World Debt Figures 2015 : Chapter 3

Debt in the South

23 February 2015 by Eric Toussaint , Daniel Munevar , Pierre Gottiniaux , Antonio Sanabria

In spite of the optimistic declarations by the World Bank World Bank
WB
The World Bank was founded as part of the new international monetary system set up at Bretton Woods in 1944. Its capital is provided by member states’ contributions and loans on the international money markets. It financed public and private projects in Third World and East European countries.

It consists of several closely associated institutions, among which :

1. The International Bank for Reconstruction and Development (IBRD, 180 members in 1997), which provides loans in productive sectors such as farming or energy ;

2. The International Development Association (IDA, 159 members in 1997), which provides less advanced countries with long-term loans (35-40 years) at very low interest (1%) ;

3. The International Finance Corporation (IFC), which provides both loan and equity finance for business ventures in developing countries.

As Third World Debt gets worse, the World Bank (along with the IMF) tends to adopt a macro-economic perspective. For instance, it enforces adjustment policies that are intended to balance heavily indebted countries’ payments. The World Bank advises those countries that have to undergo the IMF’s therapy on such matters as how to reduce budget deficits, round up savings, enduce foreign investors to settle within their borders, or free prices and exchange rates.

http://worldbank.org
and the IMF IMF
International Monetary Fund
Along with the World Bank, the IMF was founded on the day the Bretton Woods Agreements were signed. Its first mission was to support the new system of standard exchange rates.

When the Bretton Wood fixed rates system came to an end in 1971, the main function of the IMF became that of being both policeman and fireman for global capital: it acts as policeman when it enforces its Structural Adjustment Policies and as fireman when it steps in to help out governments in risk of defaulting on debt repayments.

As for the World Bank, a weighted voting system operates: depending on the amount paid as contribution by each member state. 85% of the votes is required to modify the IMF Charter (which means that the USA with 17,68% % of the votes has a de facto veto on any change).

The institution is dominated by five countries: the United States (16,74%), Japan (6,23%), Germany (5,81%), France (4,29%) and the UK (4,29%).
The other 183 member countries are divided into groups led by one country. The most important one (6,57% of the votes) is led by Belgium. The least important group of countries (1,55% of the votes) is led by Gabon and brings together African countries.

http://imf.org
, debt is still a serious hindrance to human rights and the satisfaction of the basic needs of the populations of the DCs. This section will analyse this situation and its specific characteristics in three regions of the Global South. |1| We will examine how debt and the principal economic indicators related to it have evolved since 1960, in Africa, Latin America, and Asia. Although the burden, in relative terms, has decreased since 2000, in absolute terms, the sums necessary for debt repayment continue to be significant.

Given that external debt has increased considerably in absolute value, a lower price for raw materials may make it impossible for the countries that earn income from these exports to repay their debt. Such is the case for Nigeria, Venezuela, Brazil, Argentina, Equatorial Guinea, the Democratic Republic of Congo, Angola, and scores of others. If, in addition, as is forecast, the rich countries, starting with the US, increase their interest rates Interest rates When A lends money to B, B repays the amount lent by A (the capital) as well as a supplementary sum known as interest, so that A has an interest in agreeing to this financial operation. The interest is determined by the interest rate, which may be high or low. To take a very simple example: if A borrows 100 million dollars for 10 years at a fixed interest rate of 5%, the first year he will repay a tenth of the capital initially borrowed (10 million dollars) plus 5% of the capital owed, i.e. 5 million dollars, that is a total of 15 million dollars. In the second year, he will again repay 10% of the capital borrowed, but the 5% now only applies to the remaining 90 million dollars still due, i.e. 4.5 million dollars, or a total of 14.5 million dollars. And so on, until the tenth year when he will repay the last 10 million dollars, plus 5% of that remaining 10 million dollars, i.e. 0.5 million dollars, giving a total of 10.5 million dollars. Over 10 years, the total amount repaid will come to 127.5 million dollars. The repayment of the capital is not usually made in equal instalments. In the initial years, the repayment concerns mainly the interest, and the proportion of capital repaid increases over the years. In this case, if repayments are stopped, the capital still due is higher…

The nominal interest rate is the rate at which the loan is contracted. The real interest rate is the nominal rate reduced by the rate of inflation.
, the cost of borrowing to make repayments will also become insupportable. At the same time, hundreds of billions of dollars temporarily invested in emerging stock exchanges will be rapidly called back to the Northern markets in search of better yields. In the 1980s, the same thing happened in similar circumstances. In its annual report published in June 2014, even the generally reserved Bank for International Settlements Bank for International Settlements
BIS
The BIS is an international organization founded in 1930 charged with fostering international monetary and financial cooperation. It also acts as a bank for central banks. At present, 60 national central banks and the ECB are members.

http://www.bis.org/about/
(BIS) warned that many developing countries were caught up in a ‘debt trap’.


