Collision Course: Endless Growth on a Finite Planet (21 page)

Debt

While the first world was assigning the development task to trade and foreign investment, the role of debt in third world poverty was largely ignored. The development phase of the postwar years already involved substantial borrowing by third world countries. Most of this debt was essentially unrepayable from very early on, since new loans were soon being made to pay off the previous loans, and sometimes merely the interest on these, a classic Ponzi scheme.
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The financial crises of the 1970s drastically deepened that debt. Loans to third world countries increased dramatically through the 1970s, when the surge of petrodollars swelled the global pool of capital seeking profitable investment; when Volcker hiked the US interest rate, these loans soon became onerous or unrepayable.

According to Jubilee Research—a coalition of aid agencies, trade unions, and churches that has fought to cancel third world debt—as much as 20 percent of these loans were spent on arms, which could not be expected to generate any income to finance repayment.
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In addition, entire loans to many regimes, including to dictators such as Presidents Marcos (Philippines), Galtieri (Argentina), and Mobutu (Zaire, now Democratic Republic of Congo), have been characterized by critics and aid agencies as “odious” or illegitimate lending, in which the money was not spent on the needs of the population that would later be held responsible for paying it back but, instead, was frequently squirrelled away in Swiss bank accounts. The development economist Stephen Mandel has shown in detail that numerous third world countries would actually be owed money if their odious debt were canceled.
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Significant fractions of the still-mounting third world debt fall into the categories of illegal and illegitimate debt. Notwithstanding certain precedents, most creditors resist cancellation, however extreme the circumstances.
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Several notorious cases of odious debt involved countries the West wanted to keep on its side during the Cold War, such as loans made to the Philippines when Marcos was in power. In another case, billions were loaned to Zaire by the IMF, even after its own appointee advised the head office that corruption was so serious that there was “no (repeat no) prospect for Zaire’s creditors to get their money back.”
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Even legitimate loans made for infrastructure such as dams and ports benefit a restricted class of people, though serviced by the entire population. And it is the very poor who suffer most when conditions for debt rescheduling include such measures as the abolition of health, education, and farming assistance. Since major infrastructure projects were almost always carried out by global corporations, often US-based, the cash flowed back to the United States or other parts of the developed world and often never left. In 1993, for example, the World Bank’s net disbursements to the third world came to just over $7 billion, while the borrowing countries’ payments to corporations was $6.8 billion.
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When US central bankers began the interest rate hike that aimed to solve the persistent inflationary trend of the 1970s, third world recipients of massive loans suddenly found their interest rates tripled and quadrupled; many could no longer repay even the interest. By the time defaults began, with Mexico in 1982, global financial institutions had adopted the neoliberal paradigm, and SAPs were imposed as the price of rescheduling the debt. State-owned enterprises had to be sold into private, often foreign, hands; agriculture had to be reoriented toward export earnings; taxation had to be reduced; and meager local welfare provisions had to be dropped. These measures masqueraded as rational economic policy for developing nations, but the privileging of export earnings can be better seen as an attempt to protect the interests of the first world bankers whose loans were in jeopardy.

The subsequent bailouts of defaulting countries had similar results. The IMF payments made to countries such as Thailand and South Korea after the East Asian economic crisis of 1997 had to be paid straight out again to their creditors in the first world financial system, while the nations still owed the money to the IMF.
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Twelve years later, in the wake of the 2008–2009 financial crisis, the G20 provided the IMF with hundreds of billions of dollars, ostensibly to bail out the world’s poor. Again, the funds were dispensed as loans to be used for repayment of outstanding debt—described by Ross Buckley, professor of international finance law at the University of New South Wales, as “a stimulus package for the rich countries’ banks.”
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Between 1970 and 2002, the total debts of the poorest countries went from $25 billion to $523 billion, with African debt alone rising from $11 billion to $295 billion. Over this period, African countries fully repaid $550 billion on loans totaling slightly less; because of interest requirements, however, almost $300 billion remains outstanding (figure 7.1).
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Latin America also ran on a debt treadmill. It owed $209 billion in 1982; over the next twenty years, despite interest payments of $574 billion (more than it received in extra funding), its long-term debt had mounted to $674 billion.
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Figure 7.1

Africa’s Debts, 1970–2002: Loans, Repayments, and Outstanding Debt.
Source:
UN Conference on Trade and Development (2004) based on World Bank data.

The net effect of these immense rolling debts, loaded up with compounding interest, endlessly rescheduled, many unrepayable, has been a huge ongoing outflow of funds from the third world to the first, a flow that dwarfs the entire first world’s contribution of aid, private investment, and new loans put together. On the basis of OECD figures, the political scientist Susan George has calculated that a net amount of $418 billion flowed back to the first world in
debt service payments alone
during the period from 1982 to 1990 alone, an amount equivalent to six Marshall Plans for the rich at the expense of the global south. As the African case above demonstrates, this avalanche of repayments has done little to defray the debt. As George points out, the total flow of funds to the rich world is in fact far greater if “royalties, dividends, repatriated profits, underpaid raw materials and the like” are added.
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Far from enhancing development, debt has trapped most of the developing nations in a vain and marathon attempt to generate sufficient economic growth to repay an ever-bloating debt. This situation encourages enterprise directed not toward the needs of local populations but toward the needs of first world creditors; production is directed to export earnings, generated by extractive industries such as cash crops and mining for rich world consumption.

