Thus, support for the right of Slovenia and Croatia to self-determination needs to be coupled with vigilance over moves by the Western powers to use the crisis to assert their "right to interfere" in Eastern Europe. — Colin Meade * debt
ON July 15-17, 1991, the leaders of the world's seven richest nations (the "G7"
nations) will hold a summit meeting in London. As has happened each year since
1989, an international demonstration to demand the unconditional cancellation of the Third World debt has been called to coincide with the meeting — this will take place in London on July 13.
PAUL VERBRAEKEN
H OW BIG is the outstanding
debt of the Third World? Different sources give widely differing figures, but a reasonable guesstimate of the global debt stock at the end of 1989 would be around $1,100
This represents a considerable increase in comparison with the start of amounted to "only" $485 billion.' Over these ten years there was a considcrable change in the make up of the share of the commercial banks declined from 47% to 37% and that of the official creditors rose from 37% to 47%, the share of the other private creditors remaining stable at 16%. This gives a first clue to the nature of the development of the debt crisis; especially after the beginning of the debt crisis in August 1982, the commercial banks have tried to limit their exposure. Although the percentage of their claims has diminished considerably, it goes without saying that, in absolute numbers, their exposure is much larger now than it was in 1980.
The geographical distribution of the
There is a big difference between these regions as to the nature of the creditors. No less than 70% of the claims on South and Central America are in the hands of private creditors, compared to only 30% in the case of Sub-Saharan Africa. This difference is due the fact that the commercial banks have always concentrated they expect to expand rapidly in the sense of inserting themselves in the capitalist world market. This becomes obvious when we examine the facts a little more closely.
Zaire, a country on the edge of bankruptcy for over 10 years, owes no more than 11% of its global debt to the banks, whereas Nigeria, the big oil producer of
Sub Saharan Africa, owes 52% of its debt to the commercial banks.
The capitalist economy runs on credit
The phenomenal expansion of credit is one of the most striking features of international capitalist development after the second world war.
From 1964 until 1987 net international bank loans rose 11 times faster than world trade, 20 times faster than worldwide fixed capital formation and 21 times faster than the global gross national prod-
At the end of last year the total amount of outstanding debt of central and local government, households and nonfinancial business in the USA reached the staggering figure of $10,580 billion (194% of GNP) and almost ten times as much as the global Third World debt!3
We are confronted with a painful paradox; to many Third World countries, servicing their debt means an unbearable burden on their potential for economic and social development whilst at the same time the volume of their debt represents only a marginal fraction of the global credit expansion.
At the end of 1989 the claims of the commercial banks on the international capital market reached $2,640 billion (exclusively bank loans). The claims on the Third World amounted to $488.6 billion, only 18.5% of the total claims*. 1. These amounts were calculated using data from the World Debt Tables 1990-91, Volume 1. We subtracted the total debt of "Europe and the Mediterranean" from the global debt and added the estimated debt of the non-reporting countries. The collection and processing of the data is not always easy. For an introduction to the problem, see Bevan B. Stein, "Le parcours du comwater des statistiques de la dette extérieure" in l' Observateur de l'OCDE, no. 157, April-May 1989, PP. 20-22, and Mark J. Ellyne and Hans Flinch, "Problèmes de chiffrage de la dette extérieure" in Finances & Développement, March 1990, pp. 14-16. 2. UNCTAD, Trade and Development Report, 1990, table 28, p. 110. 3. Data on the debt: Flow of Funds Account, First Quarter 1991, Board of Governors of the Federal Reserve System, Washington. Fo the CAP Figur: 3 Survey of Current Business, vol. 71, no. 4, April 1991. July 8, 1991 • #210 International Viewpoint
ource: Jeffrey Sachs (ed), Developing Country Debt and the Worl conomy, Chicago & London, 1989, Table 1.3, p.
THIRD WORLD DEBT Only a very small part of the assets of the commercial banks consists of claims on the Third World; in the United States this is the case for no more than 3.6% of the loan portfolio of the commercial banks.S
In passing, we should note that, against those claims, the deposits of Third World countries in the commercial banks of the highly developed capitalist countries amounted to $446.1 billion. If you add to this figure the real estate, securities, gold and other valuable objects in the hands of the ruling classes of the Third World, you undoubtedly obtain a mass of wealth much larger than their countries's debt to the banks. This is the second important clue in the analysis of the debt crisis; the between the international financial establishment in the West and the rich in the Third World; in this respect the cases of Marcos, Duvalier, Mobutu et al only constitute the tip of the iceberg.
The debt crisis The unbridled capital flow that started at the beginning of the 1970s gave rise to a debt problem that was suddenly transformed into a debt crisis from which most of the Third Word countries have
First of all, we should note that, contrary to an often heard "theory", there is no connection between the start of this credit explosion and the "oil shock" of 1973-74. This was confirmed by the late
Otmar Emminger, former president of should be drawn to a number of facts that should serve to correct certain widely misconceptions errors. One of these, for example, is the assertion often made by leading representatives of the banking system that the excessive credit expansion in the Third
World was more or less forced on the banks by the need for the OPEC countries' massive surpluses to be recycled to deficit countries; they claim that governments and central banks even encouraged or pressurized them to recycle the funds. In reality, the runaway momentum of international bank lending before 1982 had quite different causes"
Secondly, misconception should be corrected; until the beginning of the 1980s the impact of debt servicing on the economies of the Third World countries remained quite stable. It was only from 1980 onwards that the situation changed dramatically (see Table 1).
