is Professor of Economics at Emmanuel College, Boston, and a regular contributor to Dollars and Sense Magazine.
Why the environment suffers from debt
Sustainable development requires the conservation of natural resources. One way of doing this is to make them more expensive. In fact, they are getting very much cheaper. World-market prices for raw materials commodities like oil, timber, sugar, coffee or copper have fallen to their lowest levels in living memory. This is partly because there is less demand in times of economic recession and partly because of technological change. (Copper wiring, for example, is being replaced by optic fibres and silicon chips.) But it is mostly because of debt in the South, the source of many of the worlds commodities. Structural-adjustment policies imposed by the IMF and World Bank mean that poor countries have to earn foreign currency to service their foreign debts, before they are allowed to do anything else. This means exporting the only things they can sell on world markets raw materials. Because all poor countries have to increase their exports at once, there is a glut on world markets and prices fall sometimes by as much as a half, so that twice as much has to be exported to earn the same amount of foreign currency. The beneficiaries are the rich countries. They not only get their debts serviced, but cheap commodities keep prices down, profits up and inflation under control in the North. The losers are the people of the South and the global environment.
The downward path
Percentage fall in commodity prices, between 1980 and 1997
(in constant 1990 $)
Source: World Bank