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Dropping the debt?

A history of the debt of the world's poorest nations. Can it be written off?


Campaigns such as Drop the Debt have called for western, industrialised nations to write off the debt owed to them by the poorest nations of the South. At a United Nations meeting on the 7th September 2000, Nigerian President Olusegun Obasanjo, chairman of the Group of 77, presented a petition with an unprecedented 22 million signatures to the United Nations calling for the cancellation of debts of the world's poorest nations.

In the past, there have been agreements to write off portions of the debt of the world's poorer nations, due to their inability to pay. These agreements have all been limited in scope. To understand why the entire debt cannot simply be written off by politicians we need to understand the global, economic context within which politicians are forced to act. Here we shall examine the origins of what is now referred to as the 'debt crisis' and the economic interests which stand in the way of the debt being cancelled.

The build-up of third world debt during the 1970s, which proved to be the origin of the 'debt crisis,' is especially well documented in Banks, Borrowers and the Establishment, by Karen Lissakers, The Global Struggle for More by Bernard Nossiter and A Fate Worse Than Debt by Susan George. Here we shall aim to draw out the key factors behind the build-up of the debt crisis from such commentators before considering what this can teach us about the likely effectiveness of campaigns such as Drop the Debt.

How much is owed—and to whom?

First of all, we need to consider the actual extent of the debt accumulated by the South. Here we shall use 'The South,' which as a term referring to the world's poorest nations, given that they are predominantly in the southern hemisphere.

The scale of the debt of the South is small in relation to the global economy, although cripplingly large in relation to the size of their economies. At this writing, the First World's financial markets are estimated at approximately at $2 trillion in equity and $1.5 trillion debt.( p146; 6)

The Debt of the 41 most heavily indebted poor countries (H.I.P.C.s) was $215 billion in 1995(4; p32). By the year 2000, African governments alone had $350 billion of foreign debt. African governments have to spend two-fifths of their revenues to service their debt. (4; p32) On average, Bello notes, debt is 35% of the G.D.P. of a developing nation.(3; p54)

It is of course the scale of debt relative to the size of their economies that is the main concern for nations of the South. Due to the debt being such a large percentage of overall G.D.P. in debtor nations, they are left with very limited scope for investing in infrastructure. The communications, legislative systems, education and health services, that are required for them to develop, suffer as a consequence.

The start of the crisis

It was during the early 1970s that lending to the South reached an unprecedentedly high level, taking the debt above manageable levels. Generally, this only gradually became clear to debtors and creditors during the following ten to fifteen years.

The extent of their over-commitment was rarely, if ever, apparent during the time of this initial, rapid expansion of borrowing by the South. These loans were to trigger a steady increase in debt that the South was to struggle with during the following years, if not capitulate under. Well documented are the examples of countries being forced to take out further loans in order to service existing ones. For this reason, the early 1970s are considered to be the start of the debt crisis. A study of the causes of the growth in the South's borrowing to unsustainable levels must therefore stretch back to this time and the years that preceded it.

Motives of the South

In the early 1970s, there was a sense of optimism among the world's poorest nations that, through economic growth, they could raise their wealth to the level of the first world. Many developing countries had seen high levels of growth during the 1960s. Brazil, for example, experienced five miraculous years from 1968 to 1973, under the guidance of Finance Minister Antonio Delfim Neto, when the economy grew at more than 11 percent per year.(2; p63)

Loans were seen as necessary to facilitate the continuation of this economic growth. The firm belief in the benefits that would be brought by loans is evident in the manifesto issued by the Banco Central do Brazil in 1973. Entitled The External Sector and National Economic Development, it was a lengthy defence of the rapid increase in Brazil's external debt. As Lissakers explains, "Heavy foreign borrowing, the central bank argued, hastened economic development, raised the level of domestic savings above where it would be with less borrowing, and in fact made the country less rather than more vulnerable to foreign shocks even from the foreign debt market."(2; p64)

Motives: The States of the North

We must also consider the creditors' motives for extending their lending to such a high level. This issue itself raises the question of who the creditors were. In fact, they were a combination of governments, the financial institutions they set up as well as private, commercial banks. All had an important part in the wave of lending during the early 1970s. In 1981, writes Bello, "commercial banks supplied 42 per cent of net credit flows to the Third World and official finance institutions 37 per cent."(3; p69)

