Lecture Notes, April 12th

Transcription

1 Lecture Notes, April 12th The debt crisis around the world has done much to skew relationships between countries and peoples, has had much to do with exacerbating the tragedies of poverty and fomenting social dysfunction and abuse, has much to do with the level of violence between peoples and states, has much to do with the spread of terrorism. The basis to providing and taking loans is simple. A loan is taken because the capital is needed to create the means to develop. Any loan is an investment intended to lead to the ability to make enough money to pay off the debt and in the case of countries (or businesses) stimulate an economic growth that is self-sustaining. Yet the story of lending since World War II, is a story especially since the 70 s, of loans that are made without realistic possibilities of such returns, of being diverted through self-interested corruption, of trading and speculation that have increased debt burdens astronomically, The result are debt burdens that have sent countries into default, have forced governments to choose between paying interest on the debt and paying for health care and education, have led to great profits for some and accentuated poverty for many, have led to the buildup of militaries and conflicts. So how has some of this happened and why? For purposes of this discussion loans for development and other purposes were being made since World War, but then there was a largescale spike in lending in the early 70 s. It is not that the loans prior to the 70 s did not include many that were ill-advised, poorly designed, or improperly spent. However when the Israeli- Egypt war in 1973 caused a great increase in oil prices (400%), much of the returns for the increase were Arab countries who then deposited upwards of $333 billion in new money in Western banks. Islamic law prohibits usury or the loaning of money for interest so this is why the money was put there. The commercial banks wanted to make this money work to earn interest so they were encouraged by the World Bank to make loans to developing countries. They pushed loans upon countries with extremely limited planning or oversight. Oil importers for one took in loans because they needed money to pay for the higher prices of oil. Other motivations for the loans included pursuing domestic policy and engendering domestic support so taxes were not raised or prices raised, or loans building up the country s military, or loans ending up as personal uses for projects that did not return investment. Even as the signs were bad that countries looked like they might default, banks continued to loan based on the belief that a country had enough resources and would not go bankrupt and could continue to pay off the interest on the loans. There was an avoidance of some of the lessons of history - the fact, for instance, that Latin America had experienced defaults in 1827, in 1873, in In 1970 the level of debt for a sampling of countries was a total of $18 billion. By 1987 this total was $402 billion. Argentina s debt rose 544% in a span of 7 years from 1976 to The interest of the loaners - the governments as well as the banks was also spiked by the geopolitical environment - the Cold War, the idea that to maintain spheres of influence the West must loan or else the Soviets would in order to spread their influence. So in the 70 s Zaire (now the Congo) received 1/2 or all U.S. aid because the rival factions vied for arms from all parties. Despite the awareness of corruption and profligate spending by the Mobutu government the stream of loans just increased. The result was a debt burden that now takes up 37% of all government revenues in just paying off the debt interest service in a country where gross per

2 capita income is $90. Lending countries often ignored the domestic situation in the countries to whom they were lending as long as other interests were served. Argentina received U.S. loans while its military dictatorship was disappearing its citizens. Saddam Hussein in Iraq received over $100 billion from governments. The U.S. continued to loan money to Saddam even after he gasbombed the Kurds in Halabja in 1988, killing 5,000 and wounding 10,000. England financed loans to Indonesia to buy Hawk jets that then the Indonesian military used to attack villages in East Timor and separatists in Aceh. France provided credits to arms manufacturers for sale to Rwanda which contributed to the means for waging genocide. How are and were many of these loans made? In the U.S. and Europe there exist Export Credit Agencies (ECA). These are public entity banks that approve the financing for a business or corporation to go ahead with a loan. If a business can get a loan through these ECA s they have the assurance that if the recipient defaults on payment, the Bank will pay almost all of the debt to the business or corporation and the debt burden will instead be added to the country to country debt between the host country and the country to whom the loan was made. According to Noreen Hertz in her book The Debt Threat 65% of all debt is through these ECA s. In the U.S. it is called the Export Import Bank and this bank facilitates these loans so that developing countries will buy U.S. products and U.S. services. It is a system that provides loans 2 to 3 times the amount extended by the World Bank, regional development banks, or the countries themselves provide in aid. So who takes advantage of this system? Especially large businesses who see their projects supported do. In the 90 s the biggest beneficiaries of ECA loans were AT& T, Bechtel, Boeing, GE, and McDonald Douglas. When ENRON wanted to develop a pipeline in Brazil and Bolivia the World Bank would not recommend it. Environmental and other considerations however were ignored by the Export Import Bank which was willing to fund it. The pattern of loans through ECA s tend to have been for large infrastructure projects, for resource extraction projects, for dams, oil refineries, for nuclear power, for military arms. And the lack of both safeguards and adequate screening for environmental, human rights or development capability criteria has led to widespread abuse and corruption. When additionally the Iran-Iraq War in 1979 (which went on for 10 years and cost millions of lives in both countries) caused a 2 year increase in oil prices of 200%, the additional need for loans from countries that were oil importers led to an inflation that also led to a global recession. When Mexico said in 1982 that they would default on their loans, the threat that the $315 billion in loans in Latin America might also be defaulted and the fact that 2/3 of these loans were being held by commercial banks caused the U.S. government to feel there might be a system collapse. The U.S. then provided a bailout to Mexico to avoid default. It was especially around this time that the World Bank and the IMF, as we talked about in class last week on April 5th, decided to actively intervene between banks and debtor countries. Loans were extended in rescue packages and in the late 80 s the World Bank and IMF guaranteed loans with conditions upon the debtor countries to comply with conditions - the conditions of structural adjustment, also referred to last week and in the lecture notes of April 5th. Another market for keeping the flow of loans going was also the creation of a bonds market. New bonds were attractive because they would come with lower interest rates and could

