“Debt is a new form of slavery as vicious as the slave trade”

—Statement of the All-Africa Conference of Churches, 1999

In 1996 I participated in a delegation sponsored by Church World Service to the poor Central American country of Honduras. We were there in part to help with some of the rebuilding efforts following Hurricane Mitch, but also in part to see some of the ongoing programs and projects that CWS was sponsoring in that country. At one point we traveled high up into the mountains, in the state of Intibucá, to visit a small community called Dominguez. One of our purposes there was to establish a library in the local school. CWS was in partnership with another fine Non-Governmental Organization called “AlphaLit” that runs literacy programs all over the world. The arrangement was that CWS would donate the books and AlphaLit would teach the literacy classes. It was all a fine presentation and there were smiles all around, but when the festivities had ended one person in our group asked about the underlying issue of why we were even there. Why, she said, are we way up here setting up a library and literacy program in a school? Isn’t this something that, well, that schools do? Why isn’t there a library here already? Why aren’t there teachers teaching literacy here? Isn’t this redundant? The answer from our host was revealing. Oh, he said, the government can’t afford teachers. These schools were built years ago, during the big US anti-communist building programs in Latin America, but we can only staff them with teachers for two or three months out of the year, sometimes less. Someone else then asked, why doesn’t the government have money for schools? His answer was equally revealing: Honduras has such an overwhelming and outstanding external debt that the annual payments on just the interest alone literally drained the country of the financial resources needed for what you and I would believe to be the most basic human services like education and health. Until finally receiving some debt relief from the Inter-American Development Bank in November of 2006, Honduras used more of its national income paying on its loans, many of which were twenty to thirty years old, than it did on health care and education combined.

Here’s another story. In the town where I live there is a wonderful family who moved here originally from Bolivia. A few years ago the father and his oldest son traveled back to their home to visit family and friends for a couple of months. When they returned, they regaled us with stories of how they rented a car and drove for days into the interior to visit cousins they hadn’t seen in years. They told hair raising tales of roads that had been overgrown by jungle or deteriorated and crumbled down the edges of the mountains. They laughingly told how they had to get out and clear paths with machetes and shovels to get around boulders in order to continue. It made for great story telling, but in the end we asked the obvious question: why doesn’t the good government of Bolivia fix up its roads? Their answer was the same as our hosts in Honduras: Oh, the government doesn’t have money for that kind of thing. It is too overwhelmed with paying back the loans it has had out for the past twenty-five years to be able to rebuild roads. Roads and highways are not nearly as important as paying banks for loans taken out by their grandparents over a generation ago.

These stories are telling in that they illustrate in human terms the extent of the debt trap that afflicts so many countries in the global south. Countries like Honduras and Bolivia were far too poor to ever pay off their old debts on their own, yet they could never develop until they had paid off their debts. It is a catch-22 that keeps countries like them impoverished forever unless something dramatic occurs that changes the rules and frees them from the crippling burden that has weighed them down for so many years. The hard facts of that reality were what brought such things as the international Jubilee movement, Bono’s “Debt and Trade in Africa,” the American Friends’ Service Committee’s “Life over Debt” campaign and many others into existence.

There are a variety of reasons for why countries acquired those debts—some were their “fault” and some not—but the reality is that today they live not just under the burden of making payments, but also under the strict austerity programs of the World Bank, the International Monetary Fund (IMF) and other international financial institutions. One of the goals of this chapter is to illustrate the links between the debt crisis that gripped poor countries from the early eighties to the middle of this decade and our present hyper globalized, hyper economically integrated world. The debt crisis is not the only cause of increases in economic globalization, but it is one that is rarely looked at and its influence is much more important than most people realize.

In many ways that crisis, and the strict rules laid down for loan repayments that followed it, did more to integrate poor country markets, economies, and cultures into the fold of rich countries than any other single event in the past two hundred years. It’s easy to over look how dramatic this event was in the history of the planet. It seemed like a simple banking transaction. A bank gives out a loan to a country and the country pays it back. It sounds fairly straight forward. But imagine this scenario: Let’s say that the country of Bolivia wants to borrow a half a billion dollars from a consortium of banks in the US to help pave and repair all of those inland roads that my friends had such a harrowing experience on when they went home. It’s a worthy project. Potatoes have been grown in Bolivia’s highlands for over a thousand years and a good road up through there would not only help my friends, but also get crops like potatoes and wheat down to the cities to be sold in markets. Let’s say too that the money was spent wisely—not always the case, but grant it for the purposes of this illustration. The hired contractors and workers and spent the money on good people doing good work and at the end of the day they have a few more decent roads into the interior and everyone is happy. But now the government of Bolivia has to pay the money back. What does it pay with? Can they pay the Bank of America back with their local currency, the boliviano? Not likely. The Bank may be full of nice people, but they loaned out dollars and would like to be paid back in dollars.

So, where does Bolivia get dollars? They can buy them (but that’s a bit counter productive) or they can borrow them (and then have the same problem one more time), or—as more often happened—they can start selling some of those potatoes and some wheat and maybe corn, to the US and then take payment in dollars. And then they send those same dollars (more or less) back to the US, to the Banks, in repayments for the loans. The more they borrowed, the more they had to produce something to sell to get the dollars to pay it back. In fact, the larger the debt became, the more intense was the need—the demand really—that Bolivia (and dozens of other developing countries) completely reorient their entire economy, from production for internal consumption to production for external consumption in foreign countries. Long before the “Washington Consensus,” or “structural adjustment” programs were imposed on countries as ways of belt-tightening and loan repaying, a good many countries already were beginning to push their inward economies outward toward exports.

In Guatemala, for example, instead of growing corn (maize), which for centuries they grew themselves and consumed themselves, now they more and more often are forced to grow cotton, cardamom, hemp, flowers, sesame seeds, and winter vegetables for exports so that their government can get dollar currency to pay back to the US on their foreign loans. The result is that for the first time in its entire history, Guatemala is importing 20 percent of its corn for consumption from the US.[1] Another reason, of course, is the flood of state-subsidized US corn which is cheaper than it costs local farmers to produce it, made worse following Guatemala’s membership in the Central American Free Trade Agreement.

The IMF, which functions like an international gatekeeper for all other global financial institutions, puts pressure on poor and developing countries of the global south to make these cutbacks on expenditures to be able to make debt payments. In order to qualify for aid or limited debt cancelation, their governments are forced to divert scarce dollars to pay off the old debts rather than spend them on health, education, or infrastructure. Kenya, for example, spends around 22 percent of its annual budget on servicing its debt, which is about the same as what it spends on health, roads, water, Agriculture, transportation and finance combined. Unsurprisingly, the human cost of shifting resources from health care and education to debt payments has been tremendous. A number of countries had improved in these areas during the 1960s and 70s, but have seen them decline dramatically since the start of the debt crisis in the early 1980s.

It’s hard to over estimate how much difference this simple production change made in the lives, cultures, and economies, of so many countries. In one generation the countries gutted centuries of production habits and became a piece of the international production/consumption process, and the affect that it had on their personalities and understandings of themselves as a race or people, is profound.

Snapshots of the extent of the crisis

One good way to get a handle on the size of the debt payments made by poor countries around the world is to compare the amount of aid money going into them with the debt payment money coming out. For example, in June, 2007, over a span of one week, a number of organizations raised tens of millions of dollars to fight malaria in Africa. One was the Millennium Promise, which raised $2.7 million at a Manhattan fundraiser. Another was the drug company, Novartis, which promised that same week to practically give away—by selling below market price—tens of millions of doses of its anti-malaria drugs, the equivalent of $50 million. A third was the Global Business Coalition on H.I.V./AIDS, Tuberculosis, and Malaria, which held a dinner and raised $2 million. It was good work and a very impressive week for people of conscience. However, the fact is that Africa’s poorest countries spend that same amount of money to banks and other financial institutions as payments on their debts about every three days.[2]

Here’s another example. Some years ago the UK’s Comic Relief spent a year doing concerts as fund raisers and raised ₤26 million for aid to Africa. That is also a lot of money, but it was about equal to what Africa paid back to Europe in debt payments in just one day.[3] Honduras is one of the poorest countries in Latin America and receives about $30 million in foreign aid from the US each year. However, before its recent debt cancellation, it paid back to the US, to banks, and “multilateral” (meaning international) financial institutions, more than that amount every three weeks. And Honduras was not alone. On average, the developing world spends $1.30 on debt repayment for every $1 it receives in grants.

