Economic incompetence, chicanery or both in Mozambique

A report in the Guardian on 27 January 2017 tells us of a £1.6bn borrowing spree which has serious consequences for the wealth producing working class of that country.

 Nurses and teachers are among those bearing the brunt of a debt crisis rooted in the mistaken belief that major gas reserves would bring untold riches

 Mozambique’s £1.6bn borrowing spree has caused a fiscal crisis that means interest on loans, civil service new year bonuses and other government bills was not paid this month.

 Four years ago, with one of Africa’s largest natural gas reserves in development and visions of fabulous wealth before them, Mozambique’s leaders took secret loans worth $2bn. These were organised by the London offices of two major European banks, Credit Suisse and the Russian state-owned bank VTB, the conduct of whom was sufficiently questionable that they are now being investigated by financial authorities in the UK, Switzerland and the US.

 The money was for tuna fishing, maritime security and weapons to fight Renamo rebels; according to Christine Lagarde, director general of the International Monetary Fund (IMF), some if it was also used corruptly.

 But gas prices collapsed and the development of the gas fields was delayed. Last year, when it became obvious there was no money to pay, the loan package became public.

 In keeping the loans secret, the government lied to its own parliament, as well as to the IMF and donors (including Britain), who immediately reduced aid and lending. That exacerbated the economic crisis, forcing an austerity programme.

 There was a huge devaluation of the local currency, the metical, and two weeks ago it was announced that inflation last year was 25%. The austerity package means the government is delaying payments to its suppliers; last week, it announced it would not make any interest payments on the debt.
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 Civil servants, including teachers and nurses, who normally receive a month’s salary as a new year bonus, found the extra money halved. The secret loans are now being investigated by forensic auditors Kroll, who are due to report in May. But the domestic fiscal crisis will continue for many months, and government has already said no payments will be made on the loans this year.

 Details of the loans remain secret, but a Mozambican parliamentary investigation reported last month. Combined with press leaks, a grim picture is painted.

 Feasibility studies used to justify the loans were ridiculous, assuming Mozambique could sell tuna for four times as much as nearby Seychelles, for example, or that huge multinational companies would hire an untried Mozambican security company to protect the offshore gas wells.

 The loans were made to three private companies, largely owned by the Mozambican security services, Sise. Finance minister Manuel Chang said the state would guarantee to repay the loans. But the parliamentary commission concluded that Chang’s guarantees were unconstitutional, illegal and invalid – and that this should have been obvious because only parliament can guarantee loans.

In Mozambique fingers are pointed at former President Armando Guebuza and a small group around him, as well as Chang and Sise.

 But in London questions are increasingly being asked about Credit Suisse and VTB. They did not lend the money themselves, but they sold bonds and pieces of the loans to investment funds and other lenders. What did they tell those lenders?

On large loans like this, banks normally do what is called a “due diligence” study, looking at the viability of the loan and the borrower. Even the most cursory study would have shown that the state guarantee signed by Chang was not valid, and that the feasibility studies and repayment plans were nonsense. Furthermore, by keeping the loans secret, the banks did not reveal to the bond and loan holders that the $2bn loan package pushed Mozambique’s debt to unsustainable levels, making repayment highly unlikely.

 Credit Suisse and VTB have passed on all the risk to other lenders and made their profits from commissions, so they do not care what happens now. But global banks have a fiduciary responsibility; in this case to the borrowing country, the bank must check that the loan is sensible and not excessively corrupt, and for the investment funds who take on the loans, the bank must check that the borrower is likely to repay. A due diligence study should have shown that neither was likely, and thus the loan was highly dubious.

This is like lending to a gambler who says, “I am broke but will surely win next time.” When a loan is made ignoring obvious evidence that it is unwise, the loan is called “illegitimate” and is the liability of the lender, not the borrower.

Mozambicans and lenders alike are angry. Complaints that the secret $2bn Mozambique loans are illegitimate are growing. The supposed government guarantees were obviously invalid from the start and Mozambique cannot and should not pay. Thus Credit Suisse and VTB may be forced to take responsibility for the loans.

More on the vagaries of the market

While Africa is home to oil powers such as Nigeria and Angola, much of the continent is reliant on energy imports, and even producing nations often import gasoline and other fuels. Several African countries are suffering this year from a double-whammy of higher oil prices and weakening currencies. One of the worst hit is Ghana, which is just establishing itself as an oil exporter. Its cedi currency has tumbled almost 20% since the start of the year, meaning oil priced in cedi has soared 43%. Facing a 17% inflation rate and more pressure on the cedi, Ghana raised interest rates by 100 basis points this week to 22%, one of the highest in the world.

For African oil importers, last year’s crude price drop tempered the damage inflicted by a stronger dollar. But now, many are grappling with rising oil prices along with a depreciation of their own currencies versus the dollar. As a result, for much of Africa, the cost of oil has risen far more in local currency terms than in dollars, as this graphic shows:

While the dollar has eased recently, it is up 17% in the past 12 months, contrasting with a 40% oil price drop. Yet since January, both are up – the greenback has risen almost 4% while crude has gained 16%.

