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Title: Jubilee 2000 Author: Noam Chomsky Date: May 15, 1998 Language: en Topics: Latin America, capitalism Source: Retrieved on 19th June 2021 from https://chomsky.info/19980515/ Notes: Published in ZNet.
The Jubilee 2000 call for debt cancellation is welcome and merits
support, but is open to some qualifications. The debt does not go away.
Someone pays, and the historical record generally confirms what a
rational look at the structure of power would suggest: risks tend to be
socialized, just as costs commonly are, in the system mislabelled “free
enterprise capitalism.”
A complementary approach might invoke the old-fashioned idea that
responsibility falls upon those who borrow and lend. The money was not
borrowed by campesinos, assembly plant workers, or slum-dwellers. The
mass of the population gained little from the borrowing, indeed often
suffered grievously from its effects. But they are to bear the burdens
of repayment, along with taxpayers in the West — not the banks who made
bad loans or the economic and military elites who enriched themselves
while transferring wealth abroad and taking over the resources of their
own countries.
The Latin American debt that reached crisis levels from 1982 would have
been sharply reduced by return of flight capital — in some cases,
overcome, though all figures are dubious for these secret and often
illegal operations. The World Bank estimated that Venezuela’s flight
capital exceeded its foreign debt by 40% in 1987. In 1980–82, capital
flight reached 70% of borrowing for eight leading debtors, Business Week
estimated. That is a regular pre-collapse phenomenon, as again in Mexico
in 1994. The current IMF “rescue package” for Indonesia approximates the
estimated wealth of the Suharto family. One Indonesian economist
estimates that 95% of the foreign debt of some $80 billion is owed by 50
individuals, not the 200 million who suffer the costs in the “Stalinist
state set on top of Dodge City,” as an Asia scholar describes Indonesia
in the Far Eastern Economic Review.
The debt of the 41 highly indebted poor countries is on the order of the
bail-out of the U.S. Savings and Loan institutions in the past few
years, one of many cases of socialization of risk and cost, accelerated
by Reaganite “conservatives” along with debt and government spending
(relative to GDP). Foreign-held wealth of Latin Americans is perhaps 25%
higher than the S&L bail-out, close to $250 billion by 1990.
The picture generalizes, and breaks little new ground. A recent Council
on Foreign Relations study points out that “defaults on foreign bonds by
U.S. railroads in the 1890s were on the same scale as current developing
country debt problems.” Britain, France and Italy defaulted on U.S.
debts in the 1930s: Washington “forgave (or forgot),” the Wall Street
Journal reports. After World War II, there was massive flow of capital
from Europe to the United States. Cooperative controls could have kept
the funds at home for postwar reconstruction, but policy makers
preferred to have wealthy Europeans send their capital to New York
banks, with the costs of reconstruction transferred to U.S. taxpayers.
The device was called “the Marshall Plan,” which approximately covered
the “mass movements of nervous flight capital” that leading economists
had predicted, and that took place.
There are other relevant precedents. When the U.S. took over Cuba 100
years ago it cancelled Cuba’s debt to Spain on the grounds that the
burden was “imposed upon the people of Cuba without their consent and by
force of arms.” Such debts were later called “odious debt” by legal
scholarship, “not an obligation for the nation” but the “debt of the
power that has incurred it,” while the creditors who “have committed a
hostile act with regard to the people” can expect no payment from the
victims. Rejecting a British challenge to Costa Rican laws cancelling
the debt of the former dictator to the Royal Bank of Canada, the
arbitrator — U.S. Supreme Court Chief Justice William Howard Taft —
concluded that the Bank lent the money for no “legitimate use,” so its
claim for payment “must fail.” The logic extends readily to much of
today’s debt: “odious debt” with no legal or moral standing, imposed
upon people without their consent, often serving to repress them and
enrich their masters.
Bank lending more than doubled from 1971 to 1973, then “levelled off for
the next two years, despite the enormous increase in oil bills” from
late 1973, the OECD reported, adding that “the most decisive and
dramatic increase in bank lending was associated with the major
commodity price boom of 1972–73 — before the oil shock.” One example was
the tripling of price of U.S. wheat exports. Lending later increased as
banks recycled petrodollars. The (temporary) rise in oil prices led to
sober calls that Middle East oil “could be internationalized, not on
behalf of a few oil companies, but for the benefit of the rest of
mankind” (Walter Laqueur). There were no similar proposals for
internationalization of U.S. agriculture, highly productive as a result
of natural advantages and public sector R&D for many years, not to speak
of the measures that made the land available, hardly through the miracle
of the market.
The banks were eager to lend and upbeat about the prospects. On the eve
of the 1982 disaster Citibank director Walter Wriston, known in the
financial world as “the greatest recycler of them all,” described Latin
American lending as so risk-free that commercial banks could safely
treble Third World loans (as proportion of assets). After disaster
struck, Citibank declared that “we don’t feel unduly exposed” in Brazil,
which had doubled bank debt in the preceding 4 years, with Citibank
exposure in Brazil alone greater than 100% of capital. In 1986, after
the collapse of the international lending boom in which he was a prime
mover, Wriston wrote that “events of the past dozen years would seem to
suggest that we [bankers] have been doing our job [of risk assessment]
reasonably well”; true enough, if we factor in the ensuing socialization
of risk, welcomed by Wriston and others famous for their contempt of
government and adulation of the free market.
