Year XXXI, 1989, Number 1, Page 51



1. The debt crisis in which the Third World has been wallowing for years is not merely a liquidity crisis, but a generalized insolvency crisis. As such, it needs brave decisions to contain its effects and above all to remove its causes.
The next most urgent task consists in allowing the growth process in developing countries to resume. In the recent past a decade (or even two, in the case of Sub-Saharian Africa) has been lost for the take-off and the development of these countries. In macro-economic terms, these are the consequences of the crisis: the fall in imports, the freeze on new funding by banks, the draining of resources towards creditor countries have caused a decline in investment and low growth rates, which in many cases means that populations already barely at subsistence level have seen a reduction in their per capita income.
The strategy adopted by creditor countries, transnational banks and international credit institutions has managed to avoid a collapse in the world’s financial system, but it has not been able to revive growth in the debtor countries. In this way, the necessary resources to service the debt are simply not produced. Hence, the real premise to overcome the insolvency crisis is absent. The rescheduling of loans, which is the instrument used to tackle the crisis, together with the deflation of debtors’ economies, makes the situation even worse and conceals its fundamental nature, simply delaying in time its most serious manifestations.
A new approach merely designed to remedy the consequences of the debt crisis would however be insufficient. If the mechanisms which have led to the present situation remained unchanged, some time later the same problems would reappear. For this reason it is necessary to intervene with reforms to set up the economic and power relations between advanced countries and developing countries on a less unfair and unbalanced basis than at present, taking into account their increasing interdependence in an increasingly integrated world economy.
2. At the root of the difficulties of the Third World due to foreign debt, is in the first place the choice of developed Western countries to consolidate the ties of financial, economic and political subordination with the individual developing countries, by resorting to the expansion of private bank loans. On the one hand, it was a matter of using the objective tendency towards the formation of a world market of goods and capitals to induce Third World countries to integrate in increasingly accentuated forms into this market and the production circuits run by transnational corporations. Their evolution in this direction would be favoured by the ample financial resources made available to them for the creation of purchasing power for the developed West’s products. This made it possible to increase the outlets of the goods produced at the centre of the world economy, opposing the fall in the profit rate which was taking place during those years. On the other hand, within this general process, by using the loans granted by the various countries rather than multilateral loans, each Western country was able to maintain a particular power relationship with the developing countries within its specific sphere of influence, thus giving rise to a series of tendentially distinct hegemonic relations.
Within this framework it must be stressed that industrialized countries dealt with the disequilibrium created by the two oil shocks by choosing to take away from international credit institutions the task of recycling the producer countries’ capitals towards the Third World countries which do not produce energy resources, putting it in the hands of the private banks. Within a short time this led to the privatization of the debt, in other words to the predominance of a debt structure in which the private part widely exceeds the part granted by governments and official institutions.[1]
With the rapid adjustment to the second oil shock decided on by the main industrialized countries of the Western world, the debt burden soon became unbearable. The restrictive monetary policy adopted by US authorities caused an upward surge in the whole structure of world rates and interest rates applied to loans grew both in nominal terms and in real terms, thanks to the mechanism of variable rate financing, often reaching levels which were higher than the growth rates of the debtor countries’ gross product. Also, the progressive appreciation of the dollar, up to the first quarter of 1985, was reflected in an increase in the burden of the debt, as this currency largely constitutes the denomination currency of the private financing granted, while the presence of vast flights of capital out of Third World countries makes the continuation of the loan servicing more problematic.
Together with monetary and financial factors, other important factors which push debtor countries to the verge of insolvency concern the commercial relationships among the two groups of countries. On the one hand a heavy deterioration of developing countries’ terms of trade becomes evident because of the fall in the price of basic products, with higher peaks for oil products. On the other hand the adjustment of the debtor countries’ balance of payments is impeded by the proliferation of protectionist measures towards their exports, in the context of a generalized resumption of commercial tensions between the most important poles of the Western economy.[2]
3. When, through the interruption of payments by Mexico in 1982, the debt crisis became evident, the banks, the creditor countries and international financial institutions put an articulated strategy into effect, which aimed at avoiding the repudiation of the debt, dividing the debtor countries’ front and forcing them to a confrontation with the creditor countries’ associations (Paris and London Club) using a case by case policy. On the one hand the credit institutes demanded and obtained a guarantee of political intervention, at the same time reinforcing the soundness of their budgets and setting aside substantial provisions for the credits granted to developing countries.[3] On the other hand, mostly due to the International Monetary Fund’s policies, the debtor countries were obliged to heavily deflate their economies and to make available trade surpluses, with which to repay at least the interest on their loans.
