Politics, Debt and Development: Global Economic Structures

by / 0 Comments / 381 View / July 10, 2014

We should stop focusing on poor people in Africa and worry about ourselves. We give way too much aid to poor countries, and it doesn’t even do any good. Poor people need to learn to take care of themselves – aid makes them dependent.

These are but some of the claims made by people who don’t know what the hell they’re talking about. These are also some of the claims made by well-intending people who don’t grasp the true nature of global economic structures.

Capitalist economies are based on debt. Now, this isn’t some nefarious conspiracy of elites to enslave the world. Rather, it is a necessary instrument of growth. At the most simplistic level, a bank lends money to an individual who has a feasible idea that will generate wealth. Of course, the bank charges interest to make money and offset the interest it pays to its depositors. If that individual’s idea comes to fruition, new wealth is created:  new technologies, buildings, agriculture, oil or any other variation of wealth. This creation of new wealth allows the individual to pay off the loan and the interest. But what happens when the money lent by a bank is not usefully employed in a wealth-generating enterprise, or the interest attached to the loan is so high that even the new wealth cannot offset it? Wealth is destroyed or, in the latter case, extracted.

This is what happened throughout the twentieth century and continues to happen to this very day. Financial institutions in the developed world, such as the International Monetary Fund and the World Bank, gave loans to underdeveloped countries at insane interest rates. Often these agreements were made with dictators or corrupt governments.

For example, Indonesia is still struggling under a multi-billion dollar debt incurred in the ‘70s by loans given to Suharto, a ruthless dictator who murdered hundreds of thousands of his own people and later invaded and annihilated a third of the population of East Timor.

South Africa still bares the responsibility for debt incurred by the Apartheid regime.

The poorest 60 countries in the world give $13 in debt repayment for every $1 they receive. In 2005, they owed $523 billion in debt, despite already having paid $550 billion on $540 billion in loans and interest. The IMF’s Heavily Indebted Poor Countries (HIPC) Initiative will only provide $75 billion in debt-service relief “over time”. Debt service is making interest payments, not repaying the principal.

And how do governments in poor countries attempt to service this debt? They cut social services like education and healthcare. They divert money from critical infrastructure and to infrastructure that facilitates resource extraction. They sell rights to minerals, water, and land.

Thus, even while paying massive debts to rich countries through their taxes, people in poor countries live in utter poverty. Giving aid to poor countries doesn’t make them dependent:  taking their means of aiding themselves – tax revenue – makes them dependent. In many cases, just the repayment of interest on loans constitutes a large percentage of a country’s annual Gross Domestic Product. No country in the world gives more than 0.7% of its wealth in aid to developing countries. Some philanthropy.

This global phenomenon is exemplified in the current controversy surrounding Puerto Rico’s attempt to restructure its debt. Here you have a nation that was acquired by the United States as a direct result of imperialist expansion at the end of the nineteenth century, more formally called the Spanish-American War. Its economy and government has been largely dictated by the United States even though in Balzac v. Porto Rico, the U.S Supreme Court decided that some provisions of the U.S. Constitution did not apply Puerto Ricans.

Still, Puerto Rico is heavily-indebted, and the standard of living for its people is far below the national average of the United States. Its public corporations – those responsible for providing amenities like electricity, water, and infrastructure – hold about $20 billion in outstanding bonds. Puerto Rico’s attempt to restructure this debt – The Recovery Act – has been challenged by Franklin Templeton and OppenheimerFunds, which is a subsidiary of MassMutual Financial Group, because it appears to be modeled after U.S. Bankruptcy code.

Puerto Rico isn’t allowed to declare bankruptcy because it doesn’t enjoy certain protections of the U.S. Constitution. Thus, even its public corporations are forced to repay this debt in full, over the course of centuries if necessary. Meanwhile, private corporations in the United States can not only declare bankruptcy, but they can also get “bailed out” by the government and borrow at near-zero percent interest.

The situation in Puerto Rico is emblematic of a much broader system that disadvantages the poorest and most vulnerable people. When the United States and Europe industrialized, they used tariffs and other barriers to protect their domestic industries. They were driven by competition and mercantilist principles.

Today, the world’s poorest countries do not have the opportunity to develop meaningful domestic industries based on human capital because of the economic structures of globalization. And while it is clear that mercantilism is a flawed economic concept, it is striking to note its place in the history of most highly developed countries.

Globalization isn’t going anywhere. In order to realize true growth and development in poor countries, we must invest in the social foundations of those countries:  education, healthcare, and infrastructural development. The current global economic system does just the opposite and as long as it continues to do so, we shall continue to see widespread poverty and suffering.


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