ATTAC - Jubilee South South -The Development and Historical Context of the Debt Crisis

As it was in ancient society when usury thrived under conditions of widespread impoverishment on the one hand and the concentration of wealth on the other hand; so does usury in modern society thrives under condition of massive accumulation and concentration of finance capital coupled with widespread underdevelopment. This is the situation in the world today. And for as long as such opposite poles of concentration of wealth and poverty is maintained the cycle of indebtedness continues.

How usury thrives in such polarized situation is clearly demonstrated in the case of the backward agricultural economies still prevalent in much of the third world where usury still remains a major form of exploitation and debt peonage a means of subjugation of a mass of impoverished peasants. Usury and other forms of exploitation leave the peasant barely enough for his means of subsistence; a situation that ensures his perennial dependence on the moneylender.

It does not matter to the usurer whether the peasant had a good crop or not. What matters to him is that debt is paid even if nothing is left for the peasant's subsistence and, much less to improve his production. In fact, if misfortune befalls the peasant as in the case of a bad crop, the moneylender would only be too willing to extend another round of loans to the peasant to be paid after the next harvest. This trick assures the moneylender a good share of the next harvest even before the crop has even been planted.

As often happen the debt grows to the extent that it cannot by any stretch of imagination be paid. Then the moneylender can take possession of the land step by step until he fully owns it. But even under these new circumstances he will not banish the peasant from the land; he can make him a sharecropper and, as before, still advance his subsistence and production needs as well. And the cycle of indebtedness, therefore, continues but under more onerous terms and, often, from one generation to the next.

Modern day international usury is, of course, much more complex than the more primitive relation we have just presented. Total Third World debt amounts to USD2 trillion; annual payments is about USD 200million. The system of debts has evolved into a key aspect of the capitalist economy; a weapon for consolidating the domination of the people’s of the Third World. In many ways, the debt today is a weapon more potent than others devised by colonialism and neo-colonialism. It is institutionalized to a

very high degree, is regulated by a massive bureaucracy of the multilateral finance institutions; and backed up by the military might of the mightiest nations on earth. Worse the burden of paying debts is passed on to society in general as a routinary process.

Nonetheless, the parasitism that is characteristic of usury is there and, in fact, far more pronounced than in earlier periods of history. The modern international finance oligarchy, in contrast to the industrial capitalist, which dominated the earlier stage of capitalism, is completely detached from production and entrepreneurial activity. It makes billions in interest payments on the huge loans and more so on speculative investments rather than industrial production. It has created more financial instruments it abuses to the hilt. The big capitalists are more into betting on financial instruments and fluctuations in exchange rates than into improving production.

Modern usury is based on a highly developed system of production, employing science and technology to a high degree. Yet poverty is spreading even official statistics must admit. Obviously this is not due to scarcity of the means of human subsistence. On the contrary, there is so much means of subsistence in the world today but the problem of the big capitalists is how to sell the goods at a profit. For the last two decades the world economy has been plagued with a chronic crisis of over production. On the other hand, there is so much accumulated capital while the opportunities for investment are shrinking. Thus, this huge accumulated capital roams the globe to accumulate more profits but in the process wrecks havoc on economies of the south and east.

It is within this context that the debt crisis and the growing indebtedness of the third world must be understood. The onset of the debt crisis in 1982 was a manifestation of the crisis of global finance capital. It simply means that the capitalist trick of lending more and more money to the third world countries to facilitate the sale of surplus goods and as a way of investing surplus capital has its own limits. The injection of more loans (and other forms of finance capital for that matter) to the third world has at best provided only temporary relief, nay, postpone the recurrence of the debt crisis only to flare up later in far more destructive ways. There has been no real solution to the debt crisis. On the contrary, in the last few years, the debt crisis flared up several times in ways more devastating than at anytime in the past.

The IMF and the World Bank have turned the debt crisis into an opportunity to arrogate for themselves unprecedented regulatory powers over, and at certain times even get to micro-manage, economies of the Third World while ensuring the profits of global monopoly capital. As monopoly finance is confronted with its own crisis it "perfects" the institutions, devise new tools, and create more favorable conditions for generating profits and for intensifying exploitation and subjugation of Third World. However, as has been shown by the recent crises in Asia, Eastern Europe and Latin America, "neo-liberal" schemes, improved or otherwise, lead to crises far more devastating than previous ones.

Before we dwell on the historical development of the debt crisis let us briefly go over the emergence of the monopoly finance which today controls the commanding heights of the global economy.

