Green shoots amidst debt chaos

10 January 2008 by Eric Toussaint

As regards North/South relations [1], we are at present in a situation which is exactly the opposite of the financial crises of the past 25 years. The credit bubble has begun to deflate and is moving towards the developing countries in the form of speculative capital settling on stock exchanges such as those of Mumbai/Bombay, Shanghai [2] or Sao Paulo. The high level of foreign reserves accumulated by the developing countries gives them some protection but caution is required. We are witnessing a new phase of history. While nefarious practices continue, at the same time alternatives which empower the oppressed are beginning to emerge. These embryonic alternatives need all the support they can get. The time is ripe to reinforce and radicalize these alternatives, as the countries are in a position of strength compared to the industrial countries. Can they use this opportunity to their advantage?

In 1982, the external public debt crisis of the developing countries was triggered by the combined effects of the rise in 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.
imposed by the United States two years earlier, and the fall in prices of raw materials, particularly oil. The epicentre was in the South and the first casualties were the governments of the developing countries, who suddenly found themselves owing enormous amounts in debt repayments.
The financial crises of the 1990s practically only affected developing countries - there was the Mexican crisis of 1994-1995, the Asian crisis of 1997-1998, the Russian crisis of 1998, the Brazilian in 1999, Turkish in 2000, Argentine in 2001-2002 and Brazilian again in 2002. Each crisis was triggered by sudden movements of capital and speculative attacks on the currencies of the countries concerned. Financial capital that had been directed towards these countries before the crisis was withdrawn, causing the crisis. It was a question of capital flight to safety, with capital being returned to the financial centres of the North, considered more secure.

In August 2007, a financial crisis exploded in the North in the world’s leading economy, which so far has mainly affected private finance companies in the industrialized countries, especially in North America and in Western and Central Europe. For the moment, Japan has been spared as its private finance sector, directly hit by a debt crisis over 15 years ago, has barely had time to get started again. The Japanese crisis perhaps led Japanese bankers to be rather more prudent than their North-American and European counterparts1 [3] . The crisis in the financial system of the North is such that capital flight to safety is operating in the opposite direction to that of the past. Capital is being directed away from the North towards the flourishing stock-exchanges of countries like India, China and Brazil [4], now perceived as safe havens. The phenomenon is so excessive that the Indian government, despite being neo-liberal, is considering ways of discouraging this inopportune capital inflow, which will force up the value of the Indian rupee and quite possibly flow out again shortly if more viable financial opportunities present themselves elsewhere in the world. [5]

The global situation has changed over the last 25 years in other ways, too:
1) History shows that between 1982 and 2004 there was a tendency for the price of raw materials to fall and the terms of exchange between industrialized and developing countries deteriorated. Since 2005, there has been a renewed sharp rise in prices.
2) Most developing countries register trade surpluses, especially China which is inundating the global markets with its manufactured goods.
3) In 1982 and the years that followed, developing countries’ foreign exchange reserves were limited. Since 2002, slowly at first and gathering pace since 2005, they have continually increased.
4) Interconnected markets have led to an increase in private debt in both the North and the South in the form of complex types of derivative products which, far from ensuring greater stability, make for more opacity and speculation. We have a vast financial system with a considerable sector based on the accumulation of debt paper that could collapse at any moment like a house of cards.
5) Internal public debt has reached all-time highs in the developing countries, while the external public debt is falling. In the USA it has increased too, although more slowly, and in Japan it remains extremely high at 185% 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.
, according to 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.
6) There is an explosion of food prices worldwide.
7) There has been a frenzied acceleration of the arms race led by the United States.
8) South-South capital flows are on the increase.
9) China is making itself felt as never before in international economic and financial relations.
10) A group of Latin American countries has launched the foundations of new multilateral regional institutions, starting with a Bank of the South.

Accumulation of developing countries’ foreign exchange reserves

Since 2004, the economic situation has been characterized by the high price of raw materials and a number of agricultural products. This has allowed a large number of developing countries to increase their export revenues and accumulate significant foreign exchange reserves, especially countries which export oil, natural gas and minerals. Some agricultural exporters have also benefited from this favourable situation. China, by exporting manufactured goods, has accumulated impressive quantities of foreign exchange reserves, amounting to stock of over 1 400 billion dollars in December 2007. However, not all the developing countries are included in this scenario; some sub-Saharan African States have seen their situation take a turn for the worse.

In 2007, the developing countries together hold over 4 600 billion dollars [6] in foreign exchange reserves while the industrialized countries hold less than a third of this sum. How do the developing countries use their reserves?

