Third World Debt: an instrument of control

MP Giyose* discusses the London Agreement (1953) and the HIPC (1996) and argues that Third World debt is a means to control the Third World.

February 27th marks the fiftieth anniversary of a debt-related event that ought to attract massive public interest, at least in poor countries. More than any other event, this one highlights the politics of debt and underscores the extent to which the current debt crisis has been manufactured and sustained by the creditors and the governments that serve the interests of international banks and multinational corporations.

The London Agreement

The 1953 London Agreement dealt with the debts of the then West Germany. The terms of the agreement ought to make today’s western leaders and the major international bankers hang their heads in unmitigated shame for the entirely avoidable deaths, sufferings and humiliations of hundreds of millions of people today.

The London Agreement dealt not only with the debts of the defeated enemy of World War Two but of an enemy that in the annals of world history stands out as having been particularly evil. Germany, of course, was the enemy in World War Two and the defeated enemy in World War One. Germany had not repaid the debts incurred on the money borrowed to pay the reparations arising from that latter war. The London Agreement therefore dealt, additionally, with Germany’s outstanding World War One debts.

In other words, the creditors and the creditor governments that met in London in 1953 did so to consider the debts of a country perceived to have been responsible for two world wars and the deaths of countless millions, along with the repeated destruction of huge parts of Europe and elsewhere. No less relevant, when viewed against Third World debt, the German people were seen as having been overwhelmingly enthusiastic supporters of their government’s war efforts during most of both World Wars.

The contrast between the guilt behind the German debts and the innocence of most of the Third World debt could therefore not be greater.

The Origin of Third World Debt

The origin of much of the Third World debt lies in the recklessness of western bankers who, in the early 1970s, deliberately unloaded surplus capital on the Third World in the form of loans. What is more, much of these aggressively marketed loans were ‘odious’ in international law and therefore not covered by the obligations of sovereign debt. The Doctrine of Odious Debt removes any duty to repay the debt if the loan was contracted by dictatorships primarily for the benefit of the dictatorships, and the creditors were aware of the nature of the regime to which they were lending. The debts contracted by the Marcos dictatorship in the Philippines and the Mobutu dictatorships in the Congo are clear examples of odious debts. So, too, are the debts incurred by the military dictatorships of Argentina and Brazil? Being ‘odious’, the successor governments of those countries have no legal responsibility for any of those debts.

It is clear that most people suffering from Third World debt today have had nothing to do with either creditor recklessness or the odious debts contracted by their unpopular rulers.

The HIPC Initiative

Notwithstanding their innocence, the First World has insisted on its full pound of flesh. Full debt repayment has been required regardless of all other considerations, including even the right to life itself. An exceedingly limited rethink did take place in 1996 but then only because the unpayability of the debt could no longer be avoided. The awful suffering caused by the debt had little if anything to do with this rethink. Similarly absent from consideration were questions of morality or international law. The debt was regarded as unpayable only because it was palpably unpayble in strictly financial terms: debtor countries were becoming increasingly indebted because of having to take out new loans in order to repay previous loans granted to repay original debt. It was this debt trap that was singularly responsible for the First World’s acceptance that something had to be done about the debt.

The outcome of this slowly developing rethink was the Highly Indebted Poor Country (HIPC) initiative. The HIPC, presented with much fanfare as an example of unparalleled western generosity, laid down very strict economic criteria for inclusion under the scheme. To be poor was not sufficient; neither was being heavily indebted. To qualify for consideration as a HIPC country and therefore potentially benefit from its partial debt ‘forgiveness’ a country had to be both extremely poor and very heavily indebted. In the event, only forty-one countries qualified for consideration under HIPC. This initial qualification, however, did not in itself result in real debt reduction.

The Germany of 1953 would have come no way close even to being considered a HIPC candidate, notwithstanding the destruction of its economy during the war or the poverty of its immediate post war inhabitants. In terms of today’s criteria, the Germany of 1953 was positively well off and would be ranked a middle-income country. This did not matter in the slightest to the London negotiators. Neither did Germany’s culpability in two world wars have any bearing on the terms of the London Agreement. The London Agreement was designed to assist Germany not punish it, regardless of the enormity of Germany’s perceived guilt.