3 be floated to investors to cover the earlier debts. As a result of this lucrative way of trading on the debt, $6 trillion in such bonds were traded but in a way that was no more responsible than earlier lending practices. A bond market became a highly speculative arena for making quick profits. The debt of countries could be bought and sold in this market with the idea of the bond buyer finding an offering at a lower interest rate which it could then around and sell. Developing countries also became issuers of bonds as a way to raise capital. Interest rates would fluctuate widely. If a country was following the structural adjustment dictates of the World Bank and the IMF with balanced budgets, low inflation, privatization and the selling off of resources, deregulation, reduction of trade barriers, cutting public jobs and imposing wage controls, then the bonds would be traded at lower interest rates. If not, the market would punish countries by raising interest rates. What this means is that, depending upon the perceptions of the bond market, what the country might have to pay in terms of paying off interest on its debt would fluctuate widely. For example, I mentioned briefly about the situation in Brazil. When Lula s candidacy for President appeared more legitimate his history as a member of the Workers Party and as a labor union organizer as well as his statements that if elected he would wage a war on poverty and hunger, meant that the traders viewed this unfavorably. When interest rates were 7% the debt service Brazil was paying international lenders was 4% of their GDP (Gross Domestic Product) but as it appeared Lula might be elected (which he was) the market pushed interest rates as high as 24% and then in order for Brazil to keep paying off its debt it had to pay 15% of its GDP. The escalating level of debt for the 70 s and early 80 s mentioned earlier in these notes, continued in the same accelerating path. From 1980 to 1990 it doubled, by 95 it was up again by 50%. The effect of this situation, and additionally for the emphasis upon developing countries to increase their exports, created further economic crises. What happens when everyone is desperately trying to increase exports in order to gain capital to pay off debts? Overproduction of commodities such as coffee, cocoa (chocolate), rice, beans...meant that, in a world that had adopted a philosophy of deregulated markets with little government interference upon corporate interests, real prices for commodities plummeted. For many of these commodities, which provided sources of export capital for developing countries, more was produced and less was earned. Ethiopia s debt burden led to an international plan to provide debt relief of $100 million. In the same year the lowered prices for coffee meant that Ethiopia earned $150 million less for its coffee exports so it received a benefit in debt relief but lost even more in revenues because of declining prices. In west Africa (where most cocoa is grown) lowered prices for that commodity lead cocoa growers to either go out of business, or if they needed hired labor, to pay less and less leading to the proliferation of trafficking in labor and the proliferation of child slavery, especially in the Ivory Coast. In Africa, when so much is spent paying off debt, health spending is $10 a year per person for the year. In the U.S. $5000 per person is spent. In addition, the crisis in health care leads to the type of spending that is less effective because it is dealing with the effects of a lack of preventive care. In some African countries 25% of their health budget might be spent on amputations, kidney failures and blindness from the effects of diabetes. In a continent where 30 million people are living with AIDS, 1/5 of Mozambique farmers will die of AIDS in the next 15 years. The crisis for health care workers means that a Zambian population of 1600 doctors has

