<nettime> Noam Chomsky on debt cancellation

["nettime's roving correspondent" <nettime@Desk.nl>]

Noam Chomsky
Forgive and forget - Washington did once
Reclaiming the remaining debts must be justified

The Guardian  Tuesday May 12, 1998

The call for debt cancellation is welcome, but debt does not just go
away. Someone pays, and history generally confirms what a rational look
at the structure of power would suggest: risks tend to be socialised,
just as costs commonly are, in the system mislabelled 'free enterprise
capitalism'.

The old-fashioned idea is that responsibility falls upon those who borrow
and lend. Money was not borrowed by campesinos, assembly plant workers, or
slum-dwellers. The mass of the population gained little from borrowing,
indeed often suffered grievously from its effects. But they are the ones
who bear the burdens of repayment, along with taxpayers in the West - not
the banks who made bad loans or the economic and military elites who
enriched themselves while transferring wealth abroad and taking over the
resources of their own countries. 

The Latin American debt that reached crisis levels from 1982 would have
been sharply reduced by return of flight capital - in some cases,
overcome, though all figures are dubious for these secret and often
illegal operations. The World Bank estimated that Venezuela's flight
capital exceeded its foreign debt by 40 per cent in 1987. In 1980-82,
capital flight reached 70 per cent of borrowing for eight leading debtors,
according to Business Week estimates. That is a regular pre-collapse
phenomenon, which we saw again in Mexico in 1994.

The current IMF 'rescue package' for Indonesia approximates the estimated
wealth of the Suharto family. One Indonesian economist estimates that 95
per cent of the country's foreign debt of some $80 billion is owed by 50
individuals, not the 200 million who end up suffering the costs.  Debt can
be and has in the past been cancelled. When Britain, France and Italy
defaulted on US debts in the 1930s, Washington "forgave (or forgot)" as
the Wall Street Journal reported.

There are other relevant precedents. When the US took over Cuba 100 years
ago it cancelled Cuba's debt to Spain on the grounds that the burden was
"imposed upon the people of Cuba without their consent and by force of
arms". Such debts were later called "odious debt" by legal scholarship,
"not an obligation for the nation" but the "debt of the power that has
incurred it", while the creditors who "have committed a hostile act with
regard to the people" can expect no payment from the victims. 

When Britain challenged Costa Rica's attempts to cancel the debt of the
former dictator to the Royal Bank of Canada, the arbitrator - US Supreme
Court Chief Justice William Howard Taft - concluded that the bank lent the
money for no "legitimate use", so its claim for payment "must fail". The
logic extends readily to much of today's debt: 'odious debt' with no legal
or moral standing, imposed upon people without their consent, often
serving to repress them and enrich their masters. 

In the 1970s, the World Bank actively promoted borrowing. "There is no
general problem of developing countries being able to service debt,"  the
Bank announced authoritatively in 1978. Several weeks before Mexico
defaulted in 1982, setting off the crisis, a joint publication of the IMF
and World Bank declared that "there is still considerable scope for
sustained additional borrowing to increase productive capacity" - for
example, for the useless Sicartsa steel plant in Mexico, funded by British
taxpayers in one of the exercises of Thatcherite mercantilism. 

The record continues to the present. Mexico was hailed as a free market
triumph and a model for others until its economy collapsed in December
1994, with tragic consequences for most Mexicans.  Shortly before the
Asian financial crisis erupted in 1997, the World Bank and IMF praised the
"sound macroeconomic policies" and "enviable fiscal record" of Thailand
and South Korea. A 1997 World Bank research report singled out the
"particularly intense" progress of "the most dynamic emerging [capital]
markets", namely "Korea, Malaysia, and Thailand, with Indonesia and the
Philippines not far behind". These models of free market success under
World Bank guidance "stand out for the depth and liquidity" they have
achieved, and other virtues. The report appeared just as the fairy tales
collapsed. 

Failure of prediction is no sin; the economy is poorly understood. But it
is hard to overlook the argument that economist Paul Krugman put:  "Bad
ideas flourish because they are in the interest of powerful groups."  Over
the centuries, "free market theory" has been double-edged: market
discipline is just fine for the poor and defenceless, but the rich and
powerful take shelter under the wings of the nanny state. 

Another factor in the debt crisis was the liberalisation of financial
flows from the early 1970s. The postwar Bretton Woods system was designed
by the US and UK to liberalise trade while capital movements were to be
regulated and controlled. The latter decision was based on the belief that
liberalisation of finance may interfere with free trade, and on the clear
understanding that it would undermine government decision-making. 

The system remained in place through the 'golden age' of economic growth. 
It was dismantled by the Nixon Administration, with the support of
Britain, and later others. This was a major factor in the enormous
explosion of capital flows in the years that followed. In 1970, 90 per
cent of transactions were related to the real economy (trade and long-term
investment), the rest were speculative. By 1995 it was estimated that 95
per cent of transactions were speculative, most of them very short term
(80 per cent with a return time of a week or less). The outcome generally
confirms the expectations of Bretton Woods. 

Markets have become more volatile, with more frequent crises. The IMF has
virtually reversed its function: from helping to constrain financial
mobility, to enhancing it while serving as "the credit community's
enforcer" (IMF economist Karin Lissakers). It was predicted at once that
financial liberalisation would lead to a low- growth, low-wage economy in
the rich societies. That happened too. For the past 25 years, growthand
productivity rates have declined significantly. In the US, wages and
income have stagnated or declined for the majority while the top few per
cent have gained enormously. By now the US has the worst record among the
industrial countries by standard social indicators.  England follows
closely, and similar though less extreme effects can be found throughout
the OECD. 

The effects have been far more grim in the Third World. Comparison of
the east Asia growth areas with Latin America is illuminating. Latin
America has the world's worst record for inequality, east Asia ranks
among the best. The same holds for education, health, and social
welfare generally. Imports to Latin America have been heavily skewed
towards consumption for the rich; in east Asia, towards productive
investment.

Debt is a social and ideological construct, not a simple economic fact. 
Furthermore, as understood long ago, liberalisation of capital flow serves
as a powerful weapon against social justice and democracy.  Recent policy
decisions are choices by the powerful, based on perceived self-interest,
not mysterious 'economic laws'. Technical devices to alleviate their worst
effects were proposed years ago, but have been dismissed by powerful
interests that benefit. And the institutions that design the national and
global systems are no more exempt from the need to demonstrate their
legitimacy than predecessors that have thankfully been dismantled. 

Source details:

Part of  the Guardian's campaign to have the G8 approve debt
forgiveness for the "poor" nations.

http://www.guardian.co.uk/ see Tuesday May 12
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