Chapter 14. Developing World Loans, Capital Flight, Debt Traps, and Unjust Debt

Under present terms of international lending, a recipient of purchasing power abdicates its authority. The borrower [is] as firmly tied to the apron strings of the lender as he ever was by the chains of colonization. —CEO and author Alan F. Bartlett, Machiavellian Economics

Controlling Puppets of the Imperial Centers

Instead of building basic industry for the impoverished world which could then produce both more industry and consumer products, petrodollars not consumed by externally fomented wars were deposited in American and European banks and then lent to developing world countries for non-productive purposes:

Banks everywhere, flush with petrodollars, had to struggle to find big customers to whom they could make big loans. Brazil, Mexico, Argentina, Nigeria, and others were wonderful customers, borrowing hundreds of billions worth of these “recycled petrodollars,” as they were called…. Just moving that money out the door was an achievement because the sums were so vast. Bankers had to struggle to find clients. Never mind that at least $500-billion of those loans turned sour. Never mind that for a decade the biggest borrowers did not make a single payment. Nor, in all likelihood, will they ever.1

The banks ignored their responsibility to make sure their loans were used productively:

[E]xternal loans were not used to finance large-scale industrial or other projects designed to improve the productivity of the national economy. The military dictatorships used them instead to open up domestic markets to imports in order to allow the middle classes a brief, and therefore all the more passionate, frenzy of consumption…. [Those debts] are still being paid for today with even greater poverty, unemployment and destitution for the majority of the population. Much of the contemporary wealth of such nations, including Argentina, can be found in numbered Swiss bank accounts rather than between Terra del Fuego and La Plata.2

Economic Warfare and Financial Warfare

While bankers were busy converting those hundreds of billions of OPEC dollars into developing world debt, top financial planners were studying how to reduce the financial claims the oil nations had against the industrialized world. Out of those studies came the financial warfare plans of the imperial-centers-of-capital, debase their currencies:

In the early 1970s, the United States and, to varying extents, the other OECD countries, responded to OPEC’s increases in oil prices by heavily expanding the money supply. The resulting inflation, together with the administered pricing policies in many basic U.S. industries, sharply increased the prices of U.S. exports and thus the cost of many imports to the developing world. Such an inflationary policy enabled the OECD countries, as a group, to keep their current accounts in balance, despite the large oil prices…. In effect, the United States largely insulated itself from the oil price hikes by passing the burden on to the developing world, whose current accounts deficit mounted. The developing world, in turn tried to ease this burden by borrowing heavily rather than by deflating.3

Those petrodollars were transferred to the developing world and then returned to the developed world through export purchases and capital flight; then dollars were printed to lower the value of Arab petrodollar deposits. If the petrodollars lent to the developing world had been used to build industrial capital and agricultural self-sufficiency, inflating the dollar would have effectively reduced their debts along with the intended reduction of developed-world debts to the oil cartel.

But, as this money was spent on consumer goods (that properly should have been, on the average, produced by themselves) and funneled into personal bank accounts in the developed world, the developing world gained only the debt. The gains of the Arab cartel were largely erased as the value of their money was essentially halved and the developed nations retained their subtle monopolization of world capital in the form of a $2.5-trillion debt trap for the developing world (2002) which could only be paid off through sales of valuable resources.

The World’s Poor are subsidizing the Rich

Wealth that is skimmed off by the elite of developing countries and deposited in foreign banks is a large factor in the developing world’s debt burden. Forty-seven percent of Argentina’s and 50% of Mexico’s borrowed funds have ended up in other countries via this route. The average loss of borrowed funds for 18 of these impoverished countries was 44%. By 1985, according to economist Howard M. Wachtel, the total exceeded $200-billion. Susan George calculated that a net of $418-billion in borrowed funds flowed right back north between 1982 and 1990.4 As of 1998, about half the debts of the southern nations are private deposits sitting in the accounts of Northern banks through deposits in their subsidiaries in tax havens.