1) A considerable share Share A unit of ownership interest in a corporation or financial asset, representing one part of the total capital stock. Its owner (a shareholder) is entitled to receive an equal distribution of any profits distributed (a dividend) and to attend shareholder meetings. (certainly over 700 billion dollars [7]) is loaned to the United States through the purchase of Treasury bonds6 [8]. China lends the United States 400 billion dollars of its reserves, emanating from its trade surplus with them, so that the North-American economy can continue to buy Chinese products. Many Latin-American, Asian and African countries also lend part of their reserves to the USA. This conservative policy, which is absurd from the point of view of the interests of the populations concerned, is increasingly criticized.

2) A significant number of governments have taken the opportunity to make early repayments of their debts to the IMF, the World Bank World Bank
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, 189 members in 2017), 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.

, the Paris Club Paris Club This group of lender States was founded in 1956 and specializes in dealing with non-payment by developing countries.

and private bankers.

3) Some have created development funds, into which they can place some of their foreign reserves, in view of financing social and infrastructure projects such as buying up companies in the industrialized countries [9]. These funds are known as Sovereign Wealth Funds. In order of importance, the biggest are those of the emirate of Abu Dhabi (the amount of fund is not published, but estimates place it between 250 and 875 billion dollars!!), then Kuwait, China, Singapore, Russia. Libya has just created a fund of 40 billion dollars. Venezuela created the « Fonden » (fund for national development) in early 2007. In all, the various public funds of the developing countries place about 2 000 billion dollars at their disposal. Some of these public funds, such as China’s National Council for Social Security Fund - NCSSF - aim to back up the financing of their social security system. The biggest funds buy up companies in the industrialized countries or their shares, which is a source of anxiety for those governments. Many of these funds have taken advantage of the crisis faced by a number of big Western private banks since August 2007 to buy their shares (UBS, Merrill Lynch, Citigroup,…) This is the case particularly of the fund of Singapore (Temasek) and a number of Chinese ones. The developing countries are now having recourse to different policies from those adopted in the years following the oil boom of 1973. In those days, the governments of the developing countries recycled petrodollars by lending them to the private banks of the North and then became indebted to those banks. Present policies are more solid, but in no way break away from the dominant logic of capitalism. Investments are not made in alternative non-capitalist projects, whereas they could serve as powerful levers to set up policies reinforcing the public sector by breaking private control over the major means of production, developing a solidarity-based economy, and radically redistributing wealth by applying principles of justice and equality.

4) The creation of a Bank of the South. Since December 2007, the Bank of the South is on track, even though all the choices have yet to be concluded at the time of writing this text /book. Its founders (Argentina, Bolivia, Brazil, Ecuador, Paraguay, Uruguay, Venezuela) want to finance their regional integration and social projects. The governments of Brazil and Argentina argue for a neo-developmentalist project of regional expansion of capitalist enterprises, based on the model of European integration where the interests of big capital dominate. The governments of Venezuela, Ecuador and Bolivia are inclined to provide themselves with an instrument to finance economic, social and cultural policies that break with the 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. logic and which would apply the different conventions that guarantee civil, political, economic, social and cultural rights. The operation of the future Bank of the South has not been finalised, for example at the level of the voting rights of the member countries or on auditing mechanisms. The first trimester of 2008 should bring definitive answers. On the other hand, other countries are planning to create an ALBA bank (Bolivia, Cuba, Nicaragua, Venezuela).

Massive increase in domestic public debt

A recent development which also has to be considered is that the domestic public debt is increasing rapidly. In 1998 the internal and external debts were equal; in 2006 the domestic public debt exceeded the external debt by a factor of three [10]! This phenomenon is very important: from now on, it is no longer possible to measure the level of debt of developing countries solely on the basis of the external debt.

The weight of public debt repayments

The latest figures published by the World Bank indicate that servicing the external public and private debts by developing countries amounted to 540 billion dollars in 2006. If we only consider the servicing of the external public debt, since this falls under the responsibility of the state budget, it represented 280 billion dollars in 2006. Despite the fact that the external public debt/GDP ratio is decreasing, the total volume of the debt is continuing to rise and the amounts repaid increased once again in 2007 compared to the previous year. More ominously, if we include servicing the domestic public debt, which also falls under the state’s responsibility, it is the astronomical sum of more than 1000 billion dollars a year which the public authorities of developing countries have to repay for both external and domestic public debt. [11].

