Quarterly Bulletin

Zambia, like many developing countries of the World, suffered and still suffers huge debt stocks. These debts are either to the International Financial Institutions (IFIs), Multilateral lenders and Bilateral lenders. Zambia, for example, had a debt stock of around US$7.1 billion in 2004. The campaign by civil society and the Church to have these debt stocks cancelled was based on the fact that these huge debt stocks although economically and legally justifiable, were not socially and practically fair. In Zambia and a few other countries, we got debt relief but only after struggling and being forced to follow the HIPC conditionalities that pushed most of our people into further poverty. Sean McDonagh explores the impact of these huge debt stocks on the ecology in the first article and in the second article gives other impacts of debt on human beings, especially the poor.

The neo-liberal economic policies which were forced on Bolivia in the wake of the debt crisis of the 1970s and 1980s destroyed the lives of poor people.  The education, health care system and social services virtually collapsed as money was drawn off to service the foreign debt. This was caused, in the main, by irresponsible lending policies of Minority World banks, especially those with headquarters in the United States of America.

Nine out of the top eleven US banks should have collapsed, but rather than allow that to happen economic policies were forced on the Majority World by Minority World countries, ably abetted by multilateral agencies such as the World Bank and the International Monetary Fund (IMF). It is only now in 2008, in the light of the dubious financial products which many banks were selling during the past two decades, that people are willing to point the primary finger of blame at the banks for causing Third World debt.

The ecological damage  caused by Third World debt was extensive and has weakened the biosphere for all future creatures of the planet, including humankind.  The impact of paying Third World debt on the Brazilian environment was replicated in scores of countries in the Majority World.  The IMF began to monitor the Brazilian economy after the debt crisis began in 1982.  Social spending was diminished dramatically, leading to a fall in life expectancy to 44 years in the north-east of the country. Malnutrition among children was rampant, while 86 million people ate less than the minimum requirement of 2,240 calories per day.

In her 1992 book, The Debt Boomerang: How Third World Debt Harms Us All, the political economist Susan George details how intensified environmental destruction was a “boomerang” effect on poor countries trying to make repayments on their debts. The vicious circle began when countries, often facilitated by the World Bank, borrowed money to build massive projects, such as dams, which cause immense environmental destruction. Then, in order to generate foreign currency to pay off the debt, they further damaged the environment through massive logging programmes, mineral extraction or clearing huge areas of primal forest to grow export-oriented crops such as soya. 

Two projects in Brazil that turned out to be colossal environmental disasters are outlined and critiqued by Bruce Rich in his 1994 book, Mortgaging the Earth. One project at Polonoroeste involved building a road    to    facilitate      agricultural colonisation. Despite the fact that previous efforts to colonise the Amazon had failed dismally, and in the face of trenchant criticism from its own internal Operations Evaluation Department (OED),  the World Bank poured hundreds of millions of dollars into the Polonoroeste project. Rich maintains that the Polonoroeste transformed Rondonia – an area approximately the size of Oregon or Britain – into a region with one of the highest forest destruction rates in the Brazilian Amazon.

The impact on the Amerindian population was devastating. Indian lands were systematically pillaged and indigenous people were driven from their ancestral homes. Epidemics of tuberculosis, measles and malaria also took their toll on the indigenous population.

The Carajas project created much the same kind of forest devastation in the state of Para at the other end of the Mason basin. Here the World Bank lent over $300 million in order to build a railway to transport high-grade ore to the sea.  Included in the original project were plans to build 34 charcoal-burning industries to produce the pig-iron along the railway corridor. The timber for producing the charcoal was supposed to come from eucalyptus plantations, but, in reality, it came from standing forests. The result was massive deforestation in the area.

Despite its central involvement in the project, the World Bank, attempted to shift responsibility for what happened in Carajas to the Brazilian state mining  company, Companhia Vale del Rio Doce (CVRD).   Rich insists that the World Bank’s involvement was central, since it funded the basic infrastructure (the mine, the railroad and the deep-water port) for the devastation that  followed. Furthermore, the World Bank’s operational staff and the management prevented the Banks’ own environmental staff from appraising the broader adverse regional, environmental and social consequences of the scheme.

