A Fate Worse than Debt: The World Financial Crisis and the Poor

These facts are widely understood in the Third World, where progressive movements have initiated frequent, though still largely unsuccessful, efforts to break out of debt peonage. In the industrialized countries, on the other hand, discourse on the issue maintains a more polite tone: professional journals and the elite press speak of "payment reschedulings," "debt-equity swaps," "loan-loss reserves," and "grow th-oriented restructuring." The reality of political struggle and human suffering is thereby suppressed in this shroud of bureaucratic jargon. As Susan George aptly expresses it in A Fate Worse Than Debt, the bankers, economists, and politicians in industrialized countries dealing with Third World debt are like the bomber pilot "for whom the shattered bodies 50,000 feet below are simply not there."

The two works under review, Bradford and Kucinski's The Debt Squads and George's A Fate Worse than Debt, are important contributions precisely because they both succeed at stripping away the layers of technical mystification associated with the debt crisis and lay bare the basic issues in a straightforward way. As such, these books clearly show both the political and human dimensions ofthe crisis, while also illuminating the inevitable technical questions by placing them in their appropriate context.

The main features of the debt crisis have been well documented before, including in the pages of Monthly Review. But these two books do a good job of presenting and updating the basic chain of events in a relatively brief space. The story begins in the early 1970s, with the emergence of the Eurodollar market as the world center of international financial activity. The crucial feature ofthe Eurodollar market was that it enabled international banks to hold dollar deposits and issue dollar loans while remaining outside the jurisdiction of U.S. financial regulations. As a result, international financial activity became virtually free of regulatory constraints.

The Eurodollar market ballooned in size after the first OPECled oil price jump in 1973-74. This was because the OPEC governments for the most part chose to deposit their oil revenues in Eurodollar accounts. The banks, free of regulations and carrying a surfeit of deposits, were then faced with the problem of where to find new loan markets. The banks turned to the Third World because they perceived tremendous capitalist growth potential in these areas, particularly in the more advanced countries such as Brazil, Mexico, and South Korea. They also believed that no Third World government would ever default on its loans. Walter Wriston, chairman of Citibank during those heady times, pioneered the movement, insisting that Third World loans could never go bad because "countries do not fail to exist" (a position for which Lord Harold Lever dubbed Wriston the "Peter Pan of banking" because "he still believes in fairies").

Why were Third World governments and local capitalists such eager customers? The first consideration was that, at least in the beginning, the money was cheap. In the 1970s interest rates were never much higher than, and often below, the rate of price inflation. This meant that Third World borrowers could repay their debt obligations at a "real" interest rate-borrowing costs minus the inflation rate-that hovered around zero and often was negative. In fact, however, the loans were contracted under "floating interest rate" agreements, whereby debtors' payment obligations fluctuate along with changes in market interest rates. Branford and Kucinski call this arrangement "a trap" for borrowers because ofthe possibility that rates could rise at any time. But when real rates were low in the 1970s, Third World borrowers overlooked such troublesome technicalities.

Beyond the apparent low cost of borrowing, the other obvious attraction for Third World debtors was simply having so much money to spend. Few can resist what the leading Wall Street economist Albert Wohnilower calls "the narcotic attraction of borrowing." The Third World elite, living in poor countries, courted and Feted by the world's biggest bankers, succumbed readily.

 Ostensibly, the funds they borrowed were intended to help pay oil importers' rising energy costs and to finance productive development projects. Some ofthe funds did go for such purposes, especially to finance productive development projects, for example in Brazil, which achieved significant advances in its industrial infrastructure during the 1970s. But for the most part, the loans financed less respectable activities, such as pharaonic construction projects, the military budgets of repressive governments, high living by the Third World elites, capital flight-i.e., investment in wealthy-country assets by Third World elites-and especially, the payment of interest and principal on the debt itself Between 1 976 and 1981, Branford and Kucinski estimate that the total amount borrowed by all Latin countries amounted to $272.9 billion. Of that amount, 91.6 percent went for capital flight, debt servicing, and building up dollar reserves. Only 8.4 percent was used for domestic investment, and of that, much was squandered, as in Mexico where "lavish spending, capital flight, and conspicuous consumption were rife." In Africa, the magnitude of borrowing was only a small fraction of that in Latin America, but as George writes, the extent of waste and corruption was, if anything, proportionally higher.

