DEBT: YOUR MONEY OR YOUR LIFE

“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.

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[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. http://www.globalpolicy.org/socecon/develop/debt/2005/0630nigeria.htm

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

[6] www.worldcentric.org/stateworld/debt.htm

[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 Americas” NACLA: Report on the Americas (Vol. XXXIII, No. 1, July/August, 1999), p. 23.

[17] http://jubileeusa.typepad.com/blog_the_debt/2008/10/fast-track-for.html

[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.

From Jubilee to the World Bank

For the next few weeks posts to this blog will be chapters of my upcoming book, From Jubilee to the World Bank: Economic Globalization for Faith-based Activists. Please feel free to send me feedback.

Stan Duncan

INTRODUCTION

This book is essentially about three things: economic globalization, the international debt crisis, and faith. By “faith,” more specifically I mean possible responses of the faith communities to the first two topics. It is intended as a helpful handbook of concepts and histories about some of the major international economic justice issues of our time, and faith-full ways that we can be involved, become activists, and make a difference.

Is this a “Religious Book”?

In spite of the occasional use of economic jargon, especially in the first section, this is still a fundamentally religious book. Most of the chapters were written originally for local church congregations and not for people with previous in depth knowledge of economics.

However, there is more to writing from a religious perspective than including Bible studies and sermon notes. The Bible is enormously complex and how one understands its origins and meaning has much to do with how it can help us in our contemporary moral, ethical, and political decision making.

There are two types of writings in the Bible that may be of most help to us as interpreters of contemporary issues. The first are parallels and the second are principles, and they should be distinguished. Parallels are stories (historical or in parables) of hunger, or poverty or oppression which, however roughly, parallel conditions in our world today. Examples would be stories of the rise of poverty and social unrest in ancient Israel that grew as its own involvement in international trade grew. We could ask then, what did the Prophets say about that? How did the oppressed and those who aligned themselves with the oppressed respond to it? The answers to those questions can be helpful in understanding and critiquing current situations. Principles, on the other hand, are broader, more general interpretive teachings or paradigmatic stories that give us guidance in a larger sense. A frequently used example is the story of God through Moses liberating the Hebrew people from slavery in Egypt. A principle based on that story is that since God freed us, it is therefore our duty and responsibility to free others. This thread is found throughout the Bible, especially in Exodus and Deuteronomy and the teachings and parables of Jesus, and has had a profound influence on liberation movements all over the world.

So, while it is true that the Bible will be of little help if we are trying to decide how high to set the Federal Reserve overnight discount rates or whether there should be a tax on currency exchange rates, it can and should give us guidance on a larger perspective we as people of faith should have when making those decisions ourselves. If we believe, as the Bible seems to believe, that God has a special interest in the poor, the weak, and the oppressed, then the first questions people of the Bible should be asking themselves are: how many marginalized and weak people will be hurt or helped by this or that policy? How many wealthy and powerful will it help? If the policy is designed to bail out banks, for example, by cutting price supports for third world farmers, then it is probably a policy that stands outside of our biblical and faith tradition.

Why This Book Now?

At the time this book was being written, the US was rapidly sliding into a deep recession that lasted for months and its after-effects for years. One thing that was different in this recession from many others in the past was the intense interconnectedness of our global economies. That means that today, when the US sinks the rest of the world sinks with it. Our problems and mistakes will be carved on the foreheads of suffering children in hundreds of countries, and decisions that leaders of their countries make will impact whether we fall as a nation or just stumble temporarily. We are all related. The saying that when a butterfly bats its wings in Taiwan a monsoon is caused in Brazil, has never been more true. Today we might change the saying slightly to say that if brokers on Wall Street make gambles on commodity futures, cotton farmers in Bangladesh starve. They speculate on the future price of commodities taking them off the market, which drives up the price (called “forward-pricing”) making them pinch for the rich and unavailable to the poor. Similarly, when China eats more meat, poor city dwellers go hungry. That is, the recent growth in the standards of living in China meant more people wanting to imitate the rich and eat beef (the food of the rich) and beef takes two hundred pounds of grain to feed a cow for every one hundred-seventy-five pounds of meat. So, the more meat China eats, the less grain there is on the market. The less grain on the market, the higher its price. The higher its price means the higher the level of hunger in the world. This complex web of interlocking economic, political, and ideological forces means that more than at any other time in our history we are all winning or losing together.

One of the difficulties with the connections between these cause and effect linkages is that people who are affected by them seldom see them. During the nineties and early years of this decade, for example, small coffee farmers in the Alto Occidente region of Colombia experienced a rapid decline in profits, which drove thousands of them from their homes and farms and into the harsh ghettos surrounding Bogotá looking for work. For the most part they had no way of knowing that much of their catastrophe was caused by decisions made by bureaucrats in international banks and multilateral financial institutions thousands of miles away who promoted far too many loans for coffee production, and which eventually drove down profits for individual farmers everywhere.

