IN the name of “debt relief” for the poor developing countries, the International Monetary Fund (IMF) and World Bank have been packaging debt rescheduling programs which, ironically, can lead to the accumulation of more debts by the “beneficiary” countries.
This happened to the Philippines and a number of Latin American countries in the “lost decades” of the 1980s and 1990s. “New debts” to roll over old loans and to cover shortfalls in national budgets emptied by automatic debt service allocations. These were arranged by the IMF, World Bank and the so-called “Paris Club,” the troika that negotiated on behalf of the multilateral, bilateral and private lenders.
The “new debts” were not cheap. They were served with expensive conditionalities: recognition of all past debts (including odious debts which financed non-productive projects such as the Bataan nuclear power plant), belt-tightening austerity programs (e.g., new taxes, “wage restraint” and reduced social spending), and “structural adjustmentprogram” (SAP) to open up the economy to foreign imports and investments.
Dr. Manuel Montes, a Filipino development economist based in the United States, described the behavior of the IMF and World Bank as a new form of colonialism. Dr. Montes cited how Niall Ferguson, a Harvard-Stanford extoller of the positive impact of colonialism, gushed on the virtues of this new colonialism as follows:
“In August 1982, Mexico declared it would no longer be able to service its debt. An entire continent teetered on the verge of declaring bankruptcy. Yet the days had gone when investors could confidently expect their governments to send a gunboat when a foreign government misbehaved. Now the role of financial policing had to be played by two unarmed bankers, the International Monetary Fund and World Bank. Their new watchword became ‘conditionality’: no reforms, no money. Their preferred mechanism was the structural adjustment program. And the policies the debtor countries had to adopt became known as the Washington Consensus, a wish-list of 10 economic policies that would have gladdened the heart of a British imperial administrator a hundred years before.” (Ferguson, The Ascent of Money: A Financial History of the World, Penguin Press, 2008).
It is now 2020 and many developing countries are teetering on the verge of declaring bankruptcy, no thanks to the Covid-19 pandemic and no thanks to the pre-Covid efforts of the multilateral, bilateral and private lenders to push new debts sans a sustainable development program for the borrowing countries. Borrowing to “finance development,” a term popularized by the World Bank in the 1970s, can only be sustainable if it is backed up by a coherent program of growth and sustainable development for the borrowers. Thus, to the usual argument of the IMF and World Bank that more exports and higher economic growth can finance debts, Dr. Montes raises immediately the following:
“How soon will debt, which has to be paid back in dollars generate either more export earnings or savings in imports? Will the trade reforms included in the program reduce the government’s ability to collect tariffs and taxes [and fees from public enterprises] to raise the money to pay back the debt without reducing social expenditures or public investment?”
In this regard, the Philippine experience with the IMF-WB’s export promotion program via the SAP in the 1980s quickly comes to mind. Despite the SAP’s outward-looking framework, the country’s export industries failed to grow and match those developed by its Asian neighbors. In fact, the country’s trade deficits kept growing each year since. After Philippine membership in the WTO was ratified by the Senate in 1994, these deficits became much bigger. The Philippines was also transformed into a net agricultural importing country. In short, the SAP decades of the 1980s-2000s were decades of de-industrialization and de-agricultural development.
And yet, the Philippines managed to survive the SAP’s painful conditionalities and to even post respectable GDP growth indices in the last two decades. The explanation? The Philippines became dependent on the remittances of the overseas Filipino workers, who numbered around 50,000 in 1975 to over 10 million today.
Surprisingly, the IMF, World Bank and their neo-liberal economic partners in government have not issued any mea culpa on the failure of SAP to deliver the promises of strong industrial development, agricultural modernization and trade surpluses. These were promises made four decades ago!
This is why Dr. Montes, in a recent webinar with the Freedom from Debt Coalition, warned against the false promises being made by the multilateral, bilateral and private lenders to the developing countries. He said that haphazard external borrowing, usually packaged as the means to contain the pandemic, can lead to economic development disaster.
Yes, fiscal spending is needed to minimize deaths, disabilities, hunger, economic dislocations, enterprise bankruptcies and job losses that are associated with the harsh health impact of Covid-19, but resorting to costly borrowing, especially from international lenders, can cause what he calls as a “global development catastrophe.” The lenders’ business is primarily a “hunt for yield” that can be realized in the shortest time possible.
The attention of the creditors is focused on business operations that provide quick returns such as speculative investments on stocks, bonds, currencies, land, future prices of goods, etc. This is the underlying reason for the “financialization” of the economy. Many of the big banks and private fund holders are less concerned with investments on physical industrial or agricultural undertakings because these entail more operational costs, more people to manage and long uncertain wait for returns on investments.
In this context, the global creditors treat lending to Covid-stricken developing countries as another opportunity to make money out of money. The fact that a big number of the borrowing countries, especially the least developed ones, are sinking deeper and deeper in debt is of secondary importance to them. Their mission is to work in concert with the IMF and World Bank in generating fiscal funds needed by borrowing countries.
And despite their protestations that they are different from their “SAP parents” of the 1980s- 1990s, the IMF-WB team still maintain the old lending rules, e.g., austerity for the borrowers (as what happened in the case of Greece) and policy conditionalities in support of SAP-style trade and investment liberalization programs. These rules have been complemented by new programs aimed at further protecting and enriching the lenders.
Dr. Montes points out that most of the “debt restructuring” programs generally involves accumulation of more debts through “debt swaps,” e.g., debt for longer term with higher interest and debt in exchange for “policy reforms”, which can mean more trade liberalization or relaxation of rules protecting nature or the environment. There is also the Chinese-style “debt for patrimony,” which is reflected in the loan agreements related to the Chinese-funded Kaliwa and Chico River projects. And most of the debt restructuring programs cover or protect the financial exposures of the financial vultures, the speculative private equity funds.
The whole point is that the new debts and debt restructuring programs being lined up by the multilateral, bilateral and private creditors can indeed “lay the conditions for an oncoming Development Catastrophe,” to borrow the words of Dr. Montes. New debts purportedly to contain the global pandemic and assist the debt-ridden developing countries can pave the way for a new form of debt bondage similar to what happened to the Philippines and a number of Latin American countries during the terrible SAP decades of the 1980s-1990s.
Clearly, to survive these trying Covid times, the developing world needs financial resources. But borrowing in a haphazard way under an unjust and unequal financial order can indeed lead to a development catastrophe.
In sum, addressing the global pandemic should go hand in hand with a program of building a new global financial architecture, one that is just and fair to all. In building this new financial architecture, world leaders and governments should be guided by the message of Pope Francis, in EvangeliiGaudium:—“As long as the problems of the poor are not radically resolved by rejecting the absolute autonomy of markets and financial speculation and by attacking the structural causes of inequality, no solution will be found for the world’s problems or, for that matter, to any problem.”