“The longer you have that double-whammy of rising oil prices and weakening currencies, the more pressure there is,” said Angus Downie, head of Economic Research at Ecobank  “It all comes down to who manages the exchange rate the best, and what level of foreign exchange reserves they have.”

Oil importers across eastern Africa are also being hit.

“The biggest impact will be in east Africa,” said Cavan Osborne, portfolio manager at Old Mutual Global Investors, citing Tanzania, Uganda and Kenya where currencies have depreciated between 6 and 13% in 2015. “We will see some slower economic growth out of that region because the oil price is rising again.”

Exporters are not being spared. Nigeria has seen crude prices rise by 27% in naira terms. This puts the squeeze on the continent’s largest economy which imports 80 percent of what it consumes, including fuel. With crude revenues tumbling, Nigeria’s hard currency reserves are down by a fifth over the past year – lower than most other big emerging economies.

The caprice of the capitalist market

On the back of the start of iron exports in 2011, Sierra Leone became one of Africa's fastest growing economies. Growth soared from 6 percent in 2011 to over 20 percent by 2013.   The government hoped that rising tax returns from mining would give it resources to tackle high unemployment and rebuild infrastructure devastated by Sierra Leone's 1991-2002 civil war. Instead, the economy will contract by 12.8 percent this year as mining revenues dry up, according to the International Monetary Fund. Iron ore exports have plummeted from 4.1 million tonnes in the first quarter of 2014 to 1.8 million in the same period this year, according to the International Steel Statistics Bureau. London Mining, which operated Sierra Leone's Marampa mine, went into administration in October, citing debt, high costs, low iron ore prices and an outbreak of Ebola.

"Life has never been the same for me since I was laid off," says Abdul Kanu who said he was a casUal labourer at one mine. "We just went to work in November and we were told to go home! I've still not recovered from the shock". 

A 60 percent slump in iron ore prices over the past year, amid a slowdown in Chinese consumption, has brought a bonanza that had been expected to last 60 years to a screeching halt. Piles of iron ore and rusting railway wagons in the deserted stockyard at the port of Pepel bear silent witness to a crisis engulfing Sierra Leone's mining industry and threatening others across West Africa. Across the region, dozens of mining projects that attracted investors when iron ore hit $190 per tonne in 2011, have either stalled or been abandoned as prices hover around $60 With analysts saying prices may stay low for years, it could sound a death knell for West Africa's iron ore industry.

At the height of the commodities boom last decade, West African countries became magnets for miners seeking untapped iron ore, diamonds, gold, bauxite and other minerals. In Pepel, locals anticipated an economic surge for their civil war-ravaged country when London-listed firm African Minerals started shipping ore four years ago from its Tonkolili mine. Discovered in 2008 and lying some 200 km (124 miles) to the northeast, Tonkolili is one of the world's largest iron ore deposits. The iron ore slump hit debt-strapped African Minerals hard. Prices fell below its high costs, forcing it to shut operations in November, and it went into administration in March after failing to repay its partner, China's Shandong Iron and Steel Group.

BHP, the world's largest mining company, and rival Rio Tinto are locked in a battle to become the lowest-cost iron producer, cranking up output from mines in Australia as they seek to squeeze competitors out of the market. Paul Gray, iron ore analyst at research firm Wood Mackenzie, said supply from West Africa could fall from 25 million tonnes this year to zero by 2017 if the market conditions persist. Most West African projects require a long-term price well above $100 per tonne to achieve an acceptable return, he said. BHP and Rio have average iron ore costs of around $20 a tonne in Western Australia and are cutting that further.

In current market conditions, it looked unlikely that Australian firm Sundance Resources' Mbalam mine in Cameroon would get developed or even the massive Simandou project in Guinea, in which Rio Tinto holds a stake, Gray said. "It is not looking good, it is looking worse by the day," Gray said. "Those projects which were looking shaky beforehand are now well and truly dead."

Hunter Hillcoat, analyst at bank and asset manager Investec, said there was scant incentive for Western companies to risk capital developing expensive and risky projects in West Africa given that the iron ore market remained in oversupply. "I think it's is dead until the next decade or even longer," Hillcoat said, saying projects in Congo Republic, Cameroon and Gabon were likely to remain frozen. "There was a lot of potential in the area, just there wasn't the right infrastructure."

Colin Hamilton, head of commodity research at Macquarie, explained, "In a world where Chinese steel production growth has slowed to low single digits there is no need for new iron ore supply."

A booming time for some

As rich countries face a slowdown, sub-Saharan African economies are expected to post nearly 6 percent average growth in 2012, according to the IMF. A study by the International Finance Corporation, part of the World Bank, has pointed to the potential of the continent's more than 1 billion people, millions of whom have moved out of subsistence agriculture and into urban jobs over the past decade. Such promise has helped fuel foreign investment. Kenya alone has had a capital influx of billions of dollars in recent years: the latest official figures show around $800 million came in in 2008. Western investors have become accustomed to Africa as a boom story in recent years. As demand from places such as China and Brazil pushed up commodity prices, investment poured in. Since the financial crisis, investors have ventured into Africa in search of higher returns. Analysts fret about whether Kenya's exporting capacity can keep pace with its imports. "In most frontier markets ... we haven't seen sufficient evidence of this. Exports go up, but not nearly by enough, and imports - especially of consumer goods - go up even more." Razia Khan, head of Africa research at Standard Chartered in London, says the problem is an Africa-wide one. "More rapid growth was accompanied almost everywhere by a surge in imports, especially capital goods imports related to infrastructure development."

