Chapter 5 – The Debt Crisis’ Silver Lining

The Debt Crisis’ Silver Lining

“WE’VE ENJOYED THE DEBT CRISIS,” said Gustavo Esteva of Mexico, a country burdened with $100 billion in debt it could not repay, and with social and environmental problems as severe as those in any Third World country. Mr. Esteva, a social reformer who describes himself as “a man who works with the peasants,” is better known to some Mexicans as a former executive at International Business Machines and a former head of Mexico’s General Plan for Public Expenditures.

The debt crisis, said Mr. Esteva, has helped Mexico’s environment: it has given the land and its people a reprieve by shelving unsustainable logging and agricultural schemes, and by delaying Mexico’s nuclear program and other environmentally risky projects.

Mr. Esteva was speaking not from theory but from practice. In theory, his government might have been loath to sell off its natural resources, but been forced to do so to satisfy foreign creditors. In practice it had no such loathing, borrowing to its credit limit and beyond precisely to finance rapid resource exploitation. The only brake on that exploitation came from the debt crisis; with a government’s capacity to borrow curtailed, so too is its capacity to do environmental harm.

Brazil, the world’s largest debtor, piled up 25 per cent of its $111 billion foreign debt on a building binge of unneeded electricity projects that left its creditors dizzy and its environment in tatters. So profligate was the electricity system’s expansion that by 1988, one-third of Brazil’s national utility system’s annual operating revenues went to pay interest on external loans. Consequently, Eletrobrás (the national electric utility) borrowed ever larger amounts — eight dollars out of every ten spent — to finance new projects.

The most spectacular investment ever made by Brazil’s electricity moguls involved the Itaipu hydroelectric dam on the Brazil-Paraguay border. Itaipu is the largest dam in the world, so large that the Symphony Orchestra of Brazil held a concert in one of its eighteen turbines. It cost $20.5 billion to build, with incalculable environmental and human costs: Itaipu flooded almost 1,500 square kilometers of tropical forest and farmland; it drowned Sete Quedas, one of South America’s most impressive natural cataracts; and it displaced 40,000 people, including the Ava-Guarani Indians, mostly without proper compensation. The dam also destroyed the habitat of 252 species of birds and 70 known species of other animals including armadillos, tapirs, crocodiles, jaguars and deer. For the Brazilian people saddled with paying the $8 billion in foreign debts accumulated by the dam, it was an extravagance they didn’t need and couldn’t afford. The trade journal, International Water Power and Dam Construction, reports that the investment may never be profitable.

Tucurui, another monster dam built shortly after Itaipu, submerged 2,400 square kilometers of now rotting rainforest and cost Brazil another $5 billion, plus lasting environmental harm. Even the dam building industry called the “whole Tucurui story … one of incompetence, nepotism and greed.”

But the credit available to finance these Third World megaprojects became tighter and tighter, so much so that just a few months after Tucurui’s completion Brazil’s president decided to suspend the notorious Balbina dam as part of an IMF-induced budget cutting exercise. Brazil was out of money, and Balbina was becoming a rallying point for environmentalists around the world. It took urgent appeals by the governor and other representatives from the state of Amazonas to President Sarney to avert the cutoff of funds.

Armando Ribeiro de Araujo, adviser to the president of Eletronorte, the utility responsible for the Amazon, chided environmentalists for their “hands-off the Amazon” demands. “It is unthinkable that such a rich region as the Amazon might be kept eternally untouched,” he said. On the other hand, he acknowledged that foreign funds were the limiting factor. “Right now, in Brazil the problem is money. That’s the only limit to what we can do.”

By 1987, the credit crunch had accomplished much of what environmentalists had sought. Brazil was defaulting on its debt to commercial banks, very little new money was coming in, and the megaprojects began to fall. Eletrobrás was put on a short financial leash and forced to cut back on five hydroelectric projects, including the second phase of Tucurui.

Brazil’s massive nuclear power expansion program, like Mexico’s, was also grounded by the debt crisis, its backers bemoaning to The Wall Street Journal readers that Brazilian state planners remembered the nuclear industry “only at the time of budget cuts.”

