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A brief history of the Debt
The debts were contracted in the 1970s when Northern banks were flush with petrodollars. These flowed mainly from countries in the Middle East whose coffers were bulging as a consequence of a fourfold hike in oil prices. Naturally, commercial banks sought every opportunity to invest the money and, in the process, make a hefty profit. The investment climate was not bright in northern countries, especially Europe, as increased energy costs had triggered a recession. Undeterred the First World banks looked South to the Third World as a favourable location for their investment. Governments in the Third World, urged on by Northern consultants from institutions like the World Bank, judged it a favourable time to borrow. Interest rates were low. Borrowing cheap money seemed to be an eminently reasonable way of undertaking much needed development.
Unfortunately things went badly wrong. In the early 1980s the foreign debts mushroomed out of control. Some of the blame, undoubtedly, must be laid at the door of Southern politicians and their economic advisers. A huge proportion of the borrowed money, as high as 20 per cent according to the International Peace Research Institute in Stockholm, was spent on arms. These arms allowed dictators to terrorise and murder their own people and still stay in power. Increased weapons sales boosted the profits for the arms industry in the US, Britain, the USSR, France, East Germany and Czechoslovakia to mention just a few countries.
Much of the money was also squandered on grandiose projects or transferred to foreign bank accounts. The Philippine government spent over $2.2 billion building a nuclear power plant in Bataan, one of the most geologically active areas in the world. Luckily the nuclear fire was never started. Nevertheless, the Philippine government service the loans for the project to the tune of over $200,000 each day.
A lot of the money was also embezzled. It was widely believed in the Philippines that former President Marcos and his wife deposited over $5 billion dollars in Swiss banks. Charges of corruption plagued the previously mentioned Bataan Nuclear Power Plant. The two main contenders for the project were General Electric and Westinghouse. General Electric was in a strong position to get the contract, so Westinghouse offered Mr. Disini, a friend and golfing partner of Marcos, a 5 per cent commission if he could swing the deal for them, which he duly did. Based on the contract price this consultancy fee or bribe, depending how one views it, the amount paid out could reach $80 million. Westinghouse admits paying Disini $17.3 million in cash in commission. There is no absolute proof that Marcos got part of the Disini payoff, but there is documentary evidence that Marcos co-owned Disini's business.
President Marcos and his wife were not alone in looting their national treasuries. Lopez-Portillo of Mexico, Anastasio Somoza of Nicaragua, the Generals in Nigeria, President Mobuto of Zaire all enriched themselves with monies borrowed by their countries.
It is important to remember that they could not have achieved grand scale larceny had the lending institutions exercised normal banking caution by checking the credentials of the lender and the economic viability of the projects. "Know your client" is one of the cardinal rules of banking. The banks chose to disregard this maxim and opted for the newly invented "syndicated loans". They relied on the large banks to do the necessary investigations and hoped that they would find some sort of default limitation by spreading the risk.
So Northern banks and governments must bear huge responsibility for such negligence. They knew that regimes headed by the likes of Mr. Marcos were brutal and corrupt. Many of the debts can be considered "odious debts" They were contracted by illegally constituted regimes often in violation of the laws of the lending countries. However in the skewed morality of the cold war such ethical considerations were disregarded and support for right-wing tyrants like Marcos and Pinochet posed no dilemma for many Western leaders.
Rising interest rates led to Debt blow-out
But external factors played an even more central role in creating such appalling mountains of indebtedness. When the borrowing spree began interest rates were low. However towards the late 1970s and early 1980s interest rates skyrocketed. In May of 1981 the U.S. prime rate peaked at 21.5 per cent. Most of the loans were borrowed at variable rates, pitched approximately one percent above the U.S. prime rate. Driven by such high interest rates Third World debts grew by leaps and bounds. There is no doubt in the minds of many people that these interest rates were usurious.
It is important to remember that this global hike in interest rates had nothing to do with the internal functioning of the economies of debtor countries. It derived from the fact that the U.S., in an effort to have the rest of the world finance its military and commercial expansion without raising taxes, was forced to raise interest rates to attract investment from Germany and Japan.
A recession triggered a fall in commodity prices
While interest rates were going through the ceiling, commodity prices were plummeting through the floor as a result of the recession in Europe and North America. The fall in commodity prices was a particularly cruel blow to Third World countries. Most of them were former colonies whose economies had been shaped during the 19th and 20th century by their European masters to produce one or two commodities for export. In the mid and late 1970s commodity prices tumbled world-wide. A basket of 28 commodities which included lead, zinc, tin, sugar, coffee and tea was worth 48 per cent less in 1988 than in 1974. This meant that many debtor countries could not accumulate enough foreign exchange to service their debts.
The Era of Structural Adjustment
In August 1982 Mexico threatened to default on its external debts. If Mexico had defaulted, many of the top US banks including Citibank and Chase Manhattan, could have tumbled over the precipice into bankruptcy. To avoid this happening, the World Bank and the International Monetary Fund, acting as debt collector for lending countries and banks, forced economic stabilisation and structural adjustment programmes (SAPs) on Third World countries beginning with Mexico.
There were many similar elements in the bitter medicine of stabilisation and structural adjustment programmes. The recipe as cooked-up by the World Bank and IMF and foisted on Third World governments was simple: Earn more and spend less. The details often differed slightly but in general they included currency devaluation, cutbacks in government expenditure, an elimination of subsidies and price controls, a drop in wages, opening up to foreign competition and investment, an emphasis on export-oriented industry and agriculture, widespread privatisation of government industries leading to lay-offs and increased unemployment. Cutbacks in education, health and social welfare budgets have taken a terrible toll on the well-being of the poor, especially women and children in Third World countries. The impact of what amounts to economic shock treatment has been so severe and destructive that even the World Bank and the International Monetary Fund have been forced to introduce social safety nets in more recent SAPs.
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