In this way it was possible to prevent the debt crisis from turning into a credit crisis, which would threaten the stability of the international financial system, and a situation of apparent stability was reached which disguised the deepness and pervasiveness of the insolvency state. Thanks to the adjustment imposed on the debtor countries and thanks to the financial devices of the creditor countries, banks and multilateral institutions, the maturities were delayed through the successive rescheduling of the loans, the episodes of payment suspension were avoided or at least circumscribed, thus fostering the illusion that the Third World is more in a condition of illiquidity rather than insolvency, and finally the absolute amount of the debt was frozen, in the expectation that the expansion of international trade would reduce its relative weight and lay the foundations for a renewal of the credit flows towards the indebted countries.
After a first phase, in which the debt problem was dealt with through an overkill policy towards the debtor countries, that is with a massive deflation of their economies,[4] the Baker Plan was launched in 1985 to try and combine the stabilization of the debtor economies with a resumption of their growth, through the concession of new loans by the banks.
However, the latter did not respond to the appeal and denied credit, trying in fact in every way to reduce their exposure by disinvesting. This second phase also ended in failure.
At present a third phase is under way, in which there is an attempt at diminishing indebtedness through a series of pragmatic options (menu approach), that go from debt-equity swaps to buying back the loans on the part of the debtors according to the discounted prices of the parallel market. Among these, the most widespread are the operations of securisation of loans, namely their transformation into marketable securities that are then handed over by the creditor banks to third parties.
Not even this approach seems suitable to solve the debt problem. From a technical point of view these operations can concern only part of the loans; from a political point of view the most well-known of them, the debt-equity swap, has the disadvantage of transferring to Northern transnational corporations control over the most efficient Southern firms.
The difficulties in which even those debtor countries that have obediently accepted Fund policies and are unable to service their debt continue to founder, in spite of rescheduling agreements, prove that the debt problem is nowhere near being solved. The inability of the various strategies to relieve the Third World from insolvency conditions is reflected in the risk indicators relative to the loans granted.
In fact, on the whole the main indicators of the worsening of the developing countries’ debt situation are at decidedly higher levels than in 1982 (the year in which the international community became aware of the seriousness of the crisis), with particularly high peaks for Latin American countries.[5]
4. For the Third World the consequences of the debt crisis are serious and in some cases dramatic. The stabilization programs imposed by the IMF or autonomously adopted by governments have involved the launching of deflationary measures to reduce domestic absorption and to free current account surpluses to enable them to service their loans and have originated a whole series of accompanying measures designed to liberalize prices and increase the integration of Third World economies within the framework of the world economy.
Thus whole industrial sectors which had sprung up thanks to previous import-substituting policies have been liquidated, making it easier for transational corporations to settle and reinforce their control over developing economies, while the extension of debt capitalization operations with the transformation of the debt into shares in local companies makes the danger of a recolonization of Third World countries more and more concrete.
The desperate search for foreign currencies, moreover, drives debtor countries to launch grand projects aimed at keeping the export flow alive, with increasing perils for the protection of environmental equilibrium not only in the Third World but on the whole planet. At the same time the fall in investments combined with the stabilization programs, an interruption of financing by the creditor countries, the net outflow of resources through the debt servicing channel, the flights of capital, at the same time cause and effect of the debt crisis, interrupt the growth process of Third World countries, undermining their development prospects in the medium-to-long run.[6]
After years of deflation and consumption reduction, the per capita income of many debtor countries is lower than it was in the 1970s, while the standard of living of wide strata of the population is getting worse.[7]
Within the individual countries, because of the high level of unemployment and inflation and following the reduction and abolition of subsidies for essential commodities and the dismantling of many public services, the lower classes are particularly affected, whereas the nations’ bourgeoisies manage to defend their wealth and privileges, in many cases siding with the banks and creditor countries and deriving direct benefits from the debt crisis.
5. The multilateral financial organizations, the IMF and the World Bank, actively intervene in this process, playing an important role in imposing on debtor countries the banks’ and creditor countries’ conditions for the loan servicing to continue.
Their actions in defence of the industrialized countries’ interests are the reflection both of the reasons at their origin and of the relationship of power between countries of the North and countries of the South, as they appear within them, in the structures of their decisional organs. It is well known that the Bretton Woods institutions did not arise specifically to deal with the financial problems connected with the presence of underdevelopment, but to rebuild and reinforce the capitalist market and the international monetary system after the Second World War; it is also well-known that the industrialized countries, unlike what happens in other international institutions under the United Nations have solid voting majorities within the two organizations, while the United States have an actual right of veto within the IMF.