On a more general level, the relationship between debt and tropical deforestation was striking.  Major debtors such as Indonesia and Brazil increased their rate of deforestation by 82 percent and 245 percent respectively between 1980 and 1993.  The bulk of the Indonesian forest, apart from New Guinea, is already gone. Deforestation has continued apace in Brazil, impoverishing not just these countries, but the biosphere as a whole.

THE REAL COST OF DEBT 

It should be noted that the current global financial turmoil brings attention to the fact that this is not the first time in recent decades that banks have impoverished people and destroyed the environment through their irresponsible lending policies. The consequences of reckless lending to countries in the Majority World, formerly called the Third World, in the 1970s are horrible. Servicing these loans has caused pain, suffering and death to many people during the past 30 years.  It has also devastated the environment in crucial ecosystems across the world.

Third World debt repayment benefitted the Minority World (formerly called the First World) countries hugely in two ways. Firstly, the economist Susan George estimated that, in the period from 1982 until 1990, US$418 billion was transferred from poor countries to rich countries to service the foreign debt. This money ought to have been spent on  education,   health care, social services for the vulnerable in poor countries and on building up a diversified, local economy. Instead it subsidized the economies of rich countries and increased consumption.

Secondly, most poor countries had very little manufacturing activity and were almost exclusively commodity-producing countries.  Between 1974 and 1988, the price of a basket of 28 basic commodities, including lead, tin, zinc, sugar, coffee and tea, fell by a staggering 48%.  The Economist magazine estimated that the Minority World saved US$65 billion in 1985 alone. This, of course, kept inflation low in the Minority World during the 1980s and 1990s.

There were two reasons for the drop in commodity prices. The first had to do with the recession in the rich countries, caused by the hike in oil prices in 1973 and again in 1979.  The second reason was a direct result of the economic policies forced on Majority World countries by multilateral financial agencies such as the World Bank and the International Monetary Fund.  These policies dictated that poor counties reshape their agriculture programmes away from subsistence agriculture, geared to feeding the local population, to planting export-oriented crops.

For example, many more poor countries were encouraged to plant coffee. This led to a glut in the market and the subsequent collapse in the price of coffee on the world market in the mid-1980s. 

Low inflation in the Majority World during the 1990s and the early part of this decade was not due to shrewd economic policies designed by politicians and central bankers as they would like us to believe.  It was as a result of an ever larger variety of cheap goods being imported from China. As a consequence China began to run up huge financial surpluses, particularly with the United States. Some of this saving went into US government bonds, but the bulk was invested in various assets, often property, in various parts of the world.  These assets began to increase in value driving up property prices around the globe. 

In response to these trends central bankers around the world were faced with a dilemma. They could either target consumer inflation, even though cheap Chinese consumer goods wre keeping inflation low anyway, or they could address the asset inflation side of the equation.

Unfortunately, the Federal Reserve in the United States, under the chairmanship of Alan Greenspan, decided not to interfere in the market and thus curb the explosive growth of risky and often fraudulent mortgage lending. On October 4th 2008, Greenspan told a Congressional hearing that the largely unregulated business of spreading financial risk widely through the use of exotic financial instruments called derivatives, had gotten out of control and had added to the havoc of today’s crisis. As far back as 1994 he had resolutely opposed tougher regulation on derivatives. His status as an economic guru in the eyes of both Republicans and Democrats blocked any effective regulation.

As the property market collapsed, many banks had too much debt and too little capital to provide sufficient credit to keep the economy moving.  Some of the banks have tried to meet their debts by selling assets. Because confidence in the financial system has evaporated, the value of these assets has fallen through the floor, reducing the Banks’ capital even further.  Governments have tried to step in with a number of schemes, some to guarantee depositors, others to buy bank shares, reduce interest rates and/or recapitalize the banks.  Thus far the financial markets have not responded. Confidence in the system is at a very low ebb, probably the lowest it has been since the Great Depression.

Fr. Seán McDonagh, SSC
Ireland