The consumption boom has been fueled by fast-growing credit. In Kenya, firms have been hiring and property prices have risen exponentially, creating a feel-good factor for home owners, especially in towns and cities. That, in turn, has fed the appetite for consumer goods. In Kenya and elsewhere that has sucked in imports - cars, shoes, clothes, wines and whiskies - and swelled the current account deficit. Inflation in Kenya is now nearing 20 percent. As always, high inflation hurts the poorest most.

"Minimum wage-earners in urban centers in East Africa are encountering a simply unprecedented squeeze," said Aly Khan Satchu, a Nairobi-based independent trader and analyst. "It creates a sort of reverse Robin Hood effect where the poor carry the main burden."

Food prices - especially meat - have risen sharply. In a rain-soaked field outside the Kenyan capital, it's easy to see why. Farmer Joseph Kiarie puts the fertilizer on his crop of cabbages by hand from a plastic bucket, and says rising costs have cut his earnings by two thirds in the past year. "This has been a terrible year," he said.

Nairobi's biggest slum, Kibera is a vast shanty town that lacks even basic services such as sanitation. Many Kibera residents - there are hundreds of thousands of them - are angry that while prices of food have risen, wages have not. Many say their families now have to forego meals.
A year ago, 300 shillings ($3.48) bought breakfast, lunch and supper, "but now that is nothing," said Jane Mwalugha, a married mother of five children aged between three and 15, in her one-roomed house. "We have had to cut out lunch this year so we just take supper. Bread is now a luxury so we have cut it out...The government should construct supermarkets for the rich and let us have our own because they have decided in life that there are two tribes, the poor and the rich. They should let us have poor people's shops," Mwalugha said.

http://www.reuters.com/article/2012/01/25/us-africa-spenders-inflation-idUSTRE80N0CE20120125

Capitalism booms but little change

International investors are toasting Zambia's fast-growing economy. The economy has recorded an annual growth of five percent for the past five years, inflation is in single digits and the kwacha has appreciated against foreign currencies. Zambia's growth has been fuelled by record copper prices on the world market. Copper accounts for over 80 percent of the country's total foreign earnings.
Last month, the Global Economics Weekly, an international business research publication, ranked Zambia as number one among the 10 most improved countries in the world, ahead of Argentina, Ghana and Russia, among others. President Levy Mwanawasa's administration has been widely praised by western donors for its pro-market policies, which offer foreign investors generous conditions. This is particularly true of the mining sector, where royalty tax is an exceptionally low 0.6 percent, firms are exempt from customs duty, and there is no ceiling on the amount of dividends or profits that can be repatriated. But the benefits seem hard to find in the working-class districts of the capital , Lusaka .

Economists and social rights activists point out that it is all yet to make a serious dent in poverty.
"...they tell us the economy is growing but to us life is still the same, prices of everything on the market are still the same, we are still poor, and we are still looking for jobs," Lusaka resident Agness Banda told IRIN.
The social indicators that reflect whether Zambians are really having a better life have remained stubbornly negative. The poverty rate, as measured by the government's Central Statistical Office, has been stuck at 68 percent for years; despite all the foreign investment, only 400,000 formal-sector jobs exist for a population of 11.7 million.
"There is no emphasis on equitable distribution of wealth from this growing economy," said Ivy Mutwale, acting executive director of the Civil Society for Poverty Reduction, an umbrella advocacy group.
Oliver Saasa, a consultant economics professor at the University of Zambia, said the impact of copper earnings had been negligible because of the lack of social investment.

Poverty in the midst of Natural Wealth

Liberia - one of the largest rubber plantations in the world , the largest remaining portion of the once-great Upper Guinea Forest , virgin forest full of tropical hardwoods , gold and diamonds , a vast iron-ore mountain range in the north of the country that is currently being rehabilitated with a $1bn investment - resource-rich, dirt-poor Liberia .

Authors of the new report - called Land Grabbing and Land Reform argue that the raw materials sector has been organised almost exclusively to benefit a wealthy elite. Ordinary people saw the resources vanish - the trees being chopped down, for example - but did not see schools and hospitals coming back in return.

Liberia's modern-day economy was developed and exploited by expatriates and the small elite of "Americo-Liberian" freed slaves who colonised the country in the 19th Century and ended up dominating the indigenous Africans.
"The elites and the government structures they erected," the report says, "came to be seen as illegitimate, engendering first resentment, and in time hatred."

The war was not the cause of the poverty of Liberia but a consequence of it, and the reliance on the export of raw materials was a factor in creating that poverty.

