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The
Development and Historical Context of the Debt Crisis
Francisco G. Pascual, Jr.
As it was in ancient society when usury thrived under conditions of
widespread impoverishment on the one hand and the concentration of
wealth on the other hand; so does usury in modern society thrives under
condition of massive accumulation and concentration of finance capital
coupled with widespread underdevelopment. This is the situation in the
world today. And for as long as such opposite poles of concentration of
wealth and poverty is maintained the cycle of indebtedness continues.
How usury thrives in such polarized situation is clearly demonstrated in
the case of the backward agricultural economies still prevalent in much
of the third world where usury still remains a major form of
exploitation and debt peonage a means of subjugation of a mass of
impoverished peasants. Usury and other forms of exploitation leave the
peasant barely enough for his means of subsistence; a situation that
ensures his perennial dependence on the moneylender.
It does not matter to the usurer whether the peasant had a good crop or
not. What matters to him is that debt is paid even if nothing is left
for the peasant's subsistence and, much less to improve his production.
In fact, if misfortune befalls the peasant as in the case of a bad crop,
the moneylender would only be too willing to extend another round of
loans to the peasant to be paid after the next harvest. This trick
assures the moneylender a good share of the next harvest even before the
crop has even been planted.
As often happen the debt grows to the extent that it cannot by any
stretch of imagination be paid. Then the moneylender can take possession
of the land step by step until he fully owns it. But even under these
new circumstances he will not banish the peasant from the land; he can
make him a sharecropper and, as before, still advance his subsistence
and production needs as well. And the cycle of indebtedness, therefore,
continues but under more onerous terms and, often, from one generation
to the next.
The Debt Crisis: An Overview
Modern day international usury is, of course, much more complex than the
more primitive relation we have just presented. Total Third World debt
amounts to USD2 trillion; annual payments is about USD 200 million. The
system of debts has evolved into a key aspect of the capitalist economy;
a weapon for consolidating the domination of the people's of the Third
World. In many ways, the debt today is a weapon more potent than others
devised by colonialism and neo-colonialism. It is institutionalized to a
very high degree, is regulated by a massive bureaucracy of the
multilateral finance institutions; and backed up by the military might
of the mightiest nations on earth. Worse the burden of paying debts is
passed on to society in general as a routinary process.
Nonetheless, the parasitism that is characteristic of usury is there
and, in fact, far more pronounced than in earlier periods of history.
The modern international finance oligarchy, in contrast to the
industrial capitalist, which dominated the earlier stage of capitalism,
is completely detached from production and entrepreneurial activity. It
makes billions in interest payments on the huge loans and more so on
speculative investments rather than industrial production. It has
created more financial instruments it abuses to the hilt. The big
capitalists are more into betting on financial instruments and
fluctuations in exchange rates than into improving production.
Modern usury is based on a highly developed system of production,
employing science and technology to a high degree. Yet poverty is
spreading even official statistics must admit. Obviously this is not due
to scarcity of the means of human subsistence. On the contrary, there is
so much means of subsistence in the world today but the problem of the
big capitalists is how to sell the goods at a profit. For the last two
decades the world economy has been plagued with a chronic crisis of over
production. On the other hand, there is so much accumulated capital
while the opportunities for investment are shrinking. Thus, this huge
capital roams the globe to accumulate more profits but in the process
wrecks havoc on economies of the south and east.
It is within this context that the debt crisis and the growing
indebtedness of the third world must be understood. The onset of the
debt crisis in 1982 was a manifestation of the crisis of global finance
capital. It simply means that the capitalist trick of lending more and
more money to the third world countries to facilitate the sale of
surplus goods and as a way of investing surplus capital has its own
limits. The injection of more loans (and other forms of finance capital
for that matter) to the third world has at best provided only temporary
relief, nay, postpone the recurrence of the debt crisis only to flare up
later in far more destructive ways. There has been no real solution to
the debt crisis. On the contrary, in the last few years, the debt crisis
flared up several times in ways more devastating than at anytime in the
past.
The IMF and the World Bank have turned the debt crisis into an
opportunity to arrogate for themselves unprecedented regulatory powers
over, and at certain times even get to micro-manage, economies of the
Third World while ensuring the profits of global monopoly capital. As
monopoly finance is confronted with its own crisis it
"perfects" the institutions, devise new tools, and create more
favorable conditions for generating profits and for intensifying
exploitation and subjugation of Third World. However, as has been shown
by the recent crises in Asia, Eastern Europe and Latin America,
"neo-liberal" schemes, improved or otherwise, lead to crises
far more devastating than previous ones.
Before we dwell on the historical development of the debt crisis let us
briefly go over the emergence of the monopoly finance which today
controls the commanding heights of the global economy.
