The Third World Debt:
The Comforts of Newspaper Pie

David Gardiner

In his inauguration speech on January 29, 1949, American President Harry Truman declared that large areas of the world were “undeveloped”. Since then, successive governments of the northern industrialized countries have, along with their transnational corporations, used institutions like the World Bank and the International Monetary Fund (IMF) to try to “develop” the countries of the Third World by increasing levels of industrial production and consumption.

Today, after more than 40 years of such “development”, the vast majority of the world’s people, most of them living in the Third World, are, according to the United Nations, poorer than they have been at any other time in their history. While the world economy has created two million millionaires most of them in the industrialized north one billion southerners live in absolute poverty while another two billion, including almost half the world’s children, lack access to such a basic necessity as clean water. Third World nations have “developed” a foreign debt to northern governments and financial institutions that they can never hope to repay.

The IMF recently announced, with some satisfaction, that the scope of Third World debt has been reduced over the past year by $100 million and is now down to $1.2 trillion. In one sense this is a staggering amount of money: according to the United Nations, in 1989 the debt amounted to nearly double what all the countries of the Third World earned through the sale of exports. So, in order to pay off their debts most promptly, the people of the Third World would have to undertake the ludicrously impossible two-year chore of going without any fuel and cease everything else that involves consumption including eating and yet, somehow, still manage to produce exports at the same levels as before. And if the prices for their exports were to fall, well, they’d just have to keep at it a little while longer.

But, looked at another way, $1.2 trillion isn’t really an astounding figure. In 1988, the top 200 transnational corporations together took in 3 trillion dollars. Still the $178 billion in interest and principal that Third World countries paid on their debt in the same year amounted to more than half of their combined gross national products.

The historical roots of the debt crisis stretch back far beyond Harry Truman’s 1949 speech: they lie deep in the colonial past. The countries of the Third World were brought into the global economy as a source of cheap raw materials and labour, as a place to invest surplus capital that was accumulating in the north as a result of the industrial revolution, and as a market for the products of northern industrial production. When these countries gained independence whether in the 1820’s as in much of Latin America, or in the 1960’s as was the case for many African countries economic power remained in the north. The new nations continued to earn their foreign exchange through the sale of a few commodities such as minerals, timber, coffee, and bananas. And the markets for these commodities have long been dominated, often to the point of monopoly, by a few large northern companies.

During the 1960’s and early 70’s, prices for these products were at historic highs and most Third World countries attempted to industrialize in the accepted fashion, by borrowing from northern financial institutions and governments. Given the terms of trade prevailing at the time, it seemed reasonable to believe that the loans could be repaid. However, much was spent for projects that were designed on the model of northern industrial development and which were inappropriate to local conditions. It is estimated that 70 percent of the loans spent on industrialization returned to the coffers of northern financial institutions through transnational corporations, capital flight, arms sales and the northern bank accounts of the tiny southern elite, The disparity between rich and poor that resulted meant that, in order to maintain themselves, Third World regimes turned to repression: up to twenty percent of the loans were lavished on the very unproductive and repressive military sector that was necessary to maintain the power and privilege of local elites.

The oil price increases of 1973 and 1979 only made matters worse,, especially for the majority of Third World countries that relied on imported oil. Then, in the mid-70’s, commodity prices for southern products fell through the floor. They have remained there ever since. The period from 1979 through ‘82 was particularly bad: the terms of trade for Third World goods were worse during that period than they had been in three decades. Finally, in 1982, the crisis intruded into northern consciousness when Mexico threatened to suspend payments on its debt.

In order to get loans from northern financial institutions, most Third World countries have to be members of the IMF, where voting power is determined according to the financial clout of each of its members. Naturally, the nations of the developed north dominate, and IMF policies are designed with a far sharper eye to the health of balance sheets of northern corporations than to the bellies of Third World children. As a response to the Mexico crisis, IMF officials classically-trained economists sitting in carpeted Washington board-rooms and inspired by the “free market” policies of Ronald Reagan and Margaret Thatcher decided that the Third World’s economic problems were caused by too much internal demand for imported consumer goods that is, by the desire for everything from pots to Peugots. As well, they saw inefficient economies being constrained by interventionist government policies such as food and transportation subsidies. So, they designed something called Structural Adjustment Programmes (SAP’s) as a medicine for the ailing nations of the south. These are designed to promote exports and so allow countries to “grow” their way out of debt. To do this, SAP’s encourage policies that reduce imports and government spending, and also lower people’s incomes and purchasing power. Cash-starved Third World nations that want new loans or wish to renegotiate existing ones because they can no longer make their payments, are usually forced to swallow the SAP pill: over 70 have done so in recent years. And, the pill is always a bitter one. Typically, they include measures such as the following:

* A devaluation of the country’s currency designed to promote exports and make imports more expensive. However, increasing exports often means accelerating the rate at which the country’s resources cash crops,, timber, fish, and minerals are exploited, and so causes severe environmental problems. And, an emphasis on exports inhibits the local production of food and other basic necessities. As well, the world-wide explosion of exports that SAP’s encourage have served to saturate markets for Third World commodities, driving prices down even further and forcing countries into a vicious circle that demands ever-more export of resources, at incalculable environmental cost.