Increase in the indebtedness of private firms

We must not lose sight of the increasing indebtedness of private firms of developing countries. The external debt of developing countries’ private companies increased from 664 billion dollars in 2004 to 911 billion in 2006, which represents a hike of 37% [12]. Since the raw material exporting countries are witnessing an upturn in their fortunes, the private banks of the most industrialized countries have multiplied their loans to these private companies. The two private sectors which are indebting themselves most in developing countries are the banks and the firms dealing with hydrocarbons and raw materials. We must pay particular attention to this development: the private banks of the developing countries borrow from the North on low 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, mostly on a short-term basis, to lend this money to the internal market at a higher rate and on a long-term basis. If the economic situation suffers a downturn (which is likely in the coming years), we might witness a number of bankruptcies of the private banks of developing countries, just like the financial crises which hit Mexico in 1994-1995, the countries of South-East Asia and South Korea in 1997-1998, Ecuador in 1998-1999 and Argentina in 2001. Today’s private debt of banks might, if we are not careful, become tomorrow’s public debts. The same applies to the sector of hydrocarbons and minerals. Private petroleum, gas and mineral companies, take out loans in order to increase their production capacity and profit from the current high prices of raw materials. If the prices drop, the investments made through borrowing might not be profitable and the debt would become impossible to repay. It is imperative to limit and control this indebtedness.

Capital flight and profit repatriation towards the North versus the movement of migrants’ remittances towards the South

Capital flight and brain drain from developing countries to the most industrialized countries have increased over the last few years. However, the amount of profits repatriated by multinational branches towards the ‘parent company’ has multiplied by a factor of 4.5 between 2000 and 2006 (from 28 billion in 2000 to 125 billion in 2006) [13]. Moving in the other direction, are the remittances migrants send to their native countries, which have also increased [14]. According to a recent study, in 2006, migrants sent 301 billion dollars to their families in developing countries [15]. This is six times more than the amount sent in the context of Development Aid.

Foodstuff versus biofuel

Throughout 2007, the price of food has increased everywhere. This increase has direct repercussions on the budget that households have to allocate to food in order to survive. In sub-Saharan Africa, as well as in Southern Asia, where the large majority of the population is forced to assign at least 60% of their revenues to purchasing food, this price increase is taking an even more dramatic turn than in Western Europe, Japan or North America. Globally, it is mainly women who suffer the brunt of the increase in food prices, as they are most often in charge of feeding the family. A framework based on gender and class is required to understand the changes.

Two main reasons for the increase in food prices

Firstly, there is the decision of many governments and companies to develop the production of biofuels, such as ethanol, which is produced from sugarcane, maize, colza or other plants [16] . Nowadays, 20% of US maize is used to produce ethanol, and 50% of the sugarcane in Brazil! [17]The rise in price of maize has had repercussions in Mexico and increased the cost of tortillas. This is an example of the devastating effect of free-trade treaties. In fact, in 1994, a free-trade agreement between the US, Canada and Mexico (NAFTA) was signed. Once NAFTA was in place, US agro-business flooded the Mexican market with cheap US maize, selling it at a price that was below the cost of production of the small Mexican farmers, thousands of whom subsequently lost their jobs (and have since tried to emigrate to their rich Northern neighbour). Since 2006, the price of maize exported by the US has largely increased because of demands linked to the production of ethanol. Consequently, the price of food went up in Mexico since maize is the main staple food. The Mexican peasants that used to produce the maize are not there anymore to respond to the demand. They have either sold their land and emigrated to the cities or the US, or they are crippled by debt and have difficulties in getting back into maize production.

A second phenomenon has worsened the food situation of the poorest. In 2006 and in 2007 the big grain companies, based in the most industrialized countries with temperate climates, reduced the area planted with cereal food crops Food crops Crops destined to feed local populations (millet, manioc, etc.), as opposed to cash crops, destined for export (coffee, cocoa, tea, groundnuts, sugar, etc.) in order to force up cereal prices on the world market. This means they took the risk of creating food shortages in Africa and other continents which, over the last forty years, have become net importers of cereals due to the fact that institutions such as the World Bank have encouraged them to prioritize the cultivation of tropical products (cocoa, coffee, tea, groundnuts, etc.)

The driving forces of capitalism are trying to profit from this situation to strengthen the domination and control of multinationals over agricultural production. Thus, on the pretext of increasing Africa’s food production, the Bill and Melinda Gates Foundation and the Ford Foundation have tried to launch a green revolution in sub-Saharan Africa. They placed Kofi Annan at the head of their project, who had already created cronyism with the big multinationals through the creation of Global Compact in 2000 when he was general secretary of the United Nations. It must be remembered that since the 1960s, the green revolution has been imposed in India, the Philippines and other developing countries, by the World Bank and the Ford Foundation, resulting in greater dependence of farmers on the big multinationals responsible for the production of seeds, herbicides and pesticides (Monsanto, Cargill, Sygenta,…) [18]. The environmental effects are equally disastrous (especially soil and groundwater salinisation). The solution in sub-Saharan Africa does not lie in the green revolution but in the radical reduction in cash crops for export, so as to free up land for the production of cereals and other essential food crops. A public policy of support and protection of African peasants is needed.

