IOU: The Debt Threat and Why We Must Defuse It. Noreena Hertz
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href="#litres_trial_promo">Bob Rubin and [Lawrence] Summers told me if we don’t do this, Mexico’ll collapse, Brazil’ll collapse. We had no option,’ Clinton now explains.
In other cases, the battle for a country’s allegiance is still up for grabs. The Chinese and Taiwanese, for example, continue to mirror the bipolar world of the Cold War by competing for diplomatic recognition in Africa and the Pacific on the basis of which can give the most aid, with their ‘clients’ playing them off against each other as effectively as ever. Or a country is needed on-side to fight the 21st century’s new wars. Pakistani President General Pervez Musharraf’s support for the war on terrorism after September 11, for example, was rewarded with a $1 billion debt write off, nearly a third of what Pakistan owed the US. And on December 13, 2001, just two months after the attack on the twin towers, the Paris Club (the group of sovereign creditors to which a country must go to negotiate debt rescheduling) offered Pakistan a $12 billion ‘stock reprofiling’ of loans for 38 years under which it would have to pay nothing in debt service during the first 15 years – terms which it would have never got a few months earlier. While in January 2003, Ethiopia saw a $30 million write-off of its US debts over a year before this was due under the Cologne initiative. The timing was clearly chosen to serve the US’s own interests – this was, after all, precisely when America was looking to shore up support for the war against Iraq in the developing world.
On other occasions, a country is given a loan simply in order to maintain influence in a region. The French provided loans to the Habyarimana regime in Rwanda in 1992 to buy weapons including Kalashnikov rifles, anti-personnel mines, plastic explosives, mortars and long-range artillery, in order to maintain its credibility and influence in French-speaking Africa. The US tends to bail out countries which are facing financial crises not only if they are nearby but also if they are playing host to a US military base. South Korea, with its large American troop presence, won US help during the 1997/98 Asian crisis, for example, but Thailand and Indonesia did not.
To this day, the moral character of the borrower often remains an irrelevance. Turkey was offered the 2003 aid and debt restructuring package, for example, despite its continuing human rights abuses (although it has been making progress in its treatment of the Kurds). The French loans to Rwanda were made to a regime known to be highly repressive and were in all likelihood the monies used to buy the weapons used to commit the terrible 1994 genocide. America’s post-9/11 debt relief package to Pakistan was made in spite of the fact that calls to Pakistan to reinstate democracy following the 1999 coup that brought Musharraf to power had not been heeded. And various central Asian countries continue to be provided with loans by the US in exchange for their support in its war against terrorism, despite their own ongoing human rights violations.
It is abundantly clear that the lender is not an alms giver in the world of real-politik. The agenda is to serve the perceived self-interest of the lender, debt to be granted and withdrawn as he sees fit.
Under their thumbs
Just think how such naked self-interest could be interpreted by the borrower country’s people. In many cases, these people never got any benefits from the monies borrowed, either because the loans were used by despots to retain their internal power base or because they were unwisely spent. And then add this: the thought of how easy it is to interpret debt as a tool of subjugation, whereby countries are kept in debt specifically to keep the weak weak, the poor poor, the powerless powerless, not only to maintain pre-existing social and economic hierarchies but also to strengthen and reinforce them – something Mao Zedong, as we saw, so clearly feared.
Countries are usually only given debt relief if, as we will see, they conform to the rich world’s own set of rules. Creditors are allowed to negotiate en masse, while the articles of the Paris Club explicitly deny that right to borrower countries. The US Treasury did not even consider providing Nicaragua and Honduras with debt relief in the wake of Hurricane Mitch in 1998, Treasury Department officials actually admitting at the time that ‘loss of leverage’ was their reason for refusing to consider comprehensive debt cancellation for the two countries. The United States decided in July 2003 to withhold military aid from countries which refused to exempt American soldiers from prosecution by the International Criminal Court. Many examples seem to give this interpretation credence. But the extent to which this interpretation is accurate is almost beside the point. The fact that debt can so easily be interpreted in this way creates very real problems of its own. Problems that, as we will see in later chapters, can harm all of us, wherever we are.
For using debt as a highly effective mechanism of control will only serve to engender discontent in the very countries where the West seeks to exert influence, particularly given the heavy-handed way in which the lender often displays his dominance. When Yemen, for example, voted against UN Resolution 678 which authorized the first Gulf War, a senior US diplomat commented on the occasion, ‘This will be the most expensive “no” vote you have ever cast.’ A $70 million US aid project for Yemen was subsequently cancelled. This despite the fact that Yemen was (and remains) one of the world’s most highly indebted poor countries, and that life expectancy was only 46. Not unsurprising, then, that there were very large anti-American demonstrations in Yemen in 1991 and the US embassy was attacked with small arms fire.
So we begin to unpack the story of developing world debt. And what an unsavoury chapter this one has been proven to be. It is true that there are a few cases where countries have tended to lend for relatively altruistic or disinterested purposes (Finland and the Netherlands spring to mind), but any general interpretation of lending to developing countries as being primarily motivated by a desire to help Kennedy’s ‘struggling’ masses would clearly be naive. For the story behind country-to-country lending is on the whole neither one of altruism, nor even of enlightened self-interest. The self-interest is more usually myopic. The altruism is missing.
While it is true that in some cases, whatever motivated the lender, loans did result in high economic and social returns, all too often the outcome was one of bad guys getting benefits while the poor, marginalized and vulnerable saw very little of the spoils.
As we have seen, some developing countries who could afford to, have taken a stance against borrowing. Some others have had no choice and on occasion have used the loans for productive investment, but the majority have taken what they could get from the eagerly proffering superpowers. As a result, most of them, after the end of the Cold War, are mired in impossible levels of debt repayment that profoundly damage their country’s well-being. The lenders, for their part, not only provided the means, and sometimes the weapons for internal and external wars, they also provided the means to shore up dictatorships and corruption in pursuit of immediate national security concerns.
This chapter has been the story of reckless borrowing and of profligate lending, the antithesis of a rational process of lending and borrowing where a loan is requested and granted in circumstances where it is believed that the investment will produce enough money both to pay off the debt and generate self-sustaining economic growth. It is also the story of a complete failure to understand long-term security considerations. The slashing of aid to the world’s poorest countries after the end of the Cold War, for example, under the misconception that this signalled the end of an era of high security risks, has undoubtedly played a contributory role in creating the insecure world we all now inhabit.
The short-sighted decisions created by geopolitical considerations devoid of humanity – or even intelligent self-interest – are a crucial component in the building story of the debt threat.
CHAPTER THREE Backing the Bad Guys
‘Imagine you went to your bank manager and said, can