The largest of the financial organisations set up by governments internationally was the World Bank. The immediate factors that shaped the lending policy of this institution were somewhat different to that of a commercial bank. The World Bank had strong ties to the governments of the northern, industrialised nations of the North who were largely responsible for providing it with the capital to lend. This close relationship was reflected in the political motivation behind World Bank policy. Head of the World Bank during the 1970s was former U.S.A. president Robert McNamara. He oversaw aid programs during this time and a large increase in World Bank lending to the South. He acknowledged that U.S.A. strategic interests were an important factor to him in this role, commenting that "the foreign aid program is the best weapon we have to insure that our own men in uniform need not go into combat." (1; p117—McNamara: Foreign Aid is the Best Weapon, quoted in Denis Goulet and Michael Hudson, The Myth Of Aid (Maryknoll, NY, Orbis Books, 1973), p98.)

Prominent among these strategic interests was the need to preserve spheres of influence in the struggle with the alliances formed by the Soviet Union. This was made plain by the Canadian Prime Minister John Diefenbaker who commented that:

$50 million a year… would be cheap insurance for Canada… to halt Communism in Asia.(2; p116)

Among these strategic interests was that of 'containing' the South itself. Following the period of economic growth, as mentioned above, there was a move towards political association among nations of the South which sought to clarify their collective interests and continue to achieve economic growth. Moves towards collective action, such as the G7 Summit, were seen as a threat by Northern leaders of a significance comparable to that of the alliances formed by the Soviet Union during the cold war.

Another threat from the South was the O.P.E.C. alliance of oil producing nations which was seen by some Southern leaders as a potential mechanism for representing Third World interests. Only to a limited extent, however, did O.P.E.C. attempt to use it's cartel position to gain concessions from the North, on behalf of the G77 nations as a whole. As Nossiter points out, the G77 was unable to agree on the specific detail of issues where they had hoped to establish a common negotiating position, such as commodity prices. The unity for which some G77 leaders had hoped did not emerge. In 1977, the North did agree to a $1bn aid fund(1) but overall the attempt of the South to gain concessions through political association was unsuccessful. (See Footnote 1)

Political containment was not the only motive for the institutions of the North to become involved in economies of the South. Loans such as those provided by the World Bank tied closely to the interests of Northern capital, with the South being a potential source of cheap labour and important export markets. The series of articles on Globalisation elsewhere on this website details the process through which the North was able to gain increasing influence over the shape of economies of the South. This process was administered through institutions such as the World Bank which were, as pointed out above, set up and funded by the industrialised nations of the North. These institutions can therefore be viewed as extensions of the state apparatus of the North, acting on the global, rather than national, level.

Having identified some of the most important factors motivating government-initiated lending through institutions such as the World Bank, we can now turn to the factors that prompted the private, commercial banks to increase the scale of their lending.

Motives: The Private BanksPetro-Dollars

The drastic increase in oil prices during the early 1970s sparked a huge increase in deposits to the Northern banks from the oil producing nations. This, in turn, left the banks with a lot of excess credit which they needed to put to profitable use.

The correlation between this influx of credit and the growth of loans is clearly demonstrated by the Quarterly Bulletin, published by the Bank of England in June 1981:

"after all countries have netted out the value of goods and services exchanged (shown on the "current account" of the balance of payments), the remaining gap between countries in surplus and countries in deficit that has to be financed has been twice as large since 1973 as it was in the twenty-three years preceding the oil-price hike.(2; p28.)

Economic slowdown

Whilst this rise in available credit (often referred to as 'petrodollars,' due to it being oil revenue) was an important spur to lending by the commercial banks, it does not explain why this lending became unsustainable. It was an inability among the Southern countries to sustain the levels of growth achieved during the 1970s that caused them to start defaulting on their repayments. This reduction in economic growth was part of a global economic slowdown during the mid 1970s.