On a planetary scale, the dramatic increase in the price of food crops represents a strong argument in favour of implementing food sovereignty policies and radical agricultural reform, including rejecting the production of biofuels. Governments must take strong measures to guarantee that healthy, non-genetically modified food is available for the citizens of their countries, by favouring organic crops produced by small and medium scale farmers under different forms of organization and ownership: smallholders, cooperatives, public companies, and traditional communities.

China, a capitalist country of the modern style

China is presented from the angle of its economic success, in terms of GDP growth and increased exports. GDP growth may well be impressive, but in fact, China has chosen a capitalist model of development, implying increased exploitation of Chinese workers, mass redundancies, privatisation of many public companies, radical reductions in State spending on education, health, social security, and unbridled productivism with total disregard for nature and public health. Over the last ten years, the percentage of wages in the GDP has fallen sharply, going from 53% in 1998 to 41% in 2005 [19]. It is true that China is a net creditor with regard to the United States but it has accumulated a colossal internal debt. Worse still, social inequalities are growing at a horrendous speed. Various studies show that while the living conditions of the poorest 10% of the population have seriously declined, the richest 10% have seen their income and wealth booming. The number of Chinese billionaires in dollars has shot up from 3 in 2004 to 106 in 2007 [20]. A severe economic slowdown in the United States may not make too much impact on the economic health of China, as it exports more to Europe than to North America. Nevertheless, it is not impossible that the contradictions of China’s domestic economy combined with an external shock such as a significant slowdown in the USA could lead to major problems. The rise of internal debt both at government level and in companies, the accumulation of unsafe debts in banking, the creation of speculative bubbles on the property market and the stock exchange are some of the factors that could lead to an economic crisis, sooner or later. Not to mention the powder-keg of glaring social inequalities. Quite apart from the risk of a crisis, it is the model adopted that deserves utmost criticism [21].

Statistical errors of the World Bank in China: 200 million more poor people

The news was barely noticed by the big non-specialised media: the World Bank admitted in December 2007 that it overestimated the Gross Domestic Product (GDP) of China for a number of years. This is what happened.

With a fixed amount, let’s say 10 dollars, the average consumer cannot naturally buy the same amount of products in New York, La Paz, Kinshasa or Beijing. To eliminate these differences and to compare GDP equivalently, the World Bank use a conversion that produces the GDP at purchasing power parity (PPP).

The first question to ask is: which prices are considered? Here, opacity reigns. How are the cost of access to education and health factored in? What goods and basic services are taken into account in this conversion?

Nevertheless, the prices (or the cost of living) considered by the World Bank in the case of China, were below the real ones. In December 2007, the World Bank thus recognized that the size of the Chinese economy was in fact 40% less than previous estimates. This is not an insignificant amount. Thus, the GDP of China at PPP for 2005 would be 5.333 billion dollars instead of 8.819 billion with the old estimation. The trend is probably the same for India, the other emerging Asian power.

But is it really a simple mistake? The World Bank is served by an army of well paid experts and is well equipped to detect such a mistake much earlier. And it is not alien to such errors: in many cases already, its estimations have been erroneous, allowing this spearhead of neoliberal globalization to push through its demands. Thus, in the case of China, who does the crime benefit?

Effectively, it profits the World Bank and those who defend the dominant economic model. For this overestimation has repercussions on worldwide growth, which would be only 4.5% instead of the 5% announced. An argument, often put forward, is that with such growth, things are improving in the world, proof that the current system will bring happiness and wealth….

However, this overestimation also has strong ramifications for the discourse on poverty reduction. According to the World Bank, the number of poor people has decreased by 100 million between 1990 and 1999, thanks to the figures coming from China and India (-200 million) while this number has increased on the other continents (+100 million). With the current re-estimation, the number of people living with less than a dollar a day in China will increase by roughly 200 million. If the same procedure is applied to India, we realize that the absolute number of poor people in the world has in fact increased.

If on one hand, questions are being raised about the credibility of the World Bank studies, on the other, the whole rationale of the discourse of poverty reduction and the merits of neoliberal globalization are now collapsing.

