THE DEBT CISIS, EXTERNAL AND ECOLOGICAL DEBT

Franklin Canelos

Many of the world's poorest nations today have foreign debts that are greater
than their entire national income in any given year. A significant portion of the
foreign currency they earn from exports goes just to make their debt payments.
In Latin America and the Caribbean, for instance, on average one-third of all
export earnings go to interest payments.

In the 1960s and early 1970s, developing nations were encouraged to borrow
money to service old debts and to finance national development projects,
especially infrastructure like roads and dams. At the time, northern banks had
huge deposits of “petro-dollars” (oil earnings deposited by OPEC member
countries) that they were eager to lend at low rates.

However, in 1979, the U.S. central bank raised interest rates dramatically in
order to fight inflation, with callous disregard for the effect of such a policy on
other countries. Central banks in the other northern countries quickly followed
suit.

By the early 1980s, developing nations found themselves with much larger debt
servicing bills than they had ever imagined. At the same time, the prices for raw
commodities—their main exports and a source of foreign currency earnings—
dropped on world markets, leaving less-developed countries strapped for
foreign currency.

Attempts were made by creditor nations to address the "Third World debt crisis"
through the 1980s and '90s. But these efforts were limited and often self-
interested, and the debts of low- and middle-income countries continued to rise.

Debt payments were rescheduled, but with interest added to the principal in a
seemingly endless cycle of indebtedness. None of the attempted "remedies” -
longer grace periods, lower interest, or longer amortization– succeeded in
effectively freeing poor nations from devastating debt loads and the consequent
human costs.

Despite the glaring poverty in indebted countries of the global South, the net
flow of capital has been northward. For example, between 1982 and 1996, Latin
America and the Caribbean paid out $739 billion in interest payments alone –
more than the entire accumulated principal owed. Yet their debt continued to
grow, while spending on health, education, and nutrition dropped by 60 percent
per capita.

IMF and WB impose economic policies carried out by the so-called Structural
Adjustment Programs which consist of a set of economic, social and financial
strategies in order to curb inflation and the balance of payments.

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Given the need to redress the balance of payments, the governments of
indebted countries theoretically have several options.

The structural adjustment targets are:

• Reduce domestic wages and social spending in general. Virtually all countries
have passed through this point in some way. And it is part of the usual
recommendations of the IMF. However, this is not sufficient to balance the
external balance of payments and has serious consequences for the most
vulnerable sectors of society. Taken to an extreme, it can break the so-called
"social pact", the implicit bargain that society has with itself and its governance
structures. This involves serious problems of coexistence and also has
devastating effects on the macroeconomy of the country.

• Improving terms of trade in foreign trade. While this approach is theoretically

possible, it has not occurred in recent years. Rather it has deteriorated, mainly
due to the decrease in raw material prices (key feature of the exports of the less
industrialized economies) and the increased dependence on imports of
products of high added value (economic polarization).

• By increasing technical efficiency. Unfortunately, this requires heavy

investment, a planning medium and long term education and research and
development and cannot expect short-term improvements. The lack of
economic resources in these countries and the need for immediate results
makes this solution very difficult when you pay a high short-term external debt.

Faced with the grave problem of the external debt in the economies of the
South, a call for acknowledging foreign debt as illegitimate is gaining
recognition.

Illegitimacy of external debt

Illegitimacy is expressed as a general consensus and based on rational

arguments that a reality is unjust. Unfair is understood as what might be
described as unethical, arbitrary, unfair, biased, hateful, undesirable, harmful,
unfair, inconsistent, and so on.

The legitimacy or illegitimacy of any question depends largely on the correlation

of forces that exist in a society. This correlation of forces is leading to a
behavior or a specific circumstance which happens to be considered legitimate
and illegitimate, and, ultimately, when the illegitimacy is enshrined by law it
ends up being illegal.

Financial debt can be considered illegitimate if it relates to loans that we

consider illegitimate, i.e. derived from loans that hide, finance or result in
mechanisms and phenomena that threaten the development of dignified life and
/or threaten peaceful coexistence among peoples.

