At the Economic Summit held in Toronto in June this year, the seven leaders agreed, in principle, measures to ease the debt problems of the poorest countries in sub-Saharan Africa. Africa is mainly dependent on raw materials for its trading income, but because of the state of the world economy, and the introduction of substitute materials, the demand for Africa’s staple products has dropped, so that a typical 'basket' of exports buys nearly one third less imports than ten years ago. Debt service obligations for countries like Mozambique. Sudan and Somalia now pre-empt the whole of their export income.
The measures eventually worked out by the Paris Club, from the "menu of options" (sic) agreed at the Summit, will do little to relieve the conditions of the poor in those countries. The lucky beneficiaries of debt relief must first be undertaking internationally approved "adjustment" programmes. This means conditions laid down by the International Monetary Fund (IMF). The aim of such conditions is to increase exports, and those most frequently imposed are devaluation of the currency, drastic reduction of government expenditure, price increases, wage cuts, and the reduction of domestic consumption. When added to the difficulties arising from the dependence on particular products, the concentration on growing cash crops, "unfair" competition and falling world prices, these policies spell disaster for people whose incomes are precarious at the best of times. Over forty countries are under IMF "guidance", while others practice Fund doctrine without formal agreement, in order to obtain loans from other sources.
Formed at the Bretton Woods Conference in 1944, the IMF is a financial institution, primarily concerned with promoting trade, which only slowly became involved in developing countries. It is governed by the Group of Ten leading members, and voting rights are related to the quotes put in by each member country, although the US has what amounts to veto power on important issues.
Although the deprivation endured by millions in Third world countries has intensified, their poverty did not begin with the debt crisis. It is a capitalist world. Every country is run in the interest of its owning class, following the dictates of a system geared to sale and profit. The Third World (or "The South' or "less developed countries") accounts for three-quarters of the world's population and includes countries at widely differing stages of development. Most of the high-interest debt has been incurred by the better-off developing countries, while the countries needing most help to "develop" are the least attractive from an investment/profit point of view. There has not been the same incentive to push loans to them. Sub-Saharan Africa accounts for less than 9 percent of total Third World borrowing. In A Fate Worse Than Debt Susan George details the background, and the many implications, of debt for the less developed countries. She describes the dire consequences of IMF adjustment programmes for the poor — who do not benefit from the loans; how repressive ruling elites are assisted by IMF loans; how billions of dollars have been "squandered on current consumption or spent on sterile pursuits or has ended up Northern banks" (p59); and the way in which huge foreign loans have contributed to "environmental plunder, widespread impoverishment and ethnocide" (p161).
The International Bank of Reconstruction and Development, known as the World Bank, was also founded at Bretton Woods. The 134 member countries have to be members of the IMF. and subscriptions and voting power are on the same basis. The projects financed by the World Bank are supposed to follow guidelines with regard to migration, minorities and the environment. These guidelines have been flouted by internal migration programmes in Indonesia and Brazil. The Grande Carajas iron ore project in Brazil is receiving major funding from the World Bank, Carajas, the "several billion tons of iron and half a dozen other mineral-ore deposits", has been described by the Brazilian government as a "national export project", and as an answer to the country's crippling debt problem. It will cost $62 billion (with an EEC contribution of $600 million) and will mean an area the size of France and Britain together, being partially or totally deforested. To hasten the completion of the Tucurui Dam. forest was not cleared but sprayed instead with the defoliant Dioxin — agent orange. Landless peasants are sent to the deforested areas, where the soil is unsuitable for cropping. to grow soybeans — a major cash crop — for the foreign exchange needed to help pay between $12 and $14 billion in interest on loans each year. The price of soybeans is depressed because of “overproduction" in the US (the effect of the current drought in US remains to be seen), so more must be grown “to keep the revenues stable". However the motivation for extracting mineral wealth, and for the drive to export, is the pursuit of profit — regardless of the debt problem
Servicing the debt is seen as a major obstacle to development, with development itself adding to the debt burden. Under the influence of foreign experts, the western industrialised model has been followed in Third World countries regardless of whether it was appropriate, and the costly capital goods and energy requirement have been financed by borrowing. Some highly inappropriate and expensive projects have been debt financed. In the Philippines a nuclear power plant was sited in a zone of high seismic activity — it is not being made operational. Possibly up to $40 billion of Brazil’s debt is due to the purchase of nuclear reactors (also non-operational to date). Twenty per cent of Third World debt is down to military spending.
