The Divide

by Jason Hickel

  These policies drove social inequality to unprecedented levels in the US and Britain. Productivity increased steadily while wages stagnated, effectively shifting an increasing proportion of profits from workers to the owners of capital. CEO salaries grew by an average of 400 per cent during the 1990s while workers’ wages grew by less than 5 per cent and the US minimum wage decreased by more than 9 per cent. The share of national income captured by the top strata of society also increased at an alarming rate. In the US, the portion going to the top 1 per cent more than doubled from 8 per cent in 1980 to 18 per cent today. Britain witnessed a similar jump during this period, with the share claimed by the richest growing from 6.5 per cent to 13 per cent. According to US Census data, the top 5 per cent of American households have seen their incomes increase by 72.7 per cent since 1980, while median household incomes have stagnated and the bottom quintile have seen their incomes fall by 7.4 per cent. In other words, the neoliberal counter-revolution restored levels of inequality that had not been seen since before the Great Depression.

  So much for the trickle-down effect. As it turns out, making rich people richer doesn’t make the rest of us richer. Nor does it stimulate economic growth, which is the sole justification for supply-side economics. In fact, quite the opposite is true: since the onset of neoliberalism, the rich countries of the OECD have seen per capita growth rates fall from an average of 3.5 per cent during the 1960s and 1970s down to an average of 2 per cent during the 1980s and 1990s. As these numbers show, neoliberalism has failed as a tool for economic development – but it has worked brilliantly as a tool for restoring power to the wealthy elite.

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  The developmentalist policies that were introduced across the global South after the end of colonialism succeeded in reducing inequality and poverty. The movement operated according to a vision that was diametrically opposed to Truman’s narrative: it saw inequality and poverty not as natural phenomena, or as a sign of moral failure, but rather as a matter of injustice – a political problem that demanded political solutions. Poor countries didn’t want aid from the West, they wanted a fairer global economic system, with the latitude to determine their own economic policies. They refused to be playgrounds for foreign extraction.

  We can learn a great deal from the legacy of developmentalism. The solution to mass poverty turns out to be remarkably simple. Poor people don’t need charity, they need fair wages for their work, labour unions to defend those wages and state regulation that prevents exploitation. They need decent public services – such as universal healthcare and education – and a progressive taxation system capable of funding them. They need fair access to land and a fair share of natural resource wealth. In other words, real development requires the redistribution of power, which then in most cases naturally precipitates a redistribution of resources. Developmentalist policies were generally brought in by democratically elected governments that had broad popular support, although a few of them – as in Egypt – calcified into authoritarian regimes. But in all cases, developmentalist governments sought to change the rules of national economies to make them fairer for the majority, so that economic systems would serve the interests of the people rather than just the interests of the national elite and foreign corporations.

  In short, the fight against poverty and underdevelopment during this period was understood as a political battle. It sought to challenge the prevailing distribution of power and resources around the world.

  And this is exactly what the West would not tolerate. Not all developmentalist states were subject to retaliation during this period, like India, China, Libya, Algeria, Egypt, Syria, Iraq, Tanzania and a number of East Asian countries. Some of them were either too powerful to cross without igniting open warfare, while others simply didn’t pose enough of a threat to Western interests. But in the key cases described above, Western governments intervened on the side of disgruntled national elites in order to roll back developmentalist legislation. Under the banner of the Cold War, pro-poor legislation was demonised in Western media as ‘communist’, and this designation gave Western governments licence to employ even the most draconian tactics with impunity. Yet few of the global South leaders who were assassinated or deposed during this period identified as communist; for the most part, they were explicitly non-aligned, and championed the third way of a Keynesian mixed economy. Indeed, they were merely mimicking the policies that the US and Europe had used themselves to such great effect. If we dig behind the rhetoric, it becomes clear that Western support for right-wing coups had little to do with Cold War ideology, and certainly nothing to do with promoting democracy (quite the opposite!); the goal, rather, was to defend Western economic interests. The veil of the Cold War has obscured this blunt fact from view.

  It is interesting to imagine how states such as Guatemala, Brazil, Iran, Indonesia and the Congo would have developed had they been allowed to continue with their pro-poor policies in peace. It is possible that by now they would have come very close to eradicating poverty, and perhaps even shed their Third World status altogether – as many East Asian countries managed to do. Sadly, they were prevented from taking this path.

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  But there is one point of caution that we should take care to note. Developmentalism was not without its flaws. Rapid economic growth, industrialisation and ‘modernisation’ came with significant costs. In many cases it meant pushing peasant farmers off the land in order to make way for bigger, more ‘efficient’ operations. It meant displacing communities in order to build dams. It meant drawing people into the labour force for the first time, making them dependent on wages for survival and roping them into consumer markets. And it had environmental costs, too, such as soil degradation from high-input farming, pollution from power stations and factories, and ecosystem disruption caused by industries like mining and forestry. In 1980, at the end of the developmentalist period, even Raúl Prebisch – one of the movement’s founders – had come to recognise these issues: ‘We thought that an acceleration in the rate of growth would solve all problems,’ he said. ‘This was our great mistake.’