* A reduction of government spending designed to reduce state intervention in the economy. The IMF insists that it makes only broad recommendations and does not interfere in the creation of domestic policy. But the high levels it sets for cuts to government spending leave little choice but to slash already woefully inadequate funding to health care, education, sanitation and other social services. As well, the reduction or elimination of existing subsidies on such basic items as food and fuel places the greatest burden on those already least able to bear it the poor. The loss of jobs in the civil service adds to the problem of unemployment while those positions that do remain often suffer salary cuts so severe that it becomes impossible to survive on those wages alone. Not surprisingly, graft and corruption result.

* Privatization of state-owned industries and local businesses. When industries in the energy, communications and health care fields are turned over to private operators, people’s access to them becomes determined solely by their ability to pay. Again, the poor suffer the most. And, an end to favourable treatment for local businesses makes them vulnerable to competition from transnational corporations that often have resources far greater than those of the government itself.

* High interest rates to discourage the flight of capital and attract investment. This serves to fetter indigenous development initiatives by reducing access to credit. In tandem with other SAP measures, high interest rates also slow down the economy, reduce real wages, increase unemployment and often make even staples beyond the means of large segments of the population.

So, who gains from Structural Adjustment? Obviously, the international banks and other financial institutions. They had a scare in ‘82 when Mexico threatened to default, but they have taken steps to protect themselves, none more important to them than the imposition of SAP’s on the Third World. (After talks with the IMF, Mexico retracted its threat of default. Instead, it was SAP-ped.) Canadian and other banks have used tax write-offs and other means to protect themselves against the possibility of Third World loan default. In the meantime, they are still happily collecting interest on outstanding loans. Still, the debt is a real crisis for humanity. Each payment is accompanied by stark social costs that, while not factored into the IMF’s account books, affect the lives of millions of the southern world’s already impoverished masses. In 1989 alone, at least 500,000 children are estimated to have died as a direct result of Structural Adjustment.

As the wealth is sucked out of the Third World and the poor “adjust” in the name of progress, the United Nations and other agencies are discovering that measures of the human condition food intake, infant mortality, malnutrition and the incidence of preventable illness are rapidly getting much worse. And the disparity between north and south continues to grow.

Susan George, in her 1988 book Fate Worse Than Debt, shows us just some of the human face of the debt crises:

“The hut is sinking into the mud near the bridge over the River Guaibe, in Porto Alegro, Brazil. A woman social worker is welcomed by five children, the oldest about eight years old ... Noticing how poorly the children look, the social worker asks if they have eaten recently. “Yes, Miss, yesterday Mummy made some cakes from wet newspaper.” “What? Little cakes from what?” asks the woman. “Mummy takes a sheet of newspaper, makes it into a ball and soaks it in water and when it is nice and soft kneads it into little cakes. We eat them, drink some water, and feel full inside.”

And Brazil is far from the poorest of Third World nations.

Canadians often feel complacent about suffering in the Third World: it’s too far away and out of sight to affect the lives of many. But when it comes to the global debt, it strikes even people here, and precisely where it hurts the most in the pocketbook. Canada may not have entered into any formal SAP agreement with the IMF, but this is more than made up for by the fact that the Mulroney government itself is moulding the Canadian economy in the IMF image. The free-trade deal with the United States, deregulation, privatization of Crown corporations, tax “reform” and the GST, cuts in federal spending and transfer payments, free-trade talks with Mexico all these, and more, serve to rewrite the rulebook in the interests of capital rather than of people, as SAP’s do in the Third World. Thatcherism, the Mulroney agenda for Canada, SAP’s for the Third World: these all serve a common end the globalization of world capital freed from any constraint.

Millions of Canadians are fed up with such policies and thousands are actively working to have them reversed. In the Third World, too, there is opposition to the strategies of the IMF and other corporate northern institutions. And in that fight, concerned people in the countries of the north must offer their support.

As the century draws to a close, the sufferings of the poor in Canada and the impoverished in the Third World are obviously on different scales. In Canada, the globalization of world capital means food banks and welfare cuts. In many southern nations, it means only disease, malnutrition and death.
It cannot be allowed to go on indefinitely.

From New Maritimes, Jan/Feb 1991
New Maritimes Magazine bills itself as a "regional magazine of culture and politics". Founded in 1981, it is published six times per year by the New Maritimes Editorial Council, an independent, non-profit organization. One-year GST-inclusive subscriptions are $17 for individuals, $13 for those unemployed or on pension and $25 for institutions. Write to: New Maritimes, 6106 Lawrence Street, Halifax N.S. B3L 9Z9. Where else can you find articles like "Bootlegging: a Slowly Evaporating Enterprise" or "The Made-for-TV Tyrant" by a student minister from Upper Musquodoboit, N.S.?

(CX5084)

Subject Headings

• Debt
• Debt/Developing Countries
• Debt Restructuring
• Development
• International Debt Crisis
• International Development
• International Economic Relations
• Privatization
• Structural Adjustment
• Third World Issues

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