More recently, during the global food crisis, how many of the tens of thousands of people who protested the soaring prices realized that at least one of the causes of their misery was geopolitical and ideological? During demonstrations in Haiti in March, 2008, five people died (including a UN staff member), the government fell, the prime minister was ousted, the World Bank rushed in with loans for more food, and the World Food Programme called for international aid. There are a number of reasons for the increases, but one of them began a decade ago when the US pressured Haiti to drop its tariffs on imports, such as rice, in order to allow in subsidized US rice, which then destroyed Haiti’s rice farmers, and forced Haitian consumers to become dependent upon imported rice. Then, in 2007, the price of US rice went up to triple digit highs, and people in Haiti began to experience absolute starvation for the first time in decades. How many hungry people in Haiti can connect the dots to see how their individual story fits into the global story?

Seldom do they see the connections between their small stories of poverty and the much larger stories of greed and finance. “Hardly anyone tells them that they are victims of a whole interconnected system extending all over the globe and varying only in degree,” says German biblical scholar Ulrich Duchrow. Because “If they heard, they might join forces!”[i] With the possibility of a looming global famine, one that touches the developed world as well as the undeveloped, we may for the first time in history be witnessing a time in which the poor and hungry do in fact begin to join forces.

People of faith need to work harder at making these connections and helping our churches learn them. Part of what comes from a belief in the God of all creation is a commitment to push ourselves to view issues “from above” and not just “from below.” That is, we need to lift our perspectives from a “me first” level to as high as our human limitations can take it. Part of what happens when my life is intertwined with the life of the mysterious savior from Nazareth is that I am no longer concerned with solely my own life but also with the lives of the rest of the family of God.

Additionally, the church is one of the few institutions still existing that has the perspective and ability to offer a sustained moral critique of the political and market forces that are tearing us apart. Churches and other religious organizations need to help people make those connections and to face up to its own responsibility for the damage done. Perhaps we have fallen down on that task because we are too complicit in the crime. Perhaps we subconsciously feel it would hurt too much and cost too much. But it has to be done.

To be fair to our human frailties, this is an enormously difficult task. The media will not help. The politicians who set the national conversation agenda will not help. Their re-elections are financially tied the very people who wish to keep these kinds of connections a secret. Only such things as diligence, persistence, study, advocacy, and faithful commitment to see the issues from above and people from love will do it. The Holy Spirit is not on the side of oppression or starvation. The Holy Spirit is on the side of liberation, democracy, wholeness, and the abundant life.

Obviously this one book or others like it cannot do everything. But what we can do is to supply some of the background material that might help the reader understand the framework of the various global economic forces and make some of the connections between what happens “here” and what happens “there.” Plus, in the second half of this book we will offer resources for Bible study and worship, and research and advocacy for the ongoing justice life of a church and faith community. We all must start somewhere.

Is This Book Biased?

The short answer is yes. But it’s more complicated than that. First I want to say firmly that there is much about economic globalization (and globalization in general) that is positive. I believe it is beyond debate that today’s rapid, global movement of goods and services can—and in many cases does—help feed the poor, increase democracy and lower human rights abuses. One of the most accessible books that makes that case with numerous heartening and engaging stories is Thomas Friedman’s The Lexus and the Olive Tree.

On the other hand, I also believe that all writing is biased. Friedman’s work is biased toward globalization, just as David Korten’s When Corporations Rule the World (as one can tell from the title) is biased against it. The truth is that globalization is a mixed bag. In addition to its frequently proclaimed values, there is much about it—at least in the form that it is now evolving—that is damaging both in poor countries and in rich. For example, the present reigning model of globalization requires a constant downward pressure on wages that results both in the increased poverty of workers and the increased mobility of corporations seeking cheaper wages. This darker side of economic globalization is seldom discussed on the business pages of our local papers. Until it is forced upon them through protests or presidential primaries, our national leaders and the mainstream media rarely comment on the loss of jobs in the US, many of which are directly related to NAFTA and other trade deals. And when they do, they almost never discuss whether NAFTA has been good or bad to poor communities in Mexico or other countries that have followed the free market economic formula. Therefore, though parts of these essays may seem to over-emphasize the negative aspects of globalization, in actual fact they are an attempt to bring balance to a story that most people have been told has only a positive side.

Having said that, it is also true that not much of the following will make sense unless the reader accepts the premise that there is something fundamentally wrong with our present global economic situation, that the corporate and political powers have contorted and stacked the decks of the financial machinery that runs the earth in such a way that rewards the rich and extracts payments from the poor. I will attempt to bring together evidence as we go along that will (in my opinion) make that case, but if you begin with the belief that things are fine and getting better (and that it will get better faster if the critics will just get out of the way and let the unregulated “free” market function) then most of what appears like evidence will be nonsensical.

We also need to agree that the Bible and Christian theology still have something to say to this situation. There are a number (in fact a growing number) of people who accept that the world’s economy is dangerously skewed, but who also believe that religion is unhelpful to that issue, and may in fact be a contributor to the crisis. I don’t believe that, and this work reflects a fundamental belief that we can find tools and insights to address our present situation in the stories and theological traditions of the Bible.

It is worth noting again that there are also clear biases in the existing rules of international finance. There does exist an ideology of inequality that drives the creation of the rules and by which the international financial system itself is ruled. The wealthy have not created this system which benefits them because they are mean evil people. They’ve done so because it is human nature to look out for oneself and one’s class. It is not always evil (though, undeniably occasionally). Sometimes it is simply a blindness driven by class or race or gender. Once one has sworn allegiance to a god other than the God of all creation, then the rest is less voluntary. Worshiping gods of wealth and power and influence can become an authentic bondage, a bondage that blinds one from seeing and feeling reality and blocks that reality from surfacing in one’s consciousness.

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[i] Ulrich Duchrow, Alternatives to Global Capitalism: Drawn from Biblical History, Designed for Political Action. Tr. Elaine Griffiths…et al. (Utrecht: International Books: 1995), p. 12, pp. 15-16.

A $1 Trillion Answer

New York Times
November 30, 2008

Op-Ed Contributor | Transitions

By JOSEPH E. STIGLITZ

WHAT President-elect Barack Obama will need to do is horribly complicated but also very clear.

First, he must stop the economy from going deeper into recession. Then he needs to bring about a robust recovery, preferably in ways that support the long-term needs of the United States: by repairing our neglected public works, invigorating our technological leadership, making our society greener, fixing our health care problems, healing our social and economic divide, and restoring our social compact.

It will not be easy. President Bush’s legacy of debt and the opposition of those who benefit from the status quo present major obstacles.

There is an emerging consensus among economists that a big — very big — stimulus is needed, at least $600 billion to $1 trillion over two years. Mr. Obama’s announced goal of 2.5 million new jobs by 2011 is too modest. In the next two years, almost four million workers will enter the labor force — or would if there were jobs. Combined with the loss of employment this year, that means we should be striving to create more than five million jobs.

A large stimulus package can always be trimmed later if it’s not needed because the economy returns to health faster than most economists think. But we need to plan for what looks to be a deep and long downturn. By relying heavily on automatic stabilizers — expenditures like increased unemployment benefits and revenue sharing with states — we can dose out the medicine as needed. The deeper and longer the downturn, the greater the spending.

Faint measures would be foolhardy. A weaker economy will suffer lower tax revenues, more foreclosures and more bankruptcies. Once a firm is bankrupt, you can’t unbankrupt it by providing a stronger stimulus later on.

There are other elementary principles that help guide the design of a good stimulus. The government could, for instance, temporarily pay (through a tax credit) part of the cost of new private investment for companies that are spending more than, say, 80 percent of what they have spent annually in recent years on equipment like computers and machinery. This would be a high-powered, low-cost stimulus.

Latter-day Hooverites will say the soaring deficit and national debt mean we cannot afford a large stimulus package. Although today they are receiving billions of dollars in aid, once they have their money some from the financial sector will argue that the economy won’t recover unless confidence is restored, and that confidence won’t be restored until the deficit narrows.

But it’s impossible to restore confidence when the economy is in shambles. When millions of Americans are out of work and hundreds of thousands of businesses are going into bankruptcy, there will be no “confidence.” This is the reality. To avoid this, we need a big stimulus.

But what you do with the money counts, too. The money needs to be spent carefully to ensure that every dollar provides as much stimulus now as possible while also contributing to long-term growth. That is why it is imperative to restructure the Troubled Asset Relief Program. Treasury Secretary Henry Paulson has already given away close to half of the $700 billion on very generous terms and without adequate restrictions on the use of the money.

The intent of the program was not just to give money to banks but to get them to increase lending. It has not worked, so it needs to be changed. If taxpayers pour our hard-earned money into banks, then the banks should not be allowed to pour out the money as dividends to their shareholders or bonuses to their executives. Nor should they be allowed to use the cash to purchase healthy banks, in further efforts to become “too big to fail.”

The Obama administration should not treat Mr. Paulson’s plan as immutable simply because “a deal is a deal.” The banks knew there was a quid pro quo. Besides, the terms of the relationship between the banks and the government (including the Federal Reserve) have repeatedly been adjusted, though almost always in favor of financial companies. The Fed used to accept only Treasury bills as collateral when it lent to banks. Now it accepts risky assets — junk.

Americans are rightly afraid of losing their jobs, and with that, their health insurance and their homes. We need to provide health insurance to the unemployed and to the uninsured, and we need to do it quickly, possibly through an expanded and more efficient Medicare.

We also need to stem the flood of foreclosures. If we help poorer homeowners, banks will benefit, too, as foreclosures are reduced. Through tax deductions, the federal government pays as much as 50 percent of the mortgage costs of upper-income Americans. If we treated the poor just as well as we treated the rich, more would find housing affordable.

And we need to change the bankruptcy laws to help homeowners. We have expedited bankruptcy for businesses, to keep them going when they run into financial problems. We should do the same for homeowners. It does no one any good to force poor and middle-income Americans out of their homes. Vacant houses blight neighborhoods. An expedited bankruptcy law would allow the restructuring of the mortgages of millions of Americans who owe more than their houses are worth.

Deregulation and the failure to adopt regulations to cover risky new financial products have contributed much to the current mess. So far, we have merely given banks more money to spend recklessly. We have done little to change the banks’ incentives or constraints.

Confidence is important, but it will not be restored if the economy is weak, or if Americans think the system is stacked against them. If the asset program is not changed and if regulations are not imposed to change the behavior of those who got us into this situation — who enriched themselves at the expense of their shareholders — then confidence will not return. Those who got us into this crisis cannot have undue influence in shaping the response.

America has great assets, including a productive labor force and the best universities in the world. None of these assets so far has been impaired by Wall Street’s follies. These strengths, coupled with a sensible and fair economic stimulus package and judicious regulation, will help our economy recover.

Joseph E. Stiglitz, a professor of economics at Columbia who was chairman of the Council of Economic Advisers from 1995 to 1997 and was awarded the Nobel prize in economics in 2001, is the author, with Linda J. Bilmes, of “The Three Trillion Dollar War.”

Copyright 2008 The New York Times Company

Obama and Latin America

Rebecca Bartel
Current Policy Analyst and Educator for Latin America and the Caribbean with Mennonite Central Committee.

http://mcclatinamerica.blogspot.com/

The feeling among many partners in Latin America is generally very positive in response to the historical victory of President Elect Barack Obama in last week’s elections.

In his first official effort at stating a position on Latin America last May, Sen. Obama’s speech, “Renewing US leadership in the Americas” framed his positions on policy and relationship towards Latin America referring to Franklin D. Roosevelt’s “four freedoms” speech of 1941. This was the vision FDR articulated for a new world order – prior to US engagement in the Second World War – based on 4 basic freedoms: political freedom, religious freedom, freedom from want, and freedom from fear .

That same day, after meeting with the conservative Cuban-American National Foundation, the Obama campaign released “A New Partnership for the Americas” plan, which outlines three major regional policy issues that his administration would tackle if elected to office: (1) political freedom/democracy, (2) freedom from fear/security, and (3) freedom from want/opportunity. As Larry Birns, director of the Council on Hemispheric Affairs states, “According to Obama, the strengthening of democracy will at its core address the protection of human rights, as well as support the rejection of de facto coups and autocratic practices. The U.S. will foster democratic institutions by strengthening democracy at home – habeas corpus will be restored, Guantanamo Bay will be closed, and torture and indefinite detention will end”.

Analysts note the particular speech and policy Sen. Obama referred to, which preceded FDR’s “Good Neighbour” policy, paved the way for the most harmonious era in Latin America–U.S. relations during the 1930’s. The Good Neighbour Policy is a framework that should be re-visited and there is hope in the region, from academics and think tanks, that this would be the model of relationship and diplomacy that the Obama administration will adopt.

However, there is some concern that the Obama presidency will maintain a “business as usual” style of policy towards the region.

For example, although Obama has made reference to the possibility of lifting restrictions on travel for Cuban-Americans and freeing up the process of Cubans in the US sending remittances to families in Cuba, he has maintained the position of holding the embargo as it stands in order to encourage democratic transition and institutionalization. In reference to Venezuela’s President Hugo Chávez, Sen. Obama has used strong language, partly in order to separate his campaign from Chávez’s populist government, and has again referred to encouraging democracy through “aggressive diplomacy”.

Obama has stated that the foci for security policy should be transnational gangs, drugs, violence and organized crime. He has proposed strengthening security efforts of the United States in Central America, and approves the extension and continuation of the newly implemented “Mérida Initiative” – a multi million dollar military aid package largely to be Mexico and small sum to Central America. Obama supports regional efforts to combat violence and transnational drug trafficking and organized crime, and has also stated his support of continuing military aid to Colombia to combat narcotrafficking. In addition, Obama stated his concurrence with the Colombian military’s decision to attack FARC insurgents on Ecuadorian soil stating that, “Colombia has a right to strike terrorists who seek safe-haven across its borders.”

Looking towards the future
Nonetheless, Obama’s victory is clearly a positive sign for Latin America, and certainly is a hopeful move from the Bush administration’s strategies of increased military aid to respond to social and political conflict, failed drug eradication programs and interventionist counter-terrorism tactics. These tactics and failed policies have served to create more hostility towards the United States in the region and have not responded to the great social and economic strife that millions of people in Latin America face.

Obama’s conviction that a new US-Latin America relationship must be forged and new US policy towards Latin America must be built, is welcome. Time will test the new President elect’s positions in practice towards the region, but the opportunity is ripe for creative and new relationship building..
Obama’s fresh ideas around economic development, increasing U.S. foreign aid, vocational training, micro-finance, and community development may prove to be effective strategies for poverty reduction, job creation and stimulating local economies. As analyst Birns says, “He will attempt to achieve the Millennium Development Goals, will work to decrease the prevalence of HIV/AIDS, tuberculosis, and malaria, and increase global education. He will cancel the debts of Paraguay, Guyana, St. Lucia, Bolivia, Haiti, and Honduras, as well as those of other countries around the world which have been designated as “heavily-indebted poor countries.” Obama will seek to reform the IMF and World Bank, and establish fair trade that promotes labor and environmental standards. In addition, the WTO will be encouraged to enforce mutually advantageous trade agreements. Obama opposed CAFTA and a U.S.-Colombia FTA, and will seek to amend the provisions of NAFTA to increase its benefits for American workers.” These are interesting proposals, and will be challenged from all sides by special-interest lobbies in congress, corporate America and Latin America, and potentially Obama’s own party. Lest it be forgotten that NAFTA was negotiated and implemented by a democrat government, as was Plan Colombia.
Although Obama and running mate Joe Biden, have made such overtures to Latin America as a region, in addition to large promises for re-charged relationships and leadership in the region, they have specifically cited countries already closely allied with the United States, such as Colombia, Mexico and Brazil – committing to continuing military aid packages to the first two, and opening up markets for bio-fuel sales for the latter.

Country by country: What leaders are saying.
In Bolivia, the Evo Morales administration voiced their hope that “Obama will reverse the Bush administration's anticipated suspension of trade preferences that allowed more than $150 million in Bolivian goods into the U.S. without being charged import taxes last year”. Morales affirmed hope that relations would improve with the United States expressing his confidence that relations will be healthier with Obama in the White House.

Obama has stated that he intends to cancel Bolivia’s foreign debt, however it is not clear whether or not Obama will be willing to renegotiate the inclusion of Bolivia in the ATPDEA (Andean Trade Promotion and Drug Eradication Act).

The Venezuelan government suggested that Obama's win was the culmination of a wave of leftist electoral victories that started in South America nearly three years ago, saying “the historical election of an afro-descendent to the head of the most powerful nation in the world is the symptom of an era of change which has been brewing in South America and could be knocking on the doors of the United States”.

In a televised speech on Sunday, November 9, Chávez announced that he would be open to meeting with Obama in “conditions of equality and respect” and that he hoped with Obama a “new phase of relations”.

Obama has been widely critical of Hugo Chavez’s government and manner of governing, stating that “Venezuela’s President Hugo Chavez has increased his anti-U.S. rhetoric and tried to counter American influence throughout Latin America. Some commentators fear that Chavez threatens oil markets and regional stability. Barack Obama believes the U.S. must restore its traditional leadership in the region – on democracy, trade and development, energy and immigration. This will tamp down the anti- Americanism that has sprung up in opposition to the Bush administration’s global policies and lack of engagement in Latin America”.

The Mexican government expressed its support of the new president elect, stating that the “government will maintain close relations with Obama’s transitional team to engage in dialogue at all levels of government around issues of migration and the Mérida Initiative”, affirmed Foreign Minister, Patricia Espinosa. Espinosa also stated that Mexican president, Felipe Calderón, seeks a meeting with Obama as soon as possible given that “what unites (the two countries) is much greater and more important than a long border”.
She also stated that “what unites us, above all, is the need to make North America a region in which we are strengthened economically and our two countries must work together to build societies that are not only more prosperous but also more just”.
While Obama has stated his intention of reforming immigration policy in the United States, through creating legal avenues for undocumented immigrants to seek citizenship and legalization, he has indicated his administration plans to continue and expand the military aid package known as the “Mérida Initiative” to Mexico and Central America, in addition to the building of the wall and increased border security. In his “A new Partnership for the Americas”, it is stated,

“Border violence and the trafficking of guns and stolen vehicles along the U.S. - Mexico border remains a critical crime and homeland security challenge for the U.S. To combat this increasing problem, the United States forged a new security cooperation initiative with Mexico and nations in Central America. The Merida Initiative is designed to combat the threats of drug trafficking, transnational crime and terrorism in the Western Hemisphere. Barack Obama believes that a new security initiative is needed with Latin American neighbors – an initiative that extends beyond Central America. This initiative will foster cooperation within the region to combat gangs, trafficking and violent criminal activity. And it will marshal the resources of the United States to support the development of independent and competent police and judicial institutions in the Americas.”
Daniel Ortega in Nicaragua expressed his congratulations to Obama, classifying the presidential elections as historical. Ortega stated that “it is truly a miracle that the United States has an African American president for the first time in its history” and that the new president elect is “the symbol of the immigrant that has arrived to the United States and had children there” after recognizing Obama’s African roots .
Álvaro Colom of Guatemala congratulated the new president elect saying that he, the government and the Guatemalan people, “hoped that the new government would create more humane and respectful conditions for the treatment of the thousands of Guatemalan immigrants that, without a doubt, play and important role in the economy and the progress of the United States” .
Brazilian Foreign Minister Celso Amorim compared Obama's victory to that of President Luiz Inacio Lula da Silva, a former leftist union activist known as Brazil's first leader to come from working-class roots.
"In the case of Lula, hope overcame fear," Amorim said. "In the case of Obama, hope overcame prejudice."
Obama has been clear in his intention to relax import quotas on Brazilian ethanol exports to the United States, saying that his administration is interested in creating a bigger market for Brazilian ethanol and will eliminate the 7% limit that is currently in place through the Caribbean Basin Initiative. At the same time, Obama has voiced concern around environmental degradation, particularly in the Amazon region and the risks of deforestation which accompany greater agricultural production. Obama has stated that his administration would support alternative energy and offer incentives to maintain forests and natural reserves.
Colombian President, Álvaro Uribe also congratulated the new leader, stating that Colombia’s hopes for the ratification of a Free Trade Agreement which has been stalled by the democratic Congress earlier in the year would be realized. Obama has been very firm on the free Trade Agreement, stating that consistent and systematic violations of human rights by the military, and the worsening situation with union leader assassination for which the government has not responded adequately, in addition to the para-politics scandal, are factors which his administration will not overlook and the chance of the FTA being signed without significant modifications is increasingly unlikely.
Despite his strong position on the FTA, together with Vice-President elect Joe Biden’s rejection of the deal and Biden’s consistent record of questioning this sort of bilateral trade agreement, Obama has voiced his support for continued military aid to Colombia – although there is hope that an Obama administration will be open to hearing from Colombian human rights organizations and Washington-based NGOs, and heed their call to decrease military aid and increase humanitarian aid. According to Birns, “In 2007, he (Obama) also had sent a letter to Secretary of State Condoleezza Rice stating that the U.S. must balance its military aid to Colombia with social and economic reforms. Nevertheless, four recent letters (two to Secretary of State Condoleezza Rice, one to then-Undersecretary of State Nicholas Burns, and one to President Uribe himself) regarding human rights abuses in Colombia lacked his endorsement”.
Obama has also stated his understanding and justification of the Colombian military’s attack on Ecuadorian soil during the raid in March of FARC Secretariat members Raúl Reyes’ camp.

“The U.S. and Colombia have many important shared interests. For more than 8 years, the U.S. has provided roughly $700 million a year to fight drug trafficking. We need to continue efforts to support Colombia in a way that also advances our interests and is true to our values. We must support the creation and reinforcement of robust civilian institutions in Colombia that contribute to lasting peace and to ending the decades-long reign of terror perpetrated against the Colombian people by illegal armed groups of every stripe. Given the devastating impact the drug trade has on the U.S. and Columbia (sic), we must continue to do more to work to reduce the drug trade. Barack Obama supports continuing the Andean Counterdrug Program to the U.S. strategy to combat narco-trafficking in Colombia. He will enhance the program and broaden the involvement of Colombians, while reducing its reliance on American contractors…In an Obama administration, we will support Colombia’s right to strike terrorists who seek safe-haven across its borders, to defend itself against FARC and we will address any support for the FARC that comes from members of neighboring governments because this behavior must be exposed to international condemnation and regional isolation”.


Some conclusions
It is safe to say that President Elect Obama’s victory presents a symbolic triumph that is encouraging and hopeful for the world. It is also safe to say that the majority of Latin America’s “vote” was for an Obama-Biden win.

Concern remains, however, that the new “leadership” model is not what Latin America needs. Rather, as Eduardo Galeano says, what the region needs is a new “mutual respect” model that guarantees autonomy and sovereignty in domestic decisions. Partners have expressed interest in a new model of respect that would re-negotiate un-just trade agreements, such as NAFTA and CAFTA, and close the School of the Americas military training facility and Guantanamo Bay detention center unconditionally. A new model would also cut military aid to the region and increase humanitarian aid, seeking to resolve root problems of social and political conflict through democratic institutions, instead of suppressing civil resistance through violence. This new model would re-think unjust immigration policies and instead create policies of respect and dignity for the 12 million Latin America immigrants living in the Unites States currently.

There is also concern that the renewed leadership and relationships would be only extended to countries already allied with US interests, such as Colombia, Brazil and Mexico and exclude, or maintain current relations, with countries whose current governments do not reflect US interests in the region.

While Obama is learning about Latin America, and preparing to countermand executive decisions of the Bush administration and bring significant changes to Washington, the moment for re-thinking US-Latin American relations has arrived, and none too soon.

Analysts have made mention of the significant symbolic importance that the results of the election have had, and there is widespread hope in the region that the significance will go beyond symbolism, and translate into real change for US-Latin America relationships in the region.

Obama’s policy towards the region will be different from the prior 8 years of the Bush administration, this is clear. The definitive official position and policies towards Latin America have yet to be seen. With the policy outline “A New Partnership for the Americas” and the speeches given during the campaign, it is possible that Obama will reflect a Clinton era style of Latin America relations.

Obama is in the position and in the historical moment to drastically change U.S.–Latin America relations for the better, and bring a much needed break from past, failed policies. Hopefully he will respect the call of numerous Latin American leaders, and peoples, to enter into a new era of politics, based on mutual respect, autonomy and sovereignty, fair trade policies and increased equality in decision making and distribution of the wealth of resources in Latin America.

To send Barack Obama your personalized request that US policy towards Latin America changes dramatically, click here for a sample letter from Witness for Peace. [http://org2.democracyinaction.org/o/5436/t/2467/petition.jsp?petition_KEY=163]

What Does Africa Owe?

An excellent article by Neil Watkins, head of Jubilee USA Network, on the debt in Africa and asks who is responsible for it? Who should pay? How much should Africa pay? At the bottom, click on the box to read and download a Word.doc version of the same article.

Neil Watkins | February 18, 2008
Editor: John Feffer
www.fpif.org

As President Bush embarks on his journey to Africa, he is looking to secure his legacy in part through his administration’s development initiatives on the continent. One of those initiatives is the administration’s support for expanded debt relief for the continent.
A closer look at this administration’s record on debt should begin with the question often posed by Africa-based civil society groups: who owes whom?

Canceling Debt
Take the case of the Democratic Republic of Congo (DRC). The United States, the World Bank and IMF, and other creditors lent former President Mobutu Sese Seko billions of dollars in the 1970s and 1980s, knowing full well that the funds would not benefit the people. This was a price they were willing to pay in the context of the Cold War to win the country’s allegiance to the West. But this clearly odious and illegitimate debt remains on the books today – over $9 billion worth in fact, and the people of the DRC are still paying for the sins of a leader they didn’t want.

The Bush administration has supported debt cancellation in Africa. Does Africa owe President Bush a debt of gratitude? In 2005, the Bush administration, together with the UK, took strong leadership at the G-8 summit in Gleneagles, Scotland and agreed to provide the possibility of 100% debt stock cancellation of eligible debts to eligible countries. This was important because up until this point, only debt relief – reduction of payments – rather than outright cancellation, was possible.
The initiative championed by the Bush administration has since become known as the Multilateral Debt Relief Initiative (MDRI). Under this program, 23 countries have received 100% cancellation of eligible debts, 19 of them in Africa. Another 20 countries are potentially eligible for the program but have not yet seen their debts cancelled. When previous rounds of debt cancellation are added in, eligible nations are saving about $2 billion in debt payments each year.

The money saved from debt relief has been put to good use. Of the five countries President Bush will visit on his trip, four – Benin, Tanzania, Rwanda, and Ghana – have received debt cancellation under the MDRI. In Tanzania, debt relief led to a 50% increase in primary school enrollment. In Ghana, freed-up funds supported the rehabilitation of essential major highways and feeder roads in the main agricultural areas, and to support education and health initiatives. In Benin, relief bolstered investment in health and education and funded small-holder projects in agriculture.
The other country President Bush will visit on his trip – Liberia – just recently moved toward eligibility for the official IMF/World Bank debt relief program with the strong support of the administration. But Liberia has not yet seen its more than $3.5 billion debt – much of it run up by the human-rights-abusing regimes of Samuel Doe and Charles Taylor – cancelled outright.

What’s Still Missing
The Bush Administration has clearly provided leadership on debt relief that has benefited a number of African countries. But President Bush could do even more. He could return from Africa – inspired by seeing firsthand the impact of relief to date – and address the unfinished agenda on debt, in turn cementing his legacy in this area.

He should support the expansion of debt cancellation to all countries that need it to reach global poverty-reducing goals. This would include countries devastated by HIV/AIDS – such as Lesotho – that have not been included in agreements for debt cancellation to date.

Second, Bush should put an end to the unconscionable practices of “vulture funds.” Vulture funds are private creditors that buy up distressed developing country debt on the secondary markets, then refuse to join other creditors in the debt relief process and instead sue poor country governments for a big mark-up. Last year, Zambia had to pay $15 million to Donegal International, a vulture fund that originally paid $3 million for the debt. The president should support changes to U.S. law that would make profiteering by vulture funds illegal. While that work is underway, he could immediately reach out to non-Paris Club creditors in the U.S. sphere of influence and urge them to sign onto a new Paris Club agreement that commits creditors not to sell claims on the secondary market.

Another problem facing Africa now is a rapid re-accumulation of debts, including massive new lending from China. The administration’s plan to address this problem has focused on an IMF/World Bank framework that punishes debtors by hardening the terms of soft loans they get from the World Bank if they borrow too much. But this approach is likely to only worsen the problem and punishes poor countries without addressing creditor co-responsibility for the problem. Only a strong, binding international system for responsible lending and sovereign debt restructuring, which holds creditors and debtors responsible, can ensure debt sustainability in the future.

Finally, to answer the question of who owes whom, the United States and international financial institutions including the IMF and World Bank should audit past lending in Africa. Such an audit should look at which debts are odious, onerous, or illegal. Having this information will help us learn lessons from the past and avoid the same mistakes in the future.
To enhance his legacy in this area, President Bush could announce his support for the bi-partisan Jubilee Act for Responsible Lending (S. 2166 / H. 2634). This bill, currently pending in Congress, addresses many of the elements of the unfinished agenda on debt.


Neil Watkins is National Coordinator of Jubilee USA Network, an alliance of religious organizations, development agencies, and human rights groups working for debt cancellation and responsible lending for impoverished nations


What Does Africa Owe

Get your own at Scribd or explore others:

Global Crisis -- Made in America

By Joseph E. Stiglitz
Spiegel on line
November 12, 2008

http://www.spiegel.de/international/business/0,1518,590028,00.html

It should come as no surprise in a world of
globalization that it's not just the good things that
move more easily across borders, but the bad things as
well. Now, America has exported its downturn to the
world.

