Debt among Nations: A case of disempowerment of entire societies and countries

The discourse around the notion of empowerment usually looks at problems that are internal to particular societies and particular countries.  It is therefore common to hear about the problem of empowerment of lower caste groups in India or that of the Hispanics and African Americans in the United States of America and also that of women in traditional and conservative societies such as the Islamic societies.  Not too much effort goes into the understanding of certain problems that can disempower whole nations.  In the decades that preceded the 1990s it was common to hear analyses of debt traps and the whole range of problems associated with them.  But with the latest round of globalization which has seen countries such as India and China come out of the ranks of the third world and with the disappearance of the Soviet Union which pledged support to societies that were post colonial and struggling under the weight to debt the vocabulary of debt related problems has taken a back seat.  But that does not mean that the problem has disappeared.  There are all the countries of the third world which are still in the same problem of not finding debt relief and therefore at the mercy of developed countries and global financial institutions such as the World Bank and the IMF.  The original problem of dependency and the debt was in the Latin American region which was effectively the back yard of the United States of America.  Despite varied attempts aimed at breaking the debt trap the Latin American countries, especially Argentina, have still to find an effective way out of debt.  One of the more talked about and touted plans has been the “Washington Consensus”[1].

The expression “Washington Consensus” is only useful if interpreted as a short for “Washington support for the Latin American Consensus”.  By the mid 1980’s a Consensus emerged among economists and democratic political leaders all across Latin America on the need to introduce “new rules of the game” for the national economies in order to defeat hyperinflation and renew growth. But these reforms could not be successfully implemented unless Washington would provide help to free Latin American nations from the Debt Trap. Washington support came with the Bush and Clinton Administrations. But seems to have “gone with the wind” of the Bush Administration. On the Latin American side the consensus started to disappear with Chavez in Venezuela and Duhalde in Argentina. It needs to be examined if the lack of Washington support for the disappearing Latin American Consensus will make room for better reforms or will simply consolidate the very discouraging current landscape in Latin America. Or, even worst, will recreate the situation of the 70’s and 80’s.

In the aftermath of the WWII, ideological discussions in the world focused on the dichotomy Socialism versus Capitalism. Naturally this dichotomy embodied the economic aspect of the East-West confrontation that characterized the Cold War. Latin American countries tried not to get involved in this confrontation adopting what Juan Domingo Perón, who was the Argentine President at the time, called “The Third Position”. These ideas would be the seed of the Not Aligned Countries Movement, which in turn several developing countries joined. At the same time, in Latin America economic academic thinking moved towards the so called “Structuralism” as opposed to the “Orthodoxy” that had prevailed in previous decades. “Structuralism” looked like the “Keynesianism” of the Developing World. A good account of the Structuralist School is offered by Rhys Jenkins in the book entitled Industrialization and Development edited by Hewitt, Johnson and Wield. “Structuralism” gave intellectual support to the Import Substitution Industrialization (ISI) growth strategy and the Populist Macroeconomic Policies that most Latin American governments implemented since the mid forties until the eighties with varied intensity. The economic organization and the economic policies suggested by “Structuralism “were functional to the political regimes that prevailed in most Latin American countries in those years: either civilian governments in corporate state democracies or military dictatorships. For them “Statism” was a way to accumulate and preserve political power.

The only case of a military dictatorship that implemented economic reforms departing from the Structuralist Policies was Chile under Pinochet. But the very fact that the Economic Liberal Reforms had been decided and implemented by a repressive regime had added more passion to an already heated debate. Even though very informative from the economic point of view, the Chilean Experience could not be easily digested by the political leaders of the emerging democratic regimes of Latin America during the 80’s. In Mexico and Brazil, strong criticism to the Import Substitution Industrialization growth strategy began to be heard only after the eruption of the Debt Crisis in 1982. Indeed, economic discussions had started to take place prior to 1982 analyzing whether the development strategy based on the ISI model was exhausted. These discussions overlapped with a few, but not really frequent, episodes of Populist Macroeconomic Policies based on the Structuralist mindset. But, all in all, the ISI growth strategy had delivered rapid growth in both countries during the period 1945-1982. The good results had been undisputable until the first oil crisis in 1973, and the difficulties created by the commodity crisis of the 70’s had been overcome by readily available foreign financing. By the mid 80’s the criticism regarding the Import Substitution Industrialization growth strategy that had emerged at the time of the Debt Crisis became strong and convincing because the difference in economic performance between East Asia and Latin America during the period 1965-80 spoke by itself[2].

