The Divide

by Jason Hickel

  The banks, meanwhile, were having a field day. Through the miracle of compound interest, they were raking in enormous profits – more than $100 billion per year by 1980. There was only one problem. The loans were denominated in US dollars, and the interest rates were variable. This meant that any significant rise in US interest rates would mean the interest rates on the loans would rise too, possibly pushing vulnerable poor countries into default. And that’s exactly what happened in 1981, when US Federal Reserve Chairman Paul Volcker jacked interest rates up as high as 21 per cent. Poor countries found that they simply could not repay their loans at such high rates. In 1982, Mexico took the inevitable step and defaulted on part of its $80 billion debt. This move spurred other heavily indebted countries – such as Brazil and Argentina – to do the same, and set off what became known as the Third World Debt Crisis.

  Remote-Control Power

  From the perspective of the bankers, the Third World Debt Crisis was a complete catastrophe. According to basic free-market theory, when a borrower defaults on a loan, the loss should be shouldered by the lender; after all, it was their risk to begin with. But Wall Street had so much invested in Third World debt they knew that they would be unable to absorb the losses, and would almost certainly collapse. They refused to let this happen. They set about convincing the US government to bail them out, claiming that if they collapsed then the whole financial system would crash, credit markets would dry up and the global economy would spiral into recession.

  And that is exactly what they got. The US government stepped in to bail out the banks by forcing Mexico and other countries to repay their loans. They did this by repurposing the International Monetary Fund. The IMF was originally designed to use its own money to lend to countries with balance of payments problems, so that they could keep government spending up and therefore avoid another depression. It was John Maynard Keynes’s plan for making sure that the economy of the industrialised world stayed afloat during hard times. But now the G7 was going to use the IMF for a different purpose entirely: to force global South countries to stop government spending and use their money instead to repay loans to Western banks. In other words, the IMF came to act as a global debt enforcer – the equivalent of the bailiff who comes to repossess your car, only much more powerful. This radical shift in the mission of the IMF was only possible because during this period IMF leaders – such as managing director Jacques de Larosière – systematically purged the institution of people who supported the original Keynesian philosophy and replaced them with figures more amenable to neoliberal ideology.

  This is how the plan was supposed to work: the IMF would help developing countries finance their debt on the condition that they would agree to a series of ‘structural adjustment programmes’. Structural adjustment programmes, or SAPs, included two basic mechanisms for debt repayment. First, developing countries had to redirect all their existing cash flows and assets towards debt service. They had to cut spending on public services like healthcare and education and on subsidies for things like farming, food and infant industries; they also had to privatise public assets by selling off state companies like telecoms and railways. In other words, they had to reverse their developmentalist reforms. The savings gleaned from spending cuts and the proceeds of privatisation would then be funnelled back to Wall Street to repay debts. In other words, public assets and social spending retroactively became collateral in the repayment of foreign loans – an arrangement that was, of course, never agreed at the time the loans were signed. Global South countries were made to pay for the banks’ risky practices with billions – even trillions – of dollars taken from ordinary people. This amounted to an enormous transfer of wealth from the public coffers of impoverished global South countries to the richest banks in the West.

  The second mechanism was slightly less direct. Countries that were subject to structural adjustment programmes were forced to radically deregulate their economies. They had to cut trade tariffs, open their markets to foreign competitors, abolish capital controls, abandon price controls and curb regulations on labour and the environment in order to ‘attract foreign direct investment’ and make their economies more ‘efficient’. The claim was that these free-market reforms would increase the rate of economic growth and therefore enable quicker debt repayment. As the bankers put it, countries would be able to ‘grow their way out of debt’. Debtor countries were also forced to orient their economies towards exports, to get more hard currency to repay their loans. This meant abandoning the import-substitution programmes they had used to such good effect during the developmentalist era. In addition, structural adjustment programmes required debtors to keep inflation low – a kind of monetary austerity – because the bankers feared they would use inflation to depreciate the value of their debt. This was a big blow to global South countries, not only because it prevented them from inflating away their debt, but also because it barred them from using monetary expansion to spur growth and create employment.

  So SAPs introduced a three-part cocktail: austerity, privatisation and liberalisation. These principles were applied across the board, not just in Mexico, Argentina, Brazil and India – the first victims of structural adjustment – but in every country that was placed under the control of the IMF, regardless of their local economic conditions or the particular needs of their people. It was a one-size-fits-all blueprint, handed down from above by Washington-based technocrats – the central planners of an emerging global economic order that claimed, ironically, to detest central planning.

