A-Infos (en) Chomsky on World Dept

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

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