World economy: Debt Relief – Empty words from Bush, Blair and G7

Finance Ministers and central bank chiefs from the seven richest imperialist states, the G7, meet in Washington at the start of October.

Debt relief.

Empty words from Bush, Blair and G7

At the same time, the "Bretton Woods twins", the International Monetary Fund (IMF) and World Bank – celebrating 60 years of existence – hold their annual meeting.

One of the questions on the agenda is "debt relief" – a deliberately vague concept – for the world’s poorest countries. Rival debt reduction proposals have surfaced in the days before this gathering. A month before the US presidential election, George W Bush would sorely like to win approval for cancelling $90 billion of Iraq’s foreign debt – but the war president has hardly turned into Santa Claus.

Bush’s ploy is part of the continuing power struggle between US imperialism and the "axis of betrayal" – France, Germany and Russia – who stand to lose most from a cancellation or reduction of Iraq’s debt. The US proposal is also intended as a "carrot" to relaunch the discredited Greater Middle East Initiative – a plan for faster neo-liberal "reform" which has so far foundered on the depth of anti-US feeling in the region.

Iraq’s – or rather, Saddam Hussein’s – huge foreign debt does of course represent a huge barrier to any revival of the Iraqi economy. It is a big as Argentina’s debt while the Iraqi economy is one-eighth its size. But if Bush and imperialism dictate the terms, one thing is certain: the Iraqi people will not benefit to any significant degree from a debt write-off. On the contrary, it will be US corporations like Halliburton who stand to gain from the forced privatisation of 100 state-owned companies which will be a condition of any deal.

At the British Labour Party Conference meanwhile, finance minister Gordon Brown put forward his own debt relief plan, according to which, Britain will unilaterally pay-off ten per cent of the debt of the poorest debtor countries. Armed with this plan, Brown intends to "challenge the rest of the world" at the G7 meeting. His proposal is more about upstaging Tony Blair, whose job as prime minister he covets. Brown’s proposal covers 32 countries at a cost to the British government of around $185 million a year until 2015. If the US and other G7 governments follow suit this would generate around $1 billion a year in debt "forgiveness". Compare this to the $4 billion every month the Bush administration is spending on its futile attempt to "pacify" Iraq. Even so, $1 billion a year would enable 45 million more children every year to attend school, according to Oxfam.


The world’s poor cannot place any confidence whatsoever in the powerbrokers of the G7. A limited form of debt reduction is not excluded, particularly as everyone knows that a large part of the debt can never be repaid. But debt slavery is one means by which the governments, banks and big corporations of the imperialist states exert control over the world’s impoverished majority. The IMF and World Bank, both based in Washington, are cornerstones of the modern imperialist world order. Lenin once said that imperialism was "the epoch of finance capital" – an excellent description of what has since been re-named "globalisation".

The Fund and the Bank are involved in a sophisticated form of mafia activity: blackmail, threats and retribution. While not threatening to break the fingers of debtor governments, officials of these agencies can hold an entire population to ransom. The IMF in particular has the power to pull the plug on further lending and aid programmes, and condemn a country to financial market "purgatory".

Under their stewardship, the combined foreign debt of poor and middle income countries doubled during the 1990s to a staggering $3 trillion, despite an uninterrupted stream of "debt relief" proposals. The debt burden today claims the lives of 19,000 children daily – the equivalent of six September 11 terror attacks every single day!

Today, around 90 countries are effectively governed from Washington by the Fund and the Bank. As Zambian Charity Musambe told a debt conference in Stockholm last week, her country can’t even appoint a finance minister without the approval of the World Bank. The conditionalities in the debt agencies’ programmes give them, "a degree of control that even the most despotic of colonial regimes rarely achieved", explains Wayne Ellwood in "The no-nonsense guide to globalization".

This neo-colonialism invariably leads to disaster. Three years ago, a large part of southern Africa was in the throes of famine caused in large part by government policies. This is a region where most governments are under the command of the debt agencies. Today, there are warning signals that the Philippines will become "Asia’s Argentina" as it nudges towards the brink of bankruptcy. Interest repayments now consume a third of the national budget in a country whose economic policy has been dictated by the IMF for more than 30 years.

Privatisation of state and municipal companies is one of the standard ingredients in debt agency programmes. During the last quarter of a century, more than 100 governments worldwide have been compelled to sell-off state property worth more than $100 billion. From the capitalists’ perspective this is an excellent proposition: The impoverished masses are left to continue – via taxes – paying off the money borrowed to establish and equip these companies, while the new private bosses are free to raise fees and cut payrolls.

The struggle against these IMF and World Bank driven privatisations has mobilised tens of millions – literally – in countries like Bolivia, Peru, Ecuador, South Africa, India, South Korea and Papua New Guinea. Resistance has taken the form of blockades, strikes, general strikes and even full scale insurrections. What has been lacking, up to now, is a sufficiently cohesive and conscious alternative – a socialist mass party of the working class and the poor.