The international financial institutions also played their part in the
catastrophe (for the poor). In the 1970s, the World Bank actively
promoted borrowing: “there is no general problem of developing countries
being able to service debt,” the Bank announced authoritatively in 1978.
Several weeks before Mexico defaulted in 1982, setting off the crisis, a
joint publication of the IMF and World Bank declared that “there is
still considerable scope for sustained additional borrowing to increase
productive capacity” — for example, for the useless Sicartsa steel plant
in Mexico, funded by British taxpayers in one of the exercises of
Thatcherite mercantilism.
The record continues to the present. Mexico was hailed as a free market
triumph and a model for others until its economy collapsed in December
1994, with tragic consequences for most Mexicans, even beyond what they
had suffered during the “triumph.” The World Bank and IMF praised the
“sound macroeconomic policies” and “enviable fiscal record” of Thailand
and South Korea shortly before the 1997 Asian financial crisis erupted.
A 1997 World Bank research report singled out the “particularly intense”
progress of “the most dynamic emerging [capital] markets,” namely
“Korea, Malaysia, and Thailand, with Indonesia and the Philippines not
far behind.” These models of free market success under World Bank
guidance “stand out for the depth and liquidity” they have achieved, and
other virtues. The report appeared just as the fairy tales collapsed.
Failure of prediction is no sin; the economy is poorly understood. It
is, however, hard to overlook the argument “that bad ideas flourish
because they are in the interest of powerful groups” (economist Paul
Krugman). Confidence in what is serviceable is also fortified by blind
faith in the “religion” that markets know best (World Bank chief
economist Joseph Stiglitz). The religion is, furthermore, as
hypocritical as it is fanatic. Over the centuries, “free market theory”
has been double-edged: market discipline is just fine for the poor and
defenseless, but the rich and powerful take shelter under the wings of
the nanny state.
Another factor in the debt crisis was the liberalization of financial
flows from the early 1970s. The postwar Bretton Woods system was
designed by the U.S. and U.K. to liberalize trade while capital
movements were to be regulated and controlled. The latter decision was
based on the belief that liberalization of finance may interfere with
free trade, and on the clear understanding that it would undermine
government decision-making, hence also the welfare state, which had
enormous popular support. Not only the social contract that had been won
by long and hard struggle, but even substantive democracy, requires
control on capital movements.
The system remained in place through the “golden age” of economic
growth. It was dismantled by the Nixon Administration, with the support
of Britain, later others. This was a major factor in the enormous
explosion of capital flows in the years that followed. Their composition
also changed radically. In 1970, 90% of transactions were related to the
real economy (trade and long-term investment), the rest speculative. By
1995 it was estimated that 95% is speculative, most of it very short
term (80% with a return time of a week or less).
The outcome generally confirms the expectations of Bretton Woods. There
has been a serious attack on the social contract and an increase in
protectionism and other market interventions, led by the Reaganites.
Markets have become more volatile, with more frequent crises. The IMF
virtually reversed its function: from helping to constrain financial
mobility, to enhancing it while serving as “the credit community’s
enforcer” (IMF economist Karin Lissakers).
It was predicted at once that financial liberalization would lead to a
low-growth, low-wage economy in the rich societies. That happened too.
For the past 25 years, growth and productivity rates have declined
significantly. In the U.S., wages and income have stagnated or declined
for the majority while the top few percent have gained enormously. By
now the U.S. has the worst record among the industrial countries by
standard social indicators. England follows closely, and similar though
less extreme effects can be found throughout the OECD.
The effects have been far more grim in the Third World. Comparison of
the East Asia growth areas with Latin America is illuminating. Latin
America has the world’s worst record for inequality, East Asia ranks
among the best. The same holds for education, health, and social welfare
generally. Imports to Latin America have been heavily skewed towards
consumption for the rich; in East Asia, towards productive investment.
Unlike Latin America, East Asia controlled capital flight. In Latin
America, the wealthy are generally exempt from social obligations,
Brazilian economist Bresser Pereira points out: its problem is
“subjection of the state to the rich.” East Asia differed sharply.
The Latin American country considered the leading exception to the
generally dismal record, Chile, is an instructive case. The free market
experiment of the Pinochet dictatorship utterly collapsed by the early
1980s. Since then, the economy has recovered with a mixture of state
intervention (including the nationalized copper firm), controls on
short-term capital inflow, and increased social spending.
Financial liberalization has now spread to Asia. That is widely regarded
as a significant element in the recent crisis, along with serious market
failures, corruption, and structural problems.
The debt is a social and ideological construct, not a simple economic
fact. Furthermore, as understood long ago, liberalization of capital
flow serves as a powerful weapon against social justice and democracy.
Recent policy decisions are choices by the powerful, based on perceived
self-interest, not mysterious “economic laws.” Technical devices to
alleviate their worst effects were proposed years ago, but have been
dismissed by powerful interests that benefit. And the institutions that
design the national and global systems are no more exempt from the need
to demonstrate their legitimacy than predecessors that have thankfully
been dismantled..