3.1. Africa and the Middle East

3.1.1. Debt and the means to repay it

In the countries of Northern Africa, Sub-Saharan Africa, and the Middle East total debt in 2012 was 73 times greater than in 1970. During that same period of time, they have made debt repayments equal to 145 times the original amount due in 1970.


Table 3.1. The cost of debt ($ billion): Africa and the Middle East
 |2|


3.1.2. Net debt flows

Between 1985 and 2012, Middle East and African countries repaid $61 billion more than they received in loans over the same period (-$105 bn + $44bn = $61bn).


Table 3.2. Net flows on external debt from 1985 to 2012 ($ billion): Africa and the Middle East
 |3|


3.1.3. Comparing money transfer flows

For the African continent, Official Development Assistance ODA
Official Development Assistance
Official Development Assistance is the name given to loans granted in financially favourable conditions by the public bodies of the industrialized countries. A loan has only to be agreed at a lower rate of interest than going market rates (a concessionary loan) to be considered as aid, even if it is then repaid to the last cent by the borrowing country. Tied bilateral loans (which oblige the borrowing country to buy products or services from the lending country) and debt cancellation are also counted as part of ODA. Apart from food aid, there are three main ways of using these funds: rural development, infrastructures and non-project aid (financing budget deficits or the balance of payments). The latter increases continually. This aid is made “conditional” upon reduction of the public deficit, privatization, environmental “good behaviour”, care of the very poor, democratization, etc. These conditions are laid down by the main governments of the North, the World Bank and the IMF. The aid goes through three channels: multilateral aid, bilateral aid and the NGOs.
(ODA), |4| and the remittances sent home by emigrants, fall short of the total flows out of Africa by different creditors and by international corporations that exploit African resources and repatriate profits.


Table 3.3. Comparison of financial flows in 2012 ($ billion): Africa and the Middle East |5|

As this table shows, nearly all of the Official Development assistance granted to African and Middle Eastern countries is used to service the external debt. Migrant’s remittances are three times greater than the ODA provided by Northern governments.

In 2012, profits repatriated from Africa were close to 5 % of the GDP compared to 1 % as ODA. So, who is assisting who?

When considering Africa alone, the profits repatriated by multinationals in addition to debt servicing amounts to $1 billion less than the sum of migrant’s remittances. In 2012, profits repatriated by the multinationals active in the region were close to five percent of the GDP GDP
Gross Domestic Product
Gross Domestic Product is an aggregate measure of total production within a given territory equal to the sum of the gross values added. The measure is notoriously incomplete; for example it does not take into account any activity that does not enter into a commercial exchange. The GDP takes into account both the production of goods and the production of services. Economic growth is defined as the variation of the GDP from one period to another.
compared to the equivalent of one percent of GDP received as ODA. Given these figures, we must ask ourselves who is assisting who?

We should recall that the slightly negative balance Balance End of year statement of a company’s assets (what the company possesses) and liabilities (what it owes). In other words, the assets provide information about how the funds collected by the company have been used; and the liabilities, about the origins of those funds. of Sub-Saharan Africa, or the slightly positive balance for Africa and the Middle East is incomplete. If all financial flows between the African continent and the developed countries were taken into account, the balance would be much more unfavourable. The pillaging of Africa’s natural resources by big private corporations, the ‘brain drain’ of educated Africans, the ill-gotten wealth accumulated and placed off-shore by Africa’s richest one percent and the price fixing methods used by the multinationals to increase their profit Profit The positive gain yielded from a company’s activity. Net profit is profit after tax. Distributable profit is the part of the net profit which can be distributed to the shareholders. repatriation capacities is bleeding Africa to death. Unfortunately, we do not have enough room to present the complete figures. |6|


3.1.4. Dependency on raw material exports

The countries in this region continue to be very dependent on raw material exports, which makes them highly vulnerable to price fluctuations.


Table 3.4. Proportion of raw materials in exports in 2012: |7|


3.2. Asia, Europe, and Central Asia

3.2.1. Debt and the means to repay it

In Asia, between 1970 and 2012, external debt was multiplied 102 times. During this time, Asian countries earmarked $4.9 trillion for external debt repayments.


Table 3.5. The cost of debt ($ billion): Asia and Europe and Central Asia


3.2.2 Net debt flows

The financial crisis that started in 2007–2008 in the US and subsequently spread to Europe caused a rapid increase in capital flows towards Asian markets, which resulted in positive net capital flows on debt. This is a significant reversal of the traditional negative trend of net flows observed since the 1980s. It must be noted that between May 2013 and the end of 2013 the net flows once again became negative (especially for Indonesia, the Philippines, and India) after the Fed FED
Federal Reserve
Officially, Federal Reserve System, is the United States’ central bank created in 1913 by the ’Federal Reserve Act’, also called the ’Owen-Glass Act’, after a series of banking crises, particularly the ’Bank Panic’ of 1907.

