Antoni's Wire Service

Date: 14 May 1998 00:54:17 -0400
From: (Antoni Wysocki)
To: unlisted recipients
Subject: debt forgiveness : then what?


In asking what impoverished nations will do if their debts are forgiven we should first consider how they came to be so heavily indebted in the first place. To begin with, the answer is not - as might be supposed - because these states needed funds to purchase food or other necessities of life for their citizenry. In fact, prior to the debt crisis even the most impoverished countries were generally self-sufficient in comestibles.

For the most part the borrowing took place because the World Bank and the International Monetary Fund (referred to in tandem as the International Financial Institutions or IFIs) recommended this course of action. Ostensibly the purpose of the loans was to "develop" the economies of the debtor states : the money would be invested in enterprises which would become so productive that it would be possible to pay back the loans with interest while also turning a profit.

Things seldom turned out that way, however. In the event, much of the money was simply siphoned off : by dictators (like Chile's Pinochet or Indonesia's Suharto) who ran their countries on behalf of the USA; or in the sky-high consultancy fees paid to Northern advisers. [Semantic note : by "Northern" I mean from the wealthy, industrialized states - including some below the equator such as NZ and Australia.]

That which remained for real investment was left an impossible task : not only were these funds mandated to produce booming economies from scratch in a very short period of time, they had to do so according to a particular formula. For the IFIs were not content to simply hand over the lucre and let the locals decide what was best for them; rather, the IFIs laid down strict conditions in return for the loans, stipulating that recipients had to completely reorient their economies to the production of exports. I won't tire everyone with an exhaustive discussion of the drawbacks of such a strategy except to mention one point. When the energy crisis of the 1970s caused a recession in Northern countries, the Less Developed Countries (LDCs) were absolutely devestated since they now found themselves without markets for the exports which the IFIs had directed them to base their economies on.

Suddenly the LDCs were placed in the position of having no currency coming in with which to make payments on their loans. Seeing no other option they had to go cap in hand to the IFIs seeking new loans to cover the old. The hypocritical response of the IFIs was to state that the LDCs were unfit to run their own affairs and would have to submit to a process of "structural adjustment" if they hoped to get any more cash.

Structural adjustment was code for the demolition of the public sector. Social services such as health and education were cut to free up funds for loan repayment (in some countries by up to 80 or 90%) while government assets were sold off to transnational corporations and civil servants were sacked en masse. The remaining functions of the rump governments - such as the operations of finance ministries - were largely ceded to the direct control of the IFIs.

Needless to say, while making available some money in the short term this sort of shock therapy ultimately destroys a society. To say nothing of the incalculable human cost this leaves such countries unable to produce enough to pay down their debts; but this is not an oversight on the part of the IFIs (and the Northern states which control them) - it is the whole idea!

I wrote above that "Ostensibly the purpose of the loans was to 'develop' the economies of the debtor states." However, the actual intent was quite other. The Third World dictators who signed the loan agreements typically did so to line their own pockets and finance their wars. If their fiefdoms prospered as a result that was all well and good (one less uprising to have to suppress) but really of little consequence to them.

For their part the IFIs were gung-ho about the loans for a number of reasons, none of them actually having much to do with concern for the common people of the LDCs. The IFIs favored the loans because : arbitration of the process enhanced their institutional prestige; the loans helped finance the wars of Third World dictators who were US clients and thus advanced US foreign policy; it was understood all along that the LDCs would never be able to repay their loans and that this would provide enduring leverage for the North to use on restive LDCs.

Now, some have asked, what will LDCs do if their debts are forgiven? No answer can be given with certainty. To be sure, LDCs are universally in worse shape now than before they became mired in debt. Unlike then, thanks to structural adjustment there are now very few countries which are self-sufficient in food. Populations, by and large, are less literate and more unhealthy. So while in the past such countries might have been able to get by without external aid (assuming they were not hellbent on seizing a higher "standard of living" overnight) this is now problematic.

In addition many of the demerits which plagued the loan process from the start also continue strong. For one, few if any of the developing nations have truly democratic governments, and today's crop of tyrants will only be too quick to seek fresh loan money for their personal aggrandizement. For another, following the directions of the IFIs, the LDCs have all built their economies around exportation of primary goods. This (as was intended all along by the IFIs) has only been to the advantage of the North, where consumers are able to buy commodities at articially low prices because of the consequent huge over-supply.

Frankly, then, it is not unlikely that LDCs will seek new monies if their debts are forgiven. These countries have been so ravaged by structural adjustment that they require a leg up just to be in sight of where they were prior to the whole debt imbroglio. If so the North must allocate the requisite funds : leave aside humanitarianism, elementary justice demands that we make restitution for the havoc we have wrought.

Still, the query brings out an important point (though I sense this may not have been the intention) : debt forgiveness is a necessary but not a sufficient condition for LDCs to have hope of better future. If the loans were written off. while the enormous imbalance of power between South and North remained, LDCs would likely be condemned to continued misery. In turn, for such inter-hemispheric equality to be realized there would surely have to be an equalisation within the North itself : power must be wrested from corporate and political elites and disbursed much more widely.

In sum then, what LDCs would do in the event of debt forgiveness has a lot to do with what other changes accompany this. If the North offered unconditional aid as required, supported popular democratic movements and did not attempt to ensure that the South remained a cheap labor haven for big business and a cheap manufacturer for Northern consumers, there is at least a fighting chance that LDCs might flourish. As noted above, such a wish list is in itself likely contingent on whether Northern countries continue to be run as, in effect, oligarchies, or whether thoroughgoing democracy can be effected here.