What these stories tell us in real terms is that you can give money to Church World Service, World Vision, Habitat for Humanity, or Heifer Project, or any other reputable organization, and the US can double or triple its aid to that country, and still, there is no way that it can dig its way out from underneath the crushing debts that are draining its future away. One of the indigenous Mayan communities of Guatemala have an expression that when you are walking backward, no matter how fast you go, you can never go forward.

An example from Zambia is telling. By the early 1980s it had acquired around $3.26 billion in total external debt. It paid faithfully on its debt and pulled back on its borrowing considerably, but by 2005 (on the eve of an international debt cancelation conference) it had paid back more than $4.5 billion and yet still owed $7.2 billion. Or Nigeria: in the mid 1980s Nigeria’s total external debt amounted to $19 billion. Over the next twenty years it paid back about $35 billion, it borrowed only about $15 billion, and yet by 2005 it still owed a whopping $36 billion! In general, over the past three decades, the poorest countries of the world (approximately 60 altogether), have owed about $540 billion, have paid about $550 billion (in both principal and interest), and yet still owe $523 billion.

How could this be true? The biggest reason was the sink hole of compounding interest that goes up, adds itself to the principle, and then creates an even larger debt bill to pay at the end of the day. But also it was exacerbated by variety of related tricks. For example, in Nigeria’s case, the debt continued to go up in part because of a political decision by the “Paris Club” (the organization of wealthy nations who do one-on-one loans to poor countries) to not join commercial banks in writing off a portion of Nigeria’s debts back in 1992.[4] So, while its debt was going down in some quarters, it was allowed to fester and grow in others.

The total external debt of Latin America tells a similar story. It was $60 billion in the mid-70s. By 1980 it had grown to $204 billion, and by 1990, it was $433 billion. By the end of 1999, as interest continued to pile up, it reached $706 billion. All tolled, Latin American countries are paying first world countries (mainly the US) $123 billion a year in debt service.[5] By 2008, even with a variety of very hopeful, positive cancelations, total Latin American debt had still grown to nearly $800 billion. Not a bad return on money, considering that the poor and developing countries of the world actually have paid off the principle of the debts years ago, so now all of the punishing, crippling payments are just icing on the cake.

All of these examples are just numbers on a page until you see them connected to real people and real communities. It is estimated that around 7 million children die each year as a result of the debt crisis (in addition to wars, famine, underdevelopment, legacies of colonialism, etc.). Because indebted countries are so frequently required to cut subsidies for food, transportation, education, health, etc. (so that the governments can save money for repayment on their debts), poor children in those countries are harmed at alarming and unnecessary levels. Had the debt for the world’s poorest countries been cancelled back in 1997, when the international Jubilee movement first began, the money released for basic healthcare could have saved the lives of about 21 million children by the year 2000, the equivalent of 19,000 children a day.[6]

How Much Would it Cost?

It is often said by bankers and government officials that the debts would be simply too expensive for wealthy countries to cancel. And we can assume that now that the entire globe has been wracked with a debt related financial crisis, any call for cancelation of the debts our poorer brothers and sisters will look even more impossible. So, what would be the cost of cancelling this much debt? First, in the 60 countries designated by Jubilee USA as needing total debt cancellation, a total population of 1,037 million people shoulder a debt burden of $320 billion. The total amount that the heavily indebted poor nations owe to the U.S. is about $6.8 billion. Now for a few comparisons:

· The total amount of the 1980s savings and loan bailout was a $165 billion.[7]

· The total amount authorized by Congress in October, 2008, for the first financial rescue package was $750 billion.

· A recent book by economist Joseph Stiglitz and Linda Bilmes, estimated the cost of the war in Iraq on the overall economy of the US to have reached around $3 trillion by 2007. That translates into about $12 billion a day and about six times the amount needed to cancel all debts of all poor countries in the world.

Or, put another way:

· For a week’s worth of the expense of the war in Iraq, we could create an interest-producing endowment which, under “normal” times of investment returns, could fund development in poor countries for the rest of eternity (well, more or less).

· In terms of individual human wealth, the amount needed to cancel all developing country debt is less than the net worth of the world’s 21 richest individuals.

· Spread over 20 years, canceling the debts is one penny a day for each person in the developed world.

· And finally, in light of the recent Wall Street scandal, it’s especially interesting to note that Goldman Sachs paid Chairman and Chief Executive Officer Lloyd Blankfein $54 million last year. Co-Presidents Gary Cohn and Jon Winkelried each received $53 million, including cash bonuses of $26.7 million.[8] All together their annual pay and benefit packages equal roughly what all sub-Saharan African countries pay on their debts every three hours in interest and capital repayments.

A Personal Loan Analogy

In order to understand the extent of the problem, let’s bring the story closer to home by looking at the macro credit crisis in personal terms. What would all of this look like if it happened to one person’s individual budget?

Let’s say a generation or two ago your grandfather took out some shaky loans from some unscrupulous bankers and then died old and happy in the Bahamas drinking too many margaritas (alongside some of the bankers with whom he had become close friends). Placing the story of your financial problems back two generations ago makes sense, because the first loans of today’s debt crisis were taken out in the 1970s, when most of the people who are today paying them back were only children (if born at all). In your grandfather’s will you discovered that instead of a personal fortune, he had enormous debts and you were left with the binding legal responsibility of paying them all back.

How do you do it? Let’s say your annual income is $50,000 (roughly average for a US citizen), and your normal present monthly expenditures are about $4,200, which actually comes out a little over $50,000 per year (unfortunately it’s not uncommon for Americans to go in the hole slightly every year, so you are at least normal). However, the new debt payments you just inherited are about $2,000 per month (which is about the size of half of your monthly income) and the new payments go on top of your other normal living expenses. That means that your outgoing payments have now gone up by one third and you will have to cut your normal monthly expenses nearly in half just to break even (which you weren’t totally doing before).

So, here’s how you do it. The first and most important thing that you should know is that you are not allowed to file for bankruptcy. There is no bankruptcy in the international finance world, so in this analogy, you don’t get that option either. If you tried it, you would be banned from purchasing anything ever again from anyone outside of your own immediate family and household. Or if you tried to simply stop paying on the loans, you would be completely cut off from the rest of the outside community, and you would eventually starve. Imagine, for example, not being able to buy a car or a large appliance because you can’t get a loan (nobody can get by without taking out a loan sometime) and you’ll see how constricting that would be.

Now, to pay on the loans, first you would be told you must cut out all nonessentials (like computers, bed sheets, towels, TV, or more than one shirt), but of course that wouldn’t be enough. Next would be cuts in the real essentials, like your health plan. You have to get by without it. There are, as you know, millions of Americans who are forced to do this and it’s typically pretty scary. Next comes food. You don’t need to eat healthy foods, and you probably don’t need to have more than two meals per day. It will be difficult and painful, but you can make it. Much of the world gets by without three meals a day, so you have now joined them. Then education: forget saving for your children’s college tuition. In fact, forget sending them to school at all, because the private schools in your neighborhood are too expensive and the IMF has forced your town to charge for public education as well. It’s a part of its “aid” package to “help” your town raise money to pay on its own debts. So you no longer can afford any kind of education for your children, public or private. But that’s okay. They have to go to work to earn money for the debts anyway. Next comes upkeep on the home. Don’t think about repairing the doors and windows, because you can’t afford the carpenter, let alone the wood and nails. You can’t even afford the tools to repair things yourself. So let the garage collapse, the banks need their money more than the garage does. Forget about heat or electricity too. You can get along with out it most of the year and you need to save every penny to make the additional $2,000 per month in loan payments.

But even all of this is not enough. With all of these cuts, you are still only able to come up with an extra $1200 payment per month. To meet the level of payments demanded of you on your grandfather’s debts, you still need at least another $800 per month, which means you still need more money. The only places to go for new cash are the government and private banks, which by the way, are in cahoots with the local stores and constable who are enforcing these rules on you (and the constable defines his job as punishing you if you break the pay-back rules of your grandfather’s loans).

So, to pay your loans, these friendly “helpers” float you another loan, which once again you are not allowed to default on, with interest which rolls over into the principle, and which therefore gradually increases the size of the total debt. And they only agree to give you this loan if you agree to cut back further in your expenditures on health, education, and infrastructure, and you agree to work where they tell you to work and produce what they tell you to produce, and spend what they tell you to spend, all so that you will have the money to send to them in payments on your grandfather’s debt (plus interest, of course).