On diamonds - the proceeds from which fuelled the wars in Liberia and neighbouring Sierra Leone - the report says there has been little effort by the government to make the gems benefit local communities or the artisanal miners themselves.
It says the ministry of lands, mines and energy "has resisted engaging with civil society".
On rubber, the report says the big plantations in Liberia have been extracting raw rubber for more than 70 years but have "so far not manufactured so much as a single rubber band in the country".

"The fighting... ceased only in 2003 with the departure of Charles Taylor and the arrival of UN forces," the report says, adding: "The peace however remains fragile, threatened... most importantly, by the unresolved issue of who will exploit and who will benefit from Liberia's natural resources." the report says, that many of the elite "see the return of peace as simply a chance to return to business as usual, an opportunity to recreate the Liberia they and their forebears knew, and exploited, for more than a century".

The report also describes what it calls the "resource curse" , which this blog earlier explained here in relation to the so-called oil bonanza in certain African countries . Endowment of natural resources in poor countries is one of the "traps" that prevents them from growing as rich as developed nations. The resource exports cause the country's currency to rise in value against other currencies. This makes the country's other export activities uncompetitive. Yet these other activities - manufacturing for export, for example - might have been the best vehicles for sustained economic growth. The volatility of prices of other raw material exports from poorer countries - especially but not exclusively in Africa - is also not conducive to long term investment and growth.

British economist Paul Collier argues that resource wealth can also be a curse because it induces autocracy by allowing elites to buy their way into power. Countries end up in a "resource trap" which does not generate the sustained income growth and security that can promote democratic accountability.

Once again Socialist Banner can only counsel for the working class to assume democratic control of raw materials and direct these resources for benefit of the working class as a whole and not in the interest of the small minority who presently own this natural wealth .

to aid or not to aid

The previous post reported how one charity declined American aid . It drew my attention to this interview with Kenyan economist James Shikwati . Of course he is no Marxist , and his solutions to the poverty of many Africans is a reformed capitalism , unfettered by government controls , his views on foreign aid is of interest .

Some extracts :-

SPIEGEL: ... The industrialized nations of the West want to eliminate hunger and poverty.

Shikwati: Such intentions have been damaging our continent for the past 40 years. If the industrial nations really want to help the Africans, they should finally terminate this awful aid. The countries that have collected the most development aid are also the ones that are in the worst shape. Despite the billions that have poured in to Africa, the continent remains poor...

... Huge bureaucracies are financed (with the aid money), corruption and complacency are promoted, Africans are taught to be beggars and not to be independent. In addition, development aid weakens the local markets everywhere and dampens the spirit of entrepreneurship that we so desperately need. As absurd as it may sound: Development aid is one of the reasons for Africa's problems. If the West were to cancel these payments, normal Africans wouldn't even notice. Only the functionaries would be hard hit...

... this corn ends up in the harbor of Mombasa. A portion of the corn often goes directly into the hands of unsrupulous politicians who then pass it on to their own tribe to boost their next election campaign. Another portion of the shipment ends up on the black market where the corn is dumped at extremely low prices. Local farmers may as well put down their hoes right away; no one can compete with the UN's World Food Program. And because the farmers go under in the face of this pressure, Kenya would have no reserves to draw on if there actually were a famine next year. It's a simple but fatal cycle...

... Hunger should not be a problem in most of the countries south of the Sahara. In addition, there are vast natural resources: oil, gold, diamonds. Africa is always only portrayed as a continent of suffering, but most figures are vastly exaggerated. In the industrial nations, there's a sense that Africa would go under without development aid. But believe me, Africa existed before you Europeans came along...

SPIEGEL: In the West, there are many compassionate citizens wanting to help Africa. Each year, they donate money and pack their old clothes into collection bags ...

... Shikwati: ...Why do we get these mountains of clothes? No one is freezing here. Instead, our tailors lose their livlihoods. They're in the same position as our farmers. No one in the low-wage world of Africa can be cost-efficient enough to keep pace with donated products. In 1997, 137,000 workers were employed in Nigeria's textile industry. By 2003, the figure had dropped to 57,000. The results are the same in all other areas where overwhelming helpfulness and fragile African markets collide.

Report from Africa

Participants at a regional seminar on poverty held in Swaziland are absorbing the cruel facts and figures that show the devastated face of the African continent in its state of underdevelopment.

Everyday 840 million people go hungry and more than two billion suffer from dietary deficiencies, a Southern African Regional Poverty Network (SARPN) official has said.

Jack Zulu , SARPN programme manager for economic dimensions, said that 12 million children die every year from preventable diseases, when immunisation could save three million of them.

He added that everyday 8,200 people all over the world die because of HIV/AIDS and 6,000 of these deaths occur in Africa.

He said pharmaceutical cartels declared profits of US$517 billion in 2003 .

He said expenditure on the military worldwide was more than US$1.5 billion per day in 2001.

He said that if US$1 billion per day in agricultural subsidies in developed countries was re-allocated, world poverty would go down by 75 percent.