The Rise of the Finance Oligarchy and
the Export of Capital
In the last decades of the nineteenth century the free competition that
has up to then characterized capitalism in the industrialized countries
gave way to the dominance of monopolies. Monopolies have concentrated
production, divided the market among them, controlled the supply of raw
materials, bought or forced the submission of smaller rivals into their
"organizations." The ascendance of monopolies did not come
suddenly. This development was impelled by the internal dynamics of free
competition, i.e., the need for accumulation of larger and larger amount
of capital as the condition for survival in the fierce competition among
various capitals; and the cyclic and intensifying commercial crises that
came with capitalist expansion.
Banking was also transformed with banks assuming a new role. From their
modest role as middlemen in the making of payments, the banks grew into
powerful monopolies. A few big banks have taken over the place of
numerous small banks and have within their control, to mobilize for
generating profits, the whole capital of the society, of the big and
small capitalists. At the same time, the capital of the banks
increasingly merged with industrial capital, placing the banks in a more
powerful position, over industry in general. With merging of industrial
capital and bank capital, the finance oligarchy emerged; finance capital
has established its dominance over the capitalist economy.
The export of capital as opposed to export of commodities from the
industrial economies assumed particular significance. Accumulation gave
rise to surplus capital. Thus, capital flowed in the form of loans and
direct investments from the industrial to foreign countries because
profits were higher on foreign investments. In fact, in certain aspects
(e.g. as a percentage of GDP) [1], export of capital was higher then
than in the present era of "globalization." Then as now, the
creditors were often able to obtain "advantages", some extra
profits like for example a favorable clause in a commercial treaty, an
order for guns or ships, contract for construction of a harbor etc.
Britain among several imperial powers took the lead. "As capital
accumulated in the hands of the wealthier class in Britain they found
lending their capital abroad or investing it in overseas enterprises to
be more profitable than investing it in Britain itself." But the
rash in lending and foreign direct investments reduced the available
capital that could have been used to upgrade industries in Britain.
Consequently, Britain's industrial production and manufacturing lost
pace with its rivals. "By the 1870's, British industrial monopoly
was lost, Germany and the US especially, were not ready to see Britain's
position of supremacy continue unchallenged. Coming later in the
industrial scene, they could take advantage of more advanced technology,
more modern factories, and little by little, these countries began to
out-produce and undersell Britain." [2]
Uneven development, the unceasing struggle for control of markets and
raw materials, and the crisis of overproduction would eventually lead to
two world wars among the imperial powers for a redivision of the world.
The wars devastating as they were to the means of production of
countries that were involved brought enormous profits to monopoly
capital.
In the intervening period between the two world wars there was a vast
expansion of investments and concentration of capital through mergers
and buyouts of smaller enterprises. But this rapid expansion shortly led
to the crash in 1930. The western economies would recover after the
institution of some reforms but the "great depression" would
be resolved finally by another war.
The US was the biggest gainer in both wars, economically and politically
which to a large extent explains the present relative strength of
various capitals on a worldwide scale. The US emerged out of World War
II as the dominant capitalist power. Thus, imperatives of US dominance
over the capitalist world became the most important factor in the
political and economic development in the "free" world in the
post World War II era. The phenomenal rise of the debt of the Third
World with in two decades after World War II is directly linked to the
need for US capital to continuously expand its markets through out the
world.
The Accumulation of the Third World
Debt
Starting with the American "foreign aid" drive in the years
following the war to the present regime of liberalized financial flows
the debt of third world countries has risen from USD9.7 billion in 1956
to USD 41.5 billion in 1967 [3], USD 62 billion in 1970, USD481 billion
in 1980 [4] to the present level of USD2 trillion.
So rapid was this accumulation that by the 70s massive defaults
threatened the system. The massive infusion of new loans by the
multilateral finance institutions postponed the crisis by a decade. By
1982, the accumulation of third world debt has matured into a full-blown
crisis that threatened the international financial system. The debt
crisis since then has become chronic. This development can be understood
in the context of the imperatives of US monopoly capital to expand its
markets in the post war period.
The American economy geared towards production for the war achieved
phenomenal growth during the war. Moreover, the war was fought in Europe
and Asia thus sparing the continental US of the physical devastation
that other capitalist powers suffered. Thus the productive capacity of
the US economy increased geometrically. For example the US at the end of
the war accounted for 45 percent of the world's income, produced 60
percent of the manufactured goods, in control of 70 percent of the oil
supplies, produced 55 percent of steel and other metals, one third of
the world wheat. [5] US capital was, therefore, confronted with the
problem of disposing the large stockpiles of military, industrial and
agricultural products generated by the heightened industrial capacity
and the large accumulated surplus capital to be disposed of was the
problem of US capital.
Within a few years after the end of World War II, a depression triggered
by the over-production of commodities threatened the US economy. In
October 1946, the Office of International Trade of the US Department of
Commerce estimated that "in 2 to 3 years US industry would have
saturated the domestic market with supplies." The only way out was
"to plan a decided expansion in overseas business."[6]
But the economic side of the picture presents only a partial view of the
realities the US was confronting at that time. In political terms the US
divided the world into "the free world" and the
"communist non-free world." More precisely the identifiable
political alignments in the post world war II period were: (1) The US
and other capitalist powers (including Japan and Germany who were the
enemies of the allies in the war) and the underdeveloped countries that
were under the influence of the capitalist powers; (2) The Soviet union
and the other socialist countries; (3) The non-aligned countries that
refused to be controlled by either bloc together with the strong
national liberation movements in Asia, Africa and Latin America.