  The promise was that these policies would alleviate the debt crisis and prevent it from recurring. But this was a very subtle sleight of hand – a kind of ruse. The structural adjustment reforms themselves had nothing to do with the real causes of the crisis. The real causes of the crisis were exogenous: they had to do with exorbitant interest rates and declining terms of trade, over which global South countries had no control. But the IMF had no intention of tackling these problems, for to do so would require challenging the interests of Western governments and their commercial banks. Instead, the IMF acted as though the problem was endogenous, as though it had to do with problems in the local economy. So the IMF pushed domestic economic reforms as if they were a response to the crisis when in fact they were not. The crisis was simply an excuse for rolling out an economic agenda that Washington had long been seeking to impose.

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  From the 1950s through the 1970s, Western powers had struggled to prevent the rise of developmentalism in the South. What they failed to accomplish through piecemeal coups and covert intervention, the debt crisis did for them in one fell swoop.

  The SAPs pushed the very same policies that the Chicago School had tested out in Chile, but instead of being imposed through violence, they were imposed by leveraging debt. Debt became a powerful mechanism for pushing neoliberalism around the world, and for rolling back the developmentalist agenda Washington found so threatening – more powerful, even, than the coups that had been used in the past, and without the embarrassing inconvenience of dictators and torture chambers. The brilliance of structural adjustment is that it seemed as though it was voluntary – as though global South countries chose to accept the programmes in order to get out from under their debt. In reality, however, they were not voluntary at all.

  Behind this veneer of legitimacy, Western creditors proceeded to assume de facto control over economic policy in developing countries, overriding national sovereignty. Power over economic decisions was shifted from national parliaments and elected representatives to technocrats in Washington and bankers in New York and London. It operated as a new kind of coup. But this time the coup was invisible, and most citizens would never know it happened; they would continue to believe that their elected representatives held power, when in fact power – at least over certain key portfolios, such as macroeconomic strategy – had been shifted abroad, to the core of the world system. In this way, Western hegemony was able to mask itself behind the façade of nationa
l governments that otherwise appeared to carry on as normal.

  Only two decades after global South countries gained their independence from colonialism, structural adjustment brought about the end of meaningful national economic sovereignty. Economic independence, once the dream of popular movements across the global South, quickly became an illusion.

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  The IMF was not alone in its efforts. Beginning in the 1980s, the World Bank began to require structural adjustment as a basic condition for its loans. If countries needed loans to finance development projects – power plants, irrigation systems, etc. – they had to agree to the very same conditions that the IMF had prescribed as a remedy for over-indebtedness, even if they themselves were not over-indebted. Lacking other options for finance, developing countries had no choice but to accept these conditions.

  The genius of the World Bank’s conditional lending was that it was virtually risk-free for the creditors. The World Bank sells bonds on Wall Street, allowing commercial banks and private investors to buy global South debt. These ‘innovative debt products’, as the Bank calls them, are simultaneously safe (usually AAA rated) as well as high yielding, with returns of up to 15 per cent. How is the Bank able to deliver such large and secure returns? Because it wields direct power over its debtors. Through structural adjustment conditions, the Bank can force debtors to channel all their available resources towards repaying the loans, requiring them to cut spending elsewhere and raise new funds by selling off their assets. It’s a foolproof strategy. And it comes with the added benefit of prising open the receiving country’s market to foreign investors.

  This model of lending would never fly in normal commercial banking. Imagine you walk into Barclays to get a loan for a new business. Now imagine that they will lend to you only if you agree to give them complete control over your household, so that if your interest payments don’t come in fast enough, they can garnish your wages, liquidate your house and force your children to get jobs. Imagine, further, that you are not allowed to declare bankruptcy under any circumstances; if you can’t repay your loan you have to sell everything you own, stop feeding your children, stop buying whatever medicines you might need to stay healthy and channel all that money to the bank. Such an arrangement would never fly. We would never allow it. And yet such invasive conditions are routine when it comes to development loans.

  An Adjusted World

  The IMF and the World Bank promised the world that structural adjustment would improve economic growth and reduce poverty. But it ended up doing exactly the opposite. Instead of helping poor countries, as they were supposedly designed to do, SAPs basically destroyed them, reversing all the gains they had made during the developmentalist period. During the 1960s and 1970s, global South countries enjoyed an average per capita income growth rate of 3.2 per cent. But during the era of structural adjustment – through the 1980s and 1990s – income growth rates plunged to 0.7 per cent. Progress in development was stopped in its tracks. Liberalisation did not help global South countries grow their way out of debt. Instead, the money for debt repayment had to be gained from more direct forms of appropriation: austerity and privatisation.

  In Latin America, income rose rapidly during the developmentalism of the 1960s and 1970s, and then suddenly collapsed after 1980. The region went into a long period of stagnation during structural adjustment, recovering its pre-crisis income levels only in the mid-1990s. In sub-Saharan Africa things were even worse. During the 1960s and 1970s, per capita income in sub-Saharan Africa grew at a rate of 1.6 per cent – modest, but still higher than Europe during the Industrial Revolution. Yet during the 1980s and 1990s, when structural adjustment was forcibly applied to the continent, per capita income fell at a rate of 0.7 per cent per year. The GNP of the average African country shrank by around 10 per cent, and the number of Africans living in extreme poverty more than doubled.