Higher oil prices were actually an important catalyst for this slowdown. Lissakers cites William Cline of the Institute for International Economics who, she explains,

estimated that oil price increases added $259 billion to the import bills of non-O.P.E.C. developing countries in the ten years from 1973 to 1982, over and above what their imports would have cost if oil prices had simply kept pace with U.S. inflation.(2; p35; William R. Cline, International Debt and the Stability of the World Economy, Washington DC: International Institute for Economics, 1983, 20)

Citing a rise in oil prices does not of course singularly explain the economic slump. There were other factors in the 1970s slowdown and a longer term view of trends in the global economy shows that economic slumps are a regular feature of capitalism. It is argued elsewhere on this website that they are an inevitable feature of the system (see Booms and Slumps—What Causes Them?)

In spite of this inevitability, it is also the nature of economic slumps that participants in an 'overheating' economy (i.e. one that is on the verge of a downturn) do not know precisely when a slump will occur and how severe it will be. This should be remembered when we consider the behaviour of the financiers at the time of increasing loans to the South.

Profitable lending

Banks did not deliberately intend to increase their exposure trhough loans to an extent that would jeopardise future profits. Initially at least, their lending policy proved to be highly profitable and this was generally expected to continue. As Lissakers points out:

For all the complaining in the late 1970s about cut throat competition and hair-thin spreads, the returns on these loans were nothing short of spectacular: the combination of grossing up of interest rates and full creditability of withholding taxes land substantial up-front fees) produced yields far better than anything the banks could earn on their domestic assets and more than double the profits one would estimate by looking only at the stated spreads on these loans.(2; p130)

The profit motive, combined with the need to recycle 'petrodollars' were the primary motives behind the lending.

Generally, during the 1970s and even the early 1980s, the banks rarely considered the possibility that they might be over-exposing themselves, providing credit that could not be repaid in the future. Banks can, of course, profit from a loan when repayment is delayed so the possibility of some rescheduling would not necessarily jeopardise their position.

In March 1980, Paul Volcker, the chairman of the Federal Reserve (the job that Greenspan was eventually to take in the 1990s) said:

The impression I get from the data I have reviewed is that the recycling process has not yet pushed exposure of either borrowers or lenders to an unsustainable point in the aggregate.(2; p113)

As late as 1983, several years after the increased lending, Citibank's chief spokesman on Third World lending stated, with regard to loans to Brazil: "The Brazilians have an absolutely fabulous record of managing their international financial situation. We have a great deal of confidence in them. We don't feel unduly exposed."(George J. Clark, executive vice president, Citibank NA, before the Senate Committee on Banking, Housing & Urban Affairs, 98th Congress, 1st Session, 15 Feb 1983.)(2; p64)

How wrong this supposition proved to be. During the 1980s, Brazil ended up paying US $90 billion in interest payments on it's debt—almost as much as the total debt itself at this time, which was US $120 billion.(5; p176)

The atmosphere among the key decision makers is encapsulated in this commentary by Lissakers:

To the end, home governments of the lending banks did nothing to stop or even slow the flood of credit. L. William Seidman, chairman of the Federal Deposit Insurance Corporation (FDIC), served on the White House economic staff in the Ford administration. He recalls an economic policy dispute there in 1975 or 1976 in which the question of petrodollar recycling came up. Everyone sang the banks' praises, Seidman says, including William Simon, then secretary of the treasury, and Alan Greenspan, then chairman of the President's Council of Economic Advisors. The only dissent was Arthur Burns, chairman of the Federal Reserve Board. This isn't recycling," he grumbled. "It's bad loans." But even Burns's Fed did nothing to stop the lending.(2; p110)

This was, of course, the same Alan Greenspan who is now widely hailed in the United States as the most prudent of Central Bankers. As is hinted in the above passge, Lissakers shows that there was a feeling of unease among a minority of bankers about possible over exposure, even during the 1970s. Henry Wallich, for example, who was an economist on the Federal Reserve board in the U.S.A., warned that levels of lending were becoming unsustainable. Yet, even with this element of uncertainty, the pressure on individual actors to give out loans was considerable. This is borne out in a comment from a Deutsch Bank officer, quoted by Lissakers who was embarrassed to discuss some loans by his bank to Argentina:

It was a classic case of the exporters pushing us into lending. The firms argue, `Here is a big sale. If you don't do the loans, we will lose the deal to U.S. or other competitors. It means a lot of jobs, etc., etc.' There was big pressure. So we made the loans. (2; p102)

This case of financiers placing their vested interests before any doubts they may have about the longer term sustainability of lending parallels the incentive for many economic forecasters to produce favourable predictions. This is described by The Economist in March 2001, in relation to the economic downturn in the U.S.A.:

Investment banks, which have made billions out of the boom, …. have a vested interest in remaining bullish about the economy at large. Most Wall Street firms are still officially forecasting no recession in America. But an alarming number of their economists have privately admitted to The Economist that they believe that the risk of recession is higher than their published forecasts say. They are not alone in their dishonesty. International organisations such as the IMF are no doubt just as inhibited about forecasting a recession in the country that is their biggest shareholder.(7)

Lissakers points out that during the wave of lending during the 1970s and early 1980s, banks did have their own teams of researchers, known as 'country-risk teams' who assessed the economic situation in the borrowing nations.

The banks put thousands of people in the field in the borrowing countries, who knew the local economies into which they were lending and knew the political scene.(2; p11)

However, Nossiter argues that banks asked for little explanation of how profits would be achieved by debtor nations. He points out that they greatly exceeded the recommended debt to export earnings ratio of 20%. An important factor in this was a lack of awareness amongst banks and governments at the scale of the lending, due to government statistics falling behind.(2; p108) Also very significant was the competition amongst banks which meant that they would not share information about the loans they were making. As John Donnelly of Manufacturer's Hanover, a large U.S. bank, in Mexico City concluded:

The problem was we weren't talking to our colleagues. If we had known in 1981 what was being lent, we would have done something. The government would ask us for $100 million for six months. We would say, 'They have no problem paying that in six months.' But they were asking twenty other banks at the same time.(2)

This lack of co-ordination amongst competing capitalist enterprises is a common theme in the origins of financial and economic crises. Each enterprise seeks to gain a share of a lucrative market and the foreign debt market was no exception to this. More recent examples have been the huge surge in investment into South East Asia prior to the financial crisis of 1997 (Boom Goes Bust in Asia) and the so-called 'Dot Com bubble' on the U.S. stock exchange in the late 1990s.) Capitalism is, after all, an unplanned system in which future trends and effect are often unpreditable.

Taxation incentive

As Lissakers explains, there was a strong tax incentive for banks to organise loans to developing nations during he 1970s and early 1980s. Tax credits, she points out, could be claimed by Northern banks in their home country on all overseas loans. The reason for these tax credits was that banks were often liable for a 'withholding tax' on their loans to be paid in the borrowers' country (in borrowing countries that were outside the O.E.C.D.) Significantly, these credits were calculated on the basis of gross revenues from the loans whereas they were applied to net profits resulting from the loan. This meant that the scale of the tax credits was large in relation to the actual net profit to which they were applied. However, the credits were transferable and so surplus credits resulting from one loan were applied by banks to offset against the profits from other loans.

In real terms, this system of tax credits increased the post-tax rate of return on the loan. The benefits to the creditor were even greater when, as often happened, banks avoided paying the withholding tax, which was the justification for the credit in the first place! The tax credits could even be used to offset against domestic income, as banks managed to generate 'spare' credits due to high, often 'notional,' withholding tax. The United Kingdom, for example, permitted foreign tax credits, up to a notional 15 percent withholding tax rate, to be credited against U.K. taxes on all other types of income.(2; p122)

Lissakers writes:

As a result, in the United Kingdom, Japan, and Canada and other countries where the lending banks are based, the possibility of using these tax credits to offset against other income produced a "hidden layer" of profit for the banks from their Third World loans.(2; p13)

As interest rates increased in the early 1980s, tax credits provided even more of an incentive. The scale of the gains to banks cannot be precisely measured due to company tax returns often covering up the amount of withholding tax that had (or had not) been paid on the loan. According to one report:

In 1985, twelve U.S. money-center bank holding companies claimed $1.3 billion in foreign tax credits-dollar-for-dollar reductions in their U.S. tax obligations to offset foreign taxes. These offsets were equal to 25.2 percent of the banks' net pre-tax income and 546 times their current U.S. federal taxes actually paid.( 2; p117—Saloman Bros, Tax Reform: It's Complex But Highly Manageable, I, 3 Oct 96, fig. 4)

Before 1986, according to Marsha Fields of the U.S. Treasury Department's Office of Tax Analysis, "Banks (paid) almost no tax in the United States on foreign or domestic source income." In 1985, when the U.S. federal corporate income tax rate was 46 percent, Citicorp paid U.S. federal income tax of $30 million on pre-tax income of $1,716,000,000- an effective rate of l.8 percent. p116 (Saloman Bros, Tax Reform: It's Complex But Highly Manageable, Bank Weekly, 3 Oct 96, fig. 2)

It is pointed out that Northern governments were effectively subsidising loans through the system of tax credits. It is unsurprising, therefore, that during the 1980s, as the extent of the over-exposure of Northern creditors became apparent, this policy was changed.

In May 1989, a ruling in the U.S.A, which was retroactive to December 1986, placed a restriction on the practice of using tax credits to offset against domestic income. Under this formula, banks with mounting foreign loan losses might have insufficient foreign-source income to absorb all possible deductions. Worse for the banks, the I.R.S. ruling threatened to retroactively wipe out billions in other tax benefits on Third World loan banks had already claimed.(2; p115)

Both of the causes mentioned prior to this discussion of tax incentives: the in-built competition of capitalism combined with the need to re-cycle the 'petro-dollars,' certainly provided much of the momentum for the surge of 1970s lending. However, it is clear from the huge incentive of the tax credit incentives that institutional factors were also important. Lissakers does not address the question of whether the tax credit policy was adopted by Northern governments. It could be argued that it suited their interests to (as she puts it) 'subsidise' their loans, due to the need to achieve political and economic containment of the South. Certainly though, capitalism has an in-built tendency towards over-stretching itself in terms of investment, as discussed in the article: Boom Goes Bust in Asia. This was the key factor in why the creditors became over-exposed to the extent they did which was an outcome that went far beyond conscious policy-making.

The North becomes cautious

The 1980s: caution sets in

By the early 1980s, the major U.S. banks had a high loan exposure. By 1982, for Manufacturer's Hanover, Citibank and Chase Manhattan loans to Brazil, Mexico, and Argentina combined were 190, 145 and 118 percent of capital respectively (2; p113)

At this time, as we have seen, many senior financiers did not perceive the loans to be placing their institutions in jeopardy. Yet, even in1981, one-half of the loans being taken by developing countries would be used for repaying existing debts, as pointed out by U.S. Senator Frank Church who cited an American Express Bank International study.(2; p112)

During the 1980s a conscious policy of containing future loans was adopted. For example, the Reagan administration resisted proposals to double the resources of the I.M.F. in 1982 and accepted a 50 percent increase only when it saw that this was necessary to support the Western banks.(1; p156) The 1989 reform of the tax credit system was also evidence of this more conservative policy towards lending.

From 1987, private banks started to reduce their exposure. Statistics from the Bank for International Settlements show that the exposure of the banks in the major lending countries peaked in 1987, at $517 billion in loans outstanding (including loans to O.P.E.C.). By the second quarter of 1990 this total had declined to $469 billion.(2; p245) As Lissakers explains: "The retreat is not limited to troubled debtors. These banks… reduced their lending to non-industrial countries almost across the board, to Asia as well as to Africa and Latin America. Loans to Eastern Europe and the Soviet Union declined by $6.4 billion in the second quarter of 1990.(2; p245)

The retreat from lending was prompted in part by the banks' difficulties in securing loan repayments. A huge proportion of debt owed to commercial banks at the peak of indebtedness have been subject to scheduling, payment interruption, or significant interest arrears.

As the sustainability of debt levels came to be questioned by financial institutions, banks were forced to take out reserves against their loans to the South to provide greater security for their shareholders. Banks were even forced to write off some of their loans as losses. Loans were renegotiated, with the banks compromising on the terms of the loan such as the interest rate being reduced and the repayment schedule stretched out over a long period with a suspension of some of the debt. However, such renegotiations and cancellations had relatively little impact on the size of the debt.

Inevitable write-offs

The late 1980s and early 1990s were a period of gradual acknowledgement by the banks that debts simply could not be repaid on the original terms. Rather than being prompted by some kind of benevolence on their part this compromise was prompted by the stark reality of countries having borrowed far beyond a level they could manage. During the renegotiations, there was tension between this fact and the need to enforce the terms of previously agreed loans, in so far as was possible.

The Governor of the Bank of England, Robin Leigh-Pemberton warned that "Excessive" (new provisions for debtor nations) "send misleading signals to the debtors themselves." There was concern that large loan reserves, let alone writing off of debt, would, as Gerald Corrigan, president of the New York Federal Reserve put it create "self-fulfilling prophesies."(2; p214)

In spite of sentiments such as this, further compromise had to be reached and in 1990 the Brady Plan continued the process of renegotiation. The Brady Plan saw the scale of Southern debt being reduced from $517 billion in 1987 to $469 billion in the second quarter of 1990. Lissakers writes:

a total of $72 bn of debt had been renegotiated, with a net debt and interest reduction worth about $17 billion to the debtors. (B.I.S. Annual Report, Basle, June 1990, 2; p245)

In exchange for the Brady Plan, the banks demanded that remaining loans to be securitised and asked the Northern states to provide collateral for the renegotiated debt. Running alongside these renegotiations of debt was a policy of ensuring that debtor nations would repay as much as possible in future.

Damage limitation

The presence of institutional mechanisms for enforcing repayment provides confirmation that debt cancellation and even renegotiation were a last resort for the banks and Northern governments. One instrument with which the interests of the financial institutions could be enforced were the credit ratings assigned to each nation. A widely used and influential international credit rating was established by Standard and Poor. As well as repayments, Standard & Poor ratings depended on countries agreeing to a range of policy measures that it was felt would be conducive to achieving the economic growth required for meeting repayments. (See Globalisation for an account of the role of the I.M.F. in shaping economic policy in the South.)

More forceful mechanisms were also available to the I.M.F. Chossudovsky points out that "The IMF … had the means of seriously disrupting a national economy by blocking short term credit in support of commodity trade." (5; p52) Such loans encouraged importing of commodities from rich countries. In other words, once the loan agreement had been signed, disbursements could be interrupted if the government did not conform, with the danger that the country would be blacklisted by the so-called "aid coordination group" of bilateral and multilateral donors. (5; p56)

Chossudovsky points out that the IMF exercised these powers in the case of Brazil. In debt negotiations with the I.M.F. in 1990, Brazil argued that debt repayments must be limited to ability to pay. Chossudovsky writes:

The advisory group of 22 commercial bank led by Citicorp retaliated by vetoing the IMF loan agreement and by instructing the multilateral banks not to grant 'new money' to Brazil. This veto was officially sanctioned by the G7 at a meeting in Washington. In turn, the United States Treasury directed the World Bank and the Inter-American Development Bank (I.A.D.B.) to postpone all new loans to Brazil. The IMF, also responding to precise directives from the commercial banks and the US administration, postponed its mission to Brasilia. The IMF was a mere 'financial bureaucracy' responsible for carrying out economic policy reform in indebted countries on behalf of creditors. (5; p178)

This was the I.M.F. acting in it's role as the manager of debt within global capitalism. The anti-I.M.F. focus of many campaigns also overlooks the fact that the I.M.F. played only a very minor role in the provision of credit to the South until the early 1980s. This was after the seeds of the debt crisis had already been sown. The I.M.F. had the task of enforcing the interests of the creditors by ensuring that the maximum possible level of repayments were received.

In spite of renegotiations under the Brady Plan, the levels of debt rose drastically during the 1980s and 1990s. For the 41 most heavily indebted poor countries, total external debt had risen from $55 billion in 1980 to the 1995 figure $215 billion referred to above.(4; 32) This was because no renegotiation could address the fundamental problem of Southern nations lacking the capital to repay such a huge scale of debt.