In the last decades of the nineteenth century the free competition that has up to then characterized capitalism in the industrialized countries gave way to the dominance of monopolies. Monopolies have concentrated production, divided the market among them, controlled the supply of raw materials, bought or forced the submission of smaller rivals into their "organizations." The ascendance of monopolies did not come suddenly. This development was impelled by the internal dynamics of free competition, i.e., the need for accumulation of larger and larger amount of capital as the condition for survival in the fierce competition among various capitals; and the cyclic and intensifying commercial crises that came with capitalist expansion.

Banking was also transformed with banks assuming a new role. From their modest role as middlemen in the making of payments, the banks grew into powerful monopolies. A few big banks have taken over the place of numerous small banks and have within their control, to mobilize for generating profits, the whole capital of the society, of the big and small capitalists. At the same time, the capital of the banks increasingly merged with industrial capital, placing the banks in a more powerful position, over industry in general. With merging of industrial capital and bank capital, the finance oligarchy emerged; finance capital has established its dominance over the capitalist economy.

The export of capital as opposed to export of commodities from the industrial economies assumed particular significance. Accumulation gave rise to surplus capital. Thus, capital flowed in the form of loans and direct investments from the industrial to foreign countries because profits were higher on foreign investments. In fact, in certain aspects (e.g. as a percentage of GDP) [1], export of capital was higher then than in the present era of "globalization." Then as now, the creditors were often able to obtain "advantages", some extra profits like for example a favorable clause in a commercial treaty, an order for guns or ships, contract for construction of a harbor etc.

Britain among several imperial powers took the lead. "As capital accumulated in the hands of the wealthier class in Britain they found lending their capital abroad or investing it in overseas enterprises to be more profitable than investing it in Britain itself." But the rash in lending and foreign direct investments reduced the available capital that could have been used to upgrade industries in Britain. Consequently, Britain's industrial production and manufacturing lost pace with its rivals. "By the 1870's, British industrial monopoly was lost, Germany and the US especially, were not ready to see Britain's position of supremacy continue unchallenged. Coming later in the industrial scene, they could take advantage of more advanced technology, more modern factories, and little by little, these countries began to out-produce and undersell Britain." [2]

Uneven development, the unceasing struggle for control of markets and raw materials, and the crisis of overproduction would eventually lead to two world wars among the imperial powers for a redivision of the world. The wars devastating as they were to the means of production of countries that were involved brought enormous profits to monopoly capital.

In the intervening period between the two world wars there was a vast expansion of investments and concentration of capital through mergers and buyouts of smaller enterprises. But this rapid expansion shortly led to the crash in 1930. The western economies would recover after the institution of some reforms but the "great depression" would be resolved finally by another war.

The US was the biggest gainer in both wars, economically and politically which to a large extent explains the present relative strength of various capitals on a worldwide scale. The US emerged out of World War II as the dominant capitalist power. Thus, imperatives of US dominance over the capitalist world became the most important factor in the political and economic development in the "free" world in the post World War II era. The phenomenal rise of the debt of the Third World with in two decades after World War II is directly linked to the need for US capital to continuously expand its markets through out the world.

Starting with the American "foreign aid" drive in the years following the war to the present regime of liberalized financial flows the debt of third world countries has risen from USD9.7 billion in 1956 to USD 41.5 billion in 1967 [3], USD 62 billion in 1970, USD481 billion in 1980 [4] to the present level of USD2 trillion.

So rapid was this accumulation that by the 70s massive defaults threatened the system. The massive infusion of new loans by the multilateral finance institutions postponed the crisis by a decade. By 1982, the accumulation of third world debt has matured into a full-blown crisis that threatened the international financial system. The debt crisis since then has become chronic. This development can be understood in the context of the imperatives of US monopoly capital to expand its markets in the post war period.

The American economy geared towards production for the war achieved phenomenal growth during the war. Moreover, the war was fought in Europe and Asia thus sparing the continental US of the physical devastation that other capitalist powers suffered. Thus the productive capacity of the US economy increased geometrically. For example the US at the end of the war accounted for 45 percent of the world's income, produced 60 percent of the manufactured goods, in control of 70 percent of the oil supplies, produced 55 percent of steel and other metals, one third of the world wheat. [5] US capital was, therefore, confronted with the problem of disposing the large stockpiles of military, industrial and agricultural products generated by the heightened industrial capacity and the large accumulated surplus capital to be disposed of was the problem of US capital.

