Jul 16, 1998
FINANCE: ROBBING PETER TO PAY PETER (WITH APOLOGIES TO PAUL)
BINU S. THOMAS*
Bangalore, 14 July (TWN) -- Death and debt make for strange bedfellows as the international fallout of the recent nuclear blasts on the Indian subcontinent show.
While Western governments brandish the sceptre of Armageddon to pressure India into signing the CTBT on their terms, they have been more gentle with Pakistan.
Reason: Islamabad is teetering on the brink of defaulting in its debt repayments to the rich nations. Pakistan has about $3 billion in debt repayments due this year but less than $1 billion in its foreign exchange kitty. Unless the IMF comes to its rescue with a generous loan (which has become difficult given the sanctions) Islamabad will default -- a nightmare scenario for international creditors.
But being the helpful folks they are when their money is at stake, Western creditors have been working overtime to prevent a default. An IMF team was in Islamabad recently trying to find a way out, and find a way out it will.
Those who doubt the determination of Western governments to recover every cent of every dollar due to their rapacious private financial institutions need look no further than the recent IMF bailouts in South Korea, Thailand and Indonesia. Most of the $400 billion dollars of debt that these countries are saddled with were due to overseas private financial institutions who should normally have been made to pay for their own lending mistakes. But the IMF has been used instead to become the chief debt collector on behalf of international banks.
A similar situation existed in Latin America in the early 1980s when Western banks stood to lose tens of billions of dollars they had recklessly lent to Latin American countries which led to these economies collapsing under a mountain of debt. Here again Western governments, with their control over institutions such as the IMF, came to the rescue of their banks.
In some countries where fresh lending was not an option, ingenious debt for equity swaps were resorted to by which foreign creditors were repaid with shares in well-run companies in Latin America -- a move which further entrenched their position in these economies and made them even more indebted over time.
International debt as it is created and nurtured today is a lot more dangerous than nuclear weapons. Entire regions and continents, not to speak of countries, have been decimated by large capital outflows to the developed world in the form of debt repayments. According to the London-based The Financial Times (quoted in a recent ActionAid UK report on debt 'Beyond Crisis Management') sub-Saharan Africa's debt increased from less than $3 billion in 1962 to $227 billion in 1996, a figure equal to 76% of the region's GNP. Every man, woman and child in this impoverished region of the world, where most people survive on less than a dollar a day, owes foreign creditors $600 each. In Latin America, where at the height of the crisis the foreign debt burden stood at $411 billion, the figure now is $580 billion.
India has earned for itself the dubious distinction of rapidly advancing into the ranks of the most indebted countries in the world. Its current external debt of nearly $100 billion represents a five fold increase from $20 billion in 1980. Today, one third of India's export revenues go to servicing its debt, compared to 9% in 1980. The over $12 billion that New Delhi spends annually on repaying its international loans is more than twice what it spends on health, education, water supply, family welfare, housing, etc. combined.
In 1994, India, for the first time, experienced net transfers, meaning its outflows on debt exceeded inflows. According to the World Bank's World Debt Tables, from a positive transfer of $771 million in 1991, India experienced a negative transfer of $1.7 billion in 1994 and this increased to $4.1 billion in 1995. The World Bank was the single biggest beneficiary receiving a net transfer of $1.1 billion in 1995.
New Delhi takes great pains to explain that the country does not risk getting into a debt trap like much of Latin America and sub-Saharan Africa. But as net transfers rise, the country can no longer depend on cheap loans (India has long been the biggest beneficiary of concessional IDA loans) or on dwindling aid flows to help repay its staggering debt. Rather it has to depend on the more fickle sources such as portfolio investment and FDI, apart from traditional ones like remittances and exports to stave off a forex crunch. With all these sources feeling the brunt of the post-Pokhran sanctions, a debt crisis, if not imminent, is certainly in the works.
It has become fashionable in international circles to blame developing countries for not managing their debt properly resulting in mis-utilisation, wastage, etc. While developing countries certainly contribute to the problem, such criticism masks the much more significant role played by developed nations in perpetuating it.
Indeed the operative economics of Western creditors has been Say's Law of Markets -- of supply creating its own demand. Initially, vast amounts of capital generated by the oil boom in West Asia in the early 1970s and parked in Western banks were made available at throw-away interest rates to developing countries who were encouraged by large financial institutions controlled by the developed world such as the World Bank and the IMF to go on a spending spree. In the late 1970s, as interest rates firmed up, a repayment crisis emerged resulting in the Brady Plan, Structural Adjustment and a host of other tools being brought into play to extract repayment.
In the 1980s and 1990s capital exports have been greatly facilitated by the phenomenal growth of speculative capital. In 1975 about 80% of foreign exchange transactions were for real transactions, largely to purchase and sell goods and services. Only 20% was for the speculative purpose of making profits by trading in currencies. Today the real economy in foreign exchange transactions is down to 2.5%. In other words 97.5% of the $2 trillion in currencies that is traded every day is for speculative purposes, according to Bernard Lietaer, professor of international finance at Belgium's University of Louvain and himself a one-time successful currency speculator with the Gaia Hedge Funds. ('From The Real Economy To The Speculative', Third World Economics, November 1997.)