Given the political and economic reality, US foreign policy was
organized around the twin objective of the defense of the "free
world" or the "containment" of communism together with
the national liberation movements; and the creation of markets for
surplus US goods and capital. Felix Greene (7) outlines the imperatives
for foreign policy in the period following the Second World War thus: to
keep the existing capitalist world capitalist; to find ways to invest
surplus capital abroad where the biggest profits can be made; to find
markets for American goods; to secure control over sources of cheap raw
materials; the establishment of unchallengeable military power.
The disbursement of "Foreign Aid" (the euphemism for loans and
grants) was linked to the politico-military and economic objectives. Of
the total USD115 billion 30 percent went to the developing countries, 39
percent went to Europe and Japan, 31 percent to countries that were in
the periphery of the socialist bloc. Foreign aid was used to entice and
blackmail governments to toe the US line. Of course, should the
blackmail by the use of foreign aid and loans fail the US invariably
resorted to covert (coup, assassinations etc) and overt military
interventions from the numerous military bases all over the globe.
The first of the big loans the US extended in pursuit of the above
objectives were the Marshall and Dodge plans intended to
"rehabilitate," in fact, create the markets for American
commodities in the devastated economies of Europe and Japan. The
Marshall and Dodge plans benefited the US monopolies. But unlike the
loans to the third world there would be no accumulation of foreign debt
among the recipients since they were able to build their industrial
capacity and pay the debt and, in many cases, in their own terms.
"Foreign aid" to third world countries (about 30 percent of
the total USD115 billion) Europe would have the opposite effect. It
initiated the process of perpetual accumulation and dependence on the
debt. From then on the accumulation of third world debt was geometric
and the only way by which the system could continue was for debts to be
continually recycled to maintain the legitimacy of as well as the Third
World's dependence on debt.
The fundamental cause of the perennial indebtedness is the inherently
unequal balance of trade between the predominantly agricultural and
pre-industrial economies of the third world and the industrial economies
of the first and second world. The third world economies, fixed by the
neo-colonial order to the production of raw materials, agricultural
products and low value added semi-manufactures cannot earn enough
foreign exchange to pay for capital and consumer goods they must import
from the industrial countries. More over since the 1980's falling prices
of primary products from the third world has resulted in deteriorating
terms of trade. [8] Periodic devaluation of their currencies forced on
them by the IMF/WB makes exports cheaper (hence more exports to earn the
same amount of foreign exchange), and cause inflationary spirals in the
domestic economy. Hence, from year to year, the balance of trade and
balance of payment deficit deteriorate.
This chronic deficit in trade and the attendant deficit in the balance
of payments is only once in a while masked by extraordinary factors such
as the temporary rise in the prices of primary commodities, overseas
workers' remittances (labor export), a surge in foreign direct or
portfolio investments. Normally, however, the deficit is covered by the
infusion of fresh loans to allow the country to continue importing goods
from the industrial countries and to service the foreign debt.
Ironically, debt servicing, in conjunction with the remittances of
profits by TNCs, importation of luxury goods by the local elite etc.
drains the local economy of resources needed to industrialize and
develop. It is therefore fixed to the agrarian, pre-industrial level. It
is caught in a trap resuscitated periodically by the infusion of loans
and investments.
In the period of "aid and investment" the primary source of
loans for the third world countries were official development assistance
budgets of the industrial countries and the IMF and the World Bank. By
the 1970s, however, commercial banks encouraged by the IMF/WB and with
large amounts of dollars in their hands, joined the action in a large
scale. For every dollar the IMF/WB invested into third world loans it
attracted 2-3 dollars from the commercial banks. [9] At this time
lending to the third world was attractive because prices of third world
commodities were rising which perpetuated the belief that the
underdeveloped economies would have no difficulty servicing their debts;
and interest rates for loans to the third world were high because it
allegedly entail high risks. More important is the fact that the
commercial banks believed that the IMF/WB would come to their rescue
should there be a danger of default. [10]
Given the above conditions the banks were emboldened to extend loans
even to dubious recipients and projects such as the Bataan Nuclear Power
Plant, which the banks knew, was Marcos' milking cow from its inception
[11]. All the actors in the lending scheme including the administrators
of apartheid in Africa to the military dictators of Latin America and
the autocratic dictatorships in Asia had their own roles to play to keep
the system afloat. Their corruption and indiscretion were part of the
lending system at this particular juncture in history but did not by
themselves, cause the rapid spiraling of the debt much less were its
fundamental cause. Of course, they were the frontliners in the
"containment" of communism and the national liberation
movements as well as loyal clients of international finance capital. And
in the process too, they enriched themselves at the expense of their own
people.
