IOU: The Debt Threat and Why We Must Defuse It. Noreena Hertz

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      With a lack of concern and seriousness that can only shock, aid was significantly cut back too. Between the last days of the Cold War, and the last days of the millennium, development aid in general fell by 40 per cent, despite the worsening financial and health conditions in much of the Third World, and despite the fact that countries were by now drowning in levels of debt to service. Entire regions were abandoned by their former ‘protectors’: most of Latin America saw its US backing disappear and Africa was hit hard. As the African Research Bulletin explained in 1994: ‘The Cold War’s demise…has proven a setback for black Africa. Superpower rivalry once gave crucial purchase to poor lands with prized real estate for military bases, or a grip on maritime “choke points”, or large reserves of strategic materials…Africa’s leverage has markedly weakened.’

      Many nations caught in the backdraft of the new global power vacuum were left to scramble for new loans, aid and ‘patrons’, in often quite poignant ways. In 1993, Vietnam made the extraordinary offer to take up the debts of the former South Vietnam hoping that honouring the repudiated wartime debt would help it to attract more Western loans. Particularly poignant given that Vietnam, by agreeing to do so, was essentially agreeing to assume the debt burden of its former foe. Also, the country was (and continues to be) one of the world’s most highly indebted poor countries. So when Vietnam eventually agreed to pay the United States $146 million of South Vietnam’s wartime debt in 1997, that $146 million represented three-quarters of the nation’s annual health budget. But as Nguyen Manh Hoa, director of the external financial division of the Finance Ministry explained: ‘We had to agree on old debts so we could have new relations, such as new loans and cooperation agreements.’

      By the mid-1990s, most developing countries found themselves having to face huge bilateral Cold War-era debts, often ones that had been racked up by regimes long-since vanished. In the new environment the lender had become much less understanding, and borrowers, in order to get their loans rescheduled or relieved, had to jump through many tortuous hoops (as we will see in later chapters).

      Debts which had been warmly welcomed by Third World leaders as something which they could use to their advantage, became in the post-Cold War era a ball and chain weighing their countries down.

      Of course, not all countries faced similar abandonment. Some retained their geopolitical importance, and continue to this day to receive loans and have their debts rescheduled or even cancelled. Turkey’s regular bailing out, for example, is testimony to its position as a ‘gateway to oil’, as well as to its geopolitical import to NATO. Even after its disagreement with the US over the deployment of American troops during the war on Iraq, Turkey was offered up to $8.5 billion in loan guarantees to ‘relieve potential balance of payments needs that may result from hostilities’.

      Sometimes a country is considered too close physically to be allowed to fail. This is certainly what drove President Clinton to make Mexican President Ernesto Zedillo a $20 billion loan in 1995, despite the fact that 85 per cent of the American public were at the time against the bailout. ‘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, СКАЧАТЬ