He said that a cow in Japan receives US$4 per day in subsidies while the majority of Africans live on less than US$1 per day.

He said rich countries claim that free trade, without local subsidies or protection is the key to escaping poverty, but that when poor countries open up their markets to free trade, foreign firms enjoy huge advantages. This, he said, means local companies cannot compete favourably. Zulu said developing countries have a natural comparative advantage in producing agricultural goods but that the current trade system seems designed to undermine that advantage.

"There is a system of trade rules and regulations that allow rich countries and their companies to make lots of profits but prevent poor countries from developing their own economies," Zulu said.

Indeed , capitalism does favour the more powerful and good will is short in measure when it comes to offering undeveloped economies a hand up . Nor will the growth of a home capitalist class reduce exploitation .

Capitalist Leeches

Capitalism has only one remit - maximise and accumulate profits . Investment abroad is done not out of goodwill to benefit local people but to achieve a return for shareholder .

It comes as no surprise to socialists that BBC Radio 4's File on 4 has learned that almost £100 billion a year is taken out of Africa through accounting practices , both legal and illegal , - several times what the continent receives in aid.

Because of the way Kenyan tax laws have evolved, foreign companies can quite lawfully contribute very little in the way of taxes to the country's economy . Some international companies have been found to have acted illegally .

Kenya's official export statistics say almost 50 million kilos of tea left there in 2005 bound for Britain. But the British import statistics showed 75 million kilos - one and a half times as much - arriving here from Kenya. Companies shipping tea to the UK were under-reporting exports in order to avoid paying tax.

There is also widespread under-reporting of profits by flower companies, many of which are owned by Europeans. If you do not declare the full value of income that you have earned as a business, it means you are underpaying taxes - a practice known as "transfer pricing" - the means by which firms value their goods for tax purposes when they move them across international borders. In effect, this allows companies to undervalue their products when they leave Kenya and to place their profits elsewhere . File on 4 found there were also perfectly legal accounting practices which allowed British firms to register their profits outside Kenya.
Britain's acting High Commissioner to Kenya, Ray Kyles, said it was not the job of foreign governments to encourage their corporate investors to pay tax.

Christian Aid said this capital flight amounted to "the looting of the continent".

From Third World to One World

from MY SPACE page of the Socialist Party of Canada

While the growing disparity in G.N.P. between rich and poor states in recent years has been matched by the growth of inequality within each, there are undeniably huge differences in material circumstances of the average worker in Western Europe and their counterpart in, an African country . How did this come about and what, if anything, can be done about it within global capitalism?

Modernisation

Since the Second World War there has been a concerted effort by national governments and international agencies to "develop" the so-called Third World. At the outset this was linked with de-colonisation; it would help make political independence more "meaningful". According to the prevailing "modernisation" theory, development meant "less developed countries" passing through a series of stages mirroring the economic history of "developed countries". But while favourable circumstances had allowed the latter to reach the final stage of "mass consumption", a number of internal factors prevented the former from progressing towards "take-off into self-sustaining growth".

Most important was a supposed shortage of capital. This had to be tackled on two fronts. Firstly, savings as a proportion of GNP had to be increased. As the "propensity to save" was thought to be highest among the rich, gross inequalities were justified on the grounds that they facilitated savings. Secondly, as less developed countries were thought unlikely to generate sufficient capital internally, foreign capital needed to be mobilised for inward investment along the lines of the famous Marshall Plan which helped rebuild the war-torn economies of Western Europe.

For modernisation theorists, this shortage of capital necessitated a policy of "unbalanced growth": concentrating investment where it realised the greatest return and hence the most rapid accumulation of capital. Following the example of the First World countries, Third World countries embarked on a programme of industrialisation. At a time when Keynesian orthodoxy still held sway with its implicit distrust of unfettered markets, a policy of import-substitution was pursued to protect budding industries from foreign competition behind a wall of tariffs.
As well as promoting rapid growth, industrialisation was supposed to assist the structural transformation of these countries' economies. Typically, these were thought to exhibit an essentially dualistic structure: a small modern urban-industrial sector alongside a large traditional, mainly pre-capitalist, rural sector. The latter was supposedly characterised by low productivity and an abundance of surplus labour. Industrialisation would enable this surplus labour to find employment in the modern sector and indirectly help boost local agriculture: the exodus of labour from the rural areas would draw farmers into the emerging cash economy, compelling them to buy agricultural inputs, like machinery and fertilisers, to meet the growing demand for food in the towns. It was expected that, in due course, the benefits of economic growth, hitherto confined to the modern sector, would automatically "trickle-down" to the impoverished backwater. The "dual economy" would, it was envisaged, be replaced by a structurally-integrated modern capitalist economy.

It was not long before cracks in this scenario began to appear. The prohibitive costs of agricultural inputs meant many small farmers were unable to increase output, while growing labour shortages caused by urban migration seriously impaired the productivity of traditional labour-intensive farming. As for the urban sector, modern methods of industrial production, being highly capital-intensive, required only a relatively small workforce. Thus, increasing urban migration in fact led to rising unemployment while the importation of these First World technologies imposed a growing debt burden.