Sixty Years On: Who Benefits?

To best assess the effects of sixty years of development and the claims of lifting millions out of poverty, this section looks at the evidence of whether Truman’s stragglers have indeed been catching up. Has the gap between the wealth of first and third world countries begun to be bridged, and how has any new prosperity been shared between and within countries?

Methodological Difficulties

There are wide disagreements about both the scale of global poverty and inequality and the direction of change.
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Estimating levels of inequality between countries is beset with methodological difficulties, and quantifying trends in such inequalities with even more. Quantifying poverty is equally challenging. Both exercises involve making choices between methods of measurement and data collection, and matching the chosen data across time. The World Bank has revised its figures on poverty downward in recent years, claiming sharply improved conditions, but whether this claim reflects any real improvement is unclear.

The World Bank does not start out with a clear definition of what extreme poverty means. Its money-based metrics are not based on any agreed-upon minimum requirement that would avoid extreme poverty, such as the cost of adequate nutrition. Instead, it uses an arbitrary international poverty line loosely based on available national poverty lines. Critics of the bank’s methodology, such as the economists Sanjay Reddy and Thomas Pogge from Columbia University,
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warn that the bank’s figures most likely understate the extent of global poverty, and that its recent claims of a steep decline in poverty lack adequate justification. They call for a new definition of poverty based on the actual requirements of real human beings.

Even within the money metric, one must choose between market exchange rates and purchasing power parity (PPP). Purchasing power parity attempts to measure what a set amount will actually buy in different places and is considered to yield a more accurate comparison than market exchange rates would do. World Bank calculations of PPP are, however, cobbled together from disparate national figures and arbitrary base years and distorted by what is included in the basket of goods. Services such as haircuts, which are cheap in poor countries, are included, even though the extremely poor do not buy such services and struggle to afford the food they need. Purchasing power parity also downplays the weight of items governed by market price and exchange rate, which increasingly includes all the staple foods. Reddy and Pogge propose that, even within the bank’s money metric, a food-based or bread- and-cereal-based PPP would be more appropriate than the basket approach—and would inevitably raise the poverty line and, thus, the numbers of the poor.
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Another problem arises from averaging data over the entire third world. This ignores the fact that the “Chinese miracle” is not generalized across the rest of the world.
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When China is treated as a separate case and excluded from the calculations, polarization between the first world and the third world has clearly increased, whatever combination of methodologies is used. Thus, much of the self-congratulation noted earlier is based on the changes seen in China over the past thirty years.

The way poverty is defined affects assessments of how many people have actually been “lifted out of poverty.” The World Bank’s dollar-a-day metric, supposed to equate to “absolute poverty,” has been adopted by the UN in its Millennium Development Goal of reducing extreme poverty by half. Robert Wade has pointed out that a dollar a day was about one quarter of the 1999
world median income
expressed in PPP ($1,690 per annum), an entirely arbitrary benchmark, and a truly pitiful amount in the first place.
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David Woodward and Andrew Simms of the UK’s new economics foundation calculated that someone living on the adult minimum wage in the UK and without access to free services would have to be supporting thirty-six children to experience life as those living on $1 a day in the third world do.
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The bank has since adjusted the international poverty line figure to $1.25 in 2005 dollars, still “far too low to cover the cost of purchasing basic necessities,” according to Reddy.
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Given that half the world’s people, about three billion in 1999, were living on less than $1,690 a year at that time, it is obvious that a minor adjustment of the chosen poverty line will lead to the numbers of the poor fluctuating by hundreds of millions.

Polarization of Rich and Poor Individuals within Countries

At the wealthy end of the spectrum, the economic growth of the past three decades has yielded results beyond the dreams of avarice for a restricted class of super-rich. According to Wade:

In most countries for which we have data, after-tax income distribution has become much more unequal since about 1980.… The top 1% of income earners has received a rapidly growing and hugely disproportional share of national income. All over the world—from New York and London to Beijing, Mumbai, and Lagos—a small section of the population is gathering vast personal fortunes.
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The situation of the top one-tenth of 1 percent in the United States illustrates the point: while workers’ pay has atrophied or declined, the top 0.1 percent (a mere 145,000 individuals) garnered an average annual income of $3 million in 2002; they had multiplied their income by two and a half times in the twenty-two years from 1980 and doubled their share of the national income to 7.4 percent of the total. In the period from 1990 to 2002, for every extra single dollar earned by people in the bottom 90 percent of US taxpayers, these ultra-rich individuals brought in an extra $18,000. They were also the only taxpayers whose share of the taxation burden declined in 2002.
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The notion of per capita GDP (on which most income studies rely) suffers from the distortions that small numbers of outliers can create—as in the example of George Soros joining a group of wage-earners in a bar and producing an average millionaire. The United Nations Development Programme’s (UNDP) Human Development Report for 2005 describes a “divided world”:

The size of the divide poses a fundamental challenge to the global human community.… The world’s richest 500 individuals have a combined income greater than that of the poorest 416 million. Beyond these extremes, the 2.5 billion people living on less than $2 a day—40 percent of the world’s population—account for 5 percent of global income.
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