India’s economic miracle – a myth

Another country presented as a success story is India. Economic growth exceeds 9%, the Mumbai (Bombay) stock exchange is booming, and Indian companies are investing in industrialized countries and developing countries alike. With few exceptions, the media fail to report on the changes in living conditions for the majority of Indian citizens. However, the Indian daily Hindustan Times on 14 October 2007 revealed that according to a study by a government institute, 77% of the population - in other words 836 million Indians - live on less than 20 rupees a day (less than 0.5 US dollars). These figures are very different from those of the World Bank, which only attest to about 300 million Indians living on less than one US dollar a day [22]. India has a high number of working poor. India’s National Commission for Enterprises in the Unorganized Sector reveals that 320 million workers live on less than 20 rupees a day [23]. The same Hindustan Times article published the findings of a study on world famine carried out by the International Food Policy Research Institute (IFPRI) according to which 40% of underweight children under the age of five live in India. In the fight against famine, India lags behind other Asian countries such as Pakistan and China. In a ranking of 118 countries, Cuba and Libya figure among the first while China comes 47th, Pakistan 88th and India 94th. The report states that the situation has seriously deteriorated among India’s peasants. According to other sources, between 1996 and 2003 more than 100,000 small farmers committed suicide, most of them for reasons of over-indebtedness. This translates as one suicide every 45 minutes. According to the Indian newspaper DNA in its 17 September 2007 issue reporting on a government study, 46% of Indian children are underweight. In Mumbai, a city of 14 million inhabitants, where trading Market activities
Buying and selling of financial instruments such as shares, futures, derivatives, options, and warrants conducted in the hope of making a short-term profit.
on the stock exchange reached unprecedented heights in 2007, 40% of children are underweight. According to DNA, in spite of 9 years of sustained economic growth, famine has declined by only 1% in India. Here we have a perfect example of the fallacy of the trickle-down effect, whereby the enrichment of the richest people is supposed to be automatically beneficial to the poor. According to Forbes, which publishes an annual report on the world’s richest people, in 2006 India became the Asian country with the highest number of billionaires (36 billionaires with a cumulative fortune of 191 billion US dollars, thus displacing Japan with its 24 billionaires together worth some 64 billion US dollars). Of the world’s richest people, Lakshmi Mittal ranks 5th.. According to data provided in October 2007 by the financial press, the Indian billionaire Mukesh Ambani has now overtaken Lakshmi Mittal and may well be in a position to vie for first place (currently held by the Mexican Carlos Slim) or second place (currently held by Bill Gates) in the world’s wealthiest line-up. These figures are challenged by other sources: for example, Newsweek’s 12 November 2007 issue predicts that there will be 106 Chinese billionaires in 2007. In this case Chinese billionaires will outnumber Indian billionaires, ousting India from first place. But this is of little matter here. What is certain is that rapid growth in India and China is producing more and more rich people, and at the same time more and more poor people.

Mounting inequality in Asia

According to a recent study published by the Asian Development Bank, social inequality and inequality in income distribution increased in 22 Asian countries between 1995 and 2005 [24]. Those countries where inequality is most on the increase are, in order, China, Bangladesh, Nepal and Sri Lanka. As for India, the Gini coefficient [25], which measures the level of income inequality, rose from 32.9 in 1993 to 36.2 in 2004.

Banks and hedge funds Hedge funds Unlisted investment funds that exist for purposes of speculation and that seek high returns, make liberal use of derivatives, especially options, and frequently make use of leverage. The main hedge funds are independent of banks, although banks frequently have their own hedge funds. Hedge funds come under the category of shadow banking. rush to invest in Indian microfinance
In October 2007, the first international microfinance investment fair was held in the Indian capital. It brought together 40 Indian microfinance institutions (among them SKS Microfinance, Share, Spandana and Basix) and major international private equity Equity The capital put into an enterprise by the shareholders. Not to be confused with ’hard capital’ or ’unsecured debt’. companies [26]. Microfinance is a fast-growing sector that is attracting more and more foreign investors, big banks and hedge funds. In India, 36.8 million people take out small microfinance loans for amounts not exceeding 100 dollars on average. The total volume of loans increased by 76% in 2006-2007 to reach 766 million dollars. The payment default rate for these loans is just 2%. Companies like Sequoia (the US venture capital company that backed Google) and Unitus Equity Fund (another US company investing in eBay) have taken a share in SKS Microfinance. Citibank and Fortis-ABN-Amro have announced that they will also be investing in SKS and other microfinance companies. According to SKS’ chief executive, hedge funds are also interested in investing in the sector. Who was it that said microfinance was a real alternative? Brazil’s president Lula, former presidents Jacques Chirac and Bill Clinton, Spanish prime minister José Luis Zapatero, George.W. Bush and Kofi Annan, of course. They were not entirely wrong if they were thinking of a profitable investment for bankers and private equity Private equity Private equity or investment capital designates a specific form of institutional investment in private companies with the goal of financing their development, transformation and expansion. The most common forms of private equity are venture capital, which refers to investments in the creation and development of innovative start-ups, and Leveraged Buy-Outs. companies, not to mention the founders of some of these microfinance companies like the executives of the Mexican microfinance company Compartamos who became millionaires in 2007.