For major international banks such as Citibank, Bank of America, Chase Manhattan, Barclays, etc -- who are also the biggest private lenders to developing countries -- as much as 50% of their profits come from currency speculation. Higher profits of course mean higher tax revenues for Western governments, which partly explains their zeal in protecting the interests of their banks when their excessive lending to developing countries lands them in trouble.
Large scale capital exports has helped the developed world replace the easy pickings it once enjoyed from colonies in Asia, Africa and Latin America, but which it lost when these became independent around the mid 1900s. For two centuries Britain, as did most colonial powers, enjoyed a 'free lunch' when it paid for its imports from colonies like India, not merely out of its own exorbitantly priced manufactured exports to the colonies, but through tax revenues collected from the colonised.
It is estimated that in the 18th century one-third of British imports from India was paid for by land revenue and other taxes collected from the 30 million subjects of the agriculturally rich area of Bengal, when Britain itself had a population of only 10 million. As pointed out by Prof Utsa Patnaik in her paper 'The Free Lunch Transfers From Tropical Countries And Their Contribution To Capital Formation in Britain During The Industrial Revolution,' by 1801 transfers from the colonies amounted to 86.4% of Britain's domestic savings.
But these transfers dried up when the colonies became independent. At the same time, import substitution policies in a number of newly independent countries threatened the pre-eminent position enjoyed by manufactured exports of the industrialised world. With rising incomes, the consumption by Western consumers of tropical products such as tea, coffee, cocoa, tropical timber, etc -- which to this day cannot be grown in the temperate climes of developed countries -- increased leading to higher imports from the so-called Third World. All these developments threatened major problems for developed countries on the current account front.
This was when large scale capital exports came to their rescue. Conditionalities attached to capital exports often reap the benefits that direct taxation provided for in colonial times. Frequent devaluations of Third World currencies imposed under the Stabilisation and Structural Adjustment Programmes (SAPs) or triggered off by the speculative attacks of rogue currency traders ensure that developed nations continue to enjoy their time-honoured tradition of a 'free lunch.' The more developing countries export (as they are told to do under SAPs, the WTO prescriptions, etc) the less developed countries have to pay for it thanks to competitive devaluations, the creation of global commodity surpluses, monopolistic control of commodity markets by Western commodity traders, etc. Often the repayment of foreign loans in a given year by a highly indebted country is as much as the foreign exchange earned by it from exports to the creditor nation.
Thus the process of robbing Peter to pay Peter has truly become institutionalised.
Today, developing countries are so busy meeting their foreign debt obligations, they do not have time to pause and reflect on the irreversible damage being done to their economies and their peoples. Public assets built up over decades with public monies are being privatised in a twinkling of an eye and often for a song in order to meet short-term debt repayment obligations. Natural resources such as forests, water bodies, common lands, etc ~ all vital to the survival strategies of the poor -- are being thrown open to foreign firms, often for environmentally and socially destructive ventures such as mining, to earn foreign exchange to repay international loans.
Increasing internal strife, political instability and growing regional tensions have been some of the other fallouts of rising debt. This creates a market for huge arms exports from developed nations, often on credit that is disguised as aid..
One of the more pernicious effects of rising debt, devaluations, etc has been large scale flight of domestic capital from highly indebted countries -- capital which could have replaced foreign funds in a poor country's development process. According to a recent study by researchers from the World Bank, the IMF and the University of Oxford ('Capital Flight and the East Asian Crisis: What are the Implications for Africa' by Paul Collier, The World Bank, USA, Anne Hoeffler, Centre for the Study of African Economies, University of Oxford, UK. and Cathy Pattillo, International Monetary Fund, USA), by 1990 some 39% of African-owned private wealth was held outside the continent. "If Africa could get its own wealth back into the continent, its capital stock would increase by 65%," say the authors .
Having identified the problem, the researchers then go to suggest solutions in the neo-classical tradition which could only make the situation worse. They recommend devaluations and removal of trade restrictions which going by past experience will only contribute to rather than help tackle the existing problem.
Clearly no individual developing country can by itself resist the pressure of foreign creditors, who often act in concert under the banner of institutions such as the G-8, the World Bank and the IMF. Getting out of their current predicament would require developing countries, and their sympathizers among NGOs, to do more than appeal to the sympathy of the rich nations and plead for 'debt forgiveness' as they are currently doing. Debt write offs should be demanded as a matter of right given the colonial past and the neo-colonial present. If that does not work, developing countries need to pluck up courage to collectively renege on their international debt obligations, recognising that debt today is the most potent weapon in the armoury of neocolonialism. The leadership that the developing world currently lacks to facilitate such collective action could well emerge, given the gravity of the problem, sooner rather than later. What is required is nothing less than a whole new independence struggle, a new satyagraha (nonviolent resistance) on an international scale.
(Binu Thomas, is Coordinator, Policy & Advocacy Unit, ActionAid India, and formerly Kuala Lumpur Bureau Chief of Time Warner's Asiaweek Magazine. He wrote this article for SUNS in his personal capacity)