A global financial crisis requires a global solution.
Uncoordinated macro-economic policies, for instance,
have contributed to Europe's problems. When the
European Central Bank refused to lower interest rates
earlier this year, focused as it was on the threat of
inflation, while America's did, focused on the
impending downturn, it led to a stronger euro. This in
turn contributed to Europe's downturn, though it made
America's GDP numbers look better for a while. Now,
Europe's downturn is ricocheting back on America:
Europe's weaknesses are contributing to America's.

The same has happened when it comes to regulation. To
too great extent, there has been a race to the bottom
in accordance with the myth that deregulation breeds
innovation. Instead, the innovation was greatest when
it came to getting around the regulations designed to
ensure good information and a safe and sound financial
system.

Financial markets are supposed to be a means to an end
-- a more prosperous and stable economy as a result of
good allocation of resources and better management of
risk. But instead, financial markets didn't manage
risk, they created it. They didn't enable America's
families to manage the risk of volatile interest rates,
and now millions are losing their homes. Furthermore,
they misallocated hundreds of billions of dollar.

The Human Toll

The consequences of these mistakes will run into the
trillions -- not just the money that is being spent on
the bailouts, but the shortfall between global economic
potential growth and actual performance.

Beyond this, of course, is the human toll -- families
whose life dreams are destroyed as they lose their
homes, their jobs, and their life savings. If we are to
maintain global financial liberalization, with
financial products moving easily across borders, we
must be sure that these products are safe and that the
financial institutions who are selling them can stand
behind the products they create.

Financial market regulators, at both the national and
international level, have failed. To a large extent,
Basel II, the new framework of bank regulation, was
based on self-regulation, itself an oxymoron. Banks
have shown that they are not up to the task of managing
their own risk. But even if they had, there is the more
fundamental problem of systemic risk.

The current global financial architecture hasn't been
working well. But more than that, it is unfair,
especially to the developing countries. They will be
among the innocent victims of this global crisis that
wears the 'made in America' label. Even countries which
have done everything right -- those which have managed
their economy with far better regulation and better
macro-economic prudence than the US -- will suffer as a
result of America's mistakes. Worse, the International
Monetary Fund has -- at least in the past -- demanded
pro-cyclical policies (raising interest rates and
taxes, lowering expenditures when an economy goes into
a recession), while Europe and America do just the
opposite. The result is that capital flees developing
countries in times of crisis, reinforcing the vicious
cycle.

Flawed Governance Structure

There is mounting evidence that the developing
countries may require massive amounts of money, amounts
that are beyond the capacity of the IMF. The sources of
liquid funds are in Asia and the Middle East. But why
should they turn their hard earned money over to an
institution with a failed track record; one which
pushed the deregulatory policies that have gotten the
world into the mess where are in now; one which
continues to advocate the asymmetric policies which
contribute to global instability; and one whose
governance structure is so flawed?

We need a new financial facility to help the developing
countries, one whose governance reflects the realities
of today. Going forward, this new facility might lead
to deeper reforms at the IMF. Such a facility needs to
be created quickly, but if experts from the finance
ministries and central banks are loaned out to this new
institution, it could be up and running in short order.

There are further reforms that need to be undertaken.
The dollar-based global reserve system is already
fraying -- the dollar has proven not to be a good store
of value. But moving to a dollar-euro, or a dollar-
euro-yen system could be even more unstable. We need a
global reserve system, for a global financial system.
Keynes wrote about this at the time of the last big
downturn, but the need today is even greater. His hope
was that the IMF would create a new global reserve
currency. He called his Bancor, much akin to the IMF's
SDR (special drawing rights). This is an idea whose
time may have finally come.

It is inconceivable that America would have prospered
had it left the management of its financial system to
the 50 separate states. They have a role, but that of
the national government is essential. We now have a
global financial system, but we are leaving its
management to that of the individual countries. This
system simply cannot work.

We will never achieve perfect stability of our
financial markets, or of our economy. Markets are not
self-correcting. But we can do a lot better. Hopefully,
at the summit in Washington, the leaders of Europe and
Asia will lead the way, beginning the task of creating
the global financial architecture that the world needs
if we are to have a stable and prosperous 21st century.
_____________

Joseph E. Stiglitz, 65, won the Nobel Prize in
economics in 2001 for his contribution to analyses of
the relationship between markets and information
uncertainties. He is widely cited and writes a popular
column for the New Yorker.

Click on the link below for a powerpoint slide show about Tom Friedman's book,
The World is Flat. My assessment of the book (and his previous book, The Lexus and the Olive Tree) is that he is correct in most things, but far too positive about what globalization is doing to poor people on the ground. But he writes extremely well and has done much to raise these issues to the common person's awareness.

The World is Flat

View SlideShare presentation or Upload your own. (tags: globalization world is flat)