It must also be added that the tendency of the IMF and the World Bank to favour the interests of the countries of the North in every circumstance has a solid basis in the organization of the international monetary system and in the hegemonic role of the US currency within it, both in the old Gold-Exchange Standard version and in the present Paper Dollar Standard version, in the presence of flexible exchanges. The discrimination, to the detriment of developing countries, derives both from the privileges of the dollar as an international currency and from the double asymmetry of written and unwritten rules on which the system of payments between countries is based. On the one hand, in fact, in the case of any imbalance in the balance of payments, the burden of the adjustment is laid on the countries with a deficit and not on those who manage their surpluses in a parallel way; on the other hand stabilization is imposed only on the debtors of the South, while the debtor countries of the North obtain less pressing conditions or are even spared adjustment, as is shown by the clamorous case of the United States, which for years has faced large deficits and has the highest foreign debt in the world, thanks to the privileges enjoyed by the dollar as a reserve currency.[8]
In this context, the IMF and the World Bank have continued in their traditional function as instruments for the perpetuation of the old international economic order, contributing with their interventions to accelerating the integration of developing countries in the international financial and commercial system dominated by the countries of the North and by the transnational corporations; to eliminating self-centred development experiences by removing the restrictions which allowed the infant industries in the South to reinforce their structures sheltered from foreign competition; to integrating the bilateral aid of the Western industrialized countries, as a vehicle of political and commercial penetration; to supporting the commercial interests of the North by supplying resources tied to the expansion of purchasing in the markets of the developed countries.
In connection with the debt crisis, the IMF and the World Bank have acted basically as debt collection agencies for the Western banks, adopting a case-by-case policy, breaking down the debtor countries’ front and imposing a confrontation with all the creditor countries forming a coalition. A role of guarantee towards the credit institutes has been played mostly by the Fund, whose stabilization programmes have been considered by the creditor countries as the necessary and sufficient condition to start off the debt renegotiations which have followed with ever-increasing frequency since summer 1982.
The Fund has also been the main agent in inducing debtor countries to carry out heavy deflations in order to make resources available for debt servicing. The conditionality of the Fund was strengthened after the second oil shock and has inspired measures of conditional credit concessions also on the part of the World Bank, strongly reducing the independence margins for the policies adopted by debtor countries, with serious effects on the exertion of their economic sovereignty.
The conditionality content has contributed in a decisive way to the reduction of the productive basis of developing countries, to the increase of unemployment to intolerable levels, and to a general aggravation of the living conditions of the lower classes. Local industries have been specifically hit by the elimination of the impediments to trade and the control over exchange rates, while the measures for reducing the purchasing power of the populations have mainly concerned the imposition of wage freezes or reductions, the devaluation of the currency with a consequent increase in the cost of imported goods and a reduction of public expenditure by diminishing public intervention in the social sectors, the elimination of subsidies for basic consumer goods, the reduction of civil service employment.
The conditional nature of the credits granted by multilateral institutions in this way reveals itself as an instrument to keep up the dependency relations between Western developed countries and the Third World and to weaken the position of the lower classes in developing countries.
In conclusion, while in the immediate future they place themselves at the disposal of the Western industrialized countries for the collection of debts, in the long run, the IMF and the World Bank share the responsibility of reinforcing the present economic and power relations on a worldwide scale, worsening rather than improving the growth prospects of the Third World. This is because their stabilization programmes have the effect of reducing accumulation, impeding the industrialization of underdeveloped countries and making it easier for the transnational corporations to control their economies, thus preventing a more balanced international division of labour.
6. A deep reform of the financial and real accumulation mechanisms which rule the world economy is required to solve the debt problem.
While waiting for the necessary political conditions for this reform to mature, an emergency intervention is needed to avoid the situation from deteriorating any further and deteriorating to the point where there is no way out. At present, the widespread awareness of the structural character of the crisis have already driven a certain number of countries and institutions to propose forms of debt relief, which involve the creditors renouncing various degrees of repayment of loans, as has often happened in the past, and markedly after the Second World War between the US and the European countries.
The UNCTAD is asking for the remission of 30 per cent of the debts, the Group of the Seven is willing to grant forms of partial remission only to the least developed countries, and some banks go so far as to envisage forms of generalized cancellation of the loans granted.