FED – decentralized central bank : http://www.federalreserve.gov/
announced a change of policy, which included reducing purchases of financial assets and higher interest Interest An amount paid in remuneration of an investment or received by a lender. Interest is calculated on the amount of the capital invested or borrowed, the duration of the operation and the rate that has been set. rates in anticipation of forecasts for the near future. This situation was similar to the Asian crisis of 1996-1997.


Table 3.6. Net flows on external debt from 1985 to 2012 ($ billion): Asia, East and Central Europe and Turkey


3.2.3. Comparison of financial flows

Although the relative debt burden in Asia has diminished, debt repayments and the repatriation of profits by the multinationals largely surpass the amounts received as ODA and emigrant remittances.


Table 3.7. Comparison of 2012 financial flows ($ billion): Asia, East and Central Europe and Turkey |8|


3.2.4. Dependency on raw material exports

The East Asia region is not very dependent on raw material exports, so it enjoys a more stable situation in terms of foreign exchange revenues. Nevertheless, as is the case in other developing countries, the governments of East Asian countries are pushed by corporate employers to bear down on wages in order to remain ‘competitive’. This collusion is a fundamental obstacle to real development. If the prices of raw materials go down, the raw material exporting countries will be forced to reduce their imports of many East Asian finished products.
Likewise, if the crisis returns to North America and Europe, this could also cause a drop of imports from China and Korea.


Table 3.8. Proportion of raw materials in exports in 2012
(% of total) : Asia, East and Central Europe and Turkey


3.3. Latin America and the Caribbean

3.3.1. Debt and the means to repay it

Between 1970 and 2012, the external debt of the Latin American and Caribbean countries increased 165 fold, and during the same period $3.25 trillion flowed out of the region to its creditors.


Table 3.9. The cost of debt ($ billion): Latin America and the Caribbean
 |9|


3.3.2. Net debt flows

For 1985-2012, Latin America is the developing continent that has the worst negative balance. Nevertheless, as in Asia, this trend has been somewhat reversed in recent years because of an increase in capital flows to the region. The experience of the 1970s, when capital flows to the region increased until the 1982 debt crisis exploded, should incite caution.


Table 3.10. Net flows on foreign debt from 1985 to 2012 ($ billion): Latin America and the Caribbean


3.3.3. Comparison of financial flows

As is the case for Africa and Asia, Latin America loses a great deal of its resources to creditors. Its outflows are far greater than its ODA inflows.


Table 3.11. Comparison of financial flows in 2012 ($ billion): Latin America and the Caribbean |10|


3.3.4. Dependency on raw material exports

The region is less dependant on raw material exports than the two other regions cited in this study.


Table 3.12. Proportion of raw materials in exports in 2012
(% of total): Latin America and the Caribbean


3.3.5. Internal debt trends

Borrowing on the home market has progressively replaced external debt as a source of public sector funding. For the group of countries below, internal debt increased fourfold between 2000 and 2013, while external debt remained stable.


Table 3.13. Breakdown of Latin American debt (2000 to 2013) ($ billion and as a % of total debt)
 |11|

2000 2005 2013
Public debt by country $ billions % of the Total debt $ billions % of the Total debt $ billions % of the Total debt
Argentina Internal 47 36 68 53 137 70
Foreign 81 64 61 47 60 30
Brazil Internal 302 79 541 87 1293 95
Foreign 80 21 82 13 64 5
Colombia Internal 26 58 51 69 118 74
Foreign 18 42 23 31 41 26
Ecuador Internal 3 22 4 25 10 43
Foreign 11 79 11 75 13 57
Mexico Internal 74 47 124 63 337 75
Foreign 85 53 72 37 110 25


3.3.6. The impact of debt on the use of public funds

The audit completed in 2007-2008, and the unilateral suspension of repayments that followed have enabled Ecuador to decrease its debt stock Debt stock The total amount of debt significantly. It is the only country in the region that spends more of its budget on health and education than to service its debt. |12| In all the other countries, debt repayments take priority over all other government obligations.