Through out the seventies the IMF and World Bank too increased lending
to the third world to finance large-scale infrastructure projects (e.g.
dams) including prestige projects of autocratic and dictatorial regimes
in the third world. It also refinanced the maturing loans from the
commercial banks. Hence, loans from these multilateral institutions grew
rapidly and put them in a more powerful position, vis a vis the debtors.
"The over riding concern (in the increased lending) was not over
the sustainability of these loans but on expanding markets and political
stability for the US and its allies." [12] That is why in the late
seventies up to the eve of the Mexico triggered debt crisis in 1982, the
US, the WB and IMF kept calling for an increased lending to the third
world by the private banks. Of course, they were aware that unless there
is increased lending (up to 12 percent increase per year until 1985
according to the IMF and WB) the house of cards would collapse and the
system destabilized.
In 1982, "Mexico blew the whistle" that signaled the onset of
the debt crisis. Mexico sought a moratorium on payments and announced
that it could not service its debt. Subsequently and twenty-nine other
countries at least expressed their intention to seek a moratorium on
debt payment.
For over a decade the IMF-WB postponed this impending system's failure
with some degree of success by the massive infusion of new loan capital
which increased the indebtedness of the underdeveloped countries in a
big way. However, in the early eighties the inherent defects of the
monopoly capitalist system would manifest in the incapacity of many
countries to service their debt. There was a recession in the industrial
countries, which in turn dampened the demand for third world products
and prices of these products tumbled (and has been falling ever since)
which made the servicing of the debt difficult. Moreover, because of the
economic crisis the sources of new loans to the third world also dried
up. The IMF-WB came to the rescue but this time with a whole package of
conditionalities, which would open the third world economies, more
systematically, to the ravages of finance capital.
Thus began the push for "structural adjustment programs"
ostensibly to put the third world economies on "sound economic
fundamentals." Contrary to the avowed objective, however, SAPs only
deepened underdevelopment and indebtedness of the Third World. In
reality SAPs aims to open up the third world economies to international
capital while freeing government resources for debt servicing.
The IMF/World Bank and SAPs
In the early 80's the international finance institutions devised a
"new" system of lending that links loans to a whole set of
macro-economic reforms. The IMF/World Bank since then not only ensure
the servicing of all debts of the Third World to the Paris and London
Clubs, it also uses the debt as a leverage for putting into place the
very same economic policies that is at the bottom of the ever deepening
indebtedness.
Structural Adjustment Loans (SAL) or loans tied to Structural Adjustment
Programs are a "new generation" of loans, which are tied to a
set of macro-economic reforms which aim to make the third world
economies' import dependent, export oriented and debt driven. Unlike
conventional loans which have specific objectives (e.g. a loan for the
construction of a dam has the objective of raising agricultural
production for instance), SALs are extended precisely to change
macro-economic policy. Thus, SALs constitute a new level of debt slavery
of Third World nations by monopoly capital.
These destructive powers of the IMF/WB on the world economy as
concretely exercised in its imposition of the structural adjustment
program (SAP) in exchange for loans evolved with the accumulation of
Third World debt and the deepening debt crisis. For as long as the
debtor countries recognize the legitimacy of the debt, the coercive
power of the multilateral financial institutions over the client
countries grow proportionately with the debt.
The SAP is in accordance with the original purpose of the IMF and the WB
but is also a specific response to specific exigencies of expansion of
the market in the 80s and as capitalism was confronted with one crisis
after another.
The IMF and the World Bank were founded, in July 1944, one year before
World War II ended, when the US and Britain convened a conference of 44
nations at Bretton Woods. The conference was called to chart a post war
international financial and monetary system in the framework of
"open and free market" as espoused by the US. It was urgently
necessary for the US to initiate this in anticipation of the post-war
capitalist rehabilitation and reconstruction and the giant strides
achieved by anti-capitalist forces in Europe and Asia.
Thus, in what was officially called the "United Nations Monetary
and Financial Conference" the US, Britain and 44 other nations
agreed to "the establishment of two financial institutions - the
International Monetary Fund (IMF) and the International Bank for
Reconstruction and Development (IBRD) later renamed World Bank (WB).
"The conference also agreed on US Dollar-Gold standard, setting the
value of the US Dollar at $36 to the ounce and the value of other
currencies (except the British Pound Sterling that was also gold-based)
are based on the dollar." (On this premise countries assumed that
their Dollar earnings (reserves) have the equivalent amount of gold
deposited at the US Federal Reserves at Fort Knox. This in fact
instituted the US Dollar are the world's medium of exchange.)
Finally the conference redefined "trade to include finance capital
and; instituted trade and finance liberalization through finance
liberalization and deregulation. Article VI (Capital Transfers) - state
"member countries may exercise capital controls so long as it does
not hinder trade." [13]
The Bretton Woods Conference also defined three main functions of the
IMF: "to administer a code of conduct with regards to exchange rate
policies and restrictions to payments on current account transactions;
to provide members with the financial resources to enable them to
observe the code of conduct while correcting or avoiding payments
imbalances.