If the European Community created a privileged relationship on the subject with the Third World within the UN, it would be possible to launch an emergency initiative, which might take the form of an immediate moratorium and of the summoning of an international conference on debt, during which the forms of generalized remission which are feasible at present could be discussed.
On that occasion, too, the premises would be given for the launching of a world plan for employment and development, similar in importance and meaning to the Marshall Plan in the aftermath of Second World War.[9] Thus, by reviving the growth process in the Third World, the conditions would be created to proceed towards the most radical reforms which are necessary to overcome the phase of unequal relations and exchanges between the North and the South of our planet.
In this new context the reform of the IMF and the World Bank will be considered along lines that also ensure the safeguarding of the South’s interests, and the need to replace the dollar as an international currency with a number of currencies that reflect the multipolar organization of the world.
The developing countries, by suitably reinforcing their experiences of regional economic integration, beyond the defence of the sovereignty of the individual states which is impossible nowadays, could take the option of launching a currency of their own, possibly tied to the ECU, at least at the start.
This is the concrete content which could be taken on in the running of the world economy by the creation of forms of world government whose regulating criteria are not the interests of one group of countries or another, but of mankind as a whole.
Franco Praussello

[1] Cfr. S. Griffith-Jones, “The Growth of Multinational Banking, the Euro-Currency Market and their Effects on Developing Countries”, in The Journal of Development Studies, January 1980.
[2] On this topic cfr. F. Praussello, Le interdipendenze economiche fra il Nord e il Sud del mondo, Genova, Ecig, 1986.
[3] Following the policies of rapid capitalization and increase of provisions for credits granted to Third World countries, the ratio between the debt exposure towards Latin America and their own capital for the hundred largest transnational banks in the world declined from 125 to 57 per cent between 1982 and 1987. Cfr. R. Monro-Davies, “Third World Debt: There is no Alternative to Forgiveness,” in The Financial Times, January 5th 1989.
[4] Cfr. S. Dell, “Stabilization: The Political Economy of Overkill”, in J. Williamson (ed.), IMF Conditionality, Washington, Institute for International Economics, 1983.
[5] Between 1982 and 1988 the overall Third World outstanding debt has risen from 831 to 1320 billion dollars. The ratio between debt and exports over the period 1982-1987 has risen from 120 to 157 per cent for the whole of the developing countries and from 271 to 332 per cent for Latin American countries.
[6] It is particularly outrageous that for some years now the Third World has been exporting resources in net terms, financing the countries of the North. Over the last few years net transfers towards creditor countries have amounted to over $ 100 billion. According to Gunder Frank, with respect to the reparations paid by Germany after the First World War, which amounted to 25 per cent of the value of its exports and to an average of 2 per cent of its GNP, Latin American countries have transferred abroad to service their loans after 1983 between 60 and 100 per cent of the takings from their exports, with an average of 6-10 per cent of their GNP. Cfr. A. Gunder Frank, Causes and Consequences of the World Debt Crisis, document presented at the session of the permanent peoples’ Court on IMF and World Bank policies, West Berlin, 26th-29th September 1988, mimeo.
[7] According to World Bank data, over the period 1980-1987 the per capita income in the most indebted countries has fallen by about 10 per cent, while in the countries of Sub-Saharian Africa the fall has been over 20 per cent. On the dangers, even political ones, that the debt crisis involves for the democratic regimes of many developing countries cfr. S. George, “The Impact of the Debt on Production, Income and Democratic System,” in AA.VV., The External Debt, Development and International Cooperation, Paris, L’Harmattan, 1988.
[8] Following the substantial disequilibrium of its current account, after 1983 the US became the country with the highest external debt, higher than that of the most indebted Third World countries. At the end of 1987 its debt amounted to $ 678 billion, in net currency terms. In that same year the US absorbed from other countries a quantity of goods and services much larger than that exported, financing the difference with $ 160 billion of net capital imports, equal to about $ 660 for every American citizen. If one considers that this, sum is higher than the total income that is available for the three and a half billion living in the Third World, it is easy to understand why the privileges enjoyed by the dollar as international currency are defined by Triffin as a real world monetary scandal. Cfr. R. Triffin, The Intermixture of Politics and Economics in the World Monetary Scandal, Acceptance Speech, Seidman Award, 15th September 1988, Rhodes College, Memphis, Tennessee, mimeo.
[9] On the possible content of a Marshall Plan for the Third World, cfr. F. Praussello, “Keynesianism and Welfare on an International Scale: Remarks on a World Plan for Employment and Development”, in The Federalist, XXVIII (1986), pp. 131-135.


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