Dependency

By the 1960s, modernisation theory had reached an impasse. A new scenario of development emerged: dependency theory. Contrary to the previous conventional wisdom that the economic backwardness of less developed countries was attributable to their incomplete incorporation into global capitalism, it was portrayed instead as an inevitable consequence of capitalist penetration of the Third World which left it increasingly dependent on the First. This shifted attention from internal to external factors affecting the development of national economies. For dependency theory, the "world trading system" was a hierarchical order in which the dominant or "core" countries with their technological, economic and political superiority, are able to impose their needs on the "peripheral" countries. These dictate that the latter should become markets for the products of industrial countries, not rival producers, supplying them with raw materials for processing into finished goods. In short, industrial development and economic diversification in the less developed countries was effectively blocked within an externally imposed global division of labour.

The basic mechanism that condemned the Third World to a state of perpetual "underdevelopment" was the continual outflow of economic surpluses—notably in the form of debt repayments and expatriated profits. ( see Dropping the Debt ? ) So, far from foreign aid and investment compensating for the lack of local capital, they caused this to happen. This had been compounded in recent years by the declining terms of trade with the value of Third World exports falling sharply against manufactured imports. Political independence made little difference; it simply enabled the First World to divest itself of the cost of administering these territories while co-opting their emergent class of "comprador bourgeoisie" into this process of neo-colonial exploitation.

To break this stranglehold, several less developed countries saw the need to "de-link" as far as possible from the international economy and pursue "self-reliance", while nationalising the economy to staunch the likely outflow of capital this would incur. In short, a marriage of convenience between Third World nationalism and Leninist state capitalism. However such an approach was problematic for several reasons. Firstly, the structure of production which many of these countries inherited was heavily oriented towards exportation of cash crops or minerals and could not easily be re-oriented towards local needs. Secondly, an autarkic policy favouring economic diversification would have to contend with local markets being insufficiently large, particularly in small countries, to justify investment in certain lines of production where economies of scale may be critical. Thirdly, increasing state intervention was likely to lead to the growth of an unproductive bureaucracy, further impairing an already impoverished economy while increasing the scope for corruption.

Getting Worse

The 1970s oil crisis made matters worse for the less developed countries by massively increasing import costs but in the short term it produced a flood of "petro-dollars" loaned to them via western banks. Between 1973 and 1981 these loans increased nine-fold. The spending spree this unleashed helped maintain relatively high growth rates though much of this investment tended to be channelled into grandiose projects which did little to alleviate poverty. Then, as the long post-war boom came to an end, the bubble burst. The 1980s witnessed a steep decline in Third World incomes. Growing poverty led to eruptions of popular unrest to which governments responded with increased military repression. Ironically, increased military spending only exacerbated the problem, diverting scarce resources away from development projects. In the 32 poorest countries in the world (apart from India and China) such expenditures amounted on average to twice what was spent on education and seven times on health.

Magic of the Market?

Global recession also signalled a profound change in the political climate. Growing disenchantment with Keynesian policies in the late 1970s and the sudden collapse of the Soviet bloc in the late 1980s ushered in an age of "market triumphalism". Blind faith in market forces replaced blind faith in the efficacy of state intervention.

Such free market theory was shaped by an influential theory first put forward by the British economist and MP David Ricardo in the last century. According to his theory of 'diminishing returns,' companies would reach a point after which their additional investment would yield increasingly lower returns. This theory, of course, had implications for national economies, for as they grew they could also be expected to reach a point of diminishing returns with their growth expected to eventually come to a halt. This meant that the poorer nations were predicted to catch up—the 'Third World' to convergence with the 'First.'

This view did not take account of a number of important factors. Huge initial amounts of capital are, as mentioned above, required before a company or nation can even begin to compete in many world markets. Furthermore, wealthy states can exert influence on trade patterns to maintain their interests, as indeed they were doing during the 1980s when free market theory was so much in vogue.

Free market rhetoric was the forte of the I.M.F. and World Bank who took on a more aggressive role as watchdogs of international capitalism during the 1980s. With the growing threat of debt defaults in the early 1980s, Structural Adjustment Programmes were imposed in exchange for rescheduling debts and further aid. This involved privatisation of state enterprises, public spending cuts and price liberalisation. (The World Bank, IMF and Structural Adjustment.)

If the stated intention of such reforms was "economic stabilisation", their real purpose was to ensure that these countries were better able to fulfil their debt obligations. To that end, greater emphasis was placed on boosting exports with the less developed countries reverting to their traditional role as suppliers of raw materials as prescribed by the theory of comparative advantage within a global trading system progressively shorn of protectionist features.
Predictably, the results have been disappointing. But then that is the nature of reformism; "solving" one problem within capitalism only seems to generate another. For example, while the new G.A.T.T. treaty prohibited developed countries from dumping subsidised food onto Third World markets, this meant the less developed countries having to pay more for food imports. More expensive imports means getting ever deeper into debt which in turn intensifies the drive towards export production at the expense of domestic food production. Furthermore, with many other producer countries in the same boat yet prevented by free trade agreements from forming cartels to bargain for higher price, the markets for such exports are soon saturated. So prices decline, as does the capacity of less developed countries to service their debts. It's a case of protectionist swings or free market roundabouts.

