Susan George Explains Why For Many Countries There Is...: <BR>No Fate Wor$e Than Debt

For Many Countries, There Is No Fate Wor$e Than Debt

Since 1974 Susan George has been a fellow of the Transnational lnstitute in Amsterdam. The work of the TNI addresses the fundamental disparities between the rich and poor peoples and nations of the world, investigates their causes, and develops alternatives for their remedy. She has acted as a consultant to UNESCO, the United Nations University, the Economic Commission for Europe of the UN, the International Union of Food Workers, and the Government of Nicaragua. As well, she is a member of the North South Food Roundtable of the Society for International Development and the International Committee of the World Food Assembly.

Aurora: Why is Susan George writing a book on debt?

George: Why am I writing a book on debt? Well, because it was a logical progression from the work I had done before on hunger. Debt is clearly the biggest new contributing factor to hunger, and I just had to become closer to this reality. It was a result also, of other people saying to me, “You really ought to do this.”

Aurora: Why do we find ourselves now in this debt crisis, and who’s involved?

George: There are multiple reasons for this crisis, and one set of people can’t be blamed exclusively. It’s not all the fault of the creditor, nor is it all the fault of the debtor. I think responsibility is shared.

It’s also terribly important to look at who in the borrowing country is doing the borrowing. I’m against blanket statements like, “Brazil or Mexico has borrowed so many millions of dollars” because it wasn’t Brazil, it wasn’t the Mexican people, it was their governments. The money that was borrowed did not serve, by any means, the majority of Brazilians or Mexicans or the other people in the Third World. So, that being clear, I’ll start with the borrowers. We got into the mess in the first place because money was very easy. Interest rates were low to negative, and there was a lot of money floating around because of the petro dollars which the banks wanted to get rid of. It was very easy to be tempted into borrowing a lot. I am now finishing a film with the BBC in which we interview a retired Mexican banker, head of a not terribly important midsize bank. He said, “You know, I wasn’t nearly as important as many people, but I had bankers from the North lined up to push money on me. It was very flattering.” So the borrowers borrowed, and they borrowed heartily. They borrowed for mega projects, some of them vastly detrimental to the environment. They borrowed to finance current consumption, which simply means living beyond your means. They borrowed to finance capital flight—in other words, the money didn’t even stay in the country; it went straight back to banks in the North. The countries that didn’t produce oil borrowed to finance imported oil. And they borrowed for the military. About twenty per cent of the debt went into arguments or into increasing the armed forces. So that’s the side of the borrower, and these were the major reasons that they got very deeply into debt. Then, there were the lenders. As I said, bankers were anxious to get rid of the petro dollars, and the Third World seemed the logical place to recycle the money. But the bankers were very aggressive. They did not act the way bankers are supposed to act—sober, cautious, looking out for a good investment. They just poured money into countries in the belief, apparently, that they could always pay back because, as Walter Wispen said, “Countries do not fail to exist.” He was the president of one of the major Swiss banks, and he really believed that there would never be any default.

Aurora: I always thought the lnternational Monetary Fund was the culprit in all this, but you suggest that private banks and private bankers, whom you call money mongers, are the real decision makers who fueled the debt crisis.

George: I don’t think the IMF should be directly the target. It’s a convenient one, and there should be pressure put on it. But basically the IMF does what the major creditor governments tell it to do. The fact remains that the fund is getting back more money now from the developing countries and from the Third World than it is putting into it. So I think we have to look at the behaviour of creditor governments and how the IMF reflects their instructions.

Aurora: What was the creditors’ position when the bubble burst? How did they respond to the bubble bursting?

George: The day of the burst is considered to be August 13, 1982. We’re talking about seven years ago, when Mexico came to the creditors and said, “We can’t pay our interest, and we’re going to default.” Now the creditors we’re terrifically worried because Mexico is the second largest Third World debtor with not quite a hundred billion dollars of debt. They very much feared that if one major debtor did this, then there could be a cascade of defaults. The banks were afraid that they would not be able to take this hit of a major default of one or two or possibly all developing countries, and therefore they had to find a solution fast. They had to find a solution because a run on the banks in the U.S. and in Europe could have turned into a terrific financial crash.