Within a few years after the end of World War II, a depression triggered by the over-production of commodities threatened the US economy. In October 1946, the Office of International Trade of the US Department of Commerce estimated that "in 2 to 3 years US industry would have saturated the domestic market with supplies." The only way out was "to plan a decided expansion in overseas business."[6]

But the economic side of the picture presents only a partial view of the realities the US was confronting at that time. In political terms the US divided the world into "the free world" and the "communist non-free world." More precisely the identifiable political alignments in the post world war II period were: (1) The US and other capitalist powers (including Japan and Germany who were the enemies of the allies in the war) and the underdeveloped countries that were under the influence of the capitalist powers; (2) The Soviet union and the other socialist countries; (3) The non-aligned countries that refused to be controlled by either bloc together with the strong national liberation movements in Asia, Africa and Latin America.

Given the political and economic reality, US foreign policy was organized around the twin objective of the defense of the "free world" or the "containment" of communism together with the national liberation movements; and the creation of markets for surplus US goods and capital. Felix Greene (7) outlines the imperatives for foreign policy in the period following the Second World War thus: to keep the existing capitalist world capitalist; to find ways to invest surplus capital abroad where the biggest profits can be made; to find markets for American goods; to secure control over sources of cheap raw materials; the establishment of unchalengeable military power.

The disbursement of "Foreign Aid" (the euphemism for loans and grants) was linked to the politico-military and economic objectives. Of the total USD115 billion 30 percent went to the developing countries, 39 percent went to Europe and Japan, 31 percent to countries that were in the periphery of the socialist bloc. Foreign aid was used to entice and blackmail governments to toe the US line. Of course, should the blackmail by the use of foreign aid and loans fail the US invariably resorted to covert (coup, assassinations etc) and overt military interventions from the numerous military bases all over the globe.

The first of the big loans the US extended in pursuit of the above objectives were the Marshall and Dodge plans intended to "rehabilitate," in fact, create the markets for American commodities in the devastated economies of Europe and Japan. The Marshall and Dodge plans benefited the US monopolies. But unlike the loans to the third world there would be no accumulation of foreign debt among the recipients since they were able to build their industrial capacity and pay the debt and, in many cases, in their own terms.

"Foreign aid" to third world countries (about 30 percent of the total USD115 billion) Europe would have the opposite effect. It initiated the process of perpetual accumulation and dependence on the debt. From then on the accumulation of third world debt was geometric and the only way by which the system could continue was for debts to be continually recycled to maintain the legitimacy of as well as the Third World’s dependence on debt.

The fundamental cause of the perennial indebtedness is the inherently unequal balance of trade between the predominantly agricultural and pre-industrial economies of the third world and the industrial economies of the first and second world. The third world economies, fixed by the neo-colonial order to the production of raw materials, agricultural products and low value added semi-manufactures cannot earn enough foreign exchange to pay for capital and consumer goods they must import from the industrial countries. More over since the 1980's falling prices of primary products from the third world has resulted in deteriorating terms of trade. [8] Periodic devaluation of their currencies forced on them by the IMF/WB makes exports cheaper (hence more exports to earn the same amount of foreign exchange), and cause inflationary spirals in the domestic economy. Hence, from year to year, the balance of trade and balance of payment deficit deteriorate.

This chronic deficit in trade and the attendant deficit in the balance of payments is only once in a while masked by extraordinary factors such as the temporary rise in the prices of primary commodities, overseas workers’ remittances (labor export), a surge in foreign direct or portfolio investments. Normally, however, the deficit is covered by the infusion of fresh loans to allow the country to continue importing goods from the industrial countries and to service the foreign debt.

Ironically, debt servicing, in conjunction with the remittances of profits by TNCs, importation of luxury goods by the local elite etc. drains the local economy of resources needed to industrialize and develop. It is therefore fixed to the agrarian, pre-industrial level. It is caught in a trap resuscitated periodically by the infusion of loans and investments.

In the period of "aid and investment" the primary source of loans for the third world countries were official development assistance budgets of the industrial countries and the IMF and the World Bank. By the 1970s, however, commercial banks encouraged by the IMF/WB and with large amounts of dollars in their hands, joined the action in a large scale. For every dollar the IMF/WB invested into third world loans it attracted 2-3 dollars from the commercial banks. [9] At this time lending to the third world was attractive because prices of third world commodities were rising which perpetuated the belief that the underdeveloped economies would have no difficulty servicing their debts; and interest rates for loans to the third world were high because it allegedly entail high risks. More important is the fact that the commercial banks believed that the IMF/WB would come to their rescue should there be a danger of default. [10]

Given the above conditions the banks were emboldened to extend loans even to dubious recipients and projects such as the Bataan Nuclear Power Plant, which the banks knew, was Marcos' milking cow from its inception [11]. All the actors in the lending scheme including the administrators of apartheid in Africa to the military dictators of Latin America and the autocratic dictatorships in Asia had their own roles to play to keep the system afloat. Their corruption and indiscretion were part of the lending system at this particular juncture in history but did not by themselves, cause the rapid spiraling of the debt much less were its fundamental cause. Of course, they were the frontliners in the "containment" of communism and the national liberation movements as well as loyal clients of international finance capital. And in the process too, they enriched themselves at the expense of their own people.