With the “help” of the local banks and government “aid” agencies, you are now starving, uneducated, in poor health, in a crumbling home, and you are borrowing money from one bank to pay off money owed to another bank, on loans that your grandfather took out to retire to the Bahamas. Welcome to the “Washington Consensus,” Neo-liberal, philosophy of a smoothly running global economic system.

This story is roughly what the developing world debt crisis is all about. It may be slightly exaggerated, but unfortunately not by much. If it sounds vaguely like the kind of abuses of debts and loans that Amos and Nehemiah were complaining about in the Hebrew Scriptures, you’re right. This is the same system that created debt slaves in the Bible in the twelfth through eighth centuries, translated into the contemporary world. Some things never change, do they?

History of the Debt Crisis: How We Got From There to Here

The above is a parable, but it is a fairly accurate representation of the present crisis. The following is a more historical review of the same story.

In the 1960s the US spent huge amounts of money on the Vietnam War, and paid for it by printing dollars instead of raising taxes. In fact with all of that new money flushing through the economy, the US actually experienced an economic boom at home while fighting a war abroad. However, as it goes with basic supply and demand economics, when you produce too much of one thing the value of each individual one of them goes down and the result was the value of each dollar declined. We in America did not feel it immediately, but other countries (who did not have the benefit of our money-printing machines), discovered the value of their dollars dropping precipitously. One of the fears critics raised about Treasury Secretary Henry Paulsen’s bailout plan of in 2008, or President Obama’s stimulus plan in 2009, was this same issue. If we put $1,400 billion dollars into the economy, not only would it help the crisis (maybe) but it would also drive down the value of dollars themselves. The price of everything would in effect go up because the value of our individual dollars would go down.

Many countries back in the sixties experimented with creating cartels to help prop up the prices of their exports. The oil producing countries were particularly hurt by the drop in the value of the dollar because their oil was purchased in dollars. As a response, in 1972, the finance ministers of the Organization of Petroleum Exporting Countries (OPEC) met together and announced increases in oil at breath-taking levels.

I don’t want to make this overly complicated, but they actually raised the price of oil in two ways. First they tied the price of oil to the price of gold. The significance of that is that in 1971 the US had uncoupled the value of the dollar from the price of gold, and allowed it to float up and down with the market, and that was one of the reasons why the dollar‘s value had declined, starting all of this. And since the price of gold happened to be skyrocketing in value when the US did that, prices for Middle Eastern oil did the same.

The second action was ostensibly a reaction to the Yom Kippur War. The Arabic countries of OPEC announced that they would punish all of the countries who supported Israel in that war with an oil embargo. They specifically targeted the US because we have always been Israel’s biggest ally and benefactor, but they also went after other wealthy gas-guzzling countries that sided with Israel in less dramatic ways. The US still had access to oil from other sources, but—because it was now more scarce—it exploded in price. And if oil in one part of the world was going up in price, it went up everywhere. So every oil-producing country made money, even if they had no hand in the embargo.

In the three months following the announcement of the Arab/OPEC finance ministers, the price of oil around the world quadrupled to nearly $12 per barrel (a high price in those days). Over the next year and a half, the price of Saudi light crude oil soared from $2 per barrel to over $13 per barrel. The price then leveled off for a few years to just under $15 per barrel until the next shock in 1979. This time, from 1979 to 1981, crude oil prices more than doubled again to up to $35 per barrel. The price at the pump rose from $.38 in 1973 to $ .55 in 1974, and from about $.55 in 1979 to nearly a dollar in 1982. Those prices sound meager by today’s standards, but relative to other prices at the time, it was a shock. The 1973 increase was 210 percent. The 1979-80 increase was 135 percent.

If you are of a “certain age” you will recall what the price shocks did to the American economy. Suddenly there were long lines at gas pumps all over the country. The Nixon Administration called for gas rationing, and if you had an even number on your license tag (including “vanity” plates) you could buy gas on even numbered days of the month and if you had an odd numbered license tag you could buy it on the odd numbered days. I was a divinity student at Vanderbilt University in those days, in Nashville, Tennessee, and I was a student minister in a church about three hours north in Marion, Kentucky. My pre-oil-shock agenda was that I would drive up to Marian on Saturdays, visit a few people, spend the night, preach the next morning, have Fried Chicken for lunch with a church family, and then drive home again. But with gas rationing, that got much more complicated. On those Saturdays that fell on even numbers, I would fill up my even-numbered-tagged car and make the drive, but the next day one of the church parishioners would fill up my car with a big gas tank he had filled up the day before and saved for me, so that I could make the drive home. On those Saturdays that fell on odd numbered days, I would borrow the car of a young woman I was dating who had an odd tag. What was nice about that was that her car got better gas mileage, so I could drive all the way up and back again on one tank of gas. That was the complicated way that we all survived through the oil crises of the seventies.

This arrangement made the OPEC countries more money than they had ever seen before in their collective histories. (Somewhere in the neighborhood of 400 hexa-quadra-trazillion dollars…and change). They made so much money that they were not able to spend it or store it inside their respective countries. There is a story (perhaps apocryphal, but still telling) that Saudi Arabia, during those days, made so much money that they literally could not store it in their central bank. The checks just took up too much space. So, they had to build a special banking warehouse, to stack the paper that came into their country.

It is beyond the scope of this book, but interesting to note in passing, that the explosion of wealth was not always a good thing for the oil producing countries either. A rapid increase in wealth can have a negative impact on a country. Today more than half of the OPEC countries are more poor than they were back during the oil boom of the seventies. The problem is sometimes called the “Norway Curse,” named after the time when Norway discovered oil in the North Sea, which was seen as a good thing at the time, but which eventually caused its economy to slide downward. What happened was that the increase in exports of oil drove up the value of its national currency, which then made its manufactured and agricultural exports go up in price relative to similar products in other countries and therefore made the country less competitive. (This is complicated, but when the value of a country’s money is low, it costs less for people in other countries to buy its products; when it is high, it costs more for them to buy the same products.) So, while oil exports went up, all other exports went down and eventually Norway’s overall economy slumped. Norway is an advanced country and eventually pulled itself back up, but many less developed countries, with unstable institutions and weaker leadership have been badly damaged by this syndrome. Nigeria, for example, was an early beneficiary of the oil production boom of the early seventies, but at the same time saw its agricultural exports drop from 11.2 percent of gdp (Gross Domestic Product) in 1968 to 2.8 percent in 1972. That is a serious collapse, and something from which the country has yet to recover.

New money often brings corruption. In Nigeria, tens of thousands entrepreneurs flocked to Lagos and printed up business cards with “Contractor” on them to get a piece of the oil-rich pie. It became the world’s largest importer of Champagne, with gold bathtubs being not far behind. It is estimated that in the 1970s one-eighth of the world’s merchant fleet was waiting off-shore to unload. In 1975 politicians ordered 20 million tons of cement, enough to build an entire city. They paid for it out of government funds at hugely inflated prices, and then received the difference between the inflated and actual price as kickbacks. When questions were raised, the buildings containing government records mysteriously burned to the ground.

Sometimes wars and internal disruptions can come from oil wealth that many see as easy money. A prominent example of this today is, of course, Iraq, where Sunni and Shiite militias battle each other for rights to the only lucrative export the country still has. But rebel movements in Nigeria, Algeria, Thailand, the Niger Delta, Colombia, and Sudan finance themselves in part by stealing oil from government or private pipe lines. Colombia has the interesting distinction of having both the right wing paramilitaries and the left wing FARC both tapping pipelines, or offering “protection” for a price, to finance their respective movements.[9]

The place where all of this touches on the debt crisis was that the OPEC countries solved their abundance-of-money “problem” by investing their newly acquired “Petro-dollars” in the banks of wealthy countries. That created another problem, however, because, while the banks now had more money than they had ever conceived possible, the US and Northern Europe were also going through a recession (caused in part by the inflationary spending of the sixties) and had few people wanting to borrow the money. When a country is in a recession, people don’t buy as many things. Developers don’t build shopping malls because people aren’t going to shop in them, and they don’t build housing developments because people aren’t going to buy them. The banks were in the dilemma of having an enormous amount of money to loan out but few people who wanted to borrow it.