The Outcome

History has forced economists to rethink their supposition of a smooth path towards development. Average growth for 16 rich countries surveyed by The Economist has slowed since the early 1970s in particular, but it is still above the average. As for the supposed faster growth among the developing world,

if there is any discernible pattern… it is the opposite: poorer countries have tended to grow more slowly.(1)

Interestingly, the United Nations Development Programme administrator, James Speth, believes "the world has become more economically polarised" and that "if present trends continue, economic disparities between industrial and developing nations will move from inequitable to inhuman"(6).

As a result, many of the world's poorest countries have seen average incomes decline and increased polarisation. The wealth of many nations has actually declined in recent years. 89 countries are reporting lower per-capita incomes than they were 10 years ago.(6)

The wealthiest fifth of nations dispose of 84.7 per cent of the word's combined GNP; its citizens account for 84.2 per cent of world trade and possess 85.5 per cent of savings in domestic accounts. Since 1960 the gap between the richest and the poorest fifth of nations has more than doubled which confirms in figures the bankruptcy of any promise of fairness in development aid (GT 29)

During the 1980s average incomes were reported to have fallen by 10% in most of Latin America and 20% in sub-Saharan Africa. In many urban areas wages have fallen by as much as 50%.(1)

The 1980s decline in average incomes in many developing countries has continued in the 90s: in 1990, average per capita income fell by over 2.5% in Latin America and by over 2% in Africa.(2)
The 1992 United Nations Human Development Report states that the poorest 20% of the world's population have seen their share of world income fall from 2.3% to 1.4% over the past 30 years.(3) In sub-Saharan Africa, the number of families who are unable to meet their most basic needs has doubled in a decade.(4) According to OXFAM projections, the future looks little brighter for the rest of Africa, the Middle East, South and Central America.

Yet, as the Bank works through its sixth decade of trying to promote something called 'development', the poor in most of its borrowing countries are in worse shape than they were a decade and a half before. According to the United Nations Development Programme (U.N.D.P.), since 1980, economic decline or stagnation has affected 100 countries, reducing the incomes of 1.6 billion people". For 70 of these countries, average incomes are less in the mid 1990s than in 1980, and for 43, less than in 1970. In the early 1990s incomes fell by 20 per cent or more in 21 countries, mainly in the former Soviet Empire. The poorest fifth of the world's population has seen its share of global income fall from 2.3 per cent to 1.4 percent over the past 30 years.

Even according to the Bank's Operations Evaluation Department's latest Annual Review of Development Effectiveness 1999, "poverty trends have worsened… The number of poor people living on less than US $1 a day rose from 1,197 million in 1987 to 1,214 million in 1997. Excluding China, there are 100 million more poor people in developing countries than a decade ago". Furthermore, since 1990 life -expectancy has declined in 33 countries.(7; p15)
On other indicators of progress, the U.N.D.P report does provide some more positive facts:
During this half century the trend was towards greater income inequality among countries. At the same time, on some important measures of social well-being, the gap between the `North' and the `South' has narrowed in recent years. During the 1960 to 1990 period, North-South disparities declined in, for example, life expectancy, literacy rates, infant mortality and average caloric supply. In the same period however, disparities rose on important indicators of economic capacity for further progress: mean years of schooling, tertiary education enrolment rates, and scientists and technicians per capita, for example (9; p71)

So-called 'new growth theorists' have sought explanations for this discrepancy between fact and the Ricardian theory. They have identified factors such as unequal levels of education and training as decisive in explaining the increased polarisation. In a comprehensive study R. Barro concludes that:

if one holds constant such factors as a country's fertility rate, its human capital (proxied by various measures of educational attainment) and its government policies (proxied by the share of government spending in Gross Domestic Product), poorer countries tend to grow faster than richer ones.(5)

In stark contrast to the hopes of charity organisations such as the United Nations Children's Fund (U.N.I.C.E.F.), Overseas Development Aid (O.D.A.) can be relied upon even less as a substantial source of help for poorer nations. In 1993, O.D.A. fell 8 per cent from 1992 levels to US$56 billion.(3)

As Michel Chossudovsky explains, the World Bank produced an influential study in 1990 in which they proposed a low and quite arbitrary threshold to define poverty:

The World Bank 'estimates' that 18 per cent of the Third World is 'extremely poor' and 33 per cent is 'poor'. In a major World Bank study which has served as a reference on issues of global poverty, the 'upper poverty line' is arbitrarily set at a per capita income of $US1 a day, corresponding to an annual per capita income of US$370 per annum. Population groups in individual countries with per capita incomes in excess of $US1 a day are arbitrarily identified as—'non poor.' In other words, through the manipulation of income statistics, the World Bank figures serve the useful purpose of representing the poor in developing countries as a minority group. Double standards abound in the 'scientific measurement of poverty'. The World Bank, for instance, 'estimates' that in Latin America and the Caribbean only 19 per cent of the population is—poor'.: a gross distortion when we know for a fact that in the United States ( with an annual per capita income of approximately US$20,000) one American in five is defined (by the Bureau of the Census) to be below the poverty line.(10; p43)