In Argentina the evidence against the policies recommended by Structuralism were even more eloquent and came from a different comparison. Until the WWII, Argentina had achieved a standard of living quite close to that enjoyed by the most advanced countries in the world. This was the outcome obtained from the combination of its vigorous international trade, its infrastructure and its education system. In turn, the implementation of the Import Substitution Industrialization strategy along with Populist Macroeconomic Policies produced a disappointing outcome instead. The disappointing consequence of implementing the last set of policies was a stagnant economy suffering high levels of inflation since the mid 1970s. The Argentine case when compared to countries with similar endowment of human and natural resources such as Canada and Australia shows that there was an obvious divergence among the economic performances of those countries from the WWII on. What then are the reasons of Argentina’s backwardness? The disappointing performance of Argentina after the WWII was due to a certain institutional misplace, which had been a consequence of the trade and macroeconomic policies implemented thereafter. In a well-organized mixed economy, resources are efficiently allocated by means of the signals sent by relative prices. Relative prices, in turn, are determined in competitive markets. On the other hand, redistributive policies are explicitly included in the government’s Budget.

In Argentina, on the contrary, those instruments of economic policy had switched roles. Instead of being instrumental in the efficient allocation of resources, relative prices were controlled by the government aiming at redistributing income. On the other hand, instead of playing a role in the redistribution of income, the government’s Budget aimed at allocating investment and employment. This work along with the work of other authors laid the foundation of our position on the matter. We explained that Argentina’s problem was not that it had too much Capitalism as Structuralists argued, nor was it that it had too much Socialism as the Orthodox Economists said. The real problem was that it has a poor combination of both Capitalism and Socialism. Its economy was a mix of “Capitalism without a Market and Socialism without a Plan.” The New Rules Plan was never accepted by the United States Administration and therefore the debt trap was never broken.  In fact, the 1990s saw spiraling inflation in Argentina that led to a huge economic and political crisis, out of which the country is only just limping[3].

The African debt trap

The Latin American region is not the only one caught in the debt trap.  Most African countries are also caught in debt traps that they have not been able to break out of.  The World Bank and IMF have been the agencies that have played a very key and pivotal role in the creation and perpetuation of debt traps. The IMF began to specialise in lending to the Third World, providing short term loans to poor countries in Africa and elsewhere that were experiencing trade deficits (ie an excess of imports over exports) and balance of payments crises in the wake of the 1974-75 recession. 
The majority of sub-Saharan African countries were particularly vulnerable to downturns in the world economy because of their reliance on a narrow range of price sensitive primary commodity exports (like cocoa, coffee or copper) - a legacy of colonial rule. The slump of the 1970s saw most raw material prices collapse at a time when the cost of oil imports was shooting up. The IMF began to offer short term loans to ‘stabilise’ these countries’ balance of payments. But harsh ‘conditionalities’ forced borrowers to implement an ‘austerity programme’ of slashing imports, reducing public expenditure and cutting wages in order to reduce their trade deficits and promptly repay the IMF. A second round of oil price rises and even deeper recession deepened the IMF’s hold over the poorest African states. The nominal price of primary commodities fell a staggering 30 percent between 1980 and 1982; in real terms, allowing for inflation, they hit their lowest level since the end of the Second World War. As one African economy after another effectively collapsed, the fund devoted more of its financing facilities to the region. In 1970-78 only 3 percent of the IMF’s new conditional credit went to Africa, but by 1979-80 this figure reached a very big figure of more than thirty percent.
Both the IMF and the World Bank were able to consolidate their hold over Africa as a direct consequence of the debt crisis. They now assumed a dual role. They ensured that the commercial banks were repaid by lending African states more money to service their private debts. And they acted as debt collection agencies for the Western powers and themselves, working with the creditor governments through the Paris Club. This is an informal grouping of 19 states (Western Europe, Canada, the US, Japan, Australia, Russia) that aims to squeeze the maximum repayments out of the Third World debtors and ensure they don’t default. It divides and rules by insisting all bilateral debts are rescheduled on an individual basis and will only agree to negotiate with a country if it has already signed a debt management agreement with the IMF[4]. 
The International Financial Institutions also insisted on the repayment of their own multilateral loans on even harsher terms. The charters of the IMF and World Bank specifically forbid debts that they hold to be rescheduled or written off. Moreover, most of this debt is charged at market rates.  This is one of the main reasons why Africa’s total debt has continued to grow while an ever greater volume of resources has flowed out of the continent. 