The astronomical cost of the US war in Afghanistan and Iraq

In 2008, US expenditure on the war in Afghanistan and Iraq since 9/11 will reach 800 billion dollars [27]. According to a United Nations calculation, this is the amount that the international community should have spent over a period of 10 years to ensure that every inhabitant of the planet has access to drinking water (over one billion human beings are currently without), access to basic education (over 800 million are illiterate), access to medical care Care Le concept de « care work » (travail de soin) fait référence à un ensemble de pratiques matérielles et psychologiques destinées à apporter une réponse concrète aux besoins des autres et d’une communauté (dont des écosystèmes). On préfère le concept de care à celui de travail « domestique » ou de « reproduction » car il intègre les dimensions émotionnelles et psychologiques (charge mentale, affection, soutien), et il ne se limite pas aux aspects « privés » et gratuit en englobant également les activités rémunérées nécessaires à la reproduction de la vie humaine. and health infrastructures (2 billion men and women are without), and access for all women to gynaecological and obstetric care) [28].
These calculations about the cost of the war take into account only US expenditure; if one were to add the cost of the destruction caused by invasion and occupation in Iraq and Afghanistan, as well as the money spent by US allies, the figure would be far higher. Not counting the number of human lives lost and the number of wounded and war-traumatized.

Crisis in the World Bank and the IMF

In 2007, the chief executives of the World Bank and the IMF resigned before the end of their mandate. Paul Wolfowitz, who, with Donald Rumsfeld, fabricated the lies that served as a pretext for the invasion of Iraq (the existence of weapons of mass destruction and collaboration between Saddam Hussein and Al Qaida), was forced to resign because he had been found guilty of favouritism towards his girlfriend (a World Bank employee). Rodrigo de Rato, managing director of the IMF, resigned from his post, thus triggering a new election. The “elective” processes – both of the World Bank and the IMF – demonstrate that these institutions operate outside the democratic norm. The US president alone designates the candidate for the World Bank presidency and the WB governors simply ratify this decision. This is how the “election” has worked for over sixty years. As for the IMF, it is the principal European governments who designate the candidate for managing director, who must then be approved by Washington [29]. Recent events highlight the fact that both the European and US governments wish to maintain strict control over the two main multilateral financial institutions [30]. Beyond this denial of democracy, the two institutions are going through difficult times: IMF resources have dried up, since, apart from Turkey, no other major developing country owes it large amounts of money (the IMF lives off the sums refunded by its clients) and the World Bank is having trouble proving it is fulfilling its mission in the fight against poverty. Many clients are trying to pull out of the Bank as other sources of financing become available on more favourable terms. Among these are the loans granted by China and other developing countries.

Vulture funds Vulture funds
Vulture fund
Investment funds who buy, on the secondary markets and at a significant discount, bonds once emitted by countries that are having repayment difficulties, from investors who prefer to cut their losses and take what price they can get in order to unload the risk from their books. The Vulture Funds then pursue the issuing country for the full amount of the debt they have purchased, not hesitating to seek decisions before, usually, British or US courts where the law is favourable to creditors.
descend upon weaker countries

Vulture funds are private investment funds Investment fund
Investment funds
Private equity investment funds (sometimes called ’mutual funds’ seek to invest in companies according to certain criteria; of which they most often are specialized: capital-risk, capital development funds, leveraged buy-out (LBO), which reflect the different levels of the company’s maturity.
that buy up large portions of the debt of a poor country on the secondary market Secondary market The market where institutional investors resell and purchase financial assets. Thus the secondary market is the market where already existing financial assets are traded. , at a very low rate, in order to sue the country and obtain the face value of the debt they hold, plus late penalties. These vulture funds have already received close to one billion USD on court decisions. Just last April the London High Court ruled that Zambia was to pay 17 million USD to Donegal International for a debt they had bought for only 3 million in 1999. No less than 40 lawsuits have currently been filed against twenty countries of the South, most of them in Africa though some in Latin America. Eight lawsuits have been filed against the Democratic Republic of Congo, and courts have already ruled against the Congolese State in five of them. Here is another illustration: the US Kensington Funds has filed a case against Congo-Brazzaville for 400 million USD as payment of a debt they bought for USD 10 million. In the current legal context it is most likely that US judges will again decide in favour of the vulture funds.

London Interbank Offered Rate
An average rate calculated daily, based on transactions made by a group of representative banks. There are several LIBORs for some ten different currencies and some fifteen duration rates, from one day to twelve months.