Alongside privatisations and deregulation, trade liberalisation is a common condition in debt agency programmes. The Fund and Bank coordinate their role with the World Trade Organisation (WTO), constituting a formidable united front against poor countries. Debt agency officials are allowed to take part at WTO negotiations in Geneva, where their role is to threaten to withdraw financing and help "soften up" poor country resistance to WTO demands. Most IMF and World Bank programmes include "export-led growth strategies" which result in overproduction and then, falling prices. A study of the effects of these trade liberalisation policies in Bangladesh, Ecuador, Ghana, Hungary, Mexico, the Philippines and Zimbabwe – countries with significantly diverse income levels – found that imports rose faster than exports in every case.

Mongolia, for example, was forced by the IMF, World Bank and Asian Development Bank to lift a ban on the export of raw cashmere from its goat herds in 1995. The result was the obliteration of Mongolia’s own wool processing industry by Chinese competition. Even the International Herald Tribune was forced to note that "when Communist rule ended in Mongolia 10 years ago, the country had two world-class industries: copper and cashmere. Now, despite millions of dollars in international aid and the combined wisdom of hundreds of Western experts, it has none".

HIPC programme is "cheating"

Charity Musamba from Zambia explained in Stockholm last week the reality behind the Washington debt agencies’ debt relief initiative "HIPC" (Highly Indebted Poor Countries). Despite Zambia now paying just $150 million a year in debt servicing, compared to $600 million previously, "the price is too high" she told Svenska Dagbaldet.

The conditions which Zambia’s government has been forced to accept have given foreign companies tax breaks and other benefits which Zambia companies can’t compete with. And debt repayments still cost twice as much as the country’s budget for health and education.

HIPC was launched in 1996 with a target group of 41 of the most indebted poor countries. The background was a storm of criticism against Washington’s "twin agencies" and growing fears of a revolt against impossible debt levels which could destabilise the entire system. The nightmare scenario in the minds of imperialist governments and debt agency bureaucrats was that one or more countries could follow Mexico’s example of August 1982, when it declared an embargo on further repayments and plunged the global financial system into crisis.

When virtually nothing happened with HIPC the criticism grew even louder. In 1999, Washington launched the "enhanced HIPC initiative", promising "broader, deeper and swifter" debt relief to 26 selected countries. But, in the words of one African debt activist, the new HIPC represented "enhanced cheating".

The World Bank admitted in a report from 2003 that even enhanced HIPC had failed – in just eight of 26 countries had repayments been "significantly" reduced. In a development which resembles a person running up a descending escalator, the 26 HIPC recipients had been granted a total of $29 billion in write-offs between 1998 and 2002, but had been forced to take $24 billion in new loans during the same period.

Uganda is the HIPC initiative’s star pupil – the country which qualified first and has "come furthest" in meeting the debt reduction criteria. For t en years the Ugandan government has done exactly what the IMF has told it, but – partly due to falling coffee prices (its principal export) – its debt level is still "unsustainable". According to HIPC calculations, Uganda’s "debt to export ratio" should have reached 128 per cent in 2001 and then successively fallen. Instead the ratio hit 19 per cent (i.e. the debt was more than double a whole year’s exports). Income per capita in this "model" HIPC country is just $320 a year, and only three per cent of Ugandans have access to electricity.

The enhanced HIPC contains clauses for easing access to foreign capital, imposing new investment rules which closely resemble the discredited and formally ’dead’ Multilateral Agreement on Investments (MAI).

Privatisation is obligatory under the scheme, which was illustrated in Guyana’s case: the country was a early qualifier under the HIPC initiative but was ejected when it refused to sell the national sugar company.

In Mozambique, the HIPC conditions enabled the World Bank to reduce tariffs against imported cashew nuts and 10,000 jobs in the domestic cashew nut industry were wiped out by a wave of cheaper Indian imports.

With combined capital and reserves of $410 billion, the IMF, World Bank and the latter’s development arm, the IDA, could afford a total write-off of the HIPC countries’ debts – this would not even affect the Bank’s "AAA" credit rating. Despite this, Wolfensohn, president of the World Bank warned the imperialists that such a course would "wipe out the World Bank… severely limit the Fund and in the end it will come back on your governments".

The debt agencies are fighting to preserve their own influence and prestige, while also reflecting a fear that more radical debt cancellation could open the floodgates – with demands across the neo-colonial world for complete debt cancellation.

Bretton Woods twins turn 60

Capitalist economist Jeffrey Sachs has called the IMF "an instrument by which the US Treasury intervenes in developing countries".

After the Second World War, with the horrific economic crisis and trade wars of the 1930s fresh on everyone’s mind, US capitalism was intent on creating a new "international financial architecture" to underpin its own global interests. Inspiration came from the British national economist John Maynard Keynes, who theorised that economic crises could be avoided by means of state intervention.