So for the first time in financial history, as far as I’ve been able to discover, all the public and private creditors got together. The U.S. government, the treasury secretaries of other countries, the IMF, the World Bank, the private banks, they all sat down with the Mexicans and hammered out an agreement. Now most people who don’t read the financial pages would not have noticed. It was not something television was obsessed with, like a war or a riot. It was fairly discreet and quick. From that time on, all the efforts of the creditors were directed towards getting out without being wounded too heavily. The banks in particular turned all their strategies towards diluting their portfolios and brutally stopping lending towards the Third World. In 1981, they lent about forty one billion dollars, and the next year it was down to, I think, eight billion. The banks used about one hundred different technical devices to lower their exposure in the Third World—they stopped lending; they diluted their portfolios; they lent more in the North; they sold some debt on secondary markets. Now seven years later, the creditors are congratulating themselves. As far as they are concerned, the debt crisis is over. Now this is both an opportunity and a danger. It’s over for them because there’s probably only two, maybe three, large American banks that are still over exposed, and we know that the government will not allow those banks to fail, even if something drastic happens in the Third World. They have saved, if you like, the international financial system. In other words, the system in the North isn’t hurting any more so they are congratulating themselves for having more or less defused the debt crisis.

Aurora: Could you tell us a bit about the Brady Plan?

George: The Brady Plan is the plan for lowering the bank debt. It’s not to do with public debt. It is rather complex, but basically it’s a scheme in which bank debt can be exchanged for bonds, some of which are guaranteed by the IMF and the World Bank or by the United States. The banks have agreed to write down a part of their debt, to reschedule another part, and to take a small loss. Since they’ve already made provisions against these losses, the banks are in no trouble at all.

It is very important to realize that now the entire Third World debt, including the loans that are being paid back without any problem, is less than six per cent of the banks’ outstanding portfolio. So, it’s not a very big deal for them. Of course they want to get as much back as they possibly can, and they’ll fight for that. They’re bankers, that’s their job. But six per cent of all your loan portfolio is not going to kill you if it doesn’t get fully paid back. So, you can’t make arguments that the banks are still in trouble. It’s not true.

Aurora: What’s happening in the debtor countries? How are they trying to cope?

George: What’s happening in the debtor countries more or less depends on what social class you belong to. If you belong to the elite, then not too much is happening, and sometimes you’re making money. Part of the IMF’s plan is about import liberalization. They say you’ve got to free up trade, you’ve got to let all imports in, and then the competition will make your industries more competitive with other industries, which I think is crazy, but that’s what they say. So, there’s a good deal of speculation, and a very few people are profiting from the way the debt crisis is being managed.

But if you are a middle-class or a poor person, you are being hit very hard by the debt crisis. What the IMF demands of a country which is in trouble is that it earns more and spends less. This may seem like reasonable advice, but when you say “earn more,” that means export more, and that means devote your resources to export production and not to production for local needs. When it says “spend less,” that means cut budgets, cut state expenditures, make bank credit scarce and expensive. It’s working people and consumers who are hurt by this because prices go up; food subsidies are abolished; transport becomes more expensive; electricity, gas, and other basic services go up; and then education, health, and welfare budgets practically disappear. All this doesn’t hurt the elites much because they can afford private services. If the buses break down, the elite have cars. Public schools don’t matter; they can send their kids to the U.S. or to Switzerland. Their money is in dollars any ways. They live in dollars.

Aurora: Could you elaborate on the relationship between hunger and debt?

George: Well, the basic connections between hunger and debt are pretty straightforward. One of them is related to the IMF demand for exports. When you export more, that means that you are going to neglect food crops, because the state will usually give you a decent price for an export crop but not necessarily for a food crop. That isn’t always the case, but usually that’s what happens. Not everybody is necessarily going hungrier, but certainly people in the city are. Increasing exports mean the prices for local staple food crops go up in the cities. Now in many cases the peasant doesn’t get a fair price, and there’s no slow transition to higher prices. Many people just have to pay double or triple food prices immediately, and they can’t absorb that kind of a shock in one go.

The IMF also wants to curb consumption. They want to restrict demand, and that includes demand for foodstuffs. That is part of a policy they call "demand management". As a result, food becomes more expensive. Food subsidies are wiped out because the IMF considers them to be too big a drain on government budgets.

Aurora: Could you give an example where IMF policy increased food shortages and led to hunger problems?

George: There is Morocco, where the IMF demanded truth in pricing, and for that they insisted that consumer subsidies be abolished. But they left in the price all the rake off that the monopolistic businesses were getting in the same food system. A price is nothing but the result of a series of actions on part of a series of actors. If you only touch the price that the consumer pays but you leave everything else in tact, all the middlemen and the manufactures are not making any sacrifices and are getting artificial, noncompetitive prices. I think that’s simply fraud. Either the IMF tries to make it a completely free market (which often ends up being a free fox in a free chicken coup), or they shouldn’t pretend that they are creating full truth in pricing.