"The code of conduct was designed to ensure that payments for
merchandize trade and services and other current transactions could take
place freely and that all balances arising out of these transactions
were convertible into other currencies to be used to make payments for
further current transactions." [14] Of course, convertibility of
currencies referred to in the code is convertibility to the US Dollar -
the de facto international currency - and the liberalization of foreign
exchange transactions.
It is clear that by design the IMF and the WB were to support the
expansion of US capital in the post war era the former specifically by
providing resources by which countries experiencing balance of payment
difficulties could balance their current accounts and thus continue
importing goods from the US; and, the latter, by providing long term
loans for development often times conditioned on the use of foreign
materials and equipment and the hiring of foreign technical consultants.
Loans were also tied to other "conditionalities," political
and economic, the political consideration of "containing"
communism being significant at the height of the cold war.
In the period of "aid and investments," official development
agencies - governments, the IMF and the World Bank - were the main
sources of loans. In the early seventies, the commercial banks goaded by
the IMF and WB came to the fray. We must also recall that the IMF/WB, in
the seventies, increased its lending to third world countries by
financing "mega-projects" and refinancing the loans obtain
from the commercial banks. Consequently, the two institutions acquired
and came to wield enormous influence and power over client countries.
The process by which the IMF and WB came to acquire influence and power
over indebted countries is describe by Prof. Chosudovsky [15] thus:
"Through financial 'engineering' and the careful art of debt
re-scheduling, repayment of the principal is deferred while interest
payments are enforced, debt is swapped for equity and 'new' money is
'lent' to nations on the verge of bankruptcy to enable them to pay off
their interest arrears on old debts so as to temporarily avert default,
and so on. In this process, the formal loyalty of individual debtors is
paramount. The creditors accept to reschedule only if the debtor nations
abide by the 'conditionalities' attached to the loan agreements."
In the early eighties, "a new generation of 'policy-based loans'
was devised. Money was provided 'to help countries to adjust.' The money
was granted only if government complied with structural adjustment
reforms while at the same time respecting very precise deadlines for
their implementation… These loans were granted subject to the adoption
of a comprehensive program of macro-economic stabilization and
structural economic reforms… [and] were not in any way related to a
program of investment as in conventional project lending."
Moreover, the implementation of policy reforms is tightly monitored by
the financial institutions and releases could be interrupted if the
government did not conform.
"The adoption of the IMF's policy prescriptions under the
structural adjustment program is not only conditional for obtaining new
loans from multilateral institutions, it also provided the 'green light'
to the Paris and London clubs, foreign investors, commercial banking
institutions and bilateral donors. Countries which refuse to accept the
Fund's corrective policy measures faced serious difficulties in
rescheduling their debt and/or obtaining new development loans and
international assistance. The IMF also has the means of seriously
disrupting a national economy by blocking short-term credit in support
of commodity trade."
Many of the IMF/WB impositions in the structural adjustment programs
have been incorporated in the agreements in the WTO. Thus, while the IMF
imposes structural adjustment to 100 individual countries simultaneously
through "debt management," the WTO completes the
generalization of structural adjustments on an international scale by
providing the legal basis for these in international law.
The IMF, WB and the WTO in fact "regulate" the world economy
in the name of finance capital; and "manage" it through the
deliberate manipulation of market forces. They force structural
adjustments allegedly to enable countries to take advantage of the
"globalizing" economy but actually to create the optimum
conditions for the extraction of surplus by a handful of finance
capitalist from the whole of society in both the north, south and now
also the east.
SAPs invariably include two phases - phase one concerns the
stabilization of the economy and phase two is the implementation of
structural reforms. Phase one, economic stabilization includes
devaluation, price stabilization, and budgetary austerity. According to
the WB, "Getting macro-economic policy right…Keeping budget
deficit small helps in controlling inflation and avoiding balance of
payment problems. Keeping a realistic exchange rate pays off in greater
international competitiveness and in supporting convertible
currencies." Phase two is a package of reforms pertaining to trade
liberalization, tax reform, and privatization of government
corporations.
Devaluation for its immediate and far-reaching consequences is the most
important of the package of policies in the "economic
stabilization" phase. Ironically, it destabilizes rather than
stabilizes the economy. It increases the debt in terms of the local
currency, prices of imports rise while those of exports drop; assets are
deflated and become very attractive for takeovers. Industries and
enterprises devoted to production of goods for the local economy are the
worst victims of the rising cost of imports, and lower prices of their
commodities, credit crunch, rising interest rates and the contraction of
the market.
The impact on social classes and sectors are cruel - unemployment, fall
in real wages, rise in the cost of social services, inflation and so on.
The empirical evidence showing the negative impact of structural
adjustment is overwhelming. But the World Bank argues that these are
"temporary pains" that society must bear with for "longer
gain."
When the Asian crisis erupted and the prospects of long term gain from
liberalized economies permanently quashed, the IMF/WB argued that the
problem is of too little liberalization, lack of transparency or the way
structural adjustment was carried out not structural adjustment itself.