This situation was unsustainable under any circumstances. But the thrust into a crisis phase was accelerated by the 1980-82 recession in the United States and other advanced countries, the most severe downturn since the Great Depression. The recession meant, first of all, that export markets for Third World products crashed. In addition, it was accompanied by unprecedented increases in real interest rates, producing the highest rates, as then West German Chancellor Helmut Schmidt put it, "since the birth of Jesus Christ." Such interest-rate levels meant that Third-World debtors, holding floating interest rate contracts, faced skyrocketing debt servicing burdens. The combined effects on Third-World debtors of export losses and interest-payment increases were immense-between $58 and $133 billion for 1981-82 alone, according to varying estimates reported by Branford and Kucinski.

Mexico, then carrying $80 billion in debt, was the first country to reach the stage of near-default. The story of Mexico's $8.3 billion emergency bailout in August 1982 by the IMF and U.S. Federal Reserve is recounted well by George. As she makes clear, it was Mexico's creditors who were really bailed out. The I MF and Federal Reserve forced Mexico to swallow a bitter austerity pill-the standard IMF treatment of sharp cuts in real wages, subsidies for basic goods, and public spending, among other things-to obtain the privilege of sustaining its debt-payment obligations. Moreover, after Mexico's bailout, the international banks refused to provide new loans throughout the Third World beyond the amounts necessary to continue debt servicing, and those funds also came only after the debtors, like Mexico, accepted the standard austerity terms.

 The basic situation has changed little since 1982, despite the always shifting cast of finance ministers, central bankers, and heads of state; the plethora of proposals advanced at innumerable conferences; and the six-year recovery from the 1982 recession depths. As presented in The Debt Squads and A Fate Worse Than Debt, the main features of the crisis since 1982 can be summarized as follows.

First has been the profound and needless human suffering engendered by the crisis, which emerges most vividly in the George book. One of the most moving expressions of this human cost is the 1985 statement of Cardinal Paulo Evaristo Arns, Archbishop of Sao Paulo, quoted by George:

 The huge effort of the past two years resulted in an export surplus of a billion dollars a month. Yet this money served only to pay the interest on the debt. It's impossible to go on this way; we have already taken everything the people had to eat, even though two thirds of them are already going hungry. When we borrowed, interest rates were 4 percent; they're 8 percent now and at one point they went as high as 21 percent. Even worse, these loans were contracted by the military, mostly for military ends-$40 billion were swallowed by six nuclear plants, none of which is working today. The people are now expected to pay off these debts in low salaries and hunger. But we have already reimbursed the debt, once or twice over, considering the interest paid. We must stop giving the blood and the misery of our people to pay the first world.

As George takes pains to emphasize, the impact of the crisis on the vast majority of people in Africa has been, if anything, even more severe. She writes that in Africa, "debt is now one ofthe main factors contributing to food insecurity. So long as debt relief is withheld, hunger in Africa can only be compounded."

The second major feature of the crisis since 1982 has been that the costs of adjusting to financial disorder have been distributed highly unequally. Indeed, the rich of Latin America and Africa have largely prospered since 1982. Few can match the excesses of corruption of Zaire's President Mobutu, who has spirited an estimated $5 billion from the Zairian treasury, an amount roughly equal to the country's total external debt. But in Latin America, capital flight by the continent's rich is much more extensive, amounting to an estimated 70 percent of all new loans between 1983 and 1985.

As to the fate ofthe big Western banks, it is often assumed that they have taken a beating since 1982. In fact, the banks have had to scramble a bit. In the end, however, thanks in no small part to the continued interest payments by Third World debtors, the receipt of Third World flight capital, and ongoing IMF bailouts, the banks have mostly thrived through the crisis years. George reports that between 1982 and 1985, profits rose at Bankers Trust by 66 percent, at Chase Manhattan by 84 percent, at Chemical Bank by 61 percent, at Citicorp and Manufacturers Hanover by 38 percent, and at Morgan Guaranty by 79 percent. Clearly, austerity is not the term to describe the experiences since 1982 of either the Third World elite or the international banks-the parties that contracted the loans in the first place.