The result in Morocco of the huge increases in staple foods like wheat, bread, and cooking oil was riot. Several hundred people were killed. So, it’s not just the fact that people go hungry, and that chronic hunger is growing worse and worse. It’s also that they may be killed as a direct result of rioting against higher food prices. Increased hunger is a feature in every indebted country because the prices go up, because people have less purchasing power, because far more people are unemployed, and because wages go down for everyone at the very time that food prices are increasing.

For example, a Peruvian worker lucky enough to have a minimum wage in 1980 would have worked seventeen minutes to earn a kilo of rice or a tin of powdered milk. Five years later the same worker with a minimum wage would have had to work more than two hours for a kilo of rice and nearly two hours for a tin of milk. Today it would be even worse. That’s just one rather dramatic example of how people’s security is wiped out by debt.

Aurora: I was quite startled when I read that the present debt could take away one year of a person’s life.

George: Yes, that point was made in a study which looked at the interest being paid by a country and the life expectancy figures of that country, and they found a correlation. More deaths are a direct result of countries putting their priorities into interest payments rather than into health or education or food supply or agriculture or whatever contributes to longer life expectancy. It’s quite obvious when you think of it.

Aurora: Could you explain what you mean by “sadomonetarists” and “exportamania”?

George: Sadomonetarist is Denis Healey’s phrase, which I think is brilliant. The IMF, the World Bank, and neoclassical economists in general hold what I believe is a dogmatic position, not supported by fact, that countries grow through exporting. Now this might be true if we were in a world economy of perfect competition, which is what neoclassical models assume. But unfortunately, it’s like playing Monopoly. If some players start the game owning the best properties with a couple of houses and a hotel, and the other players start with none of those things, the wealth is going to flow to those who already have the advantage.

The idea that all countries can find a niche and something to export more easily and at less cost than other countries doesn’t work. It doesn’t work because there are already monopolies and because the debtor countries are now exporting abnormally high amounts of goods. They are exporting because they won’t get any money from the IMF or from any other source unless they follow what the IMF tells them to do. So, everybody is being told to export. This means that several dozen countries at once are all having to export the same limited range of goods in competition with each other. This means the price of these goods goes down. And when prices go down, these same countries try to export even more. The result is the most terrific glut and the most terrific slump in commodity prices that we’ve had since the 1930s. This is all taking place when, at the same time, northern industries are substituting tropical products for temperate products. So supply is increasing all the time. This of course is the recipe for disaster. But the IMF and the banks will not abandon their stance that a comparative advantage is something that everyone can profit from. Well, maybe that’s true, but in order to profit from the comparative advantage, countries have to be able to diversify their economy, and where is the money going to come from to invest in diversification? There’s no spare cash. So prices get lower and lower, and the little that is earned goes into debt service. There isn’t any investment into new industries and new products, and it’s just a complete downward spiral. One wonders where it will end.

Aurora: How do debt problems affect jobs and employment in the First World?

George: Many exports, for example wheat and soybeans, from the Third World are in direct competition with the exports of the North. But countries now in the Third World are devoting so much of their resources towards debt service that there’s nothing left over to buy agricultural or manufactured products from the North. The level of exports from North America to Latin America, for example, has gone down disastrously. It’s been calculated that after the Mexican crisis, the Americans lost tens of billions of dollars worth of exports to Mexico the very first year. Every billion dollars in lost exports is twenty-five thousand jobs. So, there’s a direct connection to our own economies. The banks are indeed receiving a great deal, whereas the other sectors of our economy are the losers.

Aurora: Could you explain the solutions being proposed by northern bankers or the southern debtors?

George: There have been hundreds of technical solutions proposed. The basis of these plans, as far as I can see, is to moderate the pain but not to let anyone off the hook. I really believe that there is a war going on. Debt is war because you can do everything with debt that you-can with classical warfare except to occupy territory. In classical war you get hold of other people’s resources, and that’s what we’re doing with debt. We’re getting the cheapest raw materials we’ve had in sixty years.