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In most cases, these loans are those that (in its contraction or renegotiation, or
the financing of their effects) generated phenomena, mechanisms or behaviors
that violate individual or collective human rights - civil, political, economic, social
or cultural, or the right to development, to one’s identity or to life in a healthy
environment. But it also encompasses any phenomenon which directly or
indirectly hinders development conditions (individual and collective) of the
human person and/or their full capacity (including decision making) in the
construction of social life.

Without being exhaustive, within such phenomena, mechanisms and behaviors

are the oppression of peoples, genocide, imperialist wars, corruption, unequal
distribution of wealth, the generation of poverty, arbitrariness (action proceeding
against reason, dictated only by will or whim), the role of sovereignty, or
ecological disasters. A large portion of financial debt would definitely be
considered illegitimate.

External and ecological debt

In addition to the definition of illegitimacy that emanates from the origin and use
of financial debt, there is a second definition of illegitimacy derived from
considering not only the financial dimension of the economic system and but
also the ecological dimension.

The demands from international financial creditors for less industrialized nations
to pay their external debts forces these nations to accept ecologically
destructive practices in order to pay the debt, practices that are carried out by
transnational corporations often specialized in export from the creditor
countries. Therefore there is a connection between the burden of external debt
and the generation of new ecological debt, although the latter may exist
independently from foreign debt.

The same economic mechanisms that generate financial debt lead to a

generation of ecological debt which is systematically ignored. To the extent that
the lenders' liability incurred ecological debt, they lack claim to the debt
repayment.

The reason is simple: the quantifiable aspects of the ecological debt are much
higher than those of the external debt and creditors become debtors who are
forced to compensate the South for the environmental damage caused.

Moreover, the recognition of ecological debt includes responsibilities for issues

that go beyond the monetary exchange, such as human rights violations. The
recognition requires measures to be taken to prevent the emergence of new
ecological debt, leading to new international economic and environmental
relations.
The economy has three main inseparable pillars (monetary, ecological and
social) and all three are necessary

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Debtor countries have no response to the overexploitation of natural resources,
notably accepting unfair terms of trade and export selling prices which in many
cases do not incorporate local negative externalities. Poverty leads to
transactions at ridiculous prices and damage to environmental health.

Sustainable exploitation of nature will never be able to pay the debt. The system
of interest characteristic of the debt requires production rates higher than those
of the biological rhythms of generation from renewable resources, or the rate of
substitution of alternative technologies in the case of non-renewable materials
used to pay foreign debt. Payment of a large amount of the debt is not
compatible to a planning-oriented economy or a sustainable market economy
environment.

From an ecological perspective, it is inconceivable that wealth can grow

exponentially with time. Here is the root of the problem. As economist Herman
Daly suggests, debt is essentially a way of appropriating the future, using the
natural resources that should be maintained for future generations to pay for an
artificial construct as is the system of exponential debt growth.

External Debt in Latin America

Public debt is an issue on the agenda again, this time in Europe, which should
look closely at the experience of the debt crisis in Latin America and the lessons
learned.

Throughout its history, Latin America has gone through several debt crises,
closely related to the behavior of the economies of industrialized countries. The
latter, in the 1980's, began with the oil crisis, the impact on increasing food
prices and unfavorable exchange rates which led to a deficit in the balance of
payments.

This deficit was financed with debt through a massive influx of capital in the
form of bank loans from industrialized countries in a situation of over-liquidity.
Latin American governments, mostly dictatorial, took advantage of the spread
between local and international interest, but the restrictive monetary policies in
industrial countries caused a large increase in variable interest rates, resulting
in the increased burden of servicing external debt.

This situation, in which creditors were also part of irresponsible borrowing,

increased the external debt of Latin America from USD 27,000 to USD 231,000
million between 1970 and 1980, resulting in an over-indebtedness and an
unsustainable economic situation during the so-called "lost decade" in Latin
America.