Through out the seventies the IMF and World Bank too increased lending to the third world to finance large-scale infrastructure projects (e.g. dams) including prestige projects of autocratic and dictatorial regimes in the third world. It also refinanced the maturing loans from the commercial banks. Hence, loans from these multilateral institutions grew rapidly and put them in a more powerful position, vis a vis the debtors.

"The over riding concern (in the increased lending) was not over the sustainability of these loans but on expanding markets and political stability for the US and its allies." [12] That is why in the late seventies up to the eve of the Mexico triggered debt crisis in 1982, the US, the WB and IMF kept calling for an increased lending to the third world by the private banks. Of course, they were aware that unless there is increased lending (up to 12 percent increase per year until 1985 according to the IMF and WB) the house of cards would collapse and the system destabilized.

In 1982, "Mexico blew the whistle" that signaled the onset of the debt crisis. Mexico sought a moratorium on payments and announced that it could not service its debt. Subsequently and twenty-nine other countries at least expressed their intention to seek a moratorium on debt payment.

For over a decade the IMF-WB postponed this impending system's failure with some degree of success by the massive infusion of new loan capital which increased the indebtedness of the underdeveloped countries in a big way. However, in the early eighties the inherent defects of the monopoly capitalist system would manifest in the incapacity of many countries to service their debt. There was a recession in the industrial countries, which in turn dampened the demand for third world products and prices of these products tumbled (and has been falling ever since) which made the servicing of the debt difficult. Moreover, because of the economic crisis the sources of new loans to the third world also dried up. The IMF-WB came to the rescue but this time with a whole package of conditionalities, which would open the third world economies, more systematically, to the ravages of finance capital.

Thus began the push for "structural adjustment programs" ostensibly to put the third world economies on "sound economic fundamentals." Contrary to the avowed objective, however, SAPs only deepened underdevelopment and indebtedness of the Third World. In reality SAPs aims to open up the third world economies to international capital while freeing government resources for debt servicing.

In the early 80’s the international finance institutions devised a "new" system of lending that links loans to a whole set of macro-economic reforms. The IMF/World Bank since then not only ensure the servicing of all debts of the Third World to the Paris and London Clubs, it also uses the debt as a leverage for putting into place the very same economic policies that is at the bottom of the ever deepening indebtedness.

Structural Adjustment Loans (SAL) or loans tied to Structural Adjustment Programs are a "new generation" of loans, which are tied to a set of macro-economic reforms which aim to make the third world economies' import dependent, export oriented and debt driven. Unlike conventional loans which have specific objectives (e.g. a loan for the construction of a dam has the objective of raising agricultural production for instance), SALs are extended precisely to change macro-economic policy. Thus, SALs constitute a new level of debt slavery of Third World nations by monopoly capital.

These destructive powers of the IMF/WB on the world economy as concretely exercised in its imposition of the structural adjustment program (SAP) in exchange for loans evolved with the accumulation of Third World debt and the deepening debt crisis. For as long as the debtor countries recognize the legitimacy of the debt, the coercive power of the multilateral financial institutions over the client countries grow proportionately with the debt.

The SAP is in accordance with the original purpose of the IMF and the WB but is also a specific response to specific exigencies of expansion of the market in the 80s and as capitalism was confronted with one crisis after another.

The IMF and the World Bank were founded, in July 1944, one year before World War II ended, when the US and Britain convened a conference of 44 nations at Bretton Woods. The conference was called to chart a post war international financial and monetary system in the framework of "open and free market" as espoused by the US. It was urgently necessary for the US to initiate this in anticipation of the post-war capitalist rehabilitation and reconstruction and the giant strides achieved by anti-capitalist forces in Europe and Asia.

Thus, in what was officially called the "United Nations Monetary and Financial Conference" the US, Britain and 44 other nations agreed to "the establishment of two financial institutions - the International Monetary Fund (IMF) and the International Bank for Reconstruction and Development (IBRD) later renamed World Bank (WB).

"The conference also agreed on US Dollar-Gold standard, setting the value of the US Dollar at $36 to the ounce and the value of other currencies (except the British Pound Sterling that was also gold-based) are based on the dollar." (On this premise countries assumed that their Dollar earnings (reserves) have the equivalent amount of gold deposited at the US Federal Reserves at Fort Knox. This in fact instituted the US Dollar are the world's medium of exchange.)

