Globalization

THIRD WOLRD DEBT - THE SILENT KILLER

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by Christina Coburn

"The debt crisis is over," proclaim economic journals and government officials. Unlike a decade ago, when Mexico threw the financial world into a panic by declaring it could not meet its debt payments, the international banking system is no longer in danger of collapse from the possible default of Third World debtors.

Small banks have largely abandoned Third World lending; large banks like Citicorp, have built up capital reserves to cover the possibility of default. They also have been converting high-risk loans to more secure instruments, such as bonds carrying U.S. government guarantees.

Yet, the debt crisis is definitely not over for the poor in Lima, Sao Paolo and Manila. Their governments continue to pay out billions of scarce dollars on loans taken out by military regimes during the 1970s. These debt payments not only absorb resources essential for sustainable development, they also have failed to reduce the debt.

According to the World Bank, Third World countries collectively borrowed $1.935 trillion and repaid $2.237 trillion between 1972 and 1992. Despite these repayments, today they owe $1.7 trillion to Northern governments (U.S., U.K., Germany, Japan, etc.), commercial banks (such as Citibank and Barclay's Bank), and multilateral institutions (the World Bank, regional development banks, and the International Monetary Fund).

After 1980, sharply higher interest rates radically increased the amounts countries owed their northern creditors. And because exports earnings fell during the global recession, most countries have had to borrow new money to repay old debts. Debt continues to pile up on top of debt, leaving poor countries with little hope of escape.

Structural Adjustment

While wealth hemorrhages from heavily indebted countries, the poor suffer from the remedy prescribed by the International Monetary Fund (IMF) which has taken on the role of global debt policeman.

The IMF's mission is to insure that countries pay back their debts. They do this through "stabilization" and "structural adjustment" programs. Countries are told to cut their budget deficits and increase exports, even if it means cutting down the remains of their forests, encouraging highly pollutive strip-mining, or exporting their teachers to work as housemaids overseas so the government can tax the money sent back to the families.

Southern governments are given some leeway in making budget cuts, but the heaviest burden of structural adjustment falls on the poor. Money otherwise used to provide immunizations and medicines to fight preventable diseases, to promote child nutrition, clean water, education, and to build basic infrastucture for development is shifted out of social service programs in order to pay the debt. Meanwhile, raising new funds by taxing the rich is usually rejected by wealthy legislators. Instead governments typically impose sales taxes which hit the poor the hardest.

In the Philippines, where roughly 60% of the population lives in poverty, the World Bank's 1988 Report on Philippine Poverty revealed that the governmment collected 27% of the income of the poor Filipino families while high-income families paid only 18%. The debt is indeed being paid on the backs of the poor.

The Extent of the Problem

The United States government is the world's largest debtor. A $4.3 trillion debt is curtailing U.S. growth and causing a serious budget squeeze in Washington. Each new American baby owes $14,813 of this debt. The 1993 U.S. budget deficit (the amount by which expenses exceed income) was $281 billion. Debt payments in 1993 consumed 14% of the Federal budget. In addition, the U.S. debt has exacerbated the debt problem of developing countries by increasing real interest rates globally.

Nevertheless, the debt crisis has clearly been most severe in poor countries. African, Latin American, and Asian countries reporting to the World Bank owe over $1.7 trillion to their creditors. The situation is worst in the nations of Sub-Saharan Africa.

Although African debt is small in comparison to that of Latin America, the nation's ability to repay is far less. While countries lurch from one round of financial negotiations to another with bankers and IMF officials, the debts simply continue to mount. Recent debt management strategies--such as the Brady Plan (to reduce commercial bank debt)--have recognized the need to reduce the debt burden, but none has gone far enough. Even World Bank officials acknowledge much greater debt relief is necessary, particularly for low-income, highly-indebted countries.

Origins of the Problem

"How did all this debt accumulate in the first place?" you may ask. "Shouldn't it be repaid?" you say. "Banks, after all, are not charitable institutions."

Certainly, honorable debts should be respected. Unfortunately, much of today's debt is anything but honorable. Billions were lent by commercial banks, Northern governments and multilateral development banks to repressive governments for reasons the majority of their people neither agreed with, nor from which they derived any benefit.

"It is hardly too brutal an oversimplification to say that the rich got the loans, and the poor got the debts," writes Pat Adams, author of Odious Debts. Loose lending (1), corruption (2), and an inappropriate development model (3) promoted by government and multilateral aid agencies help explain why the money was not invested in productive enterprises.

(1) The loose lending and easy borrowing began during the 1970s, when OPEC producers channeled their increase oil revenues to European and U.S. banks. Banks, flush with money which they had to re-lend in order to pay interest to their depositors, turned to developing countries where lending restrictions were minimal. Military governments were particularly eager to borrow, yet failed to use the money well. Commercial bank loan officers jetted to Third World capitals, signed multimillion dollar deals on the basis of a sovereign guarantee, but made little analysis of the project's viability.

Walter Wriston, former President of Citibank, justified his own bank's imprudent lending by announcing that such debts cannot go bad, since "countries do not fail to exist." If the project turned out to be unprofitable, as many did, the banks would still get their money back because the country had promised to pay.

For the borrowers, the money was cheap--real interest rates (interest rates minus the inflation rate)--were actually negative for several years, and the prices of their exports were high. No one expected interest rates to go through the roof, nor commodity export prices to fall through the floor.

(2) Corruption did not slow the lending. President Marcos is believed to have stolen an estimated $10 billion from the people of the Philippines. He reaped tens of millions from one contract alone, that for a nuclear power plant built by Westing House Corporation, which eventually cost $2.2 billion to build but is unsafe to use. Billions of dollars were lent to corporations owned by close friends of Marcos, on the basis of government guarantees from the President.

The banks knew of Marcos' reputation for corruption, but didn't care, as long as they would be repaid. The cronies fled with Marcos in 1986, leaving behind bankrupt corporations; their debts were honored by subsequent governments and Philippine citizens are now paying them. The Philippine debt, which was a mere $2.3 billion in 1970, is over $35 billion today.

(3) Corruption was only partly to blame, though. The model of development which industrialized countries and the World Bank continue to promote is debt dependent.

In the Philippines, massive borrowing financed huge dams to produce energy for factories, the infrastructure (buildings, roads, electicity. water) for export processing zones, and the commercialization of agriculture. All of these projects were designed to shift the Philippine economy in a radically new direction toward a focus on production for export, rather than for domestic use.

This strategy depends upon a large pool of cheap labor, which the World Bank describes as the Philippine's "comparative advantage" (that economic factor which it should exploit to its advantage). This provided a rationale to keep wages low. A focus on export-oriented agriculture led to small farmers being dispossessed of their land, and to food crops being replaced by the cultivation of luxury crops for foreign markets. Both strategies (export-oriented industrialization and export-oriented agriculture) have made a few Filipinos rich, but have not helped the poor majority.

A similar story could be told for Brazil, on a grander scale. Brazil has the largest debt in Latin America, at $121 billion. The money was borrowed to subsidize export-oriented industries, to help pay for higher priced oil, and for the military which repressed popular opposition to their rule. Twenty-five percent of the debt was used to finance huge energy projects (dams and nuclear plants) many of which were economic and ecological disasters. The Itaipu dam project inundated almost 1,500 square kilometers, and displaced 40,000 people. Corruption raised its price tag from $2 billion to an estimated $25 billion.