Somewhere along this time, the idea came to the people in the banks that something radically new could be done with this incredible stock of money, just begging to be loaned out for interest and profit. So, for the first time in the history of banking, someone—we don’t know who first thought of it—came to the novel conclusion that banks did not have to loan just to individuals, but they could actually loan directly to sovereign governments as well. And the first step to the present debt crisis began.

There actually had been scattered instances of banks loaning to countries before that time, but nothing like what was about to take place. In the midst of this recession, which was depressing commerce in wealthy countries and which was driving dozens of poor countries to desperation, literally hundreds of banks in wealthy countries, flush with petrodollars, launched programs of shoveling out money at an amazing rate to poor countries desperately starved for cash.

I gave a talk to a church in Boston some years ago about the origins of the international, external debt crisis. I walked through all of the factors that brought the banks to the point of pushing loans on poor countries, and I think it was fairly well received. Following the talk a retired banker who had been active in arranging some of those very loans back in the seventies came up to me and said, “You didn’t get it right.” I wasn’t sure what he meant. “You didn’t say enough about the pushing and cajoling that we did to force those countries to take loans.” That got my attention. “We got raises,” he said, “not because the loans were any good, but just because of the sheer number and size of them. It was a crazy time. We were making loans we knew were no good, but we did it anyway. It was a crazy time.”

His experience has been mirrored by leaders of the countries receiving the loans. One minister of finance from a Latin American country told an interviewer once that whenever he would go to international conferences he would be accosted by US bankers offering loans. “They wouldn’t leave me alone,” he said. “If you’re trying to balance your budget it’s very tempting to borrow money instead of raising taxes to put off the agony.”[10] Eventually he caved in and accepted a huge loan that his country never really needed and which his people thirty years later are probably still paying on.

Countries that needed loans got money. Countries that might need loans later on got money. Countries that didn’t need loans at all got money. It didn’t really matter to the banks. Some countries took the loans because they were poor and the oil price shocks were crippling their economies, and they needed a loan just to get by. These were sometimes called “Consumption Loans,” taken out simply to pay the bills. During the 1960s, for example, the US had dramatically increased its aid to Latin America as a way of buying their favor in the wake of the rise of Fidel Castro. But during the 1970s our fear of Cuba began to subside and with it came a decline in interest in giving foreign aid, and poor countries, expecting our aid, reeling over oil prices, began to take out huge loans. Another enticement for taking a commercial bank loan was that when a government, like the US, gave a loan, it usually had a specific development-related purpose, such as a dam or rural electrification etc., and with numerous “Buy American” strings attached to it. But when a bank offered them money it was usually a block loan, often described as “for general purposes,” to be spent in any way the country pleased. A functioning democracy like Costa Rica could spend it on roads improvements and a dictator like Congo/Zaire’s Mobutu Sese Seko could spend it on weapons to be used on his own people, and the banks would seldom care.[11]

In Nigeria, in 1975, right in the middle of champagne, gold bath tubs, and the great cement over-purchase scandal, in the middle of a flurry of international investigations, government denials, and a million tons of wet cement hardening in vessels and sinking in their harbors, First Chicago Bank and Trust arranged a $1.4 billion loan for them, for mostly “undesignated” purposes. The money was ostensibly to pay back the government for the rampant embezzlement at the root of the scandal, but mainly it just continued it. Did anyone check this loan out to see if Nigeria would be a viable recipient of this kind of money? Or did they just not care?

Other countries took out loans simply because the deals were impossible to pass up, often at below market rates. For a while loans were actually being offered at negative real interest rates, meaning that at the end of the payment period the country would have paid back less than the amount borrowed. The theory of development pushed by the banks and their co-conspirators in the World Bank, IMF and various governments, was that an increase in indebtedness would eventually create an increase in exports, which would create an increase in income, which would create an increase in standards of living. Borrow the money, spend it (wisely, one hoped) on economic development projects, and within ten years you will not only pay back the loans, but you will have developed so much economically that you would be considered a first world county. It was called “the doctrine of debt as the path towards accelerated development.”[12] Or occasionally by its critics as the “Snake Oil” theory of development. One doesn’t have to think too hard to understand why. [13]

In the swirl and flood of big money, banks often competed with one another to make big loans, and often joined with other banks to get a piece of their action. In 1979 Bank of America was attempting to arrange a loan to a Latin American country. The loan was already large, over $1 billion, but it got larger when others heard about the project and joined in. Bank of America couldn’t finance the entire amount itself, so it planned to put up $350 million and then sell off the rest. But the size (not the quality) of the loan was so popular that in the end Bank of America only had to put up $100 million and other banks added an additional $2.4 billion to the loan. Two and a half times more than the country had requested or needed. It was like a Christmas tree with everyone adding its own ornament.[14]

These stories have three things in common. First, it didn’t matter whether a country asked for a loan, wanted a loan, needed a loan or asked for it for purely greed, graft and corruption reasons. In the end the loans would be granted anyway with no oversight or due diligence. There is a story of one bank loan officer who read a story about Costa Rica in Time magazine and called up the government to offer them a loan.[15] Second, we will say more about this below, but in 1982 a confluence of rising interest rates and collapsing income from exports caught up all countries, not just those with moral, ethical, functioning, democratic governments. The good, the bad, and the ugly went down when the credit crisis hit, sweeping everybody up (or actually down) in its wake. Third, no matter who was at fault, at the end of the story it is always the poor people within the poor countries who have to bear the worst brunt of the clean up. With frightfully few exceptions, the wealthy bankers in the US and Europe, and the wealthy presidents and finance ministers of the poor and developing countries have all retired, still wealthy, in pleasant homes with pleasant surroundings. But those who are paying for the debacle are the children and grand children in the borrowing countries who have now seen support for their education, health care, sanitation, and infrastructure crumble in order to save money to make loan payments. Whenever someone says today, as they do often say, “Well, I believe in personal responsibility; I believe if they take out a loan they ought to pay it back.” Tell them, well, yes, I agree, and let’s go to that banker who pushed the loans to get a promotion, and who has now retired to a ten million dollar home in the Port Royal neighborhood of Naples, Florida, or the dictator, who pocketed the loan and who has now retired on one of his seven yachts off the Grand Caymen Islands, and let’s see which one of them we can get to pay up. But don’t go to the kids at that abandoned school back in Dominguez, Honduras where we were planting a library, and tell them that in order to pay off the debt that the banker and the dictator arranged thirty years ago, their school will have to be closed. It’s not only a bad line of logic, it’s also immoral.

The Day the Music Died

In 1982 all of this came to a quick and painful end. It began with the US Federal Reserve raising interest rates dramatically in order to help slow down the “stagflation” that had gripped the economy during the late seventies. (“Stagflation” was the term coined in the 1970s for the condition of inflation and stagnation at the same time.) The action worked but it also threw the US economy into a deep recession. What that meant for poor indebted countries was that because of the recession, the US (and Europe) bought fewer of their goods and because of the rise in interest rates, the amount of their loan payments doubled. That caused a “perfect storm” of a disaster to hit the poor and developing countries of the global south. They spiraled downwards into an impossible debt trap. Their ability to pay on the loans went down just as the amount they needed to pay on them went up. Earnings from their exports dropped by 28 percent between 1981 and 1982 while the interest rates on their commercial bank loans rose from an average of 0.5 percent to an average of 13.1 percent, with some soaring as high as 27 percent![16] Unpayable by any definition—except perhaps that of the bankers who made the original loans. If there had been an international mechanism for bankruptcy (and as we learned above, there wasn’t) this would have been the time that it kicked in. The indebted countries spiraled steadily downward and backward. Some—most particularly, Mexico—received major bailouts. Some of the rest received heavily conditioned loans from the multilateral lending institutions, like the World Bank and the IMF, about which we will have more to say soon. And many are today more poor and less economically developed than they were before the crisis struck thirty years ago.

Attempts to Address the Crisis

So, this was the story of how the fifty to sixty poor and developing countries of the global south came to be tied to the crippling debts that have pulled them down, driven their people deeper into poverty, and damaged their prospects for a better future. But it only brings the story up to about the mid 1980s. From that time to the present there have been a number of attempts to “fix” their problems. A few of those plans have had some success, some have just perpetuated the status quo, and some have made the situation worse. We’ll take a look now at the most prominent of those plans and then at the end of the chapter we’ll share a few words on some of the ways you can get involved to work for a healthier, more ethically responsible international financial system.

