Mail & Guardian (Johannesburg)
May 22, 1998
The current call for international debt cancellation is welcome, but debt does not just go away. Someone pays, and history confirms that risks tend to be socialised in the system mislabelled “free enterprise capitalism”.
The old-fashioned idea is that responsibility falls upon the borrowers and lenders. Money was not borrowed by assembly plant workers or slum-dwellers. The mass of the population gained little from borrowing, often suffering from its effects. But they bear the burdens of repayment, along with taxpayers in the West, not the banks who made bad loans or the economic and military elites who enriched themselves while transferring wealth abroad.
The Latin American debt that reached crisis levels from 1982 would have been sharply reduced by the return of “flight capital” — in some cases overcome. The World Bank estimated that Venezuela’s flight capital exceeded its foreign debt by 40% in 1987.
The International Monetary Fund (IMF) “rescue package” for Indonesia approximates the wealth of the Suharto family.
One Indonesian economist estimates that 95% of the country’s R80-million foreign debt is owed by 50 individuals, not the 200-million who end up paying.
Debt can be and has in the past been cancelled. When Britain, France and Italy defaulted on debts to the United States in the 1930s, Washington “forgave (or forgot)” as the Wall Street Journal reported.
When the US took over Cuba 100 years ago it cancelled Cuba’s debt to Spain on the grounds that the burden was “imposed upon the people of Cuba without their consent and by force of arms”.
Such debts were later called “odious debt” by legal scholarship, “not an obligation for the nation”, but the “debt of the power that has incurred it”, while the creditors who “have committed a hostile act with regard to the people” can expect no payment from the victims.
When Britain challenged Costa Rica’s attempts to cancel the debt of the former dictator to the Royal Bank of Canada, the arbitrator, US Supreme Court Chief Justice William Howard Taft, concluded the bank lent the money for no legitimate use, and its claim for payment failed. The logic extends to much of today’s debt.
In the 1970s, the World Bank actively promoted borrowing. “There is no general problem of developing countries being able to service debt,” it announced in 1978.
Weeks before Mexico defaulted in 1982 a joint publication of the IMF and the World Bank declared that “there is still considerable scope for sustained additional borrowing to increase productive capacity” — for example, for the useless Sicartsa steel plant in Mexico, funded by British taxpayers in one of the exercises of Thatcherite mercantilism.
Mexico was hailed as a free market triumph and a model for others until its economy collapsed in December 1994. Shortly before the Asian financial crisis erupted in 1997, the World Bank and IMF praised the “sound macro-economic policies” and enviable fiscal record of Thailand and South Korea.
A 1997 World Bank report praised the “particularly intense” progress of “the most dynamic emerging markets” of Korea, Malaysia and Thailand, with Indonesia and the Philippines not far behind. The report appeared as the fairy tales collapsed.
Failure of prediction is no sin, but it is hard to overlook the argument that economist Paul Krugman put: “Bad ideas flourish because they are in the interest of powerful groups.”
Free market theory has always been double-edged: market discipline is fine for the poor, but the rich take shelter under the wings of the nanny state.
Another factor in the debt crisis was the liberalisation of financial flows from the early 1970s. The post-war Bretton Woods system was designed by the US and Britain to liberalise trade while regulating capital movements. It was dismantled by the Nixon administration. This was a major factor in the enormous explosion of capital flows in the years that followed.
In 1970, 90% of transactions were related to trade and long-term investment; the rest were speculative. By 1995, 95% of transactions were speculative, most of them very short-term. The outcome generally confirms the expectations of Bretton Woods.
Markets have become more volatile, with more frequent crises. The IMF has virtually reversed its function: from helping to constrain financial mobility, to enhancing it while serving as “the credit community’s enforcer” (according to IMF economist Karin Lissakers).
It was predicted once that financial liberalisation would lead to a low-growth, low-wage economy in rich societies. That happened too. For the past 25 years, growth and productivity rates have declined. In the US, wages and income have stagnated or declined for the majority while for the top few they have gained enormously.
The US has the worst record among industrial countries by social indicators. England follows closely and similar effects can be found throughout the Organisation for Economic Co-operation and Development.
The effects have been far more grim in the Third World. Comparison of East Asia with Latin America is illuminating. Latin America has the world’s worst record for inequality, East Asia ranks among the best.
Debt is a social and ideological construct, not a simple economic fact. Liberalisation of capital flow serves as a powerful weapon against social justice and democracy. Policy decisions are choices by the powerful, based on perceived self-interest, not mysterious economic laws.