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The superpowers gained an obvious advantage through these loans. But why did Third World countries borrow such huge amounts of money from other countries when the quid pro quo was so explicit? When in exchange they had to promise allegiance? It’s not too difficult to answer that.
In the worst cases, because their leaders knew that they could easily ill manage, misappropriate or divert funds – no bank manager would be peering over them asking them on what they would be spending the money, or how they might pay it back.
In others, because the borrower country simply wasn’t in Mao or Bolivar or Vajpayee or Shinawatra’s position – desperate for cash these nations needed to borrow money from abroad. Domestic savings weren’t sufficient to finance necessary investments for growth and development or in some cases even current consumption requirements. Exports weren’t providing enough foreign exchange to fund imports and service existing debts. Commodity price shocks (such as the oil hike in the 1970s) meant that they needed to offset their impacts (just as a person might take out a loan to tide them over when they lose their job). Grants weren’t available at levels of magnitude needed. And either loans weren’t available elsewhere or the monies being offered by the bilateral (government to government) lenders were being offered at significantly better terms than other alternatives, often at well below market rates.
But more often than not, and why the amounts borrowed were often far above what was actually needed, was because the battle for power between the East and West seemed like it would never end. As long as the superpowers were fighting it out, most Third World countries believed that they could continue playing one off against the other, and that they would remain in the money. They believed that the ‘banks’ wouldn’t foreclose, and that the tap, which ensured that new loans were always forthcoming and that rescheduling was always an option, would never be turned off.
Although there were times when there was a real, legitimate or proper need to borrow, the lending process had become divorced from sober economics (where a low-cost loan is put to sound economic use.) Sometimes loans were used productively. Brazil, for example, took out many loans during the Cold War to invest in developing its manufacturing industry; some of Africa’s loans were used to invest in its infrastructure. And the lenders, for their part, were sometimes sensible enough to make loans to countries that were rich in oil, minerals, coffee and other exportable resources. In other words, countries that were creditworthy. More often than not, however, the lending process was so distorted by geopolitics that the logic that underpins sound borrowing – that one incurs a debt in the hope of making an investment that will produce enough money both to pay off the debt and to generate economic growth that is self-sustaining – was simply absent. As too was the criteria that underpins sound lending – that the lender be likely to be able to repay the loan. And this isn’t selective reporting. While it may be that good news is sometimes not reported, and there are undoubtedly more ‘positive’ debt stories out there than I have highlighted, there is no question that in the vast majority of cases this is the way it was.
All change
Once the Cold War ended, things changed. The allegiance of strategically important Third World countries was suddenly perceived as unnecessary. Loans were called in overnight, and new lending (which was the way many countries had been able to service old debts in the past) was either curtailed, or provided under far less generous or far more conditional terms.
Moscow, in its new post-Soviet guise, and now suffering its own economic collapse began harassing the former Soviet Union’s satellite states for repayment of outstanding loans, having quite happily rescheduled them in the past. President Clinton started championing ‘trade-not-aid’ policies, despite the fact that the by now aid-addicted countries were massively weighed down with significant debt burdens that they would never be able to service through trade alone, especially given the protectionist trade policies of the West which meant that the very goods that the developing world could have hoped to export to the developed were as a consequence rendered uncompetitive.
Countries that had played off the superpowers so effectively during the Cold War now saw themselves fast abandoned by their former sponsors. North Korea was so feted by the Soviets in the 1960s that the Russians, based solely on the North Korean argument ‘You must take into account that the Americans have already built an oil refinery in South Korea’ even provided loans for a North Korean oil refinery, despite the fact that the country had no oil of its own. But by the early 1990s, the Soviet Union had drastically cut back its support.
Regimes that had once enjoyed the benefit of blind eyes in the lending nations were now suddenly chastised. Zaire, for example, began receiving tough messages to combat corruption from its long-time donors – messages which had never been delivered when Mobutu’s support had been valued.
With a lack of concern and seriousness that can only shock, aid was significantly cut back too. Between the last days of the Cold War, and the last days of the millennium, development aid in general fell by 40 per cent, despite the worsening financial and health conditions in much of the Third World, and despite the fact that countries were by now drowning in levels of debt to service. Entire regions were abandoned by their former ‘protectors’: most of Latin America saw its US backing disappear and Africa was hit hard. As the African Research Bulletin explained in 1994: ‘The Cold War’s demise…has proven a setback for black Africa. Superpower rivalry once gave crucial purchase to poor lands with prized real estate for military bases, or a grip on maritime “choke points”, or large reserves of strategic materials…Africa’s leverage has markedly weakened.’
Many nations caught in the backdraft of the new global power vacuum were left to scramble for new loans, aid and ‘patrons’, in often quite poignant ways. In 1993, Vietnam made the extraordinary offer to take up the debts of the former South Vietnam hoping that honouring the repudiated wartime debt would help it to attract more Western loans. Particularly poignant given that Vietnam, by agreeing to do so, was essentially agreeing to assume the debt burden of its former foe. Also, the country was (and continues to be) one of the world’s most highly indebted poor countries. So when Vietnam eventually agreed to pay the United States $146 million of South Vietnam’s wartime debt in 1997, that $146 million represented three-quarters of the nation’s annual health budget. But as Nguyen Manh Hoa, director of the external financial division of the Finance Ministry explained: ‘We had to agree on old debts so we could have new relations, such as new loans and cooperation agreements.’
By the mid-1990s, most developing countries found themselves having to face huge bilateral Cold War-era debts, often ones that had been racked up by regimes long-since vanished. In the new environment the lender had become much less understanding, and borrowers, in order to get their loans rescheduled or relieved, had to jump through many tortuous hoops (as we will see in later chapters).
Debts which had been warmly welcomed by Third World leaders as something which they could use to their advantage, became in the post-Cold War era a ball and chain weighing their countries down.
Of course, not all countries faced similar abandonment. Some retained their geopolitical importance, and continue to this day to receive loans and have their debts rescheduled or even cancelled. Turkey’s regular bailing out, for example, is testimony to its position as a ‘gateway to oil’, as well as to its geopolitical import to NATO. Even after its disagreement with the US over the deployment of American troops during the war on Iraq, Turkey was offered up to $8.5 billion in loan guarantees to ‘relieve potential balance of payments needs that may result from hostilities’.
Sometimes a country is considered too close physically to be allowed to fail. This is certainly what drove President Clinton to make Mexican President Ernesto Zedillo a $20 billion loan in 1995, despite the fact that 85 per cent of the American public were at