As an aside, it is interesting to note that the debt explosion of 1982 was very reminiscent of the housing loan bubble that burst in 2008. In both instances aggressive agents pushed loans onto borrowers who could ill afford them at variable rates of interest. In both, some of the borrowers were poor and desperate and took the loans to get ahead, and some were unscrupulous and took the loans to make a killing. But the explosion at the end of the two bubbles took them all down together.

The responses to the two crises had similarities as well. In both, the first inclination of the rescuers was to help the lenders and not the borrowers. The first money spent on the housing loan crisis was directed, not at the families who were in default and now living with their in-laws in the garage, but at the financial institutions that made the unwise—occasionally immoral—loans. The first plan of Treasury Secretary Henry Paulson was to buy up many of the loan packages that were on the secondary market, to help protect the incomes of the banks. That was essentially the same direction taken by the IMF and the World Bank in the early 1980s when they bought up the bad loans from the commercial banks. However, Paulson eventually changed course when he realized that the house loans had been so split, parceled, and sold all over the planet, that buying them up would be impossible. Instead, he decided to buy stock in the financial institutions themselves. The loans to developing countries, on the other hand, were usually still held by their originators, so the plan of buying them up to rescue the banks went forward. The IMF and World Bank (using taxpayer money) bailed out dozens of (mainly US) banks by purchasing billions of dollars worth of their most shaky and discounted loans. But in both crises, the rescuers made it clear that their first priority was helping those who had made the terrible loans, not those who (occasionally under pressure) had taken them.

The bias of the 2008 bailout money was not lost on the people at the Jubilee USA network, the organization most concerned with ending developing country debts. At the height of the debate over how to spend Congress’ $700 billion package, they were at a meeting of the IMF/World Bank encouraging them to “act with the same urgency in tackling the food crisis and global poverty crisis as they have the banking crisis.” Neil Watkins, national Coordinator of Jubilee USA Network put the matter bluntly: telling Haiti (which had just experienced four hurricanes, a food crisis, and a tragic school collapse) that their debt cancellation was going to be put off one more time, was “like Hank Paulson telling Wall Street he will get back to them in the New Year.” “As we’ve seen this month,” he said, “when Wall Street bankers are affected, they get fast tracked for debt relief. But the people of Haiti don’t seem to matter very much in Washington.”[17]

The “Baker Plan”

The first “solutions” to the debt crisis were standard banking solutions, based on the misconception that the problem was a temporary liquidity problem. They tried rollovers, refinancing (borrowing new money to pay the debt on old money), rescheduling, and renegotiation. In 1985 the Reagan Administration’s Secretary of the Treasury, James Baker, launched a plan (subsequently called the “Baker Plan”) that was a package of all of these ideas, plus some new ones, such as opportunities to consolidate or diversify the loans, or even to buy them back at a lower rates. One interesting idea was “Debt for Equity Swaps,” whereby a country swaps part of it productive capacity in exchange for the cancellation of some of its debts. For example, Chile agreed to give away its national pension and social security program to a bank in Chicago in exchange for alleviation of some of its debt load. It worked, but it was a major national psychic crisis to lose an entity that was so central to their national identity. But even with these new programs, the Baker plan had little real effect on the debt crisis because it continued the false assumption that countries actually were wealthy enough to pay back the old loans, which they clearly were not. The real underlying issue was that the countries did not (and do not) have the productive capacity to pay their own bills, pay on their grandfather’s loans, and pay what it takes to grow their economies all at the same time. Treating them as though they could mean relegating them to perpetual, eternal poverty.

The “Brady Plan”

By 1989, an awareness was finally dawning that this was more than a balance of payments issue and couldn’t be addressed by rolling over, rescheduling, repackaging, or swapping. These procedures were simply shuffling the money around and not addressing the problem. That year, Treasury Secretary Nicholas Brady launched the “Brady Plan.” There are two parts of it that are good to remember. The first was a call for an across the board reduction in the debt owed by some of the largest of the developing countries (Mexico, Argentina, etc.) and for the IMF and the World Bank to guarantee the repayment of the other 80 percent. In exchange, the countries would have to implement some of the draconian economic policies we described in chapter one as the “Washington Consensus.” The countries agreed to these policies, which almost invariably impoverished millions of people, but they had little choice. The IMF has an incredible amount of power and influence within the financial world and turning them down meant being cut off from almost any other credit ever again. If you say no to the IMF you never again see a dime cross your borders in aid or loans or investment. Also, it didn’t hurt in the negotiations that the leaders of the poor countries were actually very wealthy themselves. If the stringent, belt tightening policies begun with the Brady Plan and followed up with IMF structural adjustment programs caused mass hunger and poverty in their countries, the leaders would by and large be immune from it. Many of them kept their own money outside of their host country anyway and would not be harmed when the inevitable crash came.

The second important part to the Brady plan was a repackaging of many of the old loans into bonds which would then be sold on the secondary market, much like equity stock. These were called “Brady Bonds,” and to protect the investor, they were partially underwritten by the U.S. Treasury. These proved a very popular investment and by the mid-1990s about $170 billion worth of Brady Bonds were selling in the market. By 2000, that number had risen to over $2.5 trillion. The rise of the secondary market is an entire subject unto itself, with pension funds, mutual funds, hedge funds and insurance companies all leaping into it with ever more complex financial instruments and derivatives, all finally collapsing in 2008 at the same time. But interestingly Brady Bonds played an important role in getting that movement started. Their partial US backing made them very safe for investors to experiment with, and they were created just at the time when the US was relaxing its requirements, accountability, transparency, and who could get into the market and buy and sell. They were so well received that by the mid-nineties some developing countries began issuing bonds on their own to raise capital because they knew they would be bought up at low interest. Until the recent global financial crisis, bonds accounted for about 60 percent of developing country debt, compared with only 13 percent in 1980.[18]

The Rise of the Multilaterals (IMF, World Bank, etc.)

However, in spite of the importance of all of these responses to the debt crisis—the rollovers and restructures, the Baker Plan, and the Brady plan, etc.—by far the most far reaching event was the entrance of the IMF, and by extension, the World Bank and other regional development banks (because the other banks typically followed the IMF’s lead).

The IMF, you may recall from chapter one, was originally established in 1944, along with the World Bank, with the responsibility for stabilizing the global economy. Whereas the World Bank was to give long term loans for development (originally Europe and Japan, but later poor countries in the global south), the IMF was to mainly give short term bridge loans to countries caught in a balance of payments gap. But that began to change with the oil price shocks of the seventies and especially with the debt related financial meltdowns of the eighties. With the arrivals of the administrations of Margaret Thatcher in the UK and Ronald Reagan in the US, the economic policies of the IMF began to swing dramatically to the right. In fact, James Baker even threatened to cut off funding to the IMF at one time if it didn’t change more rapidly to adopt economic policies more amenable to US political priorities.[19] So, instead of loaning to help a country get by temporarily until it could balance its accounts, the IMF began loaning money conditioned on extensive internal structural adjustment changes in the recipient countries. And in addition to making these new loans, it also (along with the other multilaterals) began buying up distressed loans owned by the commercial banks. So that, by the end of the 1980s, the multilateral lending agencies owned eighty percent of all of the developing country loans. They immediately began forcing the countries to adhere to the policies that we have described here variously as “Structural Adjustment,” “Washington Consensus,” “Friedmanism,” “Thatcherism,” Reaganomics,” and “Neo-liberal.” Among other things, the countries were to deregulate labor markets (making it harder to unionize), devalue currency (making it easier for foreigners to invest, but harder for poor people to buy food), cut public expenditures on the poor, cut public sector jobs, cut price supports for farmers, lower barriers to imports, end protections against foreign ownership and investment, sell off prized state industries, raise prices for basic commodities and basic services for the poor, and so on.

To be fair, some of the items on their lists are sound policies for a healthy economy. Getting inflation under control, for one example, or getting a country to not spend more than it takes in for another. But applying them every time in every country in every situation, without correct sequencing or social protections, created tremendous hardships. They didn’t take into consideration that there would be real people with families with hopes and aspirations for their futures who would be impoverished or homeless, or uprooted by some of these policies. Sometimes, if the underlying circumstances were sound and a safety net was in place, the policies helped. Sometimes they did very little. But in many countries, when conditions were not right, the safety nets were not in place, the financial institutions were not strong, the results were devastating and millions of people dropped into poverty, became immigrants, or died. During the time that poor and developing countries were under the control of the IMF (and the institutions that followed their lead), per capita income went down, poverty went up, and inequality widened.