Finally the conference redefined "trade to include finance capital and; instituted trade and finance liberalization through finance liberalization and deregulation. Article VI (Capital Transfers) - state "member countries may exercise capital controls so long as it does not hinder trade." [13]

The Bretton Woods Conference also defined three main functions of the IMF: "to administer a code of conduct with regards to exchange rate policies and restrictions to payments on current account transactions; to provide members with the financial resources to enable them to observe the code of conduct while correcting or avoiding payments imbalances.

"The code of conduct was designed to ensure that payments for merchandize trade and services and other current transactions could take place freely and that all balances arising out of these transactions were convertible into other currencies to be used to make payments for further current transactions." [14] Of course, convertibility of currencies referred to in the code is convertibility to the US Dollar - the de facto international currency - and the liberalization of foreign exchange transactions.

It is clear that by design the IMF and the WB were to support the expansion of US capital in the post war era the former specifically by providing resources by which countries experiencing balance of payment difficulties could balance their current accounts and thus continue importing goods from the US; and, the latter, by providing long term loans for development often times conditioned on the use of foreign materials and equipment and the hiring of foreign technical consultants. Loans were also tied to other "conditionalities," political and economic, the political consideration of "containing" communism being significant at the height of the cold war.

In the period of "aid and investments," official development agencies - governments, the IMF and the World Bank - were the main sources of loans. In the early seventies, the commercial banks goaded by the IMF and WB came to the fray. We must also recall that the IMF/WB, in the seventies, increased its lending to third world countries by financing "mega-projects" and refinancing the loans obtain from the commercial banks. Consequently, the two institutions acquired and came to wield enormous influence and power over client countries.

The process by which the IMF and WB came to acquire influence and power over indebted countries is describe by Prof. Chosudovsky [15] thus:

"Through financial 'engineering' and the careful art of debt re-scheduling, repayment of the principal is deferred while interest payments are enforced, debt is swapped for equity and 'new' money is 'lent' to nations on the verge of bankruptcy to enable them to pay off their interest arrears on old debts so as to temporarily avert default, and so on. In this process, the formal loyalty of individual debtors is paramount. The creditors accept to reschedule only if the debtor nations abide by the 'conditionalities' attached to the loan agreements."

In the early eighties, "a new generation of 'policy-based loans' was devised. Money was provided 'to help countries to adjust.' The money was granted only if government complied with structural adjustment reforms while at the same time respecting very precise deadlines for their implementation… These loans were granted subject to the adoption of a comprehensive program of macro-economic stabilization and structural economic reforms… [and] were not in any way related to a program of investment as in conventional project lending." Moreover, the implementation of policy reforms is tightly monitored by the financial institutions and releases could be interrupted if the government did not conform.

"The adoption of the IMF's policy prescriptions under the structural adjustment program is not only conditional for obtaining new loans from multilateral institutions, it also provided the 'green light' to the Paris and London clubs, foreign investors, commercial banking institutions and bilateral donors. Countries which refuse to accept the Fund's corrective policy measures faced serious difficulties in rescheduling their debt and/or obtaining new development loans and international assistance. The IMF also has the means of seriously disrupting a national economy by blocking short-term credit in support of commodity trade."

Many of the IMF/WB impositions in the structural adjustment programs have been incorporated in the agreements in the WTO. Thus, while the IMF imposes structural adjustment to 100 individual countries simultaneously through "debt management," the WTO completes the generalization of structural adjustments on an international scale by providing the legal basis for these in international law.

The IMF, WB and the WTO in fact "regulate" the world economy in the name of finance capital; and "manage" it through the deliberate manipulation of market forces. They force structural adjustments allegedly to enable countries to take advantage of the "globalizing" economy but actually to create the optimum conditions for the extraction of surplus by a handful of finance capitalist from the whole of society in both the north, south and now also the east.

SAPs invariably include two phases - phase one concerns the stabilization of the economy and phase two is the implementation of structural reforms. Phase one, economic stabilization includes devaluation, price stabilization, and budgetary austerity. According to the WB, "Getting macro-economic policy right…Keeping budget deficit small helps in controlling inflation and avoiding balance of payment problems. Keeping a realistic exchange rate pays off in greater international competitiveness and in supporting convertible currencies." Phase two is a package of reforms pertaining to trade liberalization, tax reform, and privatization of government corporations.

Devaluation for its immediate and far-reaching consequences is the most important of the package of policies in the "economic stabilization" phase. Ironically, it destabilizes rather than stabilizes the economy. It increases the debt in terms of the local currency, prices of imports rise while those of exports drop; assets are deflated and become very attractive for takeovers. Industries and enterprises devoted to production of goods for the local economy are the worst victims of the rising cost of imports, and lower prices of their commodities, credit crunch, rising interest rates and the contraction of the market.

The impact on social classes and sectors are cruel - unemployment, fall in real wages, rise in the cost of social services, inflation and so on. The empirical evidence showing the negative impact of structural adjustment is overwhelming. But the World Bank argues that these are "temporary pains" that society must bear with for "longer gain."

When the Asian crisis erupted and the prospects of long term gain from liberalized economies permanently quashed, the IMF/WB argued that the problem is of too little liberalization, lack of transparency or the way structural adjustment was carried out not structural adjustment itself. On top of this, their responses to the Asian crisis produced exactly the opposite of the intended effect and were severely criticized even by economists in the "neo-liberal" camp.

In 1997, the Asian economies touted by the IMF and WB as model economies for their adherence to the liberalization programs of the former suddenly collapsed one after the other under the strain of huge short-term foreign debt they suddenly found themselves unable to pay. In the process of rescuing their distressed economies, they incurred a combined additional debt of over a hundred and twenty billion US Dollars on account of the IMF arranged "bail out."

The Asian financial is a debt crisis rooted in the same unequal trade between the third world and the capitalist economies of the west, as well as the crisis of over production of the world capitalist system but, however, operating through the system of liberalized financial flows. Half of the huge private debt due that year was incurred by banks and corporations and was made possible in the first place by financial liberalization.

That the crisis broke out in the "growth area" and standard bearers of the "neo-liberal model" of development unravels the extent to which monopoly finance has become counter productive and shows the destructive consequence of the debt crisis.

The "Asian miracle" was triggered by the influx of Japanese direct investments in the Southeast Asian countries mainly Thailand, Indonesia and Malaysia in the latter half of the 80s. The influx was in turn due to the decision of Japanese capitalists to evade the rising production cost in Japan brought about by the forced appreciation of the Yen in the 1985 Plaza accords. Japanese capitalists put up production bases in the Asian countries for the labor intensive production processes as well as the environmentally destructive ones which they were after all being forced to phase out in their home country. USD 15 billion in Japanese investment flowed into the Asian economies between 1985 and 1990. By the end of the eighties however these influx of Japanese FDI began to taper off. [16]

To sustain the inward flow of foreign capital and maintain the initially high growth rates, the Asian "tigers" implemented a package of policies designed to attract foreign capital in the early nineties. The Asian governments implemented the policies of financial liberalization (no control on the movement of capital); high interest rates; and a managed float of foreign exchange (exchange rates were allowed to fluctuate only within a given range). [17] Given the strong growth of the economies initially spurred by the influx of Japanese investment, capital flowed into the Asian economies to "catch the growth." In Thailand, in the early 90's, about USD 50 billion move into the economy annually.

With the huge amount of accumulated capital, the falling rates of profits in the industrial economies, and the fall of the Soviet Union and the wave of privatization of state assets, there was more than enough reason for finance capital to seek higher rates of returns in the "emerging markets." A significant portion of the capital flowing in went into banks and financial institutions which in turned invested into real estate, which gave high rates of returns.

By the middle of the nineties, there was a sudden drop in the growth of exports - Thailand for instance registered 22 and 24 percent growth in exports 1994 and1995 respectively to zero growth in 1996 due to a glut of commodities in the world market. Then real estate sector suddenly realized that there were more properties it had developed than could be sold. Necessarily the real state companies defaulted on their loans from the banks. In Thailand "with the bust in the real estate market, the accounts in 1996…. Were seen as extremely worrisome. The foreign debt stood at USD89 billion of which 80 percent of it was private debt and slight under half of which was short-term debt. The net foreign exchange liabilities of Thailand's banks now came to 20 percent of GNP. A massive debt crisis was in the offing, but unlike the third world debt in the eighties this was one brought about not by government borrowing but by private borrowing…” [18]

The crisis was not totally unforeseen. The 1996 UNCTAD report warned of the dangers of high balance of payments deficits the Asian economies were sustaining especially because "the period of easy export expansion" was coming to an end. [19] In other words UNCTAD saw a weakening of exports thus generating a balance of payments deficit which could trigger capital flight.