We can also get other people’s infrastructure. If something is being privatized in the Third World and if a northern investor wants to buy it, he just buys up a bit of debt, cashes it in, and uses the money to buy up local industry. These are called debt for equity swaps, and it is a way of getting hold of a profitable business on the cheap in the Third World. It doesn’t cost anything like the Vietnam War did or the occupation of Afghanistan did for the Russians, and you can also obtain political control because a country which is in financial trouble is not going to take initiative. It’s not a good idea to get bogged down in the technical details but to try to understand how debt is used as a political instrument. If we wanted to cancel the debt of every single country in the world, it would be quite an easy thing to do. The debt does not represent very much in the world financial system. I’m not saying you could cancel it all from one day to the next, but it could be written down to the point where in ten years it would be completely written off and thereby certainly remove the pain from these countries. But that would produce a whole bunch of other problems. Now I don’t think that everything should just simply be cancelled because the necessarily see that their people benefited from substantial debt relief. There is so much power in the hands of the elite that the poor wouldn’t automatically benefit from debt relief.

Aurora: Could you explain what you call “creative reimbursement”?

George: What I am proposing is that the public debt be paid back in local currency over a very long period. This does several things. First, it freezes up hard currency for purchases of necessary goods. You would have to limit the amount of local currency so that you don’t just have countries spending money and creating inflation. The money would go into special development funds which the creditor countries could then top off with hard currency, for that matter with aid money. These funds would then be used for projects that are devised by the people themselves. They could be used for ecological renewal, to pay wages, or to repair the environment, which I don’t think is going to happen unless people are paid to do it because they are just too busy trying to survive. The funds could also be used for small amounts of credit to people who can’t normally get bank credit, and that would create much more prosperity at the base.

Now, a few people and maybe even a few agencies are beginning to take this idea a little more seriously. People have begun to recognize that we are not going to collapse if this debt doesn’t get paid. We should start making a political issue out of it. I find much more public understanding of what the debt is. People think, “Oh dear this is high finance. It’s too complicated so I’ll just leave that on the financial page and go on to something else.” But when you can put the debt in simple terms and explain in human terms what it’s doing to people, then you get a response, and people are anxious to do something about it. Now, at the level of most creditor governments I think that for the moment if they are thinking about anything it’s about direct relief to a Third World government. France is cancelling part of Africa’s debt, but it’s distressing that of the cancellations that have taken place so far, half of them have been for Zaire and to Mobutu, the dictator. Now that’s the most grotesque case. Mobutu has already stolen billions of dollars, and he’s taken practically all of the wealth of Zaire. If he brought back part of his own fortune, the debt could be wiped out. This example says much better than I can what is wrong with outright cancellation of debt.

Aurora: Often countries like South Korea, Singapore, or Taiwan are cited as successful models. Debt has not been a major problem for these countries. They seem to be able to service it and grow and prosper.

George: Well, that’s what the World Bank always says. But South Korea, Taiwan, and the others started off in a period when world trade was growing by seven to nine per cent a year. They had an enormous amount of aid from the United States, including huge amounts of food aid. Their governments were extremely interventionist. The free marketeers do not mention that the government was directing investments in a very authoritarian way that required terrific discipline, not to say repression, for the workforce. This model is not generalizable because the world economy is not growing now at seven to nine per cent a year.

It was also thought that Korea and Taiwan and the others would grow up the economic ladder and abandon the lower rungs of exports to others. They would let others do t-shirts and small electric goods, and go onto more sophisticated products. Well, they have gone on to more sophisticated products, but they’ve also kept the t-shirts. The most recent report of the General Agreement on Tariffs and Trade is that Africa now only represents 2.5 per cent of world trade and Latin America 4.1 per cent. If you take any two of the four tigers—Korea, Taiwan, Hong Kong, Singapore—any two of them represents more of world trade than the entire continent of Africa. So if we’re not careful Africa is going to rop off the map. And of the 2.5 per cent of world trade from Africa, South Africa has got 20 per cent of that. So it’s clear that comparative advantage cannot work when you’re starting from that level. Not everybody can be South Korea or Taiwan. The world just doesn’t work that way.

Books by Susan George

A Fate Worse than Debt: The World Financial Crisis and the Poor. Grove Press, 1988.

Ill Fares the Land: Essays on Food, Hungerand Power. Institute for Policy Studies, 1984.

Feeding the Few:Corporate Control of Food. Institute for Policy Studies, 1979.

How the Other Half Dies: The Real Reasons for World Hunger. Rowman and Littlefield, 1977.

Article originally published in 1990

An Aurora Update

Susan George has now authored ten books, she lives in/near Paris and acquired French citizenship in 1994. She is now Associate Director of the Transnational Institute in Amsterdam, she is also Vice-President of ATTAC France [Association for Taxation of Financial Transaction to Aid Citizens].

Books by Susan George

An Aurora Update

Related Links: