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  Number 218 | Septiembre 1999
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International

Five Basic Theses on the Third World Foreign Debt

The warning bells have sounded and the clamor is now general: the world's economy is at the edge of the abyss. The solution to the foreign debt problem of the poor countries in the South demands recognition of this larger crisis. Different economic policies are urgently needed, as are technological modifications and, above all, a stress on human beings.

Oscar Ugarteche

The following five theses on the third world foreign debt problem are based on the crisis that began in 1997 and the experiences of the 1980s. The main argument is that the international economic system as a whole is not working; it is in a systemic crisis and it is evident as a result that the solution to the debt problem in Africa and Latin America has not been definitive. Such a solution must be found, but it is essential to understand which elements of the international system have to be modified to make economic development viable and to avoid the possibility of another large-scale crisis.

The following figures help provide a frame of reference for the problem:
* Economic growth from the 1950s to the 1970s was double that of the 1990s.

* Latin America's foreign debt doubled between 1970 and 1980.

*Latin American economic growth stagnated between 1980 and 1990 and the region exported US$375 billion net in debt service payments (in other words, it paid out that much more than it received in new loans).

Starting in the mid-1980s, structural adjustment policies began to be implemented throughout the world. The per-capita GDP of the planet's ten richest countries doubled between 1985 and 1995, while that of the ten poorest countries dropped by 30%. At the beginning of that period the per-capita wealth of the world's richest country was 70 times greater than that of the world's poorest; by the end it was 430 times greater.

Thesis 1: Liberalization and deregulation

Liberalization and deregulation in Latin America have three objectives:
* Increase national savings to avoid the foreign debt levels seen in the 1970s.

* Level out the overvalued exchange rates that make imports cheaper and exports more expensive.

* Close the current account (or trade) deficit in the balance of payments, which was very high as a result of low exchange rates and import substitution policies.

The concept of structural adjustment accompanied by free market policies was introduced in Latin America as a response to the foreign debt problem. To negotiate its foreign debt a country must first sign an agreement with the IMF establishing the conditions for resolving its exchange rate, national savings and foreign debt problems. After reaching that agreement a structural adjustment agreement with the World Bank is then necessary, which includes the following policy elements:
* Liberalization and deregulation of domestic and foreign trade.

* Deregulation of the labor market, making labor more “flexible.”
* Liberalization and deregulation of the financial system.

* Reduction of the size of the state by:
- Eliminating subsidies.

- Privatizing public enterprises.

- Reducing the state's functions and the number of public employees.

Having reached agreements on all of this, countries can then negotiate their foreign debts with the Paris Club and with private creditors to obtain access to soft loans from both the World Bank's IDA facility for low-income countries and the Brady Plan for middle-income countries. The agreements signed with the IMF, the World Bank, the Inter-American Development Bank (IDB) and the Paris and London Clubs are all conditional on the agreements signed with the others, so that failing to honor one means failing to honor them all. World Trade Organization (WTO) agreements, anti-drugs agreements with the US government and environmental agreements are also all usually linked to the macroeconomic agreements.

The argument used to convince Latin American governments of the need to implement drastic adjustment changes was that there is no alternative. In other words, the instrument was coercion. The governments were persuaded to apply such policies because doing so was made a condition for negotiating their foreign debts with public and private creditors. Either they followed the orders established by the Group of Seven (G-7) governments through the IMF and World Bank, or there would be no dialogue. Nicaragua was the one exception in 1979, but there would be no escape for it in 1990.

The results of the adjustment in the 1990s did not live up to expectations. National savings did not increase in the way expected following the opening up of the market, nor did the anticipated improvements in growth, investment or the foreign deficit ever materialize. As a result, investment rates failed to return to the levels of the 1970s: economic growth is currently about half of what it was before the crisis of the 1980s and domestic savings fell and were replaced by foreign savings, which are now private rather public. In the 1990s total national savings represent 18% of the GDP, while in the 1970s they represented 20%.

The reason for all of this is that the capital flows are oriented to increasing the consumption of imports and expanding the Central Bank's international currency reserves. This has had a negative impact on the exchange rate, which was revalued making imports cheaper and exports more expensive. The 1994 Mexican crisis marked the beginning of the end of this situation, which became definitive with the 1999 Brazilian crisis.

At the end of the deregulation and liberalization process we have been left with:
* A drop in domestic savings.

* A small rise in foreign savings.

* A slight increase in real investment.

* Low economic growth.

* Great financial volatility.

* Greater income inequality.

* The loss of autonomy to define economic policy.

Thesis 2: End of the economic order

The international order that had been established after the Second World War was based on:
* Economic welfare policies.

* Petroleum-based technology.

* The Bretton Woods institutions established as stabilizing forces in a global economic system based on the gold standard and exchange rate stability.

That order came to a close with the 1971 dollar crisis, which put an end to the dollar/gold relationship (known as the gold standard), and with the 1973 oil crisis. A new international economic order then emerged, but it was not the one suggested by third world countries and agreed to in 1974 negotiations. The current order, in which third world countries still have no defined role, is anchored in:
* Market policies.

* Information-based technology.

* The Bretton Woods institutions converted into the leaders and supervisors of the new economic policies and foreign debt agreements.

One weakness of this new order is that it is based on information technology, which is in turn based on accelerated innovation. As a result, investment in new technology has grown increasingly unprofitable due to the speed with which the new innovations have been coming out. This technological race has created great instability in the world system.

In an attempt to change the technological base, the end of the 1970s saw an increase in US interest rates aimed at recapturing capital that was circulating throughout the world. One consequence of this was the so-called Latin American foreign debt crisis in 1982. In August of that year, bankers, intellectuals and officials of international organizations gathered for a conference known as Consensus of Washington, aimed at hammering out consensus over market policies and their stable and homogenous application. It took the rest of the decade, however, for such an agreement to be finally reached. In Latin America the new policies were not integrated into all of the national economies until 1990, by which time a population already exhausted by the structural adjustments of the 1980s accepted them as “common sense.”

Thesis 3: Ideological burnout

Over the 1990s, the various governments have opened up their economies in conjunction with the IMF and the World Bank. The exhausted people, unions and trade associations all welcomed this move and there was a brief period of hope. With the collapse of the Berlin Wall (1989), the defeat of the FSLN in Nicaragua (1990), the disappearance of the USSR (1991) and the publication of books by Hernando De Soto and June Abbott (The Other Path: The Invisible Revolution in the Third World, 1986), Francis Fukuyama (The End of History and the Last Man, 1990) and Kenichi Ohmae (The Borderless World: Power and Strategy in the Interlinked Economy, 1990), the totalitarian view that there is no alternative became widely accepted in the different societies. With no alternative, there was nothing to talk or even think about. This ideology opened the way for regimes of the new right to take power in Latin America, leaving the old right in the opposition.

All of the region's governments bar Cuba conformed to these ideas, while Latin American societies grew increasingly less organized, so there was no real social opposition to the implementation of the new policies. With the opening up of the markets, debt reduction schemes were introduced in both the Paris and London Clubs, while the multilateral organizations (IMF, World Bank, IDB) kept their distance from any debt reduction initiatives.

The promises proved to be greater than the results and a decade later there are still low growth rates and large current accounts deficits. Exchange rates are also still maladjusted and are being balanced by means of sudden adjustments, as was the case in Mexico in 1994 and Brazil in 1999, with others predicted to be on their way. Another effect of the new policies has been the economic polarization between the 20% of the population that has benefited and the 80% that has not and has been forced to watch from the sidelines.

Thesis 4: The effects of the systemic crisis

The systemic crisis first began to be felt in all its depth around mid-1997, first in Asia, then in Russia and later in Brazil. The stock exchanges of the more developed countries have also been highly unstable, opening the way for the final resolution of a crisis that really began in the first half of the 1970s.

Suddenly there is general awareness that the levels of short-term credits and of international debt are very high throughout the world. There is also an alert about the current financial volatility and its contagious effects. In 1997-98, the stock exchanges in all developing countries took a dive, falling between 30% and 66% between 1997 and 1998, while those in other countries came out a bit ahead, albeit in conditions of great instability. The warning bells have sounded: the world economy is on the verge of disaster. It is recently recapitulating, which is where we are now.

What is the sum-up for the Third World?
* The foreign debt problems of the 1970s in Africa, Latin America and Asia were not definitively resolved, as previously thought.

* It would appear that the rigid and irreversible structural adjustment policies are going to change.

* Taken as a whole, the population has made progress, but actually a small sector has advanced a great deal, while the majority has been left far behind.

* Latin American exchange rates are out of whack and therefore GDP measurements are overvalued.

* Foreign deficits were greater than ever in 1998.

* In 1998 national savings reached their lowest point in contemporary history.

* Latin America currently has a much greater debt burden, which is made up of short-term debts that have been contracted since 1990 and are mainly owed by the private sector.

Thesis 5: Solutions for the South

Within the context of the systemic crisis, it is possible to observe a sharp drop in the prices of raw materials and the weakening of regional integration agreements. From 1997 to 1998 there was an average fall of 20% in export-generated income in the Latin American countries, with a few exceptions. International interest rates are falling temporarily, but a sharp rise in the interest rates of the dollar and the euro are expected relatively soon. This opens the possibility of a future foreign debt conflict that must be avoided, as it would be an exact repetition of the 1982 crisis and of the debt problems of 1930, 1876 and 1825.

A definitive solution has to be found to the debt problems of the 1970s, but the question is, how?
* By completely writing off the poorest countries' debts.

* By reducing the debts contracted by middle-income countries since 1981.

* By limiting debt service payments using the precedent of Peru in 1945 and Germany in 1953, establishing a ceiling of 3% on fiscal income or its equivalent in exports.
* By imposing conditions on use of the budget to avoid political favoritism and waste. Resources should be geared to sustainable development and promoting the development of the poorest sectors. Health, education and food availability should be priorities.

* By demanding economic policies that put human beings first.

* By recognizing the existence of a systemic crisis and that therefore:
- Economic theory is not operating as it should.

- The international institutions are not responding to, and have in fact become part of, the problem.

- Technology should be modified.

There is a need for a new international institutionality that:
* Eliminates the IMF, as it is part of the problem rather than the solution. It presently induces economic depressions and increases debt levels to bail out international banks through its credits to third world countries such as Mexico, Korea, Russia, Brazil, etc.

* Creates a World Central Bank with regional Central Banks to guarantee reserves of all currencies. The US dollar is currently a currency without reserves. This will also ensure the existence of foreign currency reserves and the limiting of the credit multiplier. The multiplier is currently infinite and credit is not supervised at the source.

* Creates a Club of debtor countries for negotiating the debt with both multilateral institutions and London and Paris Club countries.

* Redefines the World Bank and the IDB so that they concentrate on projects and stop designing policies, a task that belongs to the national policy-making institutions. The aim of these organizations should be the well-being of the population rather than that of transnational companies and international banks.

* Strengthens the United Nations system so that it promotes peace rather than war.

Oscar Ugarteche is a Peruvian economist who wrote the above for the Jubilee 2000 Campaign's Latin American Conference.

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