The net gain to the developed countries (loss to the underdeveloped) of $418-billion between 1982 and 1990 is more than what was spent to rebuild Europe after WWII. “Capital flight from Mexico between 1979 and 1983 alone [was] $90-billion—an amount greater than the entire Mexican debt at that time.”5

The big American banks … welcomed the money as savings, even though the lending officers in a different department had sent it to those same countries for supposedly productive uses … 40 percent of Mexico’s borrowed money leaked away, 60 percent of Argentina’s, and every penny of Venezuela’s. Like alchemists, the Latin American elite converted the debt of the public at home into their private assets abroad…. About one dollar out of every three loaned to Latin America by banks between 1979 and 1983 made that round trip.6

Corporate imperialist loans are almost invariably tied to purchases from the creditor nations. Over 80% of America’s foreign aid returns immediately through exports tied to that aid.7 Foreign aid of other nations carries the same self-repatriating provisions. In fact, aid money typically never leaves the donor country; it is credited to other institutions in the donor country to which money is owed. Commenting on such generosity, the Prime Minister of Malaysia pointed out that, “Although Japan furnishes loans; it takes back with its other hand, as if by magic, almost twice the amount it provides.”8

Central American authorities estimated that by 1986 the wealth drained from Latin America was “more than $70-billion in a single year in the form of money or merchandise for which [Latin America] didn’t receive anything in exchange.”9

If a loan is to be of lasting value to the country to which it is granted, it must be put to productive, not unnecessary, consumptive, or wasteful, use. Equally important, if those loan funds were spent in the developing region instead of the loaning country as typically required, that money will be spent several times (the multiplier factor) and create buying power within that region. Producing a healthy economy in the industrial exporting nation through the multiplier factor is the reason most aid is tied to purchase of exports from the donor country. Continuation of that policy provides wealth for the nation exporting manufactured goods and poverty for the nation exporting raw produce and products produced with low-paid labor.

Building the Infrastructure to transfer Natural Wealth to the Imperial Centers

A 1987 Sixty Minutes documentary explained how billions of dollars were lent to Brazil to clear rain forest for homesteading. The World Bank’s own agricultural experts testified that this plan was not feasible because, once cleared, the thin soil would be unable to sustain agriculture. The bank lent the money anyway and the result was just what the experts predicted and what slash and burn farmers have known for thousands of years.10 Instead of using the rainforest for the sustainable production of medicines, rubber, timber, and even oxygen, it was clear-cut for about seven years of wasteful grazing at which time the soil nutrients were exhausted.

There were also loans for unsound and disastrous development projects in Kenya, Morocco, the Philippines, Tanzania, Togo, Zaire, Zambia, and other dependent countries, including Poland. The projects produced little or no income and the loans had to be repaid by selling valuable resources and lowering the standard of living of already impoverished populations.11

A careful analysis will conclude that the purpose of many loans is to develop infrastructure (mines, roads, railroads, pipelines) to move the resources of the periphery to the imperial-centers-of-capital. Much of the timber being cut from Brazil’s rainforest ended up in those imperial centers. A minimum infrastructure must be built to move those resources and those resources are then sold to fund a debt that—due to low prices for those exports, the expense of imported consumer products, and the high cost of infrastructure development—proves unpayable and continues to grow.

Debt Traps: Loaning Excess Accumulations of Capital back to the Producers of that Wealth

Third World development has not had serious consideration. Instead, vastly underpriced developing world natural resource commodities and underpaid labor (essentially dictated by IMF/World Bank/GATT/NAFTA /WTO/ MAI/GATS/FTAA structural adjustment policies and unequal currency values) and overpriced developed world manufactures created excessive accumulations of capital in the already wealthy world, which were lent wastefully back to the developing world for purchase of developed world exports (a major share being for arms). This forced the developing world to harvest ever more of their natural resources to pay that debt, which further increased surplus production, which lowered natural resource commodity prices still further, and the process keeps repeating itself. This is the little understood debt trap. Sooner or later the crunch of debt incurred under the massive assault of financial warfare will become unpayable:

A debtor who repeatedly borrows more than the surplus his labor or business enterprise produces will fall further and further behind in his obligations until, sooner or later, the inexorable pressures of compound interest defeat him … interest [is] usurious when the borrower’s rightful share of profit [is] confiscated by the lender…. The creative power of capital [is] reversed and the compounding interest [becomes] destructive.12

Professor Lester Thurow explains:

The fundamental mathematics is clear. To run a trade deficit, a country must borrow from the rest of the world and accumulate international debt. Each year interest must be paid on this accumulated debt. Unless a country is running a trade surplus, it must borrow the funds necessary to make interest payments. Thus the annual amount that must be borrowed gets larger and larger, even if the trade deficit itself does not expand. As debts grow, interest payments grow. As interest payments grow, debt grows. As time passes the rate of debt accumulation speeds up, even if the basic trade deficit remains constant.13.

The size of a financial warfare debt trap can be controlled to claim all the surplus production of a society and the magic of compound interest assures those unjust debts are unsustainable. Developing world debt climbed from $100-billion in 1973 to $1.7-trillion in 1999, to $2.5-trillion by 2002. With resource prices having dropped 60% the past 40 years and still dropping, obviously that debt cannot be paid.

Peonage has only changed its Name

Most of these debts are incurred without the recipient country receiving any lasting benefits. In fact, only about $500-billion of that $2.5-trillion debt was borrowed finance capital; the rest was runaway compound interest.14 The situation is comparable to the loathsome form of slavery known as peonage:

In classic peonage, workers, though nominally free and legally free, are held in servitude by the terms of their indenture to their masters. Because their wages are set too low to buy the necessities, the master grants credit but restricts the worker to buying overpriced goods from the master’s own store. As a result, each month the peon goes deeper and deeper into debt. For as long as the arrangement lasts, the peon cannot pay off the mounting debt and leave, and must keep on working for the master. Nigeria [and most other Third World countries] shares three crucial characteristics with a heroin-addicted debt-trap peon. First, both debts are unsecured consumer debts, made up of subsistence and spending-spree expenses, and with future income as the only collateral. Second, both loans are pure peonage loans, that is loans made not because of the potential of the project the loan is to be used for, but simply in order to secure legal control over the economic and political behavior of the debtor. Third, the only way made available for getting out of both debts is by getting into more debt.15

Lending responsibly, a Well-Recognized Tenet of Law

American citizens have won lawsuits against banks that foreclosed on their property for defaulted loans that were less blatantly irresponsible. Developed nations should cancel unjust and unpayable debts and start over; giving serious attention to plans that will eliminate waste, using the savings to capitalize impoverished countries, and developing true equality and balance of industry, agriculture, and trade.

The reason these sensible policies are not followed is that, under current corporate imperialist free trade policies, developing world capitalization would be catastrophic for developed world owners of capital. The development of productive capital with borrowed finance capital would produce profits, pay the debt, eliminate the need to borrow, eliminate dependency, and increase market competition to the detriment of the developed world and gain of the impoverished dependent world.

Canceling Unjustly Incurred Debts

There are compelling reasons for paying attention to this potential for catastrophe as, “every debt crisis in history since Solon of Athens has ended in inflation, bankruptcy or war, and there is no cause to believe we’ve solved this one, even if it has been postponed.”16

As much of this imposed debt can never be paid back, most developing world debt is severely discounted. As of June 1990, Argentina’s debt traded at a low of 14.75-cents on the $1 while the average price of all developing world debt was 28-cents on the $1.17 Although it is being traded at a 72% discount, the indebted countries must still pay full price. After the financial collapse on the periphery of empire seven years later, discounts for those debts can only trade at a sharply higher discount.

In the 1800s, the United States defaulted on much of its development debt, as did Latin America and others during the crisis of the Great Depression. American managers-of-state knew their nation became wealthy due to avoiding the monopolization of their economy, and their European cousins eventual sharing their industrial capital and markets. America returned that favor by sharing its wealth after WWII to rebuild the ancestral home of their culture.