Korea's route to its own crisis was quite different. Korea enjoyed special treatment from the US especially during the period of the cold war, it was shielded by the military might of the US and its exports were given preferential treatment in the US market. Japan was the primary source of machinery and capital while the Korean State protected the industries as well as "intervened" in the direction of economic development. With this set of conditions, Korea developed a certain level of industrial capacity so much so that in 1988 it enjoyed a USD6 billion-trade surplus with the US.

In 80's,however, the US now less concerned with the cold war and alarmed by its massive trade deficit launched an offensive to reverse this trend. The East Asian economies became the targets in this offensive. Japan and Korea were labeled as "unfair traders" in the propaganda of the Reagan administration and the US demanded that Korea and Japan take steps to reduce their trade surpluses with the US including the appreciation of their currencies to "cheapen" US exports and make imports from East Asia more expensive. By 1996 Korea was sustaining a USD11 billion-trade deficit with the US.

Korea did not have a chance against this pressure. Korean industry was dependent upon foreign technology, and more over was based on the production of goods that were aplenty in the world market - steel, ships, cars, computer chips, etc. Moreover the chaebols, invested heavily in real estate which in previous years was giving a higher rates of returns than industry and in lines of industries that had "excess" capacity. By 1996 with the drop in export earnings, Korea's current account stood at USD72 billion of a total of USD110 billion external debt.

Investors knew the real situation in Korea (and East Asia) and the Southeast Asian countries. With the precarious state of the balance of payments, panic soon spread. Portfolio investments took flight, so with foreign exchange that was parked in the banks simply taking advantage of the differential in the domestic and foreign interest rates. Speculators joined in the raid the of the foreign exchange reserves of the countries in crisis. Capital flight and dwindling reserves put enormous pressure on the local currencies that eventually led to their devaluation, Thus, was set off the worst economic crisis in the post world war II era.

The raids on the foreign exchange reserves of the Asian economies would be repeated shortly in Eastern Europe and Brazil.

The Asian crisis took the form of concurrent currency devaluation, collapse of the stock market, and massive bankruptcies and tight credit. This ultimately led to a recession of 40 percent of the world economy. The whole economies are thrown back into previous levels of development; a process called "thirdworldization" by some economists. The social consequences include massive unemployment, inflation, declines in real wages, and increasing rates of poverty.

In the latter half 1997 the IMF organized a "bail out" for the three most severely affected countries in the crisis. The bail out is to save the banks and ensure that servicing of the debt continues. Thus the private sector debt was conveniently transferred to the public sector. In Korea of the USD72 billion short-term debt USD 25 billion was paid from the bail out and USD 50 billion was rescheduled but this time guaranteed by government. The banks decide whom to let go bankrupt and whom to resuscitate. Bankruptcies lead to takeover by foreign capital. The creditors imposed new conditionalities to further liberalize of the economy. [20]

Meanwhile in Eastern Europe privatization of state own enterprises led to a large-scale transfer of industries to MNCs who by corrupting the bureaucracy bought these at bargain prices and then mothballed the same enterprises. Competition is thus eliminated together with the potential for developing an independent economy free from the dominance of global capital based on cumulative gains these countries gained in the period of "socialist construction." A very recent article sent to the New York Times puts it clearly;

"The International Monetary Fund and the World Bank are successfully devouring Bulgarian industry. They have insisted on the privatization of Bulgaria's plants and factories. In many cases, the Bulgarian government, which diligently follows the IMF's advice, sold these factories to powerful foreign corporations. And these corporations often liquidated the businesses (a new way to fight the competition!).

What is the result? Hordes of unemployed workers, beggars in the streets, old people digging in rubbish containers for some rag or moldy piece of bread.

We are undergoing untold hardships, yet George Soros, the financier, eggs us on, telling us to open our boundaries, make ourselves an open society. But we in Bulgaria have learned the hard way what those pretty slogans mean. It means killing the industry that is managing to stay alive in Bulgaria. Turkish imports are flooding the market. Socks made in Bulgaria are selling for 1 leva; I have seen Turkish socks, selling for half a leva. So soon we will have only Turkish socks, and no jobs. Lots of low-quality food products and other goods flow freely into Bulgaria, undermining the efforts of local producers…

What is the West offering us in return for this misery? What is the great attraction for foreign corporation in a devastated country? The cheap labor and national resources! So much for open boundaries. So much for an open society."

Such is the situation in Eastern Europe. In Asia too, the means of production are laid to waste as these countries are commanded by the banks to jettison "excess" capacity. Asian industries are operating at a fraction of their capacity [21] that is if they have not closed down completely.