The final major point that emerges from these two books is that the problems faced by the Third World since 1982 are not unfamiliar features of life in the underdeveloped countries. To begin with, the statistics throughout the indebted Third World on such social indicators as malnutrition, illiteracy, inequality, and child prostitution were nearly as high in the 1970s as in the 1980s. The difference is that earlier these conditions were diminishing, if only slightly, while since 1982 they have worsened, as governments have had to divert whatever paltry funds they once devoted to health, education, employment, and welfare into debt servicing and budget balancing. As Branford and Kucinski write: "What the debt crisis had done is absorb resources and energies that should have been used to tackle . . . urgent social problems. It has turned a highly unjust form of economic development into an intolerable one."

 In financial terms as well, balance-of-payments deficits, debt crises, and the imposition of I MF-type austerity programs are not new features of Third World economies. As Cheryl Payer's 1974 The Debt Trap thoroughly documented, the IMF and other Western financial institutions have been destabilizing Third World economies throughout the postwar period. Moreover, even during the colonial era, poor countries faced chronic balance-of-payments difficulties. Again, what is unique about the post-1982 period is not the existence of these problems, but their extent and severity.

Is there any resolution in sight? Both books discuss the range of proposals that have been advanced since 1982, most of them only minor variations on the I MF theme of austerity-cum-free-market restructuring. An interesting part of both books is their discussion of the homemade resolutions and survival strategies being pursued among poor and middle-class Third World communities. These include broadly based production workshops and consumer cooperatives and, of course, "informal" economic activities ranging from street hawking to, most importantly, the cocaine trade.

Both books also advance solutions of their own to the crisis. Here the discussions diverge somewhat. George argues against a debt default on the ground that it would prevent the Third World from obtaining adequate loans in the future. But she goes on to support a range of more moderate-sounding concessionary policies, including partial payment moratoria such as that presently practiced by Peru under President Alan Garcia. Cumulatively, her proposals would amount to a virtual default; and though she does not acknowledge it, the international banking community would not fall to grasp the point. George also suggests strategies for avoiding the path of "maldevelopment" which culminated in the debt crisis. Some of her proposals are worth considering, but she does not recognize that their implementation would depend heavily on the good will of Western financial institutions, the same entities that continue to fight vehemently in behalf of free-market, export-led development policies. In short, she does not emphasize sufficiently, though she no doubt understands, that a progressive resolution of the crisis will depend less on advancing any given set of policy ideas than on developing a mass movement against the entrenched and sophisticated financial institutions that have sustained the crisis up to now.

Branford and Kucinski are more clear on this fundamental point. They endorse the proposal of London's Financial Times reporter Anatole Kaletsky for a "conciliatory default" as the necessary first step toward advancing an equitable Third World development path. But they also point out that such a move will be opposed by Third World elites, even that segment which has not personally benefited from the crisis. They argue that a default would be dangerous for the ruling elites. "The masses, once aroused," they write, "are unlikely to limit their demands to those prescribed by the government. They will tend to broaden out their program to include demands for farreaching changes in domestic policies, such as greater political freedoms, radical measures to reduce inequalities in income distribution, and effective agrarian reform."

 Two crucial points are thus suggested by Branford and Kucinski's policy discussion: first, that the debt itself is only the most visible manifestation ofthe fundamental problem of gross economic inequities currently afflicting the Third World; and second, that the only viable resolution of the debt crisis will emerge through a concerted struggle by progressive forces, primarily in the Third World but in advanced countries as well. Both A Fate Worse Than Deht and The Debt Squads can serve as important educational resources in advancing this struggle, and as such they are both most welcome contributions.

Robert Pollin teaches economics at the University ofCalifornia-Riverside and is a member of the Union for Radical Political Economics National Steering Committee.

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