South/North Dialogue – Quito – 10-15 September 2008

International Conjuncture. Short version

5 September 2008 by Eric Toussaint

In 1982, the epicentre of the debt crisis 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. In August 2007, a debt 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 Europe.

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.
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 900 billion dollars) is loaned to the United States through the purchase of Treasury bonds [1]

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. These funds are known as Sovereign Wealth Funds.

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 [2]
! 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 523 billion dollars in 2007 [3]
. If we only consider the servicing of the external public debt, since this falls under the responsibility of the state budget, it represented 190 billion dollars in 2007. Despite the fact that the external public debt/GDP ratio is decreasing, the total volume of the debt is continuing to rise. 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 800 billion dollars a year which the public authorities of developing countries have to repay for both external and domestic public debt. [4]

Increase in the indebtedness of private firms

We must not lose sight of the increasing indebtedness of private firms of 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.

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. 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

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. 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 operation of the future Bank of the South has not been finalized, for example at the level of the voting rights of the member countries or on auditing mechanisms. On the other hand, other countries have created an ALBA bank (Bolivia, Cuba, Nicaragua, Venezuela).

ICSID ICSID The International Centre for the Settlement of Investment Disputes (ICSID) is a World Bank arbitration mechanism for resolving disputes that may arise between States and foreign investors. It was established in 1965 when the Washington Convention of that year entered into force.

Contrary to some opinions defending the fact that ICSID mechanism has been widely accepted in the American hemisphere, many States in the region continue to keep their distance: Canada, Cuba, Mexico and Dominican Republic are not party to the Convention. In the case of Mexico, this attitude is rated by specialists as “wise and rebellious”. We must also recall that the following Caribbean States remain outside the ICSID jurisdiction: Antigua and Barbuda, Belize, Dominica (Commonwealth of) and Suriname. In South America, Brazil has not ratified (or even signed) the ICSID convention and the 6th most powerful world economy seems to show no special interest in doing so.

In the case of Costa Rica, access to ICSID system is extremely interesting: Costa Rica signed the ICSID Convention in September, 1981 but didn’t ratify it until 12 years later, in 1993. We read in a memorandum of GCAB (Global Committee of Argentina Bondholders) that Costa Rica`s decision resulted from direct United States pressure due to the Santa Elena expropriation case, which was decided in 2000 :
"In the 1990s, following the expropriation of property owned allegedly by an American investor, Costa Rica refused to submit the dispute to ICSID arbitration. The American investor invoked the Helms Amendment and delayed a $ 175 million loan from the Inter-American Development Bank to Costa Rica. Costa Rica consented to the ICSID proceedings, and the American investor ultimately recovered U.S. $ 16 million”.

Since May 2 2007, Bolivia is no longer a member of the ICSID, the International Centre for the Settlement of Investment Disputes, an organ of the World Bank. It is very important to convince other governments to do the same.

Integral Debt Audit

Ecuadorean government has created the CAIC in July 2007. Project of new constitution includes permanent debt audit process.

We must 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.

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


[1See the critical analysis of this policy in “Bank of the South, International Context and Alternatives” Sept 2006,

[2World Bank, Global Development Finance 2007, Washington DC, p. 46.

[3World Bank, Global Development Finance 2008, Washington DC

[4According 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 2007, the internal public debt was three times higher than the external public debt. In 2007, 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 190 billion dollars in 2007, we can estimate that the total repayment on the external and internal public debts exceeded the sum of 800 billion dollars in 2007.

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.

Other articles in English by Eric Toussaint (621)

0 | 10 | 20 | 30 | 40 | 50 | 60 | 70 | 80 | ... | 620




8 rue Jonfosse
4000 - Liège- Belgique

00324 60 97 96 80