4 been reduced to 400 doctors. and there are more doctors from Sierra Leone in Chicago than in Sierra Leone. The possibility for social breakdowns and increased violent activities cannot all be placed solely on debt s doorstep, but this debt burden contributes greatly. IMF austerity programs in Rwanda contributed to large numbers of unemployed Hutu youth who became a significant part of the genocide of Tutsis in Unemployment elsewhere provides ready recruits for militias, for armies, for terrorist groups. In Pakistan for instance where 40% are below the poverty line, 60% have no access to education, 50% have no health services the state in dealing with the pressures of their debt, cuts its spending on these services and subsequently fundamentalist Islamics step into the void and provide services to the needy. They provide educational schools that are religious and often militant with a range of enemies that are taught to be hated. But when poor families are desperate, they apply to these schools in more number than there are openings in order to send their kids to the thousands of such schools who promise food, clothes, and housing for these children to go along with their militant education. Drug lords in some cultures take up this same role. The drug trade enters the void whether its khat growers in Kenya or coca farmers in Bolivia and Colombia where viable economic farming options have been removed. As Noreena Hertz remarks Most of the world s drug supply is grown in poor, often highly indebted countries where economic opportunities are scarce, law enforcement is weak, and officials can be bribed or eliminated. In such a world the environment is assaulted - resources are exploited to service debt, privatized logging deforests and contributes to global warming, mechanized fishing fleets have wiped out the sustainable stocks of close to 90% of the most important species of fish. And countries cannot afford environmental regulation. There has been a 50% reduction in protection of the Amazon funds since the 1980 s. World Bank and others emphasis on commercial shrimp farms as a means to create exports have not only produced a glut of shrimp lowering the prices but environmental destruction of the coastal saltwater mangrove forests which protect the coasts from erosion and destruction. The recent tsunami would not have had the same level of devastation if many of the original mangrove forests had remained. ` So what might be some solutions? A movement has developed to forgive much of this debt which was incurred by those who profited for narrow interests and yet have placed an unmanageable burden upon the masses of the people suffering the consequences of those prior actions. Solutions have been suggested. The worldwide movement Jubilee 2000 is working to try to get the World Bank and IMF and countries to forgive 100% of the debt. Their website is attached on the class notes so that you can get more information on their reasoning and activities. Noreena Hertz comments that so many debts, estimated at 60% of the total, are illegitimate and unpayable. She categorizes these debts this way because: 1. the loans were borrowed by regimes that lacked any democratic consent 2. the loans were used in ways that were contrary to the interests of the population 3. the lenders knew the monies would be used in this irresponsible fashion She argues that there are precedents applying to each of these principles where U.S. or international courts have forgiven debt or not held a party responsible for debt based on each of these behaviors. And the additional argument can be made that what if the level of debt prevents

5 a country from meeting the most basic of human needs. In societies debts are delayed or forgiven under such circumstances. In U.S. city bankruptcies, arbitrators and law allow the cancellation of debt which is considered unpayable when the municipalities needs for their citizens take priority. The subtleties and complexity of how to deal with the cancellation of debt are great. Here are some of them. How would you determine that a government has broken from its past pattern of abuse of loan funds to justify forgiveness of debt and to have some assurance that new funds would not be similarly abused and instead would be spent on social needs? Arbitration tribunals might be necessary to make such judgements. What sort of bankruptcy provisions need to be established so that countries might address their most urgent needs while at the same time reorganize to meet expectations in the world market where they might go to get needed capital? If the market established such high interest rates for those countries who go through such a procedure, how would those countries get the investment to create responsible growth? Hertz suggests that in countries which lack evidence of democratic responsibility, there be National Regeneration Trusts where the debt savings from bankruptcy be saved for development goals. They might have national and international representation of trustees charged with monitoring and verifying the responsible use of funds. Perhaps the Millennium Development Goals would be the benchmark. Debt cancellation would also happen in installments reflective of whether these goals were being addressed and met. This idea is not in effect. But the possibility of it assisting in development is boosted by some current realities. Where there has been some debt relief for instance in Mozambique the monies were used for a free immunization program, in Uganda, Malawi, Benin, and Tanzania user fees for education were eliminated. And to avoid the problem in the future? Here are some suggestions from experts - 1. minimize external borrowing through a variety of measures such as improving tax collection where feasible saving on non-essential spending 2. Remove secrecy from lending and have transparency about the motives and uses for loans 3. Reestablish the rights for developing countries to have capital controls so they can have more control over the inflow and outflow of capital from its highly speculative and manipulative purposes. 4. Reform the ECA s in western countries so that their practices do not promote arms sales, environmental destruction, and ill-devised schemes. Instead make the ECA s open to scrutiny as to the purposes and effects of their approval of loans. 5. Let those who suffer from the effects of World Bank and IMF practices hold those institutions accountable for their practices in the same way as malfeasance as a bank officer can be held accountable. Many things to ponder.