When the Latin American states came to the brink of default in the early 1980s, the concentration of private bank loans in just three countries threatened to destabilise the entire international financial system by wiping out some of the world’s largest banks. The major powers had no choice but to rush in and attempt to rescue the banks through massive bailouts and schemes designed to shift the burden of repayment onto the shoulders of the workers & peasants.

 The African debt was quite different. Not only was it small to the point of insignificance in world terms, but it was also spread over a large number of poor countries which had become increasingly dependent on Western aid as well as loans. As such, individual defaults did not present much of a threat to the system. This gave the International Financial Institutions extraordinary leverage over sub-Saharan Africa and, through this, unparalleled capacity to launch the neo-liberal assault[5]. 

The principal levers of the neo-liberal offensive were the new Structural Adjustment loans of the World Bank and the IMF. Their overarching aim was, in the words of then US Secretary of State, James Baker, ‘encouraging the private sector and allowing market forces a larger role in the allocation of resources’.40 This would be achieved through a radical programme of privatisation, liberalisation and reduced public spending that would ‘roll back’ the state and subject the indebted economies to the full rigours of global competition. Structural Adjustment Programmes (SAPs) had effects in Africa over the course of the 1980s and 1990s which significantly shaped the form and content of the debt relief schemes that followed.
-They systematically undermined the formal independence of the African states. The new and powerful conditions attached to the loans enabled the International Financial Institutions to dictate the economic policy of almost the entire continent. Regardless of whether an African country carried the trappings of formal democracy or was the most authoritarian of states, its key ministries were now answerable to the IMF and the World Bank. Their remit was further extended in the 1990s when the World Bank adopted its ‘good governance’ agenda. Now African states would themselves be re-engineered to complement the market economies forcibly constructed by the earlier wave of reforms.

-They significantly boosted the power and profits of the Western multinational corporations operating in Africa. Successive rounds of deregulation stripped the African states of what little control they had previously exercised over the activities of foreign firms. The wholesale privatisation of state-owned industries and utilities simultaneously provided the multinationals with ‘public goods’ in the form of bargain basement assets that could be stripped, squeezed and sold on. Between 1985 and 1995 the profits repatriated by the multinationals from sub-Saharan Africa rose from $4 billion to $4.5 billion; and by 1997 the rates of return on US direct investments in the continent were, at 25.3 percent, the highest of any region in the world.

-They spectacularly failed in their own terms. The stated aim of ‘macroeconomic shock treatment’, as the World Bank called it, was to jumpstart growth and get Africa back on its feet. The indebted economies would be reoriented on the world market by shifting them away from industrialisation strategies of the early decades after independence from colonialism. They were to be (re)specialised in a narrow range of raw material and cash-crop exports. As a consequence, sub-Saharan Africa was effectively deindustrialised.  But the new surge in primary commodity exports only flooded already saturated markets and forced world prices further down[6]. 
Africa’s fragile and marginalised economies went deeper into crisis. Annual average growth rates fell from a respectable 4 percent in 1970-79 to 1.7 percent in 1980-89 and 0.4 percent in 1990-94. Even the World Bank was forced to admit in 1989 that ‘overall Africans are as poor today as they were 30 years ago’ and per capita income in sub-Saharan Africa in 2000 was 10 percent below the level reached in 1980. 
-They relentlessly assaulted the livelihoods and welfare of Africa’s workers, peasants and poor. To take the example of Zambia, there were 140 textile manufacturers employing 34,000 people in 1991; just eight remained by 2000. Formal manufacturing employment fell from 75,400 to 43,320 between 1991 and 1998; and paid employment in agriculture from 78,000 to 50,000 in that decade. Real wages in nearly every African country were estimated to have fallen between 50 and 60 percent since the imposition of the Structural Adjustment Programmes. Food prices rocketed following the removal of subsidies on staples like maize, while the collapsing health and education sectors fell out of reach of most people thanks to the imposition of user fees.
But there was immense resistance to the SAPs. Anti-IMF strikes and riots broke out across the continent in the 1980s and gathered momentum towards the end of the decade. Protests against the SAPs turned into struggles against the states that were implementing them. Between 1989 and 1992 some 20 African countries were rocked by mass democratisation movements which brought down one government after another.  It is against this background that the debt relief schemes now hailed by Brown began to emerge.
On Saturday 11 June 2005 a meeting of the G7 finance ministers in London reached agreement on multilateral debt relief ahead of the July Gleneagles summit. The proposed scheme is a compromise between the rival British and US positions and a third plan put forward by Germany, Japan and France at the last minute. Gordon Brown and his press have hailed the deal as a “historic breakthrough” and the “largest debt write-off ever”[7].  But this is not true.