The Libor (London Interbank Offered Rate) is the interest rate at which London banks lend money to each other. Almost all variable rate loans granted to developing countries are based on it. Loan contracts specify that the interest owed is equal to the LIBOR interest rate plus a given percentage, for instance, Libor + 3%. If the Libor rate is at 4.5 %, the interest owed will be 7.5 %. Since the crisis that started in August 2007, the Libor rate has been extremely unstable. When banks lose their confidence in each other the Libor rate increases. This is what happened in September when the Libor rate soared before decreasing again. If the crisis that started in August 2007 drags on, which is not at all impossible, the Libor rate may reach a much higher level than the present rate. In which case the following paradoxical situation could arise: the US interest rate falls while interest rates paid by developing countries actually increase because of an increase in the Libor rate. Developing countries would then have to dig into their reserves in order to pay a higher bill. Of course this is one possibility which should not be excluded and that developing countries must consider when making their choices.

Increase in South-South lending and the growing role of China

Private and public Banks in some developing countries (China, Brazil, India, Malaysia, South Africa) grant more and more loans to governments or companies in other developing countries. Loans by Chinese public banks to Africa have soared. In 2004-2006 Chinese banks lent two billion USD to developing countries for oil and gas development and production [31]. India, South Africa and Brazil as well as China are on the lookout for raw materials, which accounts for their banks granting more loans in order to back up supplies. These countries also try to sell their goods and services to other developing countries. The more vulnerable countries may thus fall into a new kind of dependence that will not necessarily be any better than the current one towards industrialized countries. In order to avoid this happening, South-South loans must be part of a more general process aiming at mutual empowerment.

The Bank of the South: the first step towards a new international financial architecture

It is all the more essential to develop a new international institutional architecture which would include the WB and IMF being replaced by democratic institutions. The IMF and the WB will eventually overcome their ongoing crisis if developing countries do not rapidly develop new alternative financial instruments Financial instruments Financial instruments include financial securities and financial contracts. . Indeed were there to be a new financial crisis in developing countries, we can be sure that the IMF would be straight back in the lead as last resort creditors. Even though they have been weakened, these two institutions are still implementing their neo-liberal agenda.
Developing a new architecture will require the creation and reinforcement of South-South regional integration processes: setting up one or several Banks of the South that will have to coordinate their efforts, devising counter-trade mechanisms among developing countries that are based on solidarity. [32] Such mechanisms are already producing interesting results in Latin America and the Caribbean, for example a marked improvement in the field of health care, energy security (Petrocaribe), education and information (Telesur).

We must also continue to demand the cancellation of illegitimate public debts, whether internal or external, so as to free up new resources to meet human development, which forcibly requires that human rights be respected. This is why initiatives concerning debt auditing are essential.

We are witnessing a new phase of history. While nefarious practices continue, at the same time alternatives are beginning to emerge which empower the oppressed. These embryonic alternatives need all the support they can get. The time is ripe to reinforce and radicalize them, since the developing countries are in a position of strength compared to the industrial countries. Local ruling classes want to use the situation to buttress their own capitalist projects which can take the form of regional trade integration (the Chiang Mai agreement in East Asia or Mercosur in South America) but in a context that favours the pursuit of maximum private profits. Peoples and governments who want real change cannot be content with such projects; they can go further by taking advantage of this historic opportunity - an opportunity for emancipation not to be missed.

Translated by Vicki Briault, Judith Harris, Christine Pagnoulle and Diren Valayden in collaboration with Elizabeth Anne.


[1This article updated in January 2008 follows on from “An International Situation Dominated by the Bursting of the North’s Private Debt and Housing Bubble” written in November 2007, updated in January 2008. The author has recently published several articles on the international economic situation and its alternatives: “The International Situation and the Debt: the new Challenges Facing CADTM” August 2007, “The Bank of the South: a Review of what is at stake” May 2007 , “Bank of the South, International Context and Alternatives” Sept 2006, , See also: Damien Millet, Eric Toussaint, « Banque du Sud contre Banque mondiale », Le Monde diplomatique, juin 2007.
- Centre/Periphery or industrialized countries/ developing countries. Neither of these descriptions is satisfactory.

[2The Shanghai stock exchange, which has seen a sharp rise throughout 2007, has nevertheless fallen in the second fortnight of November 2007. This would seem to indicate that investors are beginning to have doubts about the unfailing strength of the Chinese economy, and are starting to think that it could be affected by the crisis which erupted in the USA.

[3That said, the economic situation of Japan is particularly depressed. In the second quarter of 2007, the GDP had fallen by 1.2% when annualized. At the same time, investment spending fell back by 4.9%, while household consumption only progressed by 0.3%; yet these two items are the principal motors of growth. The Nikkei index on the stock-exchange has nose-dived. Salaries are stagnating and unemployment is up. Projected growth for the whole of 2007 was 1.7% but this will depend on the success of the exports which are pulling the economy this year.