  In other words, the focus on rapid economic growth sped up the process of commodifying human life and nature that had begun under colonialism. And as under colonialism, in most cases ‘traditional’ values and lifeways were treated as a barrier to economic growth and social progress, and were often purposefully eradicated. Developmentalism was, after all, a Western model. By adopting the growth-at-all-costs agenda and by looking to the West as the apex of economic achievement, global South countries missed their opportunity to chart an alternative trajectory from the outset – one that would be rooted in care, ecology and sustainability; one that would draw on rather than reject indigenous values; and one that would measure progress by more meaningful indicators than GDP. Instead they jumped on to the very bandwagon that we now recognise has brought us to the brink of climate change and ecological crisis.

  PART THREE

  The New Colonialism

  Five

  Debt and the Economics of Planned Misery

  There are two ways to conquer and enslave a nation. One is by the sword. The other is by debt.

  John Adams

  The Western-backed coups of the 1950s and 1960s hobbled progress in a number of key countries, and put an end to some of the developing world’s most effective leaders. But despite these setbacks, the global South was still rising. Governments across the region realised that because they controlled most of the natural resources and raw materials that Western powers needed for their industries, they didn’t have to accept the shoddy terms of trade that the West offered. Some took steps to improve the prices of their commodity exports by working together in groups. The Organization of Petroleum Exporting Countries (OPEC), for example, gained traction during the 1960s and, much to the dismay of Western powers, proved that they could drive up oil prices. Other groups began to organise around commodities like copper, bananas and bauxite. The possibilities were endless.


  Emboldened by their growing strength, the countries of the G77 coalesced around a proposal to make the rules of the global economy fairer for the world’s majority. They called it the New International Economic Order (NIEO), and in 1973 they got it passed by the General Assembly of the United Nations. The NIEO proposed that developing countries should have the right to regulate multinational corporations; the right to nationalise foreign-owned assets when necessary; the right to protect their economies with tariffs; the right to cooperate with each other to maintain reasonable prices for raw materials; and, most importantly, the freedom to do these things without fear of retaliation or invasion by Western powers. They also believed that access to development finance and technology transfers should come without strings attached, so that Western creditors would not be able to manipulate them.

  The adoption of the NIEO at the UN represented the highest achievement of developmentalism – the very summit of Third World political consciousness. It drove right to the deepest causes of global inequality, pointing out that the international economic system was effectively rigged in the interests of Western powers at the expense of virtually everyone else.

  Western powers, for their part, were enraged by this movement, and worried about the successes the South was scoring at the United Nations. They realised that in the new era of global democracy – in the halls of the UN General Assembly – they would no longer be able to dominate the world’s majority. Their strategy of resisting the rise of the South with coups had worked well enough for a time, but it was a piecemeal effort, and as the 1970s wore on and people became more sensitive to issues of human rights and national sovereignty, Western voters were often reluctant to allow such neocolonial violence to be conducted in their name.

  They needed a new plan. In 1975, the leaders of the US, Britain, France, Italy, Japan and West Germany met at Château de Rambouillet in northern France to form the alliance that – with the later addition of Canada – would become the G7. The goal was to counter the rise of developmentalism and the NIEO, and to prevent global South countries from working together to increase the prices of raw materials. Henry Kissinger, the US secretary of state at the time, laid out the new geopolitical strategies that the group would use. He proposed to shift the most important decisions at the UN away from the General Assembly to the Security Council, which the rich nations controlled. Next, he laid out plans to divide the G77 by using aid as an instrument of control. The idea was to create a new group of so-called Least Developed Countries (LDCs) – the poorest and most desperate members of the global South – and offer them aid in exchange for siding with the West against OPEC and the rest of the G77. Aid would be wielded as an intentional strategy to shatter global South unity.

  Borrowing from Truman, Kissinger also sought to wield the narrative of aid in order to defuse the rising political power of the South, especially at the United Nations. He insisted that the question of global inequality and development should not be approached as a political question but rather as a matter of national responsibility. Rich nations were not responsible for causing the poverty of the global South, he insisted. Quite the opposite – they were prepared to give aid to help poor countries develop. Desperate to avoid any substantive redistribution of power and resources, Kissinger sought to change the narrative about inequality altogether, hoping to convince the LDCs to abandon their demands for global political reform and settle for aid handouts instead.

  It is possible that these new strategies might have turned the tables on the South. But the Non-Aligned Movement was a formidable force, and it seems likely that they would have been able to see through Kissinger’s plans. We will never know, because only a few years after the G7 gathered at Château de Rambouillet, something happened that changed the course of international history for ever, giving Western powers the decisive upper hand and abruptly reversing the South’s rise. In what seemed like the blink of an eye, the US and Europe seized de facto control over the economic destinies of developing countries, conquering them all over again without spilling a single drop of blood. Instead of conquistadors on horses or secret agents in smoke-filled rooms, this time the job was done by bankers and bureaucrats – an army of men in grey suits with briefcases, dealing in nothing more glamorous than loan portfolios.