Occurring side by side with this "dismantling" of the Asian and East European economies is the concentration of the means of production into bigger and bigger concerns in an effort to control a bigger share of the market. Thus mergers are on the rise. Ironically "free market" that is supposed to engender competition for the benefit of society is producing exactly the reverse. Mergers are the trend in banking, pharmaceutical, airline, biotech and other lines of industry. Just four MNCs today control the pharmaceutical industry [22] and the recent bank mergers are unprecedented in scale.

In the wake of the crisis, a new round of concentration of productive assets occurs while economies of the south and east are push back, productive capacity is destroyed while the people of these countries are denied of their birth right over their economies.

There is no choice for the people of the third world but to break free from the cycle of indebtedness. The debt crisis is linked to the crisis of the global capitalist system and is bound to worsen as the crisis of the system deepens. The present level of the third world debt cannot be serviced by the underdeveloped countries. New loans only postpone the day of reckoning, increase the debt burden, lay the grounds for worse crisis in the future and serve to tighten the control of finance capital over economies of the third world. In struggling against the debt we must at the same strike at its very roots - monopoly capitalist rule over the world economy.

It will not be enough to call for "debt relief" and more so when these are conditioned on the very same economic policies that exacerbates indebtedness. Debt relief schemes at best are publicity stunts to draw away attention from the real causes of the debt. When debt relief is conditioned on the installation of the very policies that recreate the conditions, which breeds the debt problem then it is an insult to the victims of the debt.

So is it with such deceptive schemes as "debt swaps" that, while ostensibly providing funds for some objectives that are beneficial to the people - credit, protection of the environment etc. - nevertheless mask the basic nature of the debt problem which is the systematic exploitation of the third world through institutionalized usury.

Indeed the discourse on the debt must be enlightened by a thorough going analysis of the system that breeds this problem. The debt crisis is a systemic crisis and we must link our critique of the unjust international economic system; our critique of debt peonage must be linked to our critique of the monopoly capitalist system. As we in the Jubilee South often say that the debt problem is an excellent window to the unequal relations in the international economy.

The call for unconditional cancellation of the third world debt is a just demand. It is just for the third world to demand this and be relieve of the burden of servicing the debt. It is also necessary to call on or exert pressure on the governments of the Third world to repudiate the debt unilaterally. Indeed the third world "owes" nothing to the first world.

These demands challenge the legitimacy of the debt. Such challenge is even more important because of the fact that the ever tightening "conditionalities" that go with the ever deepening indebtedness is based on a recognition of the legitimacy of the debt. That it is illegitimate is proved by the historical circumstances under which it was incurred - apartheid, dictatorship, kleptocracy etc. Most important the debt is based on an unjust exploitative system that systematically appropriates the wealth created by the third world for a few financial oligarchs.

We are often told that the discredited regimes of the past are responsible for the burgeoning of the debt. Of course they played their part in the system of debt during their despotic rule and enriched themselves in the process. But the "democratic" regimes that replaced them through various "people power revolutions" have brought their countries far deeper into indebtedness than their despotic predecessors and are even more avid supporters of the "neo-liberal" agenda of finance capital. There must be recognition of the fact that the economic interest of the elites of the third world, be they of the "autocratic or democratic type," is aligned with that of the international finance oligarchy.

It is not enough to simply go back to some worn out model of the past, and recycle this into the present or even to pick certain aspects of it and graft it to the present model. For the third world to break the cycle of indebtedness there must be a radical break from the present import dependent, export oriented, and debt driven economy. The economy must be reoriented to providing for the needs of the local population rather than the international market, a determined thrust to break import dependence by developing industry.

There must be economic reforms. The current monopoly of land in many third world countries must be broken. The commanding heights of the economy should be taken over by the democratic state so that the whole economy can be directed for the people.

We have to build the movement against the debt at every level and link this to the movements seeking to put an end to the "neo-liberal" order and the whole rule of the finance oligarchy. We have to place special importance to the national movements and in doing so we build the necessary political strength to confront the unjust system. Let us also build international solidarity to amplify our efforts. We must not fall into the trap of chasing the international institutions in every summit in the hope of getting some small concessions not unlike morsels after the finance oligarchy are done with their feast.

The national level presents to us the weak link in the rule of global finance capital because it is here where we build the real political strength. The elite of the Third World countries must be made to account for their responsibility in the debt crisis and the whole “neo-liberal” onslaught on the people.

We are certain that this unjust social order must come to an end as others before it came to an end. Certainly, the people will bring it to an end.

[1] Paper presented at the Jubilee South Summit, November 18-21, 1999, Johannesburg South Africa

[2] Executive Director , Resource Center for People's Development RCPD, Philippines. RCPD is the secretariat of the Philippines Asia Jubilee Campaign against the Debt (PAJCAD).