Statistics are sometimes difficult to follow in these matters, but here are a few easy ones. A few years ago the United Nations Conference on Trade and Development (UNCTAD) studied the journeys of the 48 least developed countries under the guidance of the IMF’s “Structural Adjustment Facility,” which it officially launched in 1986. The UNCTAD study found that on average the Gross Domestic Product per person was going down slightly, by 1.4 percent, in the three years before they initiated IMF policies, it leveled off for the first three years that they were in practice, and then they declined again after that by about 1.1 percent. That part of the story alone could allow one to say that at least the countries didn’t get any worse under IMF control, except for one thing. The UNCTAD report also found that “under the time of IMF guidance, their indebtedness actually became worse. It grew to unsustainable levels.”[20] So, their incomes flattened out in real terms, while their loan payment demands went up.

Some regions of the world fared worse than others. Between 1980 and 2000 (the years when the IMF’s structural adjustment programs were most in effect), the incomes of the poorest 20 percent of countries in southern Africa fell by 2 percent a year. During the twenty years before the 1980s, their economies grew by 2.3 percent per year. Admittedly, national income is not always the best measure of the health of a country—distribution of wealth within the country is often a better indicator—but clearly even the most progressive, just government cannot distribute income well if the national income is declining every year. And that was what happened for most countries under IMF conditionality in the past twenty-five years. Interestingly, as we noted in chapter one on the broad picture of globalization, the countries that had the highest rate of economic growth during this period (China, India, Korea, etc.) were the ones that devised their own paths for growth and ignored IMF prescriptions.[21]

They are held up as a poster child of new free market growth, while they starkly reject many of the basic “Washington Consensus” principles of the free market. China, for example, created a two-track structure in which an international market system operates on top of its state-ordered system. That allowed it to liberalize its foreign trade, but still use government policies to direct and distribute the incoming wealth to a larger portion of its population. Until the recent global financial crisis, this idea, that a government should have a hand in distributing national income to lift up the incomes of the poor and tamp down the incomes of the wealthy, has been an absolutely anathema in Washington and in IMF rules.

This idea of redistribution within the country is one of the central pieces missed in the global advice and management of country economies. It is considered a good thing to throw open the doors of a country and invite a free flow of trade and finance, but what if the income from that open door policy stays only in the hands of a small minority of upper class elites. A useful comparison for this is Colombia and Brazil, two strong economies in South America. Both have shown similar strong rates of economic growth over the past twenty years. But in Brazil, the percentage of poor people in the country is actually going down while in Colombia it is going up. Why? It isn’t related to their openness to international trade, because in that they are very similar. What is different is that in Brazil there are a large number of government-driven mechanisms that intentionally help the poor and middle classes (job supports, housing, food subsidies, health care, etc.) and in Colombia there are very few of these. In fact in the last decade a good number of them have been cut-to save money.[22]

Joseph Stiglitz, in his book Globalization and its Discontents, describes how the IMF’s “one size fits all” approach failed again and again, in part because they failed to understand local situations and local cultures. He tells the story of the IMF putting extreme pressure on Uganda in the nineties to place fees on education as a way of raising money to be applied to payments on its debts. According to their statistical studies, gathered globally, the IMF determined that raising school fees had little impact on school enrollment and if applied nation-wide they could raise a considerable amount of money. However, Uganda’s President Museveni balked. He knew that for much of sub Saharan Africa, simply finding food to survive was a daily trial and most families felt forced to forgo education (especially for girls) for jobs. So, in a rare instance of a country standing up to a powerful international financial institution, he ignored their advice and abolished all school fees and threw open education for everyone. Within two years school enrollment soared. Ironically, everyone, including the economists at the IMF, have always understood that in the long run the most important element that can turn a country around is education for its young people. But they nonetheless support short-term-gain policies that ultimately function to keep a poor country poor.[23]

Interestingly, the UNCTAD study cited above concluded its work by questioning the science used by the IMF to determine their economic policies. “The efficacy of the economic reforms, on which so many lives and livelihoods now hang is, and must remain, an act of faith.”[24] I agree.

Excursus: Structural Adjustment programs

Much has been said about the structural adjustment policies of the IMF and its partner institutions. Here is a summary of the most important of those. If this list sounds similar to our list earlier of the basic principles of the “Washington Consensus,” it’s not an accident. Both evolved at roughly the same time from roughly the same people holding roughly the same ideologies.[25]

1. Public Sector Layoffs.

Most poor countries have huge federal staffs. In many ways, it was their jobs program. However, the public sector is often bloated, so understandably the IMF says cut it down. The problem, as with so many of the IMF’s prescriptions, they tend to demand it immediately without jobs programs or an economic safety net to catch those who are fired.

2. Privatization of state owned industries

Water, telephone, electricity, health care, education, national forests, etc. Everything is sold off. And, because most poor countries do not have enough wealthy people within their borders to buy these things, the majority are either sold to foreigners or sold at fire-sale prices for huge losses. The old Soviet Union is the worst example. During its transition to capitalism, a small number of insiders bought the entire soviet industrial sector for cents on the dollar. They became billionaires and impoverished the country in the process.

3. Spending Cuts in Basic Social Services

These include education, health care and other social programs. The philosophy, again, is that anything that does not enhance the ability to balance the budget and make payments on the loans should be cut. But in the end, the future health and well being of the country is often undermined. An illustration is Honduras. Honduras is one of the poorest countries in this hemisphere and in the years leading up to 2007 (when it received some debt relief) it had been working to qualify for the IMF/World Bank debt relief program called the “Highly Indebted Poor Country initiative” (“HIPC”). However, according to the initiative, indebted countries can receive relief only if they agree to the restraints we’ve stated here, including cuts in education. However, much of its physical and social infrastructure was disintegrating and its future was in jeopardy. So in 2001 the Honduran legislature voted to increase education salaries over three years. It was a leap, but teachers’ salaries were so low that even the increase kept them at below the Central American average. The IMF responded by informing Honduras that because of that legislation—voted on by their democratically elected representatives—the country’s debt relief would be postponed indefinitely. So, the government of Honduras caved in and rescinded the law. The teachers did get a raise, but it was less than half of what was projected, putting Honduras once again dead last in teacher salaries for the region. What Honduras saw as an education crisis that was destroying the future of its young people, the IMF termed “fiscal slippage” which they could—and did—change.

4. Abolition of Price Controls on Basic Foodstuffs

Frequently poor countries subsidize basic goods like bread or cooking oil. But typically the IMF demands that these are cut (to save money for the loans, etc.) While, again, saving money makes sense in general, it is the poorest of the poor who suffer, and in many countries food riots have broken out when the subsidies were cut.

5. Wage Freezes and Labor Suppression

The lower the local wage, the more appealing the country is for foreign investment and the building of foreign owned companies. Mexico, for example, was forced to lower its minimum wage as one of the conditions for signing nafta. Also strongly encouraged is legislation weakening unions, or encouragement of state sponsored unions, which would be more apt to go along with wage lowering proposals.

6. Devaluation of Local Currencies

If a country’s currency is forced down in value, it encourages foreign investment and purchases because goods and services become cheaper relative to the investor’s currency. However, it also means that the local people have to spend more of it to get the same products. It in effect makes the local population slightly more poor.

7. Export-Oriented Production

Developing countries are heavily encouraged to make an historic switch from producing for domestic consumption to producing for foreign consumption. Factories that once made products for local sales now refocus on products for exports; farmers that once grew agricultural goods for domestic needs now grow cash crops for exports. Millions of farmers and indigenous people lose their land to large farming conglomerates growing the new crops. The result is that a good many countries are no longer food-sufficient and now dependent on imported foods that they once grew themselves. Mexico, after nafta, began a steady shift away from growing corn—a staple food stuff for over five hundred years. Today it imports more from the US than it produces itself. The fragility of that became clear recently when US production of corn began to be siphoned off the food market for the production of ethanol, causing prices in Mexico to leap upward.