Over a quarter of the debt accumulated by the totality of Third World countries is accounted for by the increase in oil prices following the oil and energy crisis of 1973/4 and 1979/80. When the Reagan administration refused more resources to the IMF bank, lending, which had already expanded, was increased to the most heavily indebted countries. In the four years to the end of 1982 the amount loaned by US banks grew from $110 billion to $450 billion. The banks eagerly sold money to Third World countries, including those with oil (Mexico borrowed heavily to develop the oil industry), ignoring the usual constraints and safeguards. There was pressure to serve the interests of their domestic clients. Bank loans enabled countries to purchase the products of US and European corporations like Boeing and Westinghouse. Some of the money borrowed is invested outside of the debtor country. Banks accommodate this capital flight which accounts for billions of dollars in debt — possibly 70 per cent of the new loans to the big ten Latin American countries between 1983 and 1985. Money from corrupt government officials, or national companies whose government has guaranteed the debt, goes straight back to the banks — some of it actually carried back in suitcases taken there empty for this purpose — but has still been added to the burden of debt. Multinational corporations have taken over the role of direct investment. Apparently the banks do not consider development to be any of their business Bank strategy, based on the assumption that countries could not cease to exist, was (is) simply to make money. Even the debt crisis was looked on as "a true windfall" with Brazil, for example, paying back $69 billion in interest between 1979 and 1985. However, global recession brought home to the banks their over-exposure. Clearly, countries could have repayment problems, with further borrowing as the only way to service their debts.
Borrowing and lending are normal commercial and banking practices, and the usual answer when countries get into repayment difficulties is to reschedule the debt. There were 144 reschedulings of official debt alone in the ten years to 1985. Default is not in the interest of either side. All of the indebted Latin American countries defaulted in the 1920s and 1930s when most of their debts were in the form of government bonds held by individual investors. Today the situation is different. In 1982 Mexico came close to default when holding $80 billion of debt. The nine largest US banks had 44 per cent of the capital tied up in loans there. A deal was eventually agreed between assorted representatives from US government Departments and Agencies — including the White House, "top brass" from the commercial banks with their lawyers, the Mexican team led by their Finance Minister, and with the involvement of the IMF. The banks were saved from having their stock plummet, an international financial crisis was averted — and Mexico got $8.3 billion in fresh money. Dividends declared by the big nine banks increased by more than a third between 1982 and 1985. (the fate of more than 400 smaller banks was rather different.) A country which defaulted would have considerable difficulty getting new loans. When Argentina showed signs of stopping interest payments in 1984. coercion was applied by US bankers, and representatives from the IMF, commercial banks and officials from major industrial countries. The US Treasury compiled a list of items likely to become "scarce" — and raised questions of what would happen to a President of a country if, for example, "the government couldn’t get insulin for its diabetics? (George. p68).
Third World countries are expected to solve their problems by exporting, but their exports have to compete in world markets. They also provide markets for creditor countries. The Brazilian computer industry became so successful that in 1985 it managed to outsell the transnational competition, which brought threats of "trade reprisals" from the US if local (Brazilian) demand continued to be satisfied at the expense of IBM. Ironically IMF imposed conditions mean fewer imports. US exports to Latin America fell by 42 per cent between 1982 and 1984. and hundreds of thousands of US workers lost their jobs. The annual report of the United Nations Conference on Trade and Development (UNCTAD) calls for the writing off of at least $90 billion of Third World bank debts, and says that, if combined with the $5 billion of debt relief for sub-Saharan African countries, debtor countries could increase their "net demand for imports by $18 billion each year". A third of this would come from the US “helping its trade get out of the red" (The Guardian, 2 September 1988). The report also argues that debt relief on this scale (30 per cent of the $300 billion owed to banks by the 15 worst afflicted countries) would enable Third World economies to grow faster, and boost the world economy.
Since the Mexican rescue the banks have made their own provision against the effects of possible bad debts, by adding to their reserves. (Some debts have been sold at a discount, and some "debt for equity" swaps have also been made.) Together with the IMF. they are opposed to the UNCTAD proposal, preferring the present strategy whereby each near-defaulting country is dealt with "case by case".
Whatever deals over debt relief are agreed in order to facilitate trade, they will not end Third World poverty — that is not their purpose.