To avoid non-payment of debts, as had happened in previous crises, the U.S.

proposed to apply the Brady Plan, a strategy adopted in the late 1980s to
restructure the debt owed by developing countries to commercial banks based
on the repurchase of debt according to market conditions. This operation would

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complement the efforts to restore a viable balance of payments within the
framework of structural adjustment programs of the IMF and official creditors.

However, this plan had design flaws which later resulted in the inability to pay
the debt. For example, countries had to acknowledge as part of the balance to
negotiate even the accumulated unpaid interest. The capitalization of this
interest generated debt under questionable conditions unilaterally imposed by
creditors. These bonds and the debt load were and in some cases still are part
of the problem of external indebtedness.

As a result, the crisis was not resolved and several countries of Latin America
could not pay their debt. In 1982, Argentina and Mexico, both in the midst of a
severe economic and political crisis, declared a default, followed Brazil, which in
1987 declared a moratorium on the payment of interest. This situation shows
the need for a transparent and independent mechanism for resolving debt that
avoids long periods of negative impacts which in the case of some countries are
still being felt.

The impacts are not only financial and economic, but also have increased the
social debt in the form of rising inequality, unemployment and immigration -
issues that require decades to be reversed.

After the debt crisis in Mexico in 1982, international creditors lost confidence in
Latin America and in its ability to pay, such that commercial banks stopped
lending to the countries of this region. However, the illiquidity and deficits forced
the countries to seek re-negotiations or further indebtedness to honor their
debts. These new loans came with strict terms and conditions to IMF programs.
Thus, between the decades of 1990 and 2000, almost all countries of the region
had an agreement with this institution.

In this framework, structural reforms were oriented mainly to the opening to

foreign participation and the private sector; reforms which were accepted and
well received by decision makers in the region at that time. Some analysts
believe that this process ignored previous development experience, especially
in the context of productive development.

While these reforms were successful in reducing inflation and the deficit, they
did not achieve an increase in investment, productivity and economic growth,
but rather there was a tendency toward pro-cyclical policies that resulted in a
financial crisis in the 1990s. The average economic growth remained at 2.9%
between 1990 and 2001. This level is lower than the one before the “lost”
decade, and resulted in emerging labor markets that generated an increase in
unemployment and underemployment rates.

During the “lost” decade, poverty increased from 40% to 50%, which then
improved in the early 1990s but did not regain the level held before the debt
crisis, registering a total of 200 million people in poverty affected by a crisis with
slow recovery.

The IMF measures, such as cuts in social spending, privatization of resources

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such as water and other sectors, austerity measures, wage limits, the creation
and control of stabilization funds, among others, led to demonstrations and
rejection by the majority of the population, showing that these policies were
imposed on democratically elected governments and did not consider the
welfare of the population.

In the mid-2000s, several Latin American governments distanced themselves

from the IMF and no longer considered it as an economic adviser. The
accumulation of reserves also allowed countries such as Argentina, Brazil,
Ecuador and Venezuela to make advance payments of its debt to the IMF,
which reduced the total debt of the region from USD 48,000 million in 2003 to
USD 1,000 million in 2008.

In the global financial crisis of 2007, the IMF returned again, albeit with some
amendments, to the same vision of austerity policies, fiscal discipline and
further liberalization of economies, although in some cases with a little more
flexibility to maintain social spending and counter-cyclical fiscal policies.

European countries affected by the debt crisis that followed the global financial
crisis now have become the largest borrowers from the IMF. However, the
eurozone countries that resort to external financing are receiving the same drug
that led to Latin American social and economic bankruptcy in the early 1990s. In
part this is due to the rescue packages which have the same regulations and
poor design from the outset, as was the case in Latin America.

More than three decades after the “lost” decade of Latin America, the impact of
the debt crisis has not yet been resolved. Hopefully, in the case of Europe it will
not take so long and the citizens and governments will generate processes of
debate to analyze the impacts and propose alternatives for the benefit of the
population.