Brazil’s nuclear program, started in 1969, soon called for nine nuclear reactors by 1990, all but one of which was to be built and financed under an agreement with the West German government. The agreement provided for direct loans and credit facilities and for an extensive program of technology transfer involving some 16 German companies and organizations. By 1990, however, only one of the nine plants, Angra I, had been completed. Its intermittent operation has earned it the nickname, “the firefly.” Angra II, with 90 per cent of the work done, was grounded until March of 1990 when the Brazilian National Congress finally authorized $200 million needed for its completion, now scheduled for 1995. Funds to finance the balance of the program have simply dried up — probably a good thing. Brazil’s experience with nuclear power has been dismal, with the cost of nuclear electricity approximately five times higher than the government estimated when signing the agreement with the West German government.

In Argentina, the nuclear power program was also slowed by the credit squeeze. In 1988, the National Atomic Energy Commission started to plan the orderly shutdown of the half-completed Atucha 2 nuclear power plant because the $750 million needed to finish it could not be found. “It’s not that there has been a conscious decision to postpone nuclear development,” said Dr. Pérez Ferreira, the president of the National Atomic Energy Commission, “but that the Government has to postpone everything — teacher’s raises, social welfare, pensions and more.”

During the 1970s — the decade responsible for the lion’s share of the Third World’s $1.3 trillion debt — developing countries undertook an estimated 1,614 megaprojects with a total cost of more than $1 trillion. The average size of each project was about $620 million. Nearly a quarter of those megaprojects were in the oil sector, nearly 20 per cent in the mining sector, and over half were for infrastructure projects including electric power, roads, agricultural, and communications projects. Virtually all of these projects required foreign financing to proceed, and virtually none were economic without subsidies. Virtually all of these projects have damaged the environment.

The megaprojects building craze led Brazilian environmentalists like Magda Renner of Friends of the Earth to conclude that “Brazil’s environment and the world’s financial system would be a lot better off if the international financiers had just kept their money.” Like Gustavo Esteva of Mexico, many Third World citizens were suddenly finding they had the unlikeliest of allies — the debt crisis.

Because too much money in the wrong hands so often causes environmental destruction, environmentalists have sometimes found themselves fighting hard to thwart debt-relief measures worked out in Washington and Third World capitals. One such unlikely rallying point for the global environmental movement was the World Bank’s Second Power Sector Loan. Like the First Power Sector Loan that helped finish the Balbina dam, the second loan would have both helped Brazil pay back some of its international debts and refueled Brazil’s mega-dam plan to build 136 new dams, many of them in the Amazon.

In Peru, exuberant attempts to finance a rapid expansion of hydro dams in the wake of the 1973 oil crisis were dampened by Peru’s own credit unworthiness and by the most fundamental handicap for a hydro dam, a lack of water. Construction of the Carhuaquero plant in the north of Peru — designed to generate electricity and to provide water for irrigation — ground to a halt for three years during the 1980s because Peru couldn’t raise the money to finish it and because, as International Water Power and Dam Construction described it, the dam “would not have sufficient water.” Construction of the Charcani V hydro station in the south part of the country was also delayed for exactly the same reasons. While these projects limped along, other large hydro power plants scheduled to be built in Peru’s Amazonian areas never got off the drawing boards at all. The debt crisis was the cause: international bankers began insisting that Peruvians finance 50 per cent of each project. Since neither the Peruvian people nor the Peruvian government had this money, the largest schemes were canceled.

Argentina’s Yacyretá dam staggers from one financier to another, each financier suspecting that the $5.8 billion dam should be canceled, but each one dedicating an extra few hundred million dollars in the belief that too much money has been sunk into the scheme to turn back now. The current financier, the Inter-American Development Bank, signed a $250 million loan in April 1990, the same day Argentina’s President Carlos Menem called the dam a testament to greed and corruption too expensive for the country’s treasury. Without fresh money, the Yacyretá cannot be completed.

The debt crisis has been stopping African boondoggles as well, such as the Sudanese government’s attempts to finance an increase in the height of the Roseires dam. A ten meter increase would have doubled the dam’s storage capacity, increasing its power output and irrigation. But the increased height would have expanded the dam’s reservoir and displaced thousands of farming families, many of whom had been previously displaced by the Aswan dam built on the Nile in the 1950s. Sudan’s limited access to foreign financing put the $350 million project on hold for at least five years.

Even China, notable for its financial prudence (in limiting its debt servicing payments to between 15 per cent and 20 per cent of its foreign exchange earnings), was forced to shelve projects when foreign funds became scarce. Fiscal constraints slowed China’s nuclear power expansion program, and helped postpone the mammoth Three Gorges hydroelectric dam on the Yangtze River, among others.

According to the manager of Asea Brown Boveri China Limited, a Swiss-Swedish company building a hydro project in southwest China, without outside money “we have no chance. They [the Chinese] can’t afford to build the project without foreign financing.”

All over the world, megaprojects vanished as fast as the money-lenders withdrew their credit lines. In the Cameroon, all that stands between that country’s last great standing rainforests and the loggers’ chainsaws is an IMF-World Bank austerity program. Thanks to a “restructuring” of Cameroon’s forestry sector there are no foresters on staff to carry out a menacing national forestry plan devised by the United Nations Food and Agriculture Organization under the auspices of the Tropical Forestry Action Plan. Known as TFAP, this plan is a lumbering Frankenstein invented by foreign aid bureaucrats, ostensibly to save tropical forests in dozens of Third World countries. The Cameroon’s version of TFAP foresaw the country becoming “the most important African exporter of forestry-based products from the start of the 21st century.” To accomplish this it recommended that roads and other infrastructure be built to get the timber out of the rainforest. The 50,000 Pygmy people of the rainforest, who wish that the U.N. experts and their logging entourage would go back to wherever they came from, will have their wish if lending doesn’t resume.

While grandiose megaprojects were canceled by the debt crisis, so too were environmentally destructive policies that depended on persistent government subsidies. Agricultural subsidies in Nicaragua cost the country’s economy dearly while pumping dangerous chemicals into the Nicaraguan environment. Although the former Sandinista government had, on the face of it, an enlightened pesticides policy — upon taking power the Sandinistas banned a number of dangerous pesticides including DDT, aldrin and endrin — a host of subsidies made pesticides virtually free to most Nicaraguan farmers. All agricultural inputs were brought into the country at a highly favorable exchange rate: pesticides, for example, were imported and marketed through a state-owned agency providing 95 per cent to 98 per cent subsidies on the real price. Another subsidy came in the form of interest rates to farmers at a fraction of inflation rates. In addition, the state-owned bank providing many of the loans periodically forgave them, never foreclosing or punishing producers for not repaying. The consequences of these policies, in the words of an entomologist and foreign aid official, were “easy to predict: the use of agrochemical inputs rose dramatically, as did their waste and misuse.” Farmers applied pesticides whenever they had time, since cost was not a consideration.

Cheap pesticides led to irrational use. Although pest infestation did not increase during the periods of subsidies, pesticide use did, doubling in maize in a ten year period.

The irrational use extended beyond any imagined by the policymakers. Plastic containers were scarce in Nicaragua, and valued as water, gasoline, and diesel storage vessels. Reused pesticide containers filled this demand. During the height of the pesticide subsidies, the containers became more valuable than their contents, leading some entrepreneurs to buy insecticides, dump out the contents, and sell the container.

Pesticides also became lucrative contraband in neighboring Costa Rica and Honduras, which had relatively high pesticide prices. Smuggling sprang up along the borders. Along the Honduras-Nicaraguan border, one gallon of the herbicide Roundup (value U.S. $50) from Nicaragua would be routinely swapped for one pair of U.S. blue jeans coming through Honduras — a good deal for both traders whose profits came courtesy of the Nicaraguan taxpayer.

The Nicaraguan government maintained this costly and environmentally destructive policy for a political purpose: to subsidize the citizenry’s basic necessities. For the urban dweller, the government subsidized staple foods and utilities such as electricity, transportation, and water. For the rural dweller, the government subsidized the inputs for agricultural production.

Ironically, despite repeated challenges to the subsidy policy from the Ministry of Agriculture, the Office of the Presidency maintained the subsidies until 1988, when enormous budget deficits and trade deficits (imports cost four times what exports earned) eventually forced an IMF-style austerity package on the government. The currency was subsequently devalued by 3,000 per cent against the U.S. dollar, and cheap credit policies and the preferential exchange rate for imports were abandoned. In a span of a few months, producers found their virtually free agricultural inputs at world-market prices. The effect was dramatic. Producers cut back on many inputs, including pesticides and other agrochemicals, while the Nicaraguan economy and the Nicaraguan environment heaved a sigh of relief.

Oil exploration in Peru, pulp mills in Brazil, railways in Honduras, bauxite mines in Surinam, cheap pesticides in Nicaragua — all disappeared in the absence of the cash to carry out the projects .

Then along came the Brady Plan in 1989, a debt relief plan designed to get new money flowing by having rich countries guarantee the repayment of existing debt. But many throughout the Third World fear that this new money — in the absence of democratic reforms needed to ensure prudent borrowing — will only breathe life into their governments’ cash-starved megaprojects.

The Brady Plan’s first test case — a rescheduling in Mexico — bore out these concerns. After negotiating a debt management strategy with the IMF and the World Bank, and thus getting back into their good credit books, Mexico borrowed $1.96 billion from the World Bank and $3.6 billion from the IMF. Almost half a billion dollars from the World Bank loan would finance two hydroelectric dams, destroying the environment of at least 3,000 peasants and indigenous people, and foreshadowing a new assault on the Third World’s environment. It was the type of agreement that Gustavo Esteva had been dreading: “We are afraid when the debt crisis is over the money will flow again.”

Sources and Further Commentary

Gustavo Esteva has written many books and articles, and has been interviewed extensively by the broadcast media. See in particular “Regenerating People’s Space” in Alternatives, Special Feature, 1987; “The Informal Economy”, transcript of an interview on IDEAS, Canadian Broadcasting Corporation, November 27 and 28, 1990. Esteva offers many examples of environments saved because governments are pauperized. For example, in the late 1980s, Mexico’s Rural Development Bank had insufficient funds to force peasants to plant sorghum for animal feed. The result: many communities returned to traditional intercropping of corn and beans, which greatly improved nutritional levels and soil fertility. Similarly hydro dams and pulp mills that would destroy some of Mexico’s last remaining natural forests were on hold because of lack of money. Also see my article, “Debt crisis riding to the rescue of Third World environment,” in The Globe and Mail, Toronto, July 4, 1989.

On Brazil’s indebted electric utility system see “Eletrobrás expansion plans hobbled” in Gazeta Mercantil, Brazil, December 21, 1987; “Extracting Power From the Amazon Basin” by John A. Adam, in IEEE Spectrum, August 1988; “Financial Problems Delay Brazilian Schemes” in International Water Power & Dam Construction, U.K., February 1988; “Eletrobrás: A Pleasant Shock” in Gazeta Mercantil, January 25, 1988; “Tucurui Waters Poisoned” in International Water Power & Dam Construction, U.K., July 1984. For details on how Balbina was almost canceled due to austerity measures, see Philip M. Fearnside Brazil’s Balbina Dam: Environment Versus the Legacy of the Pharaohs in Amazonia, INPA, Manaus, Brazil, 1989; “U.S. Splits With World Bank Over Brazil Hydro Loans” by Glenn Switkes, in International Dams Newsletter, vol. 1, no. 5, September 1986.

On Brazil’s nuclear power program see “Brazil is well on the way to energy self-sufficiency” by Edwin Taylor, Special Advertising Section in The Wall Street Journal, March 21, 1986; Impacts of Great Energy Projects in Brazil: Comparative Study of Hydroelectric and Nuclear Power by Luiz Pinguelli Rosa and Otávio Mielnik, published by the International Development Research Centre, Manuscript Report 196e, August 1988; “Bank Officials Check Brazil’s Nuclear Ambitions” in The New Scientist, February 25, 1989; “West German Investment Outlook” in Brazil Service, New York, March 7, 1990; “Datafile: Brazil” in Nuclear Engineering International, U.K., April 1990; “Good News for Angra 1 and 2” in Nuclear Engineering International, U.K., March 1990:7.