Multilateral debt relief will apply to an outrageously small number of countries. Only those that have gone through the entire HIPC process will qualify. A mere 18 countries have reached ‘completion point’ so far; together, they represent just 5% of the total population of the Global South. Poor and indebted countries like Angola, Kenya and Nigeria will continue to be excluded. The colossal debts of ‘middle income’ countries like Brazil are completely off the G8 radar. The ability of countries to take advantage of multilateral debt relief is entirely dependent on their ability to fulfill their neo-liberal reform programmes to the World Bank and IMF’s satisfaction. In the meantime, tens of thousands will continue to die from lack of basic healthcare. 

A portion of the multilateral debt of the qualifying countries will be written off, but the amounts involved are small and will lead to reduced aid disbursements for the ‘beneficiaries’.  At one level, anti-debt campaigners have achieved a small but significant victory by forcing the G8 to establish the principle of ‘full’ multilateral debt cancellation in the new scheme. Brown was proposing no more than a ten year moratorium on debt service payments and Germany, France and Japan were opposed to even this. Likewise, the inclusion of IMF debt represents a partial retreat on the part of the US, which was adamant that the Fund’s debt should remain untouched. However, pressure from below was not the only factor at work in the London deal. Imperialist rivalry also significantly shaped the debt compromise the outcome of which is reflected in both the scope and means of the write-off. To make sense of this, it is useful to briefly outline the different strategic relationships between the G7 states and the International Financial Institutions, and how these manifested in the debt negotiations.

The World Bank, IMF and other multilateral institutions should of course be understood as instruments of the West’s collective domination over the Global South. But they are also arenas of the competitive struggle between the major powers as they pursue their distinctive economic and geo-political interests. The broad shift towards US unilateralism under Bush has in part been expressed through a strategy of reducing the role of the World Bank while reinforcing that of the IMF and establishing more bilateral aid and trade agreements with key regions in the Third World. In particular, the Bush administration has increasingly pushed for the World Bank to phase out loans in favour of making grants (aid) and devolve its lending responsibility to regional multilateral banks, like the Inter-American Development Bank, in line with the recommendations of a Congress Commission headed by the conservative academic, Alan Meltzer, which reported in February 2000. The aim is to erode the Bank’s centralised creditor power over the Third World and, with it, the leverage of its other major shareholders – like Japan, Germany and to a lesser extent Britain – who are at once America’s major competitors.

The appointment of arch-neoconservative Paul Wolfowitz to the World Bank was the most obvious expression of the drive to transform the Bank from the general representative of the advanced capitalist states into a narrower tool of US imperialism.  At the same time, America has been strongly opposed to any attempt to weaken both the creditor status of IMF through the sale of its gold, or its bilateral and heavily conditional aid scheme, the Millennium Challenge Account, through Brown’s proposal for the multilateral International Finance Facility. By the same token, the other advanced capitalist states have to varying degrees resisted the downgrading of the World Bank, which remains their favoured vehicle for opening up the Global South to their multinationals and retaining a check on US power. This is the main reason why Japan, France and Germany on the one hand, and Britain on the other, formulated debt relief proposals that would keep some, if not most, of the World Bank’s multilateral debt stock intact, contra the US position of writing off debts.

The debt deal has been designed to retain World Bank and IMF control, and hence deepen neo-liberal conditionality, in three mutually reinforcing ways. First, and most obviously, the new debt scheme will strengthen and expand the discredited HIPC (Heavily Indebted Poor Countries) approach. At present, the G7’s proposal only applies to the countries that were arbitrarily identified for the HIPC initiative by the World Bank in the 1990s and by the same token continues to exclude those that were left out of the original selection. It also significantly increases the incentive for struggling participants to see the whole HIPC process through – and thus the heavy programs of neo-liberal reform that accompany it – as completion is now the only way to become eligible for multilateral, as well as bilateral, debt relief[8]. With this new lease of life, the HIPC scheme will be widened to include a new tranche of ‘worthy’ poor and indebted countries. The World Bank is said to be drawing up a new list. The International Financial Institutions, and through them the Western powers, will thus not only continue to be the arbiters of who is ‘fit’ to be relieved of their debt burden, but will also be able to extend this form of neo-liberal control. The Committee for the Cancellation of Third World Debt has summarised the horrors that will be entailed:

“Privatisation of natural resources and of strategic economic sectors to the benefit of transnational corporations; higher cost of health care and education; a rise in VAT; free flow of capital, which leads to capital leaving the country as shown by UNCTAD reports; lower tariff protection, which leads to thousands of small and middle producers losing their livelihoods because they cannot compete with imported goods”[9].