  A Crisis of Debt

  This surprising turn of events had been building in the background for a number of years, beginning with drama in the Middle East. In 1967, Israel launched unexpected attacks against Egypt that sparked a regional conflagration known as the Six Day War. During the chaos that ensued, Israel took the opportunity to seize territory from its Arab neighbours, annexing Gaza and the Sinai Peninsula from Egypt, East Jerusalem and the West Bank from Jordan and the Golan Heights from Syria. Outraged by this incursion, the Arab states plotted to recover their land. Six years later, in 1973, they launched a surprise attack of their own against Israel. But things didn’t go quite as smoothly as planned. The United States stepped in to support Israel, its main ally in the region, with an immense shipment of military aid. Arab States were upset by this move, as it gave Israel an unexpected advantage. So they retaliated by unleashing the ‘oil weapon’. Working with Saudi Arabia and OPEC, they raised the price of oil by 70 per cent, hoping this would force the US to back down. The US was undeterred. In fact, three days later President Nixon asked Congress to deliver an additional $2.2 billion in military aid to Israel. In response, the Arab coalition took an even more extreme step, imposing a total embargo on oil shipments to the US and a partial embargo on shipments to Western Europe. By the end of the embargo in March 1974, the price of oil had risen from $3 per barrel to nearly $12.

  The embargo sent a massive shock through the US economy and triggered the crisis of high inflation and low growth that characterised the 1970s. Desperate for a quick solution, Nixon considered invading the Middle East to seize the oil fields, but at the last minute the two sides managed to reach a negotiated settlement. Israel withdrew from the Sinai Peninsula, thus placating Egypt; and Saudi Arabia would ensure that oil prices remained at a level acceptable to the United States in exchange for US military aid that would help the House of Saud hold off their domestic political enemies. But there was another, more important dimension to the settlement. As a result of the oil price increases, OPEC states suddenly found themselves awash with excess cash worth more than $450 billion. The only problem was that they didn’t know what to do with all the money. Because there was nowhere to invest it internally, Saudi Arabia and other OPEC nations decided to circulate or ‘recycle’ the money through Wall Street banks, probably to some extent under the pressure of US compulsion, as part of the negotiated settlement.

  So $450 billion of petrodollars poured into US banks in a very short period of time. But the banks, too, faced the problem of what to do with it all. Western economies were stagnating, so domestic investments were not a profitable option. Scrambling for a different plan, they decided to invest the money abroad in the form of loans to global South countries. What began as a fringe idea quickly turned into a booming business. Many global South countries, having emerged from the rubble of colonialism just two decades prior, were hungry for capital to build up their economies and to fuel import-substitution industrialisation, which was taking off across the region. On top of this, after 1973 they also needed additional finance to cover the higher costs of oil. In short, they were eager to borrow.

  The banks considered these loans to be a safe investment. They assumed that governments would be very unlikely to default. ‘Countries don’t go bust,’ as Citibank CEO Walter Wriston was fond of saying. This made good sense at the time – especially given that developmentalism was working and global South economies were soaring; no one thought they would have any difficulty repaying debts. So banks like Citibank, Chase, Deutsche Bank and others sent representatives jetting all around the global South to convince governments to take out big loans. They called this ‘go-go banking’, or ‘loan pushing’. Many of these loans wer
e legitimate, of course. But in the midst of all the excitement, some banks got carried away. Loan pushers were trained to invent inflated projections of how beneficial the loans would be, manipulating statistics to convince governments to borrow even if they knew full well that they would never be able to repay. Pushers often focused specifically on dictatorships, since – given the absence of democratic accountability – they were much more likely to accept these risky loans, which they could very easily use to line their own pockets, either by stealing the money directly from public accounts or by channelling it through the government and into their own contracting businesses. In this sense, the dictatorships that the US government helped install during the 1950s and 1960s – as in Guatemala, Chile and the Congo – suddenly proved useful in a new way.

  It was basically a global sub-prime market. For loan pushers, what counted was not the quality of the loans, but their quantity. For each loan they sold, they made a handsome kickback in the form of so-called ‘participation fees’: for example, a loan of $100 million with a participation fee of just 1.5 per cent would land them a quick bonus of $1.5 million. These ‘juicers’ created a strong incentive to get as many loans out the door as possible, without giving much thought to whether the recipients would ever be able to pay them back. These kinds of incentives are known to be problematic, since they induce predatory lending behaviours that generate toxic debts at high risk of default.

  Debt levels in the global South skyrocketed – particularly in Latin America, which was the focus of most of the lending. And the situation was made even worse in 1979, when the Iranian Revolution led to a second oil price hike that forced developing countries to borrow yet more to finance their energy needs. By 1982, total debt stocks had quadrupled, from $400 billion in 1970 to more than $1.6 trillion twelve years later. In many countries, debt levels reached well over 50 per cent of GDP. If the loans had been used to build productive capacity, this might have been all right. But because they were used largely to cover rising oil prices, the prospect of future repayment began to seem a pipe dream. To make matters worse, the terms of trade between global South countries and their Western counterparts were continuing to deteriorate; their raw material exports were worth less and less compared to the manufactured products they had to buy from abroad, so any income they might have used to repay debt was quickly diminishing. And the recession in the West meant there was less demand for their exports in the first place. It was a crisis waiting to happen.