For a description of how the debt crisis slowed Argentina’s nuclear power program see “Argentina, short of funds, is likely to halt work on A-plant” by Shirley Christian, The New York Times, April 23, 1988.

For an interesting account of megaprojects in the Third World see Macroproject Development in the Third World: An Analysis of Transnational Partnerships by Kathleen J. Murphy, Westview Press, Boulder, Colorado, 1983.

For details of the Carhuaquero hydro dam in Peru see “Prospects For Large and Small Hydro Development in Peru” by P. Wicke in International Water Power & Dam Construction, U.K., July 1987.

The commotion over the Yacyretá dam was particularly astonishing, especially as President Menem’s statement coincided with the IDB loan signing ceremony that took place at the IDB annual meeting in Montreal, 1990. Argentina’s Executive Director to the Bank, who had shepherded the loan through to the signing stage, was said to be close to tears upon hearing of his president’s condemnation of the dam. See “Billions flow to dam (and billions down drain?)” by Shirley Christian, The New York Times, May 4, 1990; “Menem Damns IDB Dam Loan” by Judith Evans in Annual Meeting News, vol. 5, no. 4, Montreal, April 4, 1990; “Can Argentina’s Third Loan Start Giant Dam Flowing?” in World Bank Watch, U.S., May 15, 1989.

Information on the Roseires dam in the Sudan is from “Delay for Sudan’s Roseires Scheme” in International Water Power & Dam Construction, U.K., November 1986 and from correspondence with Sudanese environmentalists.

For further details on the effect of budget constraints in China see “Energy crisis shuts factories in China” by Julia Leung in The Wall Street Journal, January 6, 1989; “Go-go Chinese regions choking under hard-liners’ iron fist” in The Globe and Mail, Toronto, March 12, 1990; “China’s syndrome: Beijing’s economic ills pose a new threat of social upheaval” by Adi Ignatius and Amanda Bennett in The Wall Street Journal, August 3, 1989.

Cameroon’s forest policy, as recommended by the Tropical Forestry Action Plan, “is essential if the Cameroon is going to be able to meet the demand of the international market.” See The Tropical Forestry Action Plan: What Progress? by Marcus Colchester and Larry Lohmann, World Rainforest Movement, Friends of the Earth and The Ecologist, U.K., 1990.

Details of Nicaragua’s ruinous pesticide policy can be found in “Government Pesticide Policy in Nicaragua 1985-1989” by Allan J. Hruska, in Global Pesticide Monitor, vol. 1, no. 2, May 1990.

The Brady Plan, launched by U.S. Treasury Secretary Nicholas Brady in March 1989, was designed to use public funds and guarantees to encourage commercial banks to cut their existing Third World debts while continuing lending. It was considered a watershed in the Third World’s debt crisis because it marked the first time finance officials from the industrialized countries recognized that some debt forgiveness was required if the Third World was going to get out from under its debt “overhang.” Commercial banks were asked to write-down the value of their loans — lower the face value or the interest rates due on their outstanding Third World loans. The role of the public institutions was to collateralize — or guarantee either the principal or the interest — on the balance of the debt.

The Mexico package provides cash flow relief in the form of new money disbursements, a rescheduling of principal obligations, and interest relief resulting from the reduction in contractual interest rates and the elimination of some principal. Specifically, commercial banks holding eligible claims on Mexico were invited to choose from three financing options:

• exchange their existing claims for new 30-year discount bonds worth 65% of the face value of their original loans with full guarantee of principal to be paid back in one installment after 30 years, with 18 months’ guarantee on interest;

• convert existing claims to 30-year bonds at par with below-market fixed interest rates and the same guarantee structure as for the discount bonds described above;

• provide net “new money” for 1989-92 amounting to 25 per cent of eligible claims, repayable over 15 years, including 7 years’ grace.

The financing package also included options for converting claims into equity in newly privatized enterprises and infrastructural investments. To enhance the debt exchanges Mexico bought U.S. Treasury zero coupon bonds to use as collateral; Mexico also established an interest collateralization account at the Federal Reserve Bank of New York. To pay for these enhancements, Mexico received some $1.7 billion from the IMF, $2 billion from the World Bank, and $2 billion from the Export-Import Bank of Japan.