The Highly Indebted Poor Country initiative (HIPC)

Beginning in around 1995 the tide of global public opinion on the debt crisis appeared to turn. That year the G8 (an annual gathering of a group of the eight wealthiest countries) met in Halifax, Nova Scotia. At that meeting, following intense lobbying by people of faith and conscience around the world, the leaders for the first time agreed that nothing short of outright cancellation would ever get at the root of the problem. They sent that message to the World Bank and the IMF, and James Wolfensohn, then president of the Bank, took it seriously. He asked his staff to put together a proposal for complete cancellation of all debts for about fifty countries with no conditions, and they did that. On the other hand, Stanley Fisher, Deputy Managing Director of the IMF, designed his own plan, one that had no debt relief, more loans, and more conditions. For the next few months disputes over these two very different proposals caused near war to break out between the two organizations until Lawrence Summers, Deputy Secretary of the US Treasury (now head of President Obama’s National Economic Council) told the two of them to quit fighting, get together, and work something out. In 1996 they finally did that but the plan they devised, called the Highly Indebted Poor country initiative (HIPC), was almost entirely what the IMF had first wanted. It demanded six years of the brutal structural adjustment programs to qualify, it calculated eligibility based on value of exports and not on a country’s poverty or ability to pay (Haiti, for example, the poorest country in our hemisphere, was left off the list), it made overly optimistic assumptions about most countries’ ability to pay, it picked a wildly impossible number out of the air for what it called a “sustainable” amount of debt (40 percent of a country’s income from exports), and it was very, very slow.

As an aside, later in chapter seven we will talk about the great Jewish historian, Josephus and his discussion of the rules by which the biblical Jubilee debt cancellation and slave liberation program was to be practiced. As you may know, Leviticus 25 calls for a complete wiping away of slavery and debt peonage and offering a fresh start, something that seemed utopian at the time, and was in fact never allowed to be enacted. Josephus, who was himself a member of the highly educated, wealthy classes, discusses in his The Antiquities of the Jews, the list of provisions that the members of his class had set down for implementing the Jubilee law. He does it with a straight face, and in excruciating and ponderous detail, line after line, rule after rule, until one finally in the end wonders whether the point of all the rules and guidelines was not actually to guarantee that no one would ever receive any debt relief. Today it’s also hard to read the ponderous, tedious, complicated, rules and guidelines of the first HIPC plan without coming to the same conclusion. It sincerely makes one wonder if the IMF today has been using descendents of the same attorneys and accountants as Josephus’?

After a few years it became clear that the HIPC initiative was simply too stringent and cumbersome and had to be revised. Also, by the end of the nineties the international grass roots anti-debt campaign had grown increasingly active and influential and it was beginning to put measurable pressure on their host governments to do something more. Jubilee chapters were popping up in country after country, and though it was an issue that attracted broad support, it was unusual in that it was driven almost entirely by church people—in the US mainly Catholics and mainline protestants, but also even a few evangelicals. They took as their theme the biblical image of the Jubilee, but more than that, many also felt spiritually connected to the cause because for generations their churches had been sending missionaries and (more recently) anti-hunger money to many of these same desperate countries. The fact that whole regions that they thought they had been helping were now sliding backwards into even deeper poverty because of a financial system over which they had little control, tugged at their religious hearts and challenged them to action.

The tipping point began in 1998 at the G8 meeting in Birmingham, England. Seventy thousand people came to the event from all continents and walks of life to demand that the wealthy countries act on the ongoing misery that had befallen the poor countries. They had with them a petition signed by 1.4 million people from all over the world. Young and old, wealthy and poor, religious and secular, walked arm in arm and called for a shared vision of a world more just and humane. Then in 1999, at the April World Bank/IMF meeting in Washington, and again in the June G8 meeting in Cologne, Germany, tens of thousands more marched and the petition was again lifted up, this time the number of signatories had grown to 17 million signatures. By the time the completed petition was finally handed over to UN Secretary General Kofi Annan later that year, it had reached 24 million signatures, and had broken two Guinness world records, one for the largest petition ever organized and the other for the most internationally compiled. The press surprisingly covered both the meetings and the march and petition. President Bill Clinton (late to the issue) threw his support behind debt relief. And an “enhanced” version of HIPC was announced by the G8 members, with “faster, deeper, broader” debt relief.[26]

It was an exciting and hopeful proposal. The number of countries on the list to receive relief was to be expanded, the bar they needed to reach cancellation was lowered, the six-year qualification period was shortened, poverty reduction was now to be a central goal and not just balance of payments, $100 billion was set aside for immediate relief, and civil society would be consulted in constructing each country’s debt cancellation and poverty reduction program. Plus, the US, Canada, France, Germany, Japan, Italy, and Britain all promised to cancel 100 percent of the bilateral debt owed to them by poor countries. It wasn’t every thing that the anti-debt campaigners wanted, but it came close enough that, to the naïve eye, the era of global economic justice seemed discernable on the horizon.

I was present at the World Bank/IMF gathering in Washington DC in 1999, and the air was truly electric. There was a sense that something finally was going to be done to end one of the truly crushing, but invisible, social evils of our time. There were speeches, there were workshops, there were marches, there were rallies. At the end of it all we locked arms and wrapped ourselves around the reflecting pool in front of the US Capitol to symbolize the great chain of debt that surrounds so many countries of the world. “Break the Chain of Debt,” we all chanted. A young iron worker from La Paz, Bolivia, was standing next to me, giddy with enthusiasm. His neighborhood, his family, and his union had all collected money to get him there. He was going to go home with a life-changing story. It was an exciting time, a hopeful time. We all believed that kairos time was happening, but…in the end, not much changed.

As it happened, some of the countries that pledged cancellation of their individual bi-lateral debt did follow through, but some did not. On average, their cancelation brought down the debt load by about twenty-five percent, which is an improvement. However, most of the affected countries were only able to pay on about seventy-five percent of their debts at that time anyway. So in reality, the country to country cancellation brought their official debt payments down to what they were presently able to pay, so in the end it didn’t change much.

The IMF, for its part continued blocking debt relief with ever more requirements and rules. By the mid-2000s, only ten countries were close to qualifying (out of 41 on the HIPC list and about 60 on Jubilee USA’s list). In the new and improved HIPC the IMF was supposed to produce “Poverty Reduction Strategy Papers” with input from each indebted country, but a number of independent analyses showed that the papers were empty or ineffective. The UK-based World Development Movement looked at four of the new poverty strategies and found they were almost identical to the earlier non-poverty alleviation strategies. The major difference was the change of the name from “Structural Adjustment” to “Poverty Reduction.”[27] But otherwise they were the same. Also each of those papers was supposed to be designed with input from civil society, but in a great many instances that never happened. One report from the Catholic Episcopal Pastoral Social Commission of Bolivia said that the supposed “civil society” organizations invited to planning sessions were actually representatives of banking consortiums and low-level government bureaucrats—not really the teachers, workers, and farmers envisioned in the plan. In Nicaragua the strategy paper for that country was not even translated into Spanish—how could civil society offer input if they couldn’t read it?[28] And Josephus’ anti-Jubilee hurdles created by IMF continued to be immense. Tanzania, for example, had to prepare three thousand reports for its debt reduction program in the year 2003 alone, and host over a hundred delegations from IMF and World Bank officials checking up on their progress, the costs of which were deducted from the money they were eventually to receive in debt relief.

All in all, the new plans seemed to be the old plans. They were built on the same ideology of anti-government, pro-corporation, deregulation, privatization, and trickle down policies that the earlier ones were. There seemed to have been the same drive to increase the national income, with no awareness of the need to distribute it equitably within the country. No awareness of how cutting schools can impact education. No awareness of how cutting health care can impact a country’s ultimate health.

There is, however, one final event that we will discuss, one that has in fact produced fragile but measurable results, and which shows that diligent and indefatigable work by people of faith and conscience working together can in fact save lives and ease hardships. There are still an enormous number of problems and pitfalls along the way, but from this event has come a definite promise of hope. It was the G8 meeting at Gleneagles, Scotland, in 2005. That year it was being chaired by British Prime Minister, Tony Blair, who had been strongly committed to finally doing something significant on global poverty and the debt issue. In fact, there were rumors that one of the reasons that he had allowed the US to talk him into going to war in Iraq was because he wanted to win over President George W. Bush for his international humanitarian causes, causes that the President by and large was not otherwise interested in. Once again the streets around the meeting were filled with throngs of people demanding quicker, deeper debt relief. But, contrary to so many other gatherings, this one appears at the date of this writing to have finally produced more positive than negative results.