Not one of the main arguments nowadays put forward by the G7, the World Bank, the International Monetary Fund (IMF) and other international bankers as to why they simply cannot do more to help ease the burden of HIPC debt is to be found in the London Agreement. Politicians and bankers alike tell us how utterly tied their hands are by economic imperatives way beyond their control. To a person, they assure us as to the nobility of their intentions were it not for their powerlessness in the face of cold economic realities. They claim to have stretched the integrity of the world economic and financial system to its limits, in their desire to be as helpful as possible in ameliorating the problems of Third World debt.

The London Agreement vs the HIPC

The contrast between the terms of the London Agreement and HIPC both give the lie to their arguments and exposes the hypocrisy of their proclaimed intentions. Consider the following:

• Germany was required to pay a maximum of 3.06 percent of its annual export income on repaying its debt. For the poorest countries on earth, HIPC required them to use between 20 and 25 percent of their export income on debt servicing.
• To qualify for consideration under HIPC,

a country’s total external debt had to be in the order of 160 percent of its GDP. Mainstream economists see ‘debt ratio’ as being problematic if it is anything between 80 and100 percent, that is, if the debt is equivalent to between 80 and100 percent of what a country generates annually in its own currency from all economic activities. Germany’s debt ratio in 1953 was a mere 21.2 percent.

• To qualify for consideration under HIPC a country’s foreign debt had to be at least 250 per- cent larger than its national budget. Germany’s ‘fiscal debt ratio’ in 1953 was 4.9 percent.

• The contrast between the London Agreement and HIPC is, if anything, even more stark when measured against the additional HIPC condi- tions that have to be met before debt relief is rewarded. Stringent public expenditure cuts in

Third World Debt: an instrument of control Documents health, education, housing and social security schemes, along with policies and practices to promote and protect a ‘market economy’ free of import restrictions and attractive to foreign investors are core HIPC conditionalities. A candidate country had three years in which to introduce these requirements. It then had a fur- ther three years in which to demonstrate the con- solidation of its good behaviour before receiving very limited debt relief. The London Agreement placed no similar conditionalities on Germany.

• What the London Agreement did instead was to place significant conditionalities on the creditors themselves. HIPC ignored such de- mands on the creditors. The London Agreement required three major benefits from creditors. First, creditors had to promote German exports because the debt payments were made entirely from trade surpluses. No trade surplus meant no debt payments; reduced trade surpluses meant reduced debt servicing.   Second, Germany had the option of imposing import restrictions if the balance of trade with any of the debtor coun- tries failed to produce a surplus. Finally, credi- tors were given no resort to sanctions against Germany, in the event of any German infringe- ment of the agreement. The most that the creditors could expect was the convening of direct negotiations with the option of seeking advice from an appropriate international organisation.

Debt: different political purposes

The extraordinarily generous terms of the London Agreement are no more difficult to understand than the extraordinary punitiveness of HIPC.Their differences lie in their very different political purposes. The London Agreement seems to be generous only when compared to what our governments, financiers and economists now say about what can be done to ameliorate the enormous debt burden of the Third World. The London Agreement was not designed as an instrument of control, as is HIPC. Rather, the London Agreement was designed politically to promote Germany’s reconstruction, but without having to cancel Germany’s debts.

These, at least, are the conclusions offered here. Whether or not one agrees with them is a matter of debate. What is no longer open to debate are First World claims that everything that can possibly be done to ease the current debt burden is being done. HIPC has gone through a number of name changes in recent years, in response to growing public pressure. But regardless of the name being used its substance has remained all too recognisable. Meanwhile, Third World debt remains a very effective killer and continues to destroy entirely innocent lives by keeping hundreds of millions of people trapped in poverty, ignorance and disease.

What the London Agreement exposes clearly is that the Third World debt trap is an instrument of deliberate policy. At the stroke of a First World pen, things could be very different. A contemporary London Agreement would go a long way to freeing the Third World from its debt bondage.

Some Germans, associated with the world-wide Jubilee anti-debt movement, are giving the lead in publicising the present relevance of this 1953 treatment of German debt. Successive German governments, by contrast, gave the lead in being the most hard-line about Third World debt: the view being that the debt must be paid with the least possible assistance to the debtors. The governmental position of the country that reaped enormous benefits from the London Agreement has been openly hostile to anything remotely similar being offered to countries in far greater need than it was.

* MP Giyose is the chairperson of Jubilee South Africa. This article first appeared in the Mail & Guardian.