More than 80 countries now have per capita incomes lower than they were a decade or more ago, and as the United Nations Development Programme (U.N.D.P.) points out, it is often the countries that are becoming even more marginal which are highly `integrated' into the global economy. While exports from Sub-Saharan Africa, for example, have reached nearly 30 per cent of G.D.P. (compared to just 19 per cent for the leading industrialised countries of the O.E.C.D.), the number of people living in poverty there has continued to grow. (7)

Contradictions

Meanwhile, the problems of poverty and environmental destruction escalate in tandem. The same pressures that force governments to inflict austerity programmes on populations in the name of "structural adjustment" compel them to drastically cut their meagre environmental protection budgets—at a time when the drive to increase exports poses a growing threat to the environment. Similarly, the increasing mobility of international capital in an era of free markets had enhanced its bargaining position vis-a-vis labour in both developed and less developed countries alike while enabling it to circumvent even limited attempts by states to impose environmental cost constraints by relocating (or threatening to relocate) to countries where environmental standards may be lower. Not that things could have turned out much different given the nature of capitalism.

There can be no turning back to the discredited models of development of the past. State interventionism could never provide a solution to poverty and environmental destruction. Even if this were theoretically conceivable, capitalism's globalising tendencies have put paid to that option. Arguably, the neo-liberal order we now have is the irresistible outcome of such tendencies but in any event it too can offer no hope of real progress.

In short, the system has exhausted every possibility of development. To move forward the dispossessed majority across the world must now look beyond the artificial barriers of nation-states and regional blocs, to perceive a common identity and purpose. There is in reality only one world. It is high time we reclaimed it.

Sources:
(1) The Economist 25–31/5/96
(2) New Internationalist—Housing issue:
(3) Fairer World Statistics (Revised Version Feb 1992) OXFAM
(4) The Guardian 29.7.96
(5) The Economist 25–31/5/96
(6) The Observer, London 1996
(7) The Ecologist, U.K., September 2000.
(8) 20/20 Plan, U.N.I.C.E.F.
(9) United Nations Development Project Report 1992
(10) The Globalisation of Poverty—Michel Chossudovsky (Third World Network 1997)

Some Theory

CAPITAL

Capital is a product of human labour turned into a social power. The social character of labour assumes an objective character in the products themselves, the abstract relationship between commodities and human beings.

The social relationship between capital and labour translates itself into a class conflict - the class struggle. The increase in capital presupposes an increase in private luxury and wealth that any increase in wages cannot compensate.

Capitalism has resolved human sympathy into exchange value and reduced social relations into a mere monetary relation. Capitalism is the last antagonistic form of social production and the disparities between labour and capital create conditions for the solution of this antagonism.

The working class cannot become the masters of the social forces of production unless they have abolished the previous mode of appropriation, wage slavery. We may infer that class consciousness is the product of man’s political consciousness. Socialism is the intensification of man’s political consciousness within the political and social antagonism between the state and civil society.

We advocate international working class solidarity.

DEMOCRACY

Democracy defines a type of society in which every person has the freedom to exercise his political privileges regardless of whether he has enough income and wealth to live on.
But political freedom has a limit and hence the need for law and order. Every law is an expression of social control . . . Political freedom must encompass an understanding of how social control is exercised by certain groups in society.

More or less it is income and wealth that determine political freedom in the sense that the distribution of income and wealth is linked to the distribution of power and life chances.
The various social categories of social classes have themselves become meaningful moral categories -- the poor have an abstract meaning of being immoral whereas the affluent regard themselves to be benevolent.

Every society creates morality by making rules and sanctions whose infraction denotes a crime.
Thus immorality can only be conceived in terms of articulated non-conformity to social rules and sanctions and is not a case of mental pathology as such.

It may come to pass that a person who is unbound by the most intellectual and academic conventions is not only considered an outsider but is also assumed to be unpredictable and unreliable in his actions. Mental pathology is defined by impropriety.

We may presuppose that there will be regulations in socialist society but such regulations will be an expression of free play otherwise than a sanction of a dominant regulating authority.

It may seem that the word democracy is a familiar political jargon that is indiscriminately used to defend a social system in which a person can exercise his political freedom only when he has enough income and wealth to live on.

The power to vote is a political weapon in the hands of the working classes. The working class political franchise has been achieved at the cost of its economic disenfranchisement.

The political revolution of capitalism was the culmination of its social and economic evolution -- and the fundamental economic and production relations have remained the same, viz. the exploitation of man by man.

It is the case socialist society will have less social problems to resolve in the sense that the causes of these social problems will not exist to any degree.

It makes me to think that a working class person who is ignorant of scientific socialism and its role in working class political struggles is rather dead than ignorant.

K. Mulenga, Kitwe, Zambia.

contact :

zambia@worldsocialism.org