The main reason for this crisis was the sudden introduction, in the last quarter of 1979, of a radical deflationary policy by the US Federal Reserve Board, followed by most Western monetary authorities, resulting in a severe international recession in the period 1980-82. This reversal of economic policy by the international bourgeoisie had enormous consequences.
The rise in interest rates led to a rapid and considerable increase in the cost of financing the debt; the average nominal interest rates on the medium and long term debt rose from 12.3% in 1979 to 17.4% in 1981. The real interest rates rose from a yearly average of 0.7% during the period 1973-80 to 6.7% during the period 1980-85.
Third World exports, which increased by 25% in each of the years 1979 and 1980, increased by only 2.5% in 1981 and diminished by 4% in 1982. This collapse was mainly due to heavy falls in the unit export price. The average price of the commodities exported from the Third World diminished by no less than 28% in the course of two years (1981-82) and by the end of 1982 it had dropped almost 39% below the 1974 peak.?
### Second oil shock
It is true that the second oil shock played a part in the deterioration of the economic situation in the oil-importing Third World countries. But we should be aware of the fact that this increase in the price was merely a reaction to the strong inflation and the ongoing devaluation of the dollar during the 1973-80 period, two developments which lowered the real price of oil. So, in the last analyadverse factor has to be explained by the economic and financial policies pursued in the highly developed capitalist countries.
This is the third clue in the analysis; the emergence of the debt crisis in the
Third World countries did not flow from the economic policies they pursued; the crisis originated in the policies adopted by the bourgeoisie of the highly developed countries to find a way out of their
"capital flight problem" in the Third World, shows that it is a consequence rather than a cause of
This has nothing • LO "third worldism"; in many Third World the mismanagement of the enrichment on the backs of the working people and the unemployed, their contempt for the "ordinary" man and woman, the all-encompassing corruption and clientelism, the growing criminalization of society cannot be overlooked because they are so obvious. But we should be aware that the Third World as a whole (and I know that there are problems in defining this concept) occupies a marginal position in international economic financial relations. It seems to me that the problem is not so much exploitation of the Third World by the highly developed capitalist countries through their industrial and financial multinationals as one of progressive marginaliza-
The handling of the crisis When the crisis emerged in its full dimensions in August 1982, the international bourgeoisie reacted immediately to prevent a melt down of the global financial system, and it has continued to do so in the ensuing years. This is done prag matically, but on the basis of a few firmly established principles - helping the banks to save their necks, and preventing the emergence of a coalition of Third World countries in the negotiations (the "case by case" approach). The policies can be summarized as follows:
• The foreign debt was rescheduled on a very large scale. Repayments were continuously postponed, the only thing that was insisted on being regular payment of the interest on the debt in order to sustain the liquidity of the creditor banks. The scope of these rescheduling operations shows the seriousness of the whereas during the period 1978-81 the amount of the rescheduled debt was only $1.5 billion, this increased to $198.4 billion for the period 1982-85 and to $308.5 billion for the period 1986-May 1989.
• Simultaneously the "voluntary" credit flow from the commercial banks dried up. The great majority of new loans were made in the framework of the rescheduling operations. The total net credits from the commercial banks to the non-OPEC
4. Calculated on the basis of figures in Bank for International Settlements, 60th Annual Report, June 1990,
6. Otmar Emminger: The International Debt Crisis and the Banks", in Intereconomics, May/June 1985, p. 107.
7. M. Feldstein, H. de Carmoy, K. Narusawa & P.
Krugman: "Restoring Growth in the Debt-laden Third
World, A Task Force Report to the Trilateral Commission", New York-Tokyo-Paris, 1987, Appendix, p. 75.
Table 1
Debt-export ratios (%)
1973
Non-oil LDCs
115.4
112.9
Western Hemisphere
176.2
178.4
International Viewpoint #210 • July 8, 1991
1980
1981
1982
1983
124.9
143.3
152.8
207.9
273.1
290.4
8. Some figures to illustrate my point: in 1989 the global GNP of the Third World stood at $2,415 billion for a population of approximately 4 billion people; the GNP of the US (with a population of 250 million) was $5,234 billion, almost twice as much. The defence budget of the US was double the amount of the GNP of Sub Sahara Africa. The share of the Third World in world trade stands at around 24%, but if you subtract the share of the OPE countries and the 4 Asian "little dragons", plus Thailand and Malaysia, the share goes down to only 8%.
----- photo credits and running heads -----
4
### Table 2
Net credits of commercial banks to Third World (in$bn)
1980 30.8 1985 4.7
1981 44.0 1986 2.4
1982 30.9 1987 -1.1
1983 19.8 1988 0.7
1984 19.8 1989 3.0
Source: World Debt Tables 1990-91, Vol 1, Table 3, p. 16 Third World countries evolved as shown
• The IMF played the role of unavoiddog and supplier of the famous, or rather infamous, short-term grammes". Presuming the broad outline short-sighted) "adjustment of the IMF policies to be known, I shall not elaborate on this subject.