On the positive side, the Gleneagles meeting appears to have been a watershed for the international organizations working for social good. Over 250,000 people from all over the globe came to the event, with concerts, rallies, sharing, and networking among the people and groups. Out of this meeting evolved the “Make Poverty History” campaign in the UK and the “One” campaign in the US, which took up the debt crisis issue as part of a larger global economic justice campaign that also included demands for trade justice and more and better aid. Scores of celebrities (in part at the behest of Bob Geldof and Bono) were in attendance at the parallel “Live 8” concert and subsequently made debt, trade, and aid, the focus of their humanitarian work. The world is not well, but it will be a better place in the future in part because of the interconnectedness and common bond forged at this one gathering.

And it was important in terms of financial pledges from the G8 representatives. The plan they drafted would wipe out most of the debt owed to the multilateral institutions for all of the countries that had completed the HIPC process, as opposed to the partial relief offered in previous plans. And the plan pledged $50 billion for actual cancellation immediately. On the downside, the G8 leaders were only willing to extend the relief to a potential 41 countries, still far short of what the Jubilee organizations had hoped for. And some of the institutions involved offset the cost of their debt relief by reducing future aid allocations. Nevertheless, for those 41 countries, it was still relief, and it did tacitly recognize the inadequacy of the “debt sustainability” language that had been used up to then.

The initiative has since become known as the Multilateral Debt Relief Initiative (MDRI). Through it 23 countries have received 100 percent cancellation of their debts, the majority of them in Africa. And there are another 20 countries that could be eligible later. Even though it still doesn’t rise up to the level called for by debt campaigners, it nonetheless means (when the amounts of previously cancelled debts are added in) that eligible nations will be saving about $2 billion in debt payments each year. That may not seem too much compared to the astronomical amounts the Bush and later Obama administrations are spending on bailouts and stimulus in the US, but for desperately poor countries it will be life saving. Tanzania has used some of the funds from its debt relief to increase primary school enrollment by 50 percent. Ghana used some of its money to rebuild dilapidated highways to distant rural farming communities so as to improve agricultural marketing and to resource schools and health clinics. Benin invested its new money in health and education and funded small-holder projects in agriculture. So, while there is still much to be done and there is still too much bureaucratic stonewalling (for example, the IMF drug its feet for far too long before granting relief to countries like Liberia and storm-ravaged Haiti, the Inter-American Development Bank at first refused to participate in the MDRI, etc.), nonetheless there is much to be grateful for.

The job is not over. There are still many important campaigns in the Jubilee struggle. One would be working for full inclusion of all countries still saddled with damaging, punishing levels of debt. Some countries like Lesotho, which is desperately poor and devastated by HIV/AIDS, are to date still not included on the list. One way to address that is by passing the “Jubilee Act” in Congress, which calls for the US to work towards complete multilateral cancelation of all debts for sixty-seven countries with none of the harsh structural adjustment conditions tied to it. It passed in the House in April, 2008, but by the time it was introduced in the Senate, distraction from the presidential campaign slowed its movement and it was never brought to the floor for a vote. Another issue is the campaign, led recently by the government of Norway, to cancel “odious” and illegitimate debt, the debts that were taken out by dictators and military governments anti-democratically and against the needs and wishes of their people. There is a particular disdain in the heart of a now-democratic country, like Liberia, that is still paying off loans taken out by the brutal regimes of Samuel Doe and Charles Taylor to purchase guns and ammunition for the purpose of subduing the very people who are now paying for the loans. Yet another is ending the so called “vulture funds,” a type of investment fund that buys up devalued poor country debt on the secondary market and then sues in the US or the UK for full price. Many poor and developing countries that have been sued for total loan amounts decide to give in and make payments because the fight in court would take more money than would the increase in payments. In 2007, Zambia lost its case in court and was forced to pay $15 million to Donegal International which had originally paid only $3 million for the debt. These people move and live at a special level of evil and should be ended by the concerted legislative action of all countries involved.

But in spite of all of these challenges ahead, there is no denying that hard work of people of faith and conscience all over the world has made the level of crisis in the countries stricken with debt is smaller today than it was just a few years ago. People can make a difference. And you are one of those people. You can make a difference. This issue, like no other like it, since the Civil Rights era of the sixties, is an example of how people of faith have stepped forward and made an impact on the direction, visibility, and outcome of a campaign to make the world a better place. In this campaign, like few others, every dollar that is freed up by the US, the World Bank, the IMF, the Inter-American Development Bank or any other, is a dollar that saves a life, builds a road, or sends a child to school. When you wonder if all those people signing post cards to the US Treasury, or making phone calls to Senators and Representatives actually did any good, think of the children in the little school up in the mountains of Honduras who might be getting an education now because of their country’s debt cancellation. They don’t know how it happened, but I am certain that their little community is a better place for all of those efforts.

[1] “A Silent War,” Jubilee 2000/UK

[2] Joe Nocera, “Can a Vision Save All of Africa?” New York Times, June 16, 2007.

[3] “A Silent War,” paper Jubilee 2000/UK

[4]Nigeria to Get $18bn Debt Relief: The Paris Club of creditor countries has agreed the outline of a debt relief package for Nigeria,” BBC, June 30, 2005.

[5] Cited in Enlace the newsletter of the Christian Commission for Development (CCD), of Honduras.


[7] From the U.S. General Accounting Office, and the New York Times, November 22, 1998, respectively. Cited in “Proclaim Jubilee: Break the Chains of Debt,” background paper by church World Service.

[8] Ben White, “Wall Street’s Pay Is Expected to Plummet” (The New York Times, November 5, 2008), B1.

[9] Michael L. Ross, “Blood Barrels: Why Oil Wealth Fuels Conflict” (Foreign Affairs, May/June, 2008), p. 3.

[10] Noreena Hertz, The Debt Threat: How Debt is Destroying the Developing World (Collins: 1994), pg. 61.

[11] To be fair, the US, World Bank, IMF and others have made their share of destructive loans to dictators to keep them happy and voting with us in the United Nations, but perhaps one could say they were not as frequent as the banks (at least in the early days of loans) and less blatant about it.

[12] Hertz, Debt Threat, p. 61.

[13] A good survey discussion of how the money from OPEC “oil shocks” moved to unregulated loans to the Third World can be found in Robert Devlin, in “Growth and Transformation of International Banking,” in Debt and Crisis in Latin America: The Supply Side of the Story (Princeton: Princeton University Press: 1989), pp. 8-55.

[14] Hertz, Debt Threat, p. 60.

[15] Cited in Ibid., p. 61, though the story could not be independently corroborated.

[16] The norm, however, was closer to twenty percent, still a horrific drain on the economy. See Oscar Ugarteche, “the Structural Adjustment Stranglehold: Debt and Underdevelopment in the AmericasNACLA: Report on the Americas (Vol. XXXIII, No. 1, July/August, 1999), p. 23.


[18] Hertz, Debt Threat, pg. 77.

[19] Cited in Richard Peet, Unholy Trinity: The IMF, the World Bank, and the WTO (London: Zed Books, Ltd., 2003), p. 104.

[20] Ibid., p. 103.

[21] Hertz, Debt Threat, p. 103-4.

[22] Dani Rodrik, “The Rights and Wrongs of Globalization,” lecture delivered at the Princeton Colloquium on Public and International Affairs, Woodrow Wilson School of Public and International Affairs, Princeton University, “The Return to Morality in International Affairs: A World of ‘Good and Evil’?” April 25-26, 2003, pp. 59-60.

[23] Joseph Stiglitz, Globalization and its Discontents (New York: W.W. Norton & Company, 2002), p. 76.

[24] Peet, Op.Cit., p. 103.

[25] The list is adapted loosely from John Cavanagh, Sarah Anderson, and Jill Pike, “Behind the Cloak of Benevolence: World Bank and IMF Policies Hurt Workers at Home and Abroad,” in Corporations Are Gonna Get Your Mama (Monroe, ME: Common Courage Press, 1996), p. 82

[26] Sarah Williams and Trisha Rogers, Unfinished Business: Ten Years of Dropping the Debt (London: Jubilee Debt Campaign, 2008), p. 12.

[27] Peet, Unholy Trinity, p. 100.

[28] Hertz, Debt Threat, p. 122.

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