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"In
developing countries, billions in reserves have been bled out
of central banks, billions in asset values have been destroyed,
and millions of workers have fallen into poverty and chronic
insecurity. Global capital markets have acted as gigantic engines
of inequality, transferring wealth from the weak to the strong,
from debtors to creditors, wage earners and taxpayers to the
holders of paper claims, from productive to financial activity."
Kari
Polanyi Levitt in
"The
Contemporary Significance of The Great Transformation" 1999
Introduction
We live
in a global economy dominated, as it was in the 1920's, by international
finance capital.
According to one estimate, before 1970, trade accounted for 90%
of all international transactions and capital flows for only 10%.
Today, despite a vast increase in global trade, that ratio has
been reversed. Ninety per cent of transactions now are accounted
for by financial flows not directly related to trade in goods
and services. Most of these flows take the form of highly volatile
stocks and bonds, investment and short-term loans. By 1992, financial
assets from the advanced OECD nations totaled USD 35 trillion
-twice the economic output of the OECD. McKinsey and Company believed
that the total financial stock would reach USD 53 trillion by
the year 2000- "triple the economic output of the OECD
economies".
These
changes to the global economy -the shift from the dominance of
industrial capital to finance capital- did not come about
"naturally" or spontaneously. They are the result of
deliberate policy-making- driven first by the City of London and
the British government, and later by Wall St. and the US government.
Both governments use the IMF as an agent for implementation of
effectively deflationary policies, whose ultimate purpose is not
to reduce poverty - but always to
protect the value of creditor assets.
In the 1920's
similar deflationary economic policies were applied to justify
the dismissal of public servants, to suppress wages and maintain
unemployment. The most important of these policies was the stabilisation
of currencies, fixed in terms of gold, to guarantee debt service to foreign bondholders.
Much the same happens today. Instead of the gold standard we have
currencies pegged to the dollar, or even outright "dollarisation".
Currencies are once again stabilised to guarantee debt service
to foreign bondholders and other creditors. The IMF, agent of
all international creditors public and private, intervenes in
the market and imposes a range of policies (SAPs) whose real purpose
is to defend the value of the assets of international creditors
and lenders.
Central
to our planned global economy dominated by finance capital, is
the powerful lever of debt. Debt acts as the key mechanism for
the transfer
of wealth from weak to strong; from debtor nations to international
creditors; from taxpayers and wage earners to the holders of paper
claims; from productive to financial activity. Without the leverage
of debt, IMF policy makers would not be able to impose policy
changes necessary to ensure such transfers.
Debt
as a constant threat to economic stability and human rights
As
the year 2000 drew to a close, the world of international finance
held its breath, concerned that Argentina would default on its
short-term debt, thereby precipitating what the Financial Times
called "a general loss of confidence". Argentina's
predicament is serious, despite her government's widely acknowledged
achievement of fulfilling creditors' conditions. Social tensions
are rising, and workers in Argentina called a general strike
at the end of 2000, to protest the impact of the debts on the
economy, in particular the deflationary austerity conditions
set by foreign creditors. Argentina's currency is artificially
inflated to equal the value of the US dollar - thereby maintaining
the value of creditor assets, while impoverishing Argentineans.
At
about the same time Argentina was teetering on the brink of default,
in another part of the international financial forest, 3,000
employees of the Thai Petrochemical Industry (TPI) disrupted
a meeting in Bangkok. Foreign creditors were due to have obtained
75% of the equity in TPI and effective control of this key Thai
industry. These creditors included the World Bank's International
Finance Corporation, Chase Manhattan and the US government's
Exim Bank. Protesters carried placards with slogans such as "World
Bank No Thanks" and "Yankee Go Home".