[4See the extended report on this subject in the Financial Times, 18 October 2007.

[5The Thai government had already taken steps to control capital movement in 2006 for the same reasons.

[6The value of foreign exchange reserves is calculated in dollars, the main international currency of foreign exchange reserves, although in fact, the reserves are also made up of other currencies: euros, yens, sterling, Swiss francs…Worldwide reserves for 2007 are 2/3 in dollars. ¼ in euros and the rest in other strong currencies. (See Bank for International Settlements, Annual Report 2007, Bale, p.97)

[7Estimation of the author. It is not unlikely that the amount is much higher but it is very difficult to obtain a precise number since the majority of central banks do not disclose how their reserves are divided.

[8See the critical analysis of this policy in “Bank of the South, International Context and Alternatives” Sept 2006,

[9This is the case of Venezuela, Russia, China. The Norwegian government has done the same thing to maximize the returns on petroleum. (See Bank for International Settlements, ibid, p. 104.)

[10World Bank, Global Development Finance 2007, Washington DC, p. 46.

[11ccording to the calculations of the author. Neither the World Bank nor the other IFI provide reliable data on the reimbursement of the domestic public debt. The basis of the calculations is the following: according to the World Bank, in 2006, the internal public debt was three times higher than the external public debt. In 2006, the interest rate for the internal public debt of developing countries was generally higher than the interest rate for the external public debt. Since the repayment of the external public debt of developing countries amounted to about 280 billion dollars in 2006, we can estimate that the total repayment on the external and internal public debts exceeded the sum of 1000 billion dollars in 2006. In 2007, the amounts repaid were greater than those of 2006.

[12World Bank, Global Development Finance 2007, Washington DC, Tables, All Developing Countries

[13World Bank, Global Development Finance 2007, Washington DC, p. 53.

[14World Bank, Global Development Finance 2007, Washington DC, p. 54

[15The study was carried out by the IFAD (International Fund for Agricultural Development), one of the specialized UN agencies. See

[16The reduction of farm land devoted to the production of cotton in the US will have a positive collateral effect for cotton producing countries in Africa (Mali, Benin, Burkina-Faso) and also Uzbekistan, because the price of cotton on the world market will go up.

[17World Bank, Global Development Finance 2007, Washington DC, p. 25.

[18See Vandana SHIVA, The Violence of the Green Revolution, Third World Network, Malaysia, 1993, 264p.

[19Newsweek, 12 novembre 2007.

[20Newsweek, 12 novembre 2007.

[21Pour une présentation critique du modèle chinois, voir Martin Hart-Landsberg – Paul Burkett, China : Entre el Socialismo real y el Capitalismo, Editorial CIM, Caracas, 2007.

[22It should be noted that to arrive at this figure the World Bank calculates in purchasing-power parity, which enables it to present the situation more positively.

[23Newsweek, 12 November 2007.

[24The Hindu, 24 September 2007

[250 represents perfect equality and 100 total inequality

[26Financial Times, 12 October 2007

[27See Peter Backer in the Washington Post, article reproduced in Courrier International of 11 October 2007. According to the Washington Post, when Bush leaves office on 20 January 2009, the cost of war could reach 1000 billion dollars (since September 2001), or more than the cumulative cost of the Korean and Vietnam wars.

[28A calculation made jointly by United Nations specialized agencies: World Bank, WHO, UNDP, UNESCO, UNFPA, UNICEF and published in Implementing the 20/20 Initiative. Achieving universal access to basic social services, 1998, The above-mentioned agencies estimate that 80 billion dollars per year is the additional sum needed for expenditure relative to the basic social services concerned, given that approximately 136 billion dollars are already devoted to them. The total annual amount to be guaranteed fluctuates between 206 billion and 216 billion dollars. For the detailed calculation see the document cited above, p. 20.

[29In 2000, Washington refused the European candidate and succeeded in having another European proposed.

[30Not forgetting that another European, Pascal Lamy, is Director-General of the WTO.

[31World Bank, Global Development Finance 2007, Washington DC, p. 44.

[32See the kind of trading developing between Bolivia, Venezuela and Cuba in 2006-2007, for instance in the fields of hydrocarbons, technology transfer, health care and education.

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 Greece 2015: there was an alternative. London: Resistance Books / IIRE / CADTM, 2020 , Debt System (Haymarket books, Chicago, 2019), 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, etc.
See his bibliography:
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. He was the scientific coordinator of the Greek Truth Commission on Public Debt from April 2015 to November 2015.

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