The I.M.F. now makes the renegotiation of loans conditional upon a country adopting a Structural Adjustment Program (Globalisation) This was the case at the G8 meeting in Cologne, when an additional US $45 billion was committed for poor country debt relief. (This scheme was for 41 countries who are most heavily in debt—known as the Heavily Indebted Poor Countries (H.I.P.C.s.) However, this will result in only 16 countries making significantly smaller debt payments because, as Robert Weissman of Multinational Monitor points out: "a large portion of the debt forgiveness would only apply to loans that have already been written off by lenders but that were still on the books: obligations of the poor country borrowers." (4; p32) This is corroborated by the Third World Network, who state that the new money agreed by the G8 amounted to US $25 billion (G7 debt deal—more cash, but strings still attached—Third World Network, 21 June 2000). The money that has been agreed for the H.I.P.C.s will help to contain their debt but only by achieving high levels of economic growth will they be able to avoid the need for future repayments. (HIPC won't give permanent exit from debt, says GAO


The debt crisis arose from the unplanned system of global capitalism. Borrowers and lenders were unable to ensure that borrowing went beyond 'unsustainable' levels due to the competitive, 'anarchic' nature of the system. As such, this problem was not unique to the system—the global economy has seen similar bubbles of over investment burst in the late 1990s. Institutional factors, such tax incentives, played a part in the origins of the debt crisis during the 1970s. But the underlying factor—the drive for profit—is essential to capitalism itself and will cause future similar problems to continue to recur within capitalism.

The debt crisis for the world's poorest nations is of course especially acute with devastating consequences. However, the banks and governments of the North cannot act to simply write off the debt. The pattern of attempting to 'contain' the debt, as has been evident for the past fifteen years, looks set to continue. Debt negotiations such as those under the Brady Plan in 1990 have, as we have seen, been shaped by the desire of Northern banks to keep repayments to a maximum and only write off debt as an absolutely final resort. These banks, after all, are primarily accountable to their shareholders and so must ensure as high a rate of profit as possible. Asking banks, or any other company under capitalism, to do anything else is completely unrealistic. (Why Profit Gets Priority) Asking governments to force banks to give up on the billions owed to them by the South is also a predominantly lost cause. All that could be hoped for is that some small adjustments to the debt at the margin (as has happened in the past.)

  • Sources:

  • 1. The Global Struggle For More—Bernard Nossiter (New York: Harper & Row 1987.)

  • 2. Banks, Borrowers and the Establishment, Karen Lissakers (New York, Basic Books 1991.)

  • 3. Dark Victory—The United States and Global Poverty—Walden Bello (Pluto Press 1999.)

  • 4. The Ecologist, September 2000.

  • 5. The Globalisation of Poverty—Michel Chossudovsky (Third World Network, 1997.)

  • 6. From Third World to World Class - the future of Emerging Markets in the Global Economy, P. Marbier, (Penens Books, U.S.A. 1998.)

  • 7. Don't mention the R-word, The Economist, March 2001.

Footnote 1

This was reflected in the way O.P.E.C. used the vast revenues that it accrued during the 1970s.

The I.M.F. estimated that of O.P.E.C.'s total $475 billion investable surplus through 1981, $400 billion or 85 percent was placed in the industrial countries. Only $60 billion or 15 percent flowed to developing countries, including contributions to the World Bank and I.M.F.(2; Amuzegar, Oil Exporters Economic Development in an Interdependent World, p62, table 27, I.M.F. Occasional Paper 18, Washington D.C., April 1983.)

Lissakers points out that about 50% of O.P.E.C. bilateral aid went to three countries: Israel, Syria and Jordan. There is, of course, nothing unusual about the resistance that O.P.E.C. members states showed to the notion that they should use their economic strength to bargain on behalf of the South as a whole. The whole story of global negotiations on economic issues such as trade and development, as well as debt, has been shaped by nation states seeking to further their own economic interests. They will not seek to further the interests of others unless this can be seen to further their own interests in some way. This is the course that capitalist nation states are compelled to take. Given the lack of unity among the South, the G77 proved to not be as much of a threat to the North as was initially expected, although there was still plenty of incentive for their policy of 'containment' through institutions such as the World Bank.