There was no expectation of that shared wealth being repaid. The rational decision, and one that Professor Lester Thurow and others consider the developed world’s only choice, would be to also forgive the developing world’s unjustly incurred and unpayable debts.18 The precedent has been set by earlier defaults, by the quickness of decisions to protect trading allies, and an honest accounting would find the developed world owing the developing world for the destruction of their social wealth, the earlier enslavement of their labor, and the long term underpayment for their labor and resources which translates to a theft of their wealth.

Endnotes

1. Joel Kurtzman, The Death of Money (New York: Simon and Schuster, 1993), p. 72. Back to text
2. Elmar Altvater, Kurt Hubner, Jochen Lorentzen, Raul Rojas, The Poverty of Nations (New Jersey: Zed Books, 1991) pp. 8-9. Back to text
3. Arjun Makhijani, From Global Capitalism to Economic Justice (New York: Apex Press, 1992), p. 159. Back to text
4. Susan George, The Debt Boomerang (San Francisco: Westview Press, 1992), p. xiv-xvi; Howard M. Wachtel, “The Global Funny Money Game,” The Nation, December 26, 1987, p. 786; Fidel Castro, Nothing Can Stop the Course of History (New York: Pathfinder Press, 1986), p. 68; Howard M. Wachtel, The Politics of International Money (Amsterdam: Trans National Institute, 1987), p. 42; William Greider, Secrets of the Temple (New York: Simon and Schuster, 1987), p. 517. See also Susan George, Fate Worse than Debt, (New York: Grove Weidenfeld, 1990), especially pp. 16-34, 77-154; Philip Agee, “Tracking Covert Actions into the Future,” Covert Action Information Bulletin (Fall 1992): p. 6. Back to text
5. George, Fate Worse than Debt, pp. 20, 236, quoted by Agee, “Tracking Covert Actions,” p. 6. Back to text
6. Lawrence Malkin, The National Debt (New York: Henry Holt, 1988), pp. 106-07; see also David Pauly, Rich Thomas, Judith Evans, “The Dirty Little Debt Secret,” Newsweek, April 17, 1989. Back to text
7. Dan Nadudere, The Political Economy of Imperialism, (London: Zed Books, 1977), p. 219; Michael Moffitt, . “Shocks, Deadlocks, and Scorched Earth: Reaganomics and the Decline of U.S. Hegemony,” World Policy Journal (Fall 1987). Back to text
8. Ibid, p. 220. Back to text
9. Castro, Nothing Can Stop the Course of History, p. 69. Back to text
10. Danaher, 50 Years is Enough, Chapter 8; CBS, Sixty Minutes, April 20, 1987; Bruce Rich, “Conservation Woes at the Bank,” The Nation, January 23, 1989, pp. 73, 88-91. Back to text
11. Susan George, Fate Worse Than Debt, pp. 18,19, 30-34, 50-57, 77-168. Back to text
12. Greider, Secrets of the Temple, pp. 707, 581-82; Susan George, Fabrizio Sabelli, Faith and Credit (San Francisco: Westview Press, 1994), pp. 80-84, 215. Back to text
13. Lester Thurow, Head to Head: The Coming Economic Battle Among Japan, Europe, and America (New York: William Morrow, 1992), p. 232. Back to text
14. Michael Barratt Brown, Fair Trade (London: Zed Books, 1993), pp. 43, 113. Back to text
15. Chinweiezu, “Debt Trap Peonage,” Monthly Review (November 1985): pp. 21-36. Back to text
16. George, Fate Worse Than Debt, p. 196. Back to text
17. CNN News (June 28, 1990); David Felix, “Latin America’s Debt Crisis,” World Policy Journal (Fall 1990): p. 734. Back to text
18. Thurow, Head to Head, p. 215. See also, Gowan, The Global Gamble; Gray, False Dawn (New York: The Free Press, 1998), and Longworth, Global Squeeze.
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This is a chapter from the book, Economic Democracy; The Political Struggle for the 21st Century. Visit that link for more information about the book.