On top of this, their responses to the Asian crisis produced exactly the
opposite of the intended effect and were severely criticized even by
economists in the "neo-liberal" camp.
The Debt Crisis Deepens under a Regime
of Free Financial Flows
In 1997, the Asian economies touted by the IMF and WB as model economies
for their adherence to the liberalization programs of the former
suddenly collapsed one after the other under the strain of huge
short-term foreign debt they suddenly found themselves unable to pay. In
the process of rescuing their distressed economies, they incurred a
combined additional debt of over a hundred and twenty billion US Dollars
on account of the IMF arranged "bail out."
The Asian financial is a debt crisis rooted in the same unequal trade
between the third world and the capitalist economies of the west, as
well as the crisis of over production of the world capitalist system
but, however, operating through the system of liberalized financial
flows. Half of the huge private debt due that year was incurred by banks
and corporations and was made possible in the first place by financial
liberalization.
That the crisis broke out in the "growth area" and standard
bearers of the "neo-liberal model" of development unravels the
extent to which monopoly finance has become counter productive and shows
the destructive consequence of the debt crisis.
How did it happen?
.
The "Asian miracle" was triggered by the influx of Japanese
direct investments in the Southeast Asian countries mainly Thailand,
Indonesia and Malaysia in the latter half of the 80s. The influx was in
turn due to the decision of Japanese capitalists to evade the rising
production cost in Japan brought about by the forced appreciation of the
Yen in the 1985 Plaza accords. Japanese capitalists put up production
bases in the Asian countries for the labor intensive production
processes as well as the environmentally destructive ones which they
were after all being forced to phase out in their home country. USD 15
billion in Japanese investment flowed into the Asian economies between
1985 and 1990. By the end of the eighties however these influx of
Japanese FDI began to taper off. [16]
To sustain the inward flow of foreign capital and maintain the initially
high growth rates, the Asian "tigers" implemented a package of
policies designed to attract foreign capital in the early nineties. The
Asian governments implemented the policies of financial liberalization
(no control on the movement of capital); high interest rates; and a
managed float of foreign exchange (exchange rates were allowed to
fluctuate only within a given range). [17] Given the strong growth of
the economies initially spurred by the influx of Japanese investment,
capital flowed into the Asian economies to "catch the growth."
In Thailand, in the early 90's, about USD 50 billion move into the
economy annually.
With the huge amount of accumulated capital, the falling rates of
profits in the industrial economies, and the fall of the Soviet Union
and the wave of privatization of state assets, there was more than
enough reason for finance capital to seek higher rates of returns in the
"emerging markets." A significant portion of the capital
flowing in went into banks and financial institutions which in turned
invested into real estate, which gave high rates of returns.
By the middle of the nineties, there was a sudden drop in the growth of
exports - Thailand for instance registered 22 and 24 percent growth in
exports 1994 and1995 respectively to zero growth in 1996 due to a glut
of commodities in the world market. Then real estate sector suddenly
realized that there were more properties it had developed than could be
sold. Necessarily the real state companies defaulted on their loans from
the banks. In Thailand "with the bust in the real estate market,
the accounts in 1996…. Were seen as extremely worrisome. The foreign
debt stood at USD89 billion of which 80 percent of it was private debt
and slight under half of which was short-term debt. The net foreign
exchange liabilities of Thailand's banks now came to 20 percent of GNP.
A massive debt crisis was in the offing, but unlike the third world debt
in the eighties this was one brought about not by government borrowing
but by private borrowing…" [18]
The crisis was not totally unforeseen. The 1996 UNCTAD report warned of
the dangers of high balance of payments deficits the Asian economies
were sustaining especially because "the period of easy export
expansion" was coming to an end. [19] In other words UNCTAD saw a
weakening of exports thus generating a balance of payments deficit which
could trigger capital flight.
Korea's route to its own crisis was quite different. Korea enjoyed
special treatment from the US especially during the period of the cold
war, it was shielded by the military might of the US and its exports
were given preferential treatment in the US market. Japan was the
primary source of machinery and capital while the Korean State protected
the industries as well as "intervened" in the direction of
economic development. With this set of conditions, Korea developed a
certain level of industrial capacity so much so that in 1988 it enjoyed
a USD6 billion-trade surplus with the US.
In 80's, however, the US now less concerned with the cold war and
alarmed by its massive trade deficit launched an offensive to reverse
this trend. The East Asian economies became the targets in this
offensive. Japan and Korea were labeled as "unfair traders" in
the propaganda of the Reagan administration and the US demanded that
Korea and Japan take steps to reduce their trade surpluses with the US
including the appreciation of their currencies to "cheapen" US
exports and make imports from East Asia more expensive. By 1996 Korea
was sustaining a USD11 billion-trade deficit with the US.
Korea did not have a chance against this pressure. Korean industry was
dependent upon foreign technology, and more over was based on the
production of goods that were aplenty in the world market - steel,
ships, cars, computer chips, etc. Moreover the chaebols, invested
heavily in real estate which in previous years was giving a higher rates
of returns than industry and in lines of industries that had
"excess" capacity. By 1996 with the drop in export earnings,
Korea's current account stood at USD72 billion of a total of USD110
billion external debt.
Investors knew the real situation in Korea (and East Asia) and the
Southeast Asian countries. With the precarious state of the balance of
payments, panic soon spread. Portfolio investments took flight, so with
foreign exchange that was parked in the banks simply taking advantage of
the differential in the domestic and foreign interest rates. Speculators
joined in the raid the of the foreign exchange reserves of the countries
in crisis. Capital flight and dwindling reserves put enormous pressure
on the local currencies that eventually led to their devaluation, Thus,
was set off the worst economic crisis in the post world war II era.
The raids on the foreign exchange reserves of the Asian economies would
be repeated shortly in Eastern Europe and Brazil.
The Asian crisis took the form of concurrent currency devaluation,
collapse of the stock market, and massive bankruptcies and tight credit.
This ultimately led to a recession of 40 percent of the world economy.
The whole economies are thrown back into previous levels of development;
a process called "thirdworldization" by some economists. The
social consequences include massive unemployment, inflation, declines in
real wages, and increasing rates of poverty.
In the latter half 1997 the IMF organized a "bail out" for the
three most severely affected countries in the crisis. The bail out is to
save the banks and ensure that servicing of the debt continues. Thus the
private sector debt was conveniently transferred to the public sector.
In Korea of the USD72 billion short-term debt USD 25 billion was paid
from the bail out and USD 50 billion was rescheduled but this time
guaranteed by government. The banks decide whom to let go bankrupt and
whom to resuscitate. Bankruptcies lead to takeover by foreign capital.
The creditors imposed new conditionalities to further liberalize of the
economy. [20]
Meanwhile in Eastern Europe privatization of state own enterprises led
to a large-scale transfer of industries to MNCs who by corrupting the
bureaucracy bought these at bargain prices and then mothballed the same
enterprises. Competition is thus eliminated together with the potential
for developing an independent economy free from the dominance of global
capital based on cumulative gains these countries gained in the period
of "socialist construction." A very recent article sent to the
New York Times puts it clearly;
"The International Monetary Fund and the World Bank are
successfully devouring Bulgarian industry. They have insisted on the
privatization of Bulgaria's plants and factories. In many cases, the
Bulgarian government, which diligently follows the IMF's advice, sold
these factories to powerful foreign corporations. And these corporations
often liquidated the businesses (a new way to fight the competition!).
What is the result? Hordes of unemployed workers, beggars in the
streets, old people digging in rubbish containers for some rag or moldy
piece of bread.
We are undergoing untold hardships, yet George Soros, the financier,
eggs us on, telling us to open our boundaries, make ourselves an open
society. But we in Bulgaria have learned the hard way what those pretty
slogans mean. It means killing the industry that is managing to stay
alive in Bulgaria. Turkish imports are flooding the market. Socks made
in Bulgaria are selling for 1 leva; I have seen Turkish socks, selling
for half a leva. So soon we will have only Turkish socks, and no jobs.
Lots of low-quality food products and other goods flow freely into
Bulgaria, undermining the efforts of local producers…
What is the West offering us in return for this misery? What is the
great attraction for foreign corporation in a devastated country? The
cheap labor and national resources! So much for open boundaries. So much
for an open society."
Such is the situation in Eastern Europe. In Asia too, the means of
production are laid to waste as these countries are commanded by the
banks to jettison "excess" capacity. Asian industries are
operating at a fraction of their capacity [21] that is if they have not
closed down completely.
Occurring side by side with this "dismantling" of the Asian
and East European economies is the concentration of the means of
production into bigger and bigger concerns in an effort to control a
bigger share of the market. Thus mergers are on the rise. Ironically
"free market" that is supposed to engender competition for the
benefit of society is producing exactly the reverse. Mergers are the
trend in banking, pharmaceutical, airline, biotech and other lines of
industry. Just four MNCs today control the pharmaceutical industry [22]
and the recent bank mergers are unprecedented in scale.
In the wake of the crisis, a new round of concentration of productive
assets occurs while economies of the south and east are push back,
productive capacity is destroyed while the people of these countries are
denied of their birth right over their economies.
Summary and Conclusions: Break the
Cycle of Indebtedness
There is no choice for the people of the third world but to break free
from the cycle of indebtedness. The debt crisis is linked to the crisis
of the global capitalist system and is bound to worsen as the crisis of
the system deepens. The present level of the third world debt cannot be
serviced by the underdeveloped countries. New loans only postpone the
day of reckoning, increase the debt burden, lay the grounds for worse
crisis in the future and serve to tighten the control of finance capital
over economies of the third world. In struggling against the debt we
must at the same strike at its very roots - monopoly capitalist rule
over the world economy.
It will not be enough to call for "debt relief" and more so
when these are conditioned on the very same economic policies that
exacerbates indebtedness. Debt relief schemes at best are publicity
stunts to draw away attention from the real causes of the debt. When
debt relief is conditioned on the installation of the very policies that
recreate the conditions, which breeds the debt problem then it is an
insult to the victims of the debt.
So is it with such deceptive schemes as "debt swaps" that,
while ostensibly providing funds for some objectives that are beneficial
to the people - credit, protection of the environment etc. -
nevertheless mask the basic nature of the debt problem which is the
systematic exploitation of the third world through institutionalized
usury.
Indeed the discourse on the debt must be enlightened by a thorough going
analysis of the system that breeds this problem. The debt crisis is a
systemic crisis and we must link our critique of the unjust
international economic system; our critique of debt peonage must be
linked to our critique of the monopoly capitalist system. As we in the
Jubilee South often say that the debt problem is an excellent window to
the unequal relations in the international economy.
The call for unconditional cancellation of the third world debt is a
just demand. It is just for the third world to demand this and be
relieve of the burden of servicing the debt. It is also necessary to
call on or exert pressure on the governments of the Third world to
repudiate the debt unilaterally. Indeed the third world "owes"
nothing to the first world.
These demands challenge the legitimacy of the debt. Such challenge is
even more important because of the fact that the ever tightening "conditionalities"
that go with the ever deepening indebtedness is based on a recognition
of the legitimacy of the debt. That it is illegitimate is proved by the
historical circumstances under which it was incurred - apartheid,
dictatorship, kleptocracy etc. Most important the debt is based on an
unjust exploitative system that systematically appropriates the wealth
created by the third world for a few financial oligarchs.
We are often told that the discredited regimes of the past are
responsible for the burgeoning of the debt. Of course they played their
part in the system of debt during their despotic rule and enriched
themselves in the process. But the "democratic" regimes that
replaced them through various "people power revolutions" have
brought their countries far deeper into indebtedness than their despotic
predecessors and are even more avid supporters of the
"neo-liberal" agenda of finance capital. There must be
recognition of the fact that the economic interest of the elites of the
third world, be they of the "autocratic or democratic type,"
is aligned with that of the international finance oligarchy.
It is not enough to simply go back to some worn out model of the past,
and recycle this into the present or even to pick certain aspects of it
and graft it to the present model. For the third world to break the
cycle of indebtedness there must be a radical break from the present
import dependent, export oriented, and debt driven economy. The economy
must be reoriented to providing for the needs of the local population
rather than the international market, a determined thrust to break
import dependence by developing industry.
There must be economic reforms. The current monopoly of land in many
third world countries must be broken. The commanding heights of the
economy should be taken over by the democratic state so that the whole
economy can be directed for the people.
We have to build the movement against the debt at every level and link
this to the movements seeking to put an end to the
"neo-liberal" order and the whole rule of the finance
oligarchy. We have to place special importance to the national movements
and in doing so we build the necessary political strength to confront
the unjust system. Let us also build international solidarity to amplify
our efforts. We must not fall into the trap of chasing the international
institutions in every summit in the hope of getting some small
concessions not unlike morsels after the finance oligarchy are done with
their feast.
The national level presents to us the weak link in the rule of global
finance capital because it is here where we build the real political
strength. The elite of the Third World countries must be made to account
for their responsibility in the debt crisis and the whole
"neo-liberal" onslaught on the people.
We are certain that this unjust social order must come to an end as
others before it came to an end. Certainly, the people will bring it to
an end.
________________
End Notes:
- International Monetary Fund, Capital Account Liberalization;
Theoretical and Practical Aspects, Washington DC 1998
- Felix Greene, The Enemy, Jonathan Cape, London, 1970
- Ibid
- Michel Chossudovsky, The Gobalization of Poverty: Impacts of IMF
and World Bank Reforms, Third World Network, Penang, Malaysia,1997
- Felix Greene, The Enemy, Jonathan Cape, London, 1970
- Ibid
- Ibid
- See For example New Internationlist
- John Mihevc, The Market Tells them so: The World Bank and Economic
Fundamentalism in Africa, Third World Network, Penang Malaysia, 1995
- C. Payer, Lent and Lost, as cited by Mihevc
- Amado M.Mendoza, Jr. et al, Debts of Dishonor, Philippine Rural
Reconstruction Movement , Quezon City, Phil. 1991
- John Mihevc, The Market Tells them so: The World Bank and Economic
Fundamentalism in Africa, Third World Network, Penang Malaysia
- IMF Pamphlet No. 37, 1984
- Ibid
- The discussion on SAPs and the IMF and WB draws from Chossdovsky
- Walden Bello, Addicted to Capital: The Ten-Year High and
Present-Day Withdrawal Trauma of Southeast Asia's Economies, Focus
on Global South, 1997
- Ibid
- Ibid
- Yilmaz Akiyuz, The East Asian Financial Crisis: Back to the
Future?, 1998
- Cafod, Capital Punishment, 1999
- Chow Wei Cheng, Behind the Asian Economic Crisis, Links No 10
March to July 1998
- UNDP, Human Development Report, 1999
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