The whole operation has added up to a gigantic sting. In 1983 the net transfers went into reversal; between 1983 and 1989 something in the order of $170 billion found their way World to the highly developed capitalist countries (commercial banks, governments, IMF, World Bank, regional development banks). But this bloodletting did not mean that the outstanding declined, on the contrary. Between 1983 and 1989 the global debt increased from $711 billion to $1,117 billion.
You could compare this to the predicament of someone who buys a house, contracts a loan for $100,000 to finance the purchase, pays an interest which is so high that s/he cannot keep the house in a decent state and finds out 6 years later that his/her debt to the bank has gone up
A new approach It goes without saying the this development could not go on forever. The arrears gradually increased and in 1989 reached a total of $79 billion.?
But it was not until 1988 that the principle of debt reduction was "officially" recognized concerning the debt owed to official creditors (the so-called Toronto Terms), and until 1989 for the debt owed to the commercial banks the Brady Plan). Both schemes offer a very partial reduction for a limited number of countries. The first one only applies to the poorest countries with serious debt servicing problems and offers a number of options to the creditor countries, among which a reduction of 1/3 of eligible maturities.
Up to now the results have not been spectacular, to say the least: "Between October 1988 and September 1990, 19 countries rescheduled on Toronto terms...The estimated cash flow savings of the 19 countries totalled about
US$ 100 million, about 1% of their
1989 exports debt service. "10
The Brady plan was announced on
March 10, 1989 and first implemented in the case of Mexico. This is no coincidence; the results of the presidential showed that the cracks in the political system were beginning to widen dangerously in a country which is of vital strategic importance to US capitalism.
Therefore it was extremely important to take some action, as was admitted at the conference sponsored by the Bretton Woods Committee and the Brookings Institution, at which Brady announced the outline of his plan: "The Carlos Salinas de Gortari administration in Mexico, Which has gone furthest in restructuring economic policy, clearly needs additional external help to continue its reform program in the face of a tenuous internal political position."!!
In the field of debt reduction this "additional external help" is rather limited. The banks had a choice between three exchanging loans dominated bonds at market interest rates at a 35% discount, exchanging loans for dollar-dominated bonds at a fixed interest rate of 6.25% or providing new money at market interest rates. The dollardominated bonds are backed by US government bonds and are explicitly exclud-
The net result of the whole operation is an increase of external debt by $5.1 billion and a yearly reduction of interest payments of $700 million (in 1989 total interest payments on the Mexican debt amounted to $9.3 billion). Note that part of the reduced debt to the commercial banks is transferred to the public domain in the form of loans from the IMF and the World Bank to help finance the US government bonds, and that the structure of the debt has become more rigid because neither the dollardominated bonds nor the loans by the IMF and the World Bank can be have been concluded for the Philippines, Costa Rica, Venezuela, Uruguay and Morocco but it is obvious that the Brady Plan has run out of steam. At the recent International Monetary Conference held in Osaka from June 2 to 5 and attended by the heads of the world's largest banks, the president of the Banque de France and former chief of the IMF, Jacques de Larosière, declared that there should be a pause in the debt reductions.!2 It is not certain that president Mitterand will fully appreciate this point of view because he recently tried, and
THIRD WORLD DEBT failed, to reach an agreement with his G-
7 colleagues to enlarge the 50% debt reductions granted to Poland and Egypt and to a number of African countries within the sphere of influence of French capitalism.
The only initiative we can expect is the probable announcement at the G-7 summit in London of an extension of the Toronto Terms; a reduction by 2/3 of the debt stock of the poorest countries. Meanwhile, we are witnessing an intensification of the offensive, led by the United States government, to deepen and accelerate the process of privatization, liberalization and deregulation in the Third World.
Debt: a political weapon
The most recent move in this offensive is the intense pressure put on the World Bank to provide loans to the private sector in Third World countries. If you want to understand how the debt burden is used as a weapon, you have only to read Fortune: "The hundreds of billions that countries borrowed in 1970s and the early 1980s financed all sorts of extravagant and profitless pro-
Amazon highways that go nowhere to highly automated steel mills in Africa. Now the Third World is discovering how market economies use capital to create new wealth. Once a country starts acting accordingly, lightening its debt may be not only appropriate but also promise is a powerful incentive for nations hesitant to take the reform plunge"13
Become a full-blooded capitalist and you will be forgiven....* 9. World Debt Tables 1990-91, vol. 1, Table 7, p. 22. 10. Ibid, p. 26. 11. Edward E. Fries and Philip H. Trezise (eds), *Third World Debt; the Next Phase", Washington DC, 1989. 12. Le Monde, June 8, 1991. See also Financial Times, 13. ran Reilly, "Coling Down the World Debi 5 June 5, 1991. Bomb", in Fortune, May 20, 1991, p. 79. July 8, 1991• #210 International Viewpoint