More important than Keynes’ economic doctrines, however, was the dominant role of US imperialism which set its imprint on the financial institutions (the IMF, the World Bank and GATT, the forerunner of the WTO) which were set up in 1944 in the small American town of Bretton Woods. The IMF would be a kind of watchdog over the post-war exchange rate regime – the "Bretton Woods system" – whereby every currency was linked to the US dollar. The World Bank’s role was to give economic support to major building projects, in the first place in war-torn Europe. Both were governed according to the principle "one dollar, one vote", which meant that the rich "share-holder" countries had control with around 60 per cent of the votes. With its crushing economic and military weight, Washington (with just 17 per cent of the votes) exercises a de facto veto over all important decisions. The smaller imperialist powers "are content to provide checks and balances over US influence", says Washington Post journalist Paul Bluestein.

The mass liberation movements against colonialism in the 1940s, 50s and 60s, were fraught with dangers for world capitalism. The world’s "tiger economies" at that time were the Stalinist states of the Soviet Union, Eastern Europe and China (The USSR achieved annual growth of six per cent in the 1960s). This gave a glimpse of what potential could exist with a democratically planned economy rather than the rampant bureaucratism and limited national horizons of Stalinism. Nevertheless, the strategists of world capitalism were traumatised by the rebellion of the masses in Africa, Asia and Latin America. The World Bank’s economic support to poor countries rose five-fold during the 1970s. Its aim was to be a "bulwark against communism" in the words of its then president, the former US Defence Minister, Robert McNamara. Washington and other imperialist governments sanctioned massive loans to support "friendly" i.e. right-wing regimes like the dictator Marcos in the Philippines (1970-85), Argentina’s military junta (1977-83) and of course Saddam Hussein, up until 1990 when he invaded Kuwait. Loans to prop up dictatorships in some 25 different countries account for almost $500 billion—one-sixth of the total debt.

The oil crisis of 1972, when oil prices tripled, helped precipitate a world recession and the collapse of the "Bretton Woods system". In the face of mounting inflation, US president Richard Nixon withdrew from the system and devalued the dollar by ten per cent. The collapse of the fixed-exchange-rate system which until this point had been the raison d’étre of the IMF meant that it "shifted the bulk of its activities to developing countries", according to The Economist.

As a result of the massive oil profits, the banking system in Europe and the US was awash with "petrodollars" from the Gulf states which, given the recession in the industrialised countries, chased southwards to the "new markets" in the neo-colonial world in search of profitable investment opportunities. The profligate lending policies which followed, coinciding with the end of the post-war capitalist upswing, paved the way for the debt crisis of the 1980s. This period also represented a turning point in the condition of global capitalism – the capitalists everywhere abandoned Keynesianism as their guiding ideology, embracing the long discredited ideas of laissez faire capitalism, now known as "neo-liberalism". Keynes’ creations, the "Bretton Woods twins", were transformed into instruments for a neo-liberal counter-revolution as a result of a historic crisis for capitalism, especially in the US, whereby the chase after profits has become more short-sighted, parasitic and desperate.

This shift was reflected in the traditional workers’ parties, as well as in nationalist and populist formations in the neo-colonial world, which in almost every case moved to the right. In this way, opposition to imperialism’s new agenda – typified by the IMF’s notorious "structural adjustment programs" (SAP) – was undermined. SAP appeared for the first time in Ghana in 1983, where a left populist military regime flirted with a "soviet" solution but were firmly rebuffed by Moscow. This coincided with a deep crisis within the Stalinist regimes, especially the USSR.

Can the IMF be reformed?

Globalisation critic Susan George points out that "structural adjustment can best be summarised in four words: earn more, spend less". A study in 1999 by Development Gap of more than 70 countries in Africa and Asia and found that "the longer a country operates under structural adjustment the worse its debt burden becomes".

But the SAP episode had another side to it, involving huge amounts of tax-payers’ money – via the Fund and the Bank – to rescue the private banks whose reckless lending had caused the crisis. As Wayne Ellwood explains, SAP programmes "were in fact an extremely effective mechanism for transforming private debt into public debt."

The idea of reforming Washington’s twin agencies has been taken up by many globalisation critics. Numerous proposals have surfaced for making these organs more "democratic" etc. Socialists warn that the idea of gradual reform is doomed to fail. The WTO, unlike the Fund and the Bank, operates on the principle "one country, one vote", but this doesn’t make it any more democratic. The fact is there has never been a vote in the history of the WTO – everything is decided behind the scenes by the major economic powers. The IMF and other imperialist financial organs must be scrapped as part of global struggle against capitalist exploitation – for a socialist world.

These articles first appeared in Offensiv, newspaper of Rättvisepartiet Socialisterna, Swedish section of the cwi

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October 2004