Table 3.14. Breakdown of spending priorities in the national budgets (as % of GDP and % of budget) in Latin America in 2013
 |13|


Footnotes

|1| Unless otherwise stated, all data in this section is from the World Bank, International Debt Statistics, http://databank.banquemondiale.org

|2| The debt repayments correspond to capital and interest paid back.

|3| A positive balance means that more was borrowed than was repaid over the period, a negative balance means more was repaid than was borrowed over the period.

|4| As explained above, a large proportion of ODA does not constitute a real flow of funds and remains in the donor country (see box 2.4).

|5| The ODA figures are those that are declared by donor countries. The figure for repatriated profits is found by identifying sums entered on corporations’ national subsidiary accounts as payments sent to their parent companies in their home countries. Source: World Bank data: this data is incomplete as it does not show the full picture of the draining away of resources from the developing counties to the developed countries. See footnote 80, page 39.

|6| See also footnote 80 on page 39.We recommend the work of the economist Léonce Ndikumna, particularly Savings, Capital Flight, and African Development - Part 1’ 12 August 2014, http://triplecrisis.com/savings-capital-flight-and-african-development-part-1/ and http://triplecrisis.com/author/leonce-ndikumana/#sthash.vlyv7ARw.dpuf.

See also, the video http://triplecrisis.com/video-africa-lost-1-6-trillion-in-capital-flight-and-odious-debt-over-forty-years/

|7| The figures for the Middle east and North Africa are for 2011.

|8| The ODA figures are those that are declared by donor countries. They do not constitute a real flow of funds (see box 2.4). The figure for repatriated profits is found by identifying sums entered on corporations’ national subsidiary accounts as payments sent to their parent companies in their home countries. Source: World Bank data: this data is incomplete as it does not show the full picture of the draining away of resources from the developing counties to the developed countries.
See footnote 80, page 39.

|9| The repayments correspond to the total amount of principal and interest paid.

|10| The ODA figures are those that are declared by donor countries. They do not constitute a real flow of funds (see box 2.4). The figure for repatriated profits is found by identifying sums entered on corporations’ national subsidiary accounts as payments sent to their parent companies in their home countries. Source: World Bank data: this data is incomplete as it does not show the full picture of the draining away of resources from the developing counties to the developed countries. See footnote 80, page 39.

|11| Source: Inter-American Development Bank (IDB), Latin American Macro Watch Data Tool, http://www.iadb.org
The figures for Argentine debt are from 2012.

|12| However, Ecuadorian debt is increasing, having borrowed from China and from the World Bank.

|13| The official Argentine figures for 2013 are from the general budget, the economy and finance ministry and the Argentine presidential office), Presupuesto 2013 Resumen, Buenos Aires, 2013,
http://www.mecon.gov.ar/onp/html/presupresumen/resum13.pdf;

The Brazilian data are from a citizen debt audit. Maria Lucia Fattorelli, Dívida consumirá mais de um trilhão de reais em 2014, Auditoria Cidadã da Dívida, http://www.auditoriacidada.org.br/wp-content/uploads/2013/09/Artigo-Orcamento-2014.pdf;

The official Columbian data are from the general budget for 2013 announced by the Columbian ministry of the interior and public credit in the general budget for the nation 2013.

http://www.minhacienda.gov.co/presupuesto/index.html ;

The official Ecuadorian data are from the general budget for 2013 announced by the Ecuadorian ministry of finance in the general budget for the nation 2013. Presupuesto General del Estado, 2012, http://www.finanzas.gob.ec/el-presu....

Author

Eric Toussaint

is a historian and political scientist who completed his Ph.D. at the universities of Paris VIII and Liège, is the spokesperson of the CADTM International, and sits on the Scientific Council of ATTAC France. He is the author of Bankocracy (2015); The Life and Crimes of an Exemplary Man (2014); Glance in the Rear View Mirror. Neoliberal Ideology From its Origins to the Present, Haymarket books, Chicago, 2012 (see here), etc. See his bibliography: https://en.wikipedia.org/wiki/%C3%89ric_Toussaint He co-authored World debt figures 2015 with Pierre Gottiniaux, Daniel Munevar and Antonio Sanabria (2015); and with Damien Millet Debt, the IMF, and the World Bank: Sixty Questions, Sixty Answers, Monthly Review Books, New York, 2010. Since the 4th April 2015 he is the scientific coordinator of the Greek Truth Commission on Public Debt.


Author

Daniel Munevar

is a 30-year-old post-Keynesian economist from Bogotá, Colombia. MPAff. LBJ School of Public Affairs at the University of Texas at Austin. From March to July 2015 he worked as a close aide to former Greek finance minister Yanis Varoufakis, advising him on issues of fiscal policy and debt sustainability. He was previously fiscal advisor to the Ministry of Finance of Colombia and special advisor on Foreign Direct Investment for the Ministry of Foreign Affairs of Ecuador. He is considered to be one of the foremost figures in the study of Latin American public debt. He is member of CADTM AYNA.


Other articles in English by Pierre Gottiniaux (13)

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Other articles in English by Antonio Sanabria (9)

Translation(s)

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COMMITTEE FOR THE ABOLITION OF ILLEGITIMATE DEBT

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