Second, those countries that have passed through HIPC and received multilateral debt relief will be forced to maintain the momentum of neo-liberal reform in order to meet the criteria of the World Bank’s Performance Based Allocation (PBA) system – the new prerequisite for clawing back some of their lost aid. Moreover, the PBA system will itself be enhanced to maintain control over these ‘beneficiaries’. During the G7 negotiations, Germany, France and Japan argued that full-scale debt relief would “encourage corruption”, condone “reckless borrowing” and, above all, “leave the west with few tools to reward countries for good governance”. This, of course, was code for their fear that the World Bank would lose its principle means of opening up the economies of the Global South and see a steady erosion of its creditor power in line with US strategic interests. The compromise reached will see the International Financial Institutions report on ways to ensure that the additional finance to the IDA is used for “poverty reduction and does not lead to corruption”. The PBA system will also include new “governance and transparency” conditionalities. If ‘corruption’ in a recipient country is deemed to have increased after debt relief, it will be penalised with reduced aid flows.

Finally, a new mechanism is being devised to ensure that the IMF does not lose control over countries freed of its debts. The US, as we have seen, was strongly opposed to any weakening of the IMF’s creditor power and only conceded to a small, internally funded write-off to bury Brown’s gold sale plan. But this does not mean that America wants to see the IMF’s role reduced after debt relief. On the contrary, US Treasury Secretary John Snow has been working on a new IMF ‘facility’ – the Policy Support Agreement (PSA) – which will allow conditions to be imposed on developing countries even if they are no longer officially indebted to the IMF or taking loans from it[10].

The net effect of the new multilateral debt initiative will, then, be to entangle developing countries in new and refined forms of neo-liberal conditionality. This in turn ensures that they will remain trapped in perpetual debt. All ready crippled after decades of structural adjustment and confronted with forms of ‘debt relief’ which effectively reduce resource inflows, the Global South is kept on its knees. Ceaseless neo-liberal restructuring means that as soon as poor countries have one set of debts reduced or cancelled, they are forced to borrow more. Tanzania, which had $2 billion in bilateral debt written off in exchange for years of wrenching HIPC conditionality, has had to continue borrowing. It now has debts of $8.2 million the service on which accounts for 12% of its tiny $3.7 billion national budget. And herein lays the ultimate genius of the G8’s debt trap. It provides the illusion of escape, but only through a route which strengthens its grip. It cannot be reformed, only smashed.

The net result is nations and countries that are caught in debt traps find themselves disadvantaged and disempowered.  When a country is disempowered it automatically follows that the people of that country are all disempowered.  The globalised world in order to be equalitarian will have to find more truthful and sincere ways of writing the debt of the struggling nations off.  Chicanery in the creation of relief schemes will ultimately only serve the purpose of postponing a crisis that will ultimately don global proportions and affect even those who may think that they will never be affected.

[1] D Millet and E Toussaint. Who Owes Who? Fifty Questions About World Debt (London, 2OO4), p87-

[2] A Callinicos, Imperialism Todav , in A Callincos et al. Marxism and the New Imperialism (London, 1994)- p35-

[3] ibid

[4] E Toussaint. Your Money or Your Life! The Tyranny of Global Finance (London, 1999), P I98.

[5] J Boyce and L NTdikumana, 'Africa's Debt: Who Owes Whom?', Political Economy Research Institute Working Paper Series. 48 (2002).

[6] L Harris, The Bretton Woods System and Africa', in B Onimode (ed), The IMF, the World Bank and the African Debt: The Economic Impact (London, 1989)

[7] W Bello, Deglobalization: Ideas for a New World Economy (London, 2004)

[8] S Riley, Debt, Democracy and the Environment in Africa', in S Riley (ed) The Politics of Global Debt (Basingstoke, 1993)

[9] ibid

[10] K Owusu et al, Through the Eye of a Needle: The Africa Debt Report , Jubilee 2000 Coalition Reports, (London.

2000),