Simultaneously
in Africa, the Zambian finance minister Mr. Katele Kalumba, was
protesting a proposal for debt "relief" negotiated
by international creditors under the IMF and World Bank's Highly
Indebted Poor Country (HIPC) initiative. After the "relief"
offered by her international creditors, the World Bank predicted
that Zambia would transfer USD 235 million in the year 2002 in
debt repayments to her creditors, nearly USD 100 million more
than she can currently afford to pay. Zambia is a country in
which four-fifths of the population live on less than USD 1 a
day; one million of the nine million inhabitants suffer from
HIV/AIDS; life expectancy is only 40 years, and 13% of children
are orphaned - the highest rate in the world. In 1999 the Zambian
government spent USD 123 million a year on the health of its
people. USD 137 million was transferred in the same year to foreign
creditors.
These
examples demonstrate the extraordinary power of foreign creditors
over poor sovereign debtors. The IMF obliges indebted governments,
regardless of democratic mandates, to prioritise foreign debt
service payments over domestic spending.
In the west,
concern about the domination of finance capital over poor countries
has been growing, amplified by the international Jubilee 2000
movement. The campaign's guiding principles were grounded in Judaic
and Christian biblical ethics on human rights, opposition to usury,
and the need for periodic correction to imbalances - the Sabbath
and Jubilee principles. These principles and ethics have, in turn,
resonated with Muslims and other peoples
of faith and with those of no faith at all.
The
International Herald Tribune noted in November 2000 that
Argentina's "various misfortunes … are not of its
own making". Investors have been eager to lend, greedy for
the high rates of return on their investments to "emerging
markets". The Argentinean government, while perhaps
not always acting wisely, has faithfully followed the advice
(and interests) of her creditors,
and maintained a permanently fixed exchange rate against the
dollar, securing stability for investors who wish to remove their
funds. Exports (which
raise revenues for debt repayments) are growing rapidly. Inflation
is low and government debt and the budget deficit are only 50%
and 1.9% of national income respectively. But Argentina has a
significant proportion of short-term debt, serviced at rates
of interest ratcheted upwards by nervous creditors. The possibility
of default is real. Investors are looking over their shoulders
to the IMF - an institution that provides protection to creditors
while leaving "taxpayers of major industrial countries
to pick up the bill, and banks to pocket the profits."
There
has been a range of bailouts since Mexico's dramatic default
in 1982. From the autumn of 1997 until October, 1998, the IMF
was forced to bail out short-term lenders by pouring USD18 billion
into Thailand, USD 43 billion into Indonesia, USD 57 billion
into South Korea and USD 23 billion into Russia -just over USD
140 billion. This emergency financing almost bankrupted the Fund.
US congressmen protested these bailouts by withholding a critical
USD 18 billion to be used to leverage further loans from other
governments. President Clinton appealed to US congressmen to
approve the allocation of USD 18 billion. "There is no
excuse for refusing to supply the fire department with water
while the fire is burning", he argued. But as the Wall
Street Journal argued, "the IMF has been treating fires
with gasoline, rather than water."
By
late October 1998, Congress had caved in. In early November,
there were rumours that the IMF was using its new loans for a
further USD 45 billion package for Brazil. In total, bailouts
and rescues transferred USD 200 billion of wealth from OECD taxpayers
to international creditors and speculators -in just over a year.
In
October, 1999 Ecuador became the first ever country to default
on so-called Brady Bonds -private sector bonds that repackaged
debt from the Latin America crisis of the 1980s. The default
was rather dramatically announced at the IMF annual meetings
that year, with Fund staff making clear, for the first time,
that the institution was now reluctant to bail out investors.
While
Ecuador's bondholders were disciplined, there has been no indication
as yet that the IMF will treat other international creditors
in the same way. On the contrary, US Treasury Undersecretary
for International Affairs Timothy E Geithner promised to provide
the IMF and World Bank with USD 90 billion of new resources and
new instruments for emergency lending and broader risk sharing
in "exceptional circumstances", thereby providing an
incentive to speculative and reckless behaviour and protection
from the losses and risks of such behaviour. In the event of
these "exceptional circumstances" the debtor government
will be left with a heavy burden of new debt. Ultimately, the
burden of losses and liabilities will fall on local taxpayers,
in particular the poor.
Facing
the reality of insolvency
As
far back as 1776, Adam Smith asserted that "when it becomes
necessary for a state to declare itself bankrupt, in the same
manner as when it becomes necessary for an individual to do so,
a fair, open and avowed bankruptcy is always the measure which
is both least dishonourable to the debtor, and least hurtful
to the creditor".
There
is little that is fair and open about procedures to re-negotiate
poor country debts today. For years the secretive Paris Club
-a cartel of sovereign creditors- has dominated debt-rescheduling
processes, hand-in-hand with the closed and bureaucratic IMF.
The
Paris Club began life in 1956, to consider Argentina's external
debt. It is an informal body representing all official and private
creditors, including all OECD governments, the IMF, World Bank
and other multilaterals. It has no legal status, yet it has tremendous
power over poor country debtors. In the words of a former Secretary,
Mr. De Fontaine Vive "the Paris Club is not an institution,
it's a non-institution. There is no charter and there is no manual",
he says proudly. There are unwritten rules, however, and the
most important of these is that the IMF and World Bank as official
creditors are "preferred creditors" -they must always
be paid, above and before other creditors, i.e. private creditors.
In other words creditors are treated unequally by this "non-institution".
So in the case of the Ecuadorian default, private creditors took
"a haircut" or hit; while the IMF and World Bank continued
to collect debts. The absence of a legal framework for the Paris
Club ensures effective creditor control over lending, re-scheduling,
conditionality, cancellation of debts and new loans.
Today
Professor Kunibert Raffer of the University of Vienna, Professor
Jeffrey Sachs of Harvard and Oscar Ugarteche, former professor
of international finance at the Catholic University of Peru,
are in the forefront of calls for an open, fair international
insolvency procedure for sovereign states. Raffer points out
that "under any insolvency procedure… human rights
and human dignity of debtors are given priority over unconditional
repayment." He argues that "debtor protection
is one of the two essential features of insolvency. The other
is the most fundamental principle of the Rule of Law; that one
must not be judge in one's own cause… like all legal procedures
insolvency must comply with the minimal demand that creditors
must not decide on their own claims"
Raffer
notes that "insolvency relief is not an act of mercy,
but of justice and economic reason". The Bretton Woods
Institutions (BWIs) he argues "take decisions, but refuse
to participate in the risks involved". He demonstrates
that decision-making by the BWIs "is not only delinked
from financial responsibilities, their errors may even cause
financial gains. … If this link [between economic decisions and financial
risks]
is severed - as it was in the Centrally Planned Economies of
the former East - efficiency is severely disturbed. The striking
contrast between free-market recommendations given by the BWIs
and their own protection from market forces must be abolished."
Prof. Jeffrey
Sachs calls for an international 'standstill' mechanism that would
provide debtor-in-possession financing and a comprehensive and
timely workout of the debts. Sachs notes the parallels between
Macy's in New
York
and Russia in 1992 -both of which went bankrupt in the same month
(January,
1992).
Macy's filed for protection from her creditors under Chapter 11.
Russia had no protection from her creditors; on the contrary,
they moved in and took over "the shop". Macy's received
an immediate standstill on debt servicing; and within three weeks
of filing for bankruptcy was able to arrange a new loan of USD
600 million from several New York commercial banks as part of
court-supervised, debtor-in-possession financing. Russia had no
such luck! There was no standstill and Russia government had to
wait over a year to receive from the IMF and World Bank as much
money as Macy's had been able to borrow in three weeks. This politically
weakened the Russian government, led to the ousting of reformers,
and threw Russia's stabilisation programme off track.
Raffer's
call for a system of independent mediation between sovereign debtors
and their international creditors - widely amplified by the Jubilee
2000 movement - has recently been supported by the Secretary General
of the UN, who in September, 2000 submitted a report to the General
Assembly, calling for "an objective and comprehensive
assessment by an independent panel of experts not unduly influenced
by creditor interests, while the existing processes are under
way. … There should also be a commitment on the part of creditors
to implementing fully and swiftly any recommendation of this panel
regarding the writing-off of unpayable debt."
The relationship between state and citizen
Partly
as a result of legal protection and IMF financial protectionism,
the international financial system operates well for corporations,
shareholders and investors, who are not obliged to face the full
wrath of market forces. Shareholders and investors have fought
hard over centuries, to achieve protection from the unlimited
liabilities that may be incurred by the directors of companies.
There are of course, exceptions, but they are few. All over the
world shareholders now enjoy the legal protection of "limited
liability".
Not
so the citizens of indebted nations. As things stand, the people
of debtor nations bear unlimited responsibility for liabilities
incurred by their "boards of directors" -sovereign
debtor governments. No wonder we encounter resistance in Zambia,
demonstrations in Bangkok and strikes in Argentina.
A concept
of "limited liability" for citizens of indebted nations
has to be worked out and agreed internationally. States cannot
hold their people responsible for the unlimited liabilities caused
by foreign debts, negotiated in secret, and often corruptly.
If debtor nation states could be compared to corporations and
if their governments were to be seen as boards of directors,
then external creditors could be put on notice that the shareholders
-citizens or stakeholders- have limited liability for loans made
recklessly.
Conclusion:
humanitarian intervention to protect human rights?
The
Universal Declaration on Human Rights, Article 3 asserts that
"everyone has the right to life, liberty and security
of person". Article 22 makes plain that "everyone
as a member of society, has the right to social security and
is entitled to realisation, through national effort and international
co-operation and in accordance with the organisation and resources
of each state, of the economic, social and cultural rights indispensable
for his dignity and the free development of his personality".
A similar set of rights is set out in the UN Charter.
NATO went
to war in Kosovo in the
name of humanitarian intervention. The legality of the armed intervention
was challenged; but the fact that massive denials of human rights
can undermine a region as well as a country, is not in dispute.
A British Foreign Office justified NATO's air campaign on the
grounds that it would prevent an overwhelming humanitarian catastrophe.
At the time of the first air action by NATO in Kosovo, 65,000
people were estimated to have been made homeless. This gives us
some yardstick by which to judge future action or inaction for
"humanitarian intervention" to defend human rights.
The UN estimates
that 7 million children die
each year, because money that could be spent on health is
instead diverted to foreign creditors in the form of debt repayments.
The example of Zambia above, demonstrates the direct impact of
debt on the life-chances of millions of people infected with HIV.
The Food and Agriculture Organisation of the UN has detailed the
impact of the debt crisis of 1997 on the people of Indonesia.
The debt crisis added 10 to 20 million people to the ranks of
the undernourished in Indonesia alone, just one of the five nations
affected by the reckless lending decisions of foreign creditors
in 1997. These numbers overshadow the 65,000 whose human rights
are accepted to have been denied in Kosovo.
Humanitarian
intervention to defend the human rights of a billion people in
indebted nations would result in a transformation of the global
economy. Intervention would challenge the dominance of finance
capital - and creditors would invariably be disciplined.
There
are many ways of disciplining finance capital - most effectively
through capital controls; by extending limited liability to sovereign
states; by introducing an international insolvency law that would
allow states to "seek protection from their creditors";
and by the introduction of a Tobin Tax. The most urgently needed
discipline, however, is massive cancellation of the unpayable
debts of the poorest countries. Decisions about what is "unpayable"
should not be decided by creditors -but by independent boards
of arbitration overseen by, and held accountable to, the citizens
of debtor nations.
Just
as in Kosovo, so there is now a clear, ethical and economic case
for humanitarian intervention in indebted nations -to subordinate
the interests of finance capital, and restore human rights to
at least a billion innocent people.
*Published in Social
Watch
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