  Robert Pollin, an economist at the University of Massachusetts, calculates that developing countries lost roughly $480 billion per year in potential GDP during the 1980s and 1990s as a result of structural adjustment. To get a feeling for how much this is, total annual aid disbursements during the same period amounted to less than $100 billion per year. In other words, losses due to structural adjustment outstripped gains from aid by a factor of five. It would be difficult to overestimate the scale of human suffering – and the loss of economic potential – that these numbers represent. Indeed, structural adjustment turned out to be the greatest single cause of impoverishment in the 20th century: the number of people living on less than $5 per day increased by more than 1 billion during the 1980s and 1990s.

  The grey line in the graph indicates hypothetical income had the 1960–1980 trend continued. Source: World Development Indicators

  The grey line in the graph indicates hypothetical income had the 1960–1980 trend continued. Source: World Development Indicators

  We can get a better sense for how devastating structural adjustment was by zooming in on particular regions, countries and cities. Take Africa, for instance, which suffered a total of thirty-one structural adjustment programmes during the 1980s and 1990s. In Dar es Salaam, public expenditure per person was cut by 10 per cent per year during the 1980s. In Khartoum, 1.1 million people were added to the ranks of the poor, many of whom had lost their public-sector jobs during spending cuts. A structural adjustment programme imposed in Harare in 1981 raised the cost of living by 45 per cent in a single year; 100,000 people ended up hospitalised due to malnutrition. In CÔte d’Ivoire, the ‘Tiger of West Africa’, poverty doubled in a single year, between 1987 and 1988, as a result of a structural adjustment programme. In Nigeria, the poverty rate rose from 28 per cent in 1980 to an astonishing 66 per cent by 1996. In Algeria, the government was made to privatise 230 firms and fire 130,000 state workers. Poverty rates rose from 15 per cent in 1988 to 23 per cent in 1995.

  In Latin America, the urban poverty rate rose by 50 per cent between 1980 and 1986 as small farmers were undercut by cheap imports and forced to leave their homes and land in the countryside and move to the cities to eke out a precarious living. According to UN statistics, the overall poverty rate increased from 40 per cent in 1980 to a staggering 62 per cent in 1993. By the end of the 1990s, the standard of living for most people in nearly every Latin American country was lower than it was in the 1970s. We can see this process of impoverishment reflected in cuts to workers’ wages: from 1985 to 1995, both average and minimum wage rates fell 40 per cent in most countries. In Brazil, wages fell by 67 per cent, and in Colombia by 84 per cent. At the same time, unemployment rates shot up. In Ecuador, for example, unemployment doubled during the 1980s. In Peru, structural adjustment cut formal employment from 60 per cent of the urban workforce to 11 per cent in just three years during the 1980s. As the formal economy contracted, many people were forced to scratch out a living in the informal sector. In Mexico, informal employment nearly doubled between 1980 and 1987.

  As wages and employment collapsed, the share of wages in national incomes fell – a sign of growing national inequality. In Latin America in 1980, wages represented around 40 per cent of the national income, but by 1996 the share of wages had declined to 32 per cent. In some countries it was even worse:

  TABLE 2 Share of wages in national income.

  1970 1980 1989

  Argentina 40.9 31.5 24.9

  Chile 47.7 43.4 19.0

  Ecuador 34.4 34.8 16.0

  Mexico 37.5 39.0 28.4

  Peru 40.0 32.8 25.5

  Source: Adapted from Petras and Veltemeyer, ‘Age of reverse aid’

  When wages fall as a proportion of national income, as we see here, it means there is a shift of income from wage-earners to capital-holders. In other words, the rich get richer while the poor get poorer. We can also see this happening at the level of specific cities. In Buenos Aires in 1984, the richest 10 per cent of the population were ten times richer than the poorest 10 per cent. By the end of the decade, they were twenty-three times richer. In R
io, inequality rose from a Gini index of 58 in 1981 to 67 in 1989. At the end of it all, Latin America had become one of the most unequal regions in the world.

  It was too much to bear. In the face of rising unemployment, rising food prices and declining wages, people took to the streets. ‘IMF riots’, as they were called, swept across the global South in waves – a first wave in 1983–85, and a second that began in 1989 and lasted for a number of years. One of the biggest hit Caracas in 1989, when riots erupted against IMF-mandated increases in fuel prices and transportation fares. Before long a full-blown insurrection was under way. Four hundred people were killed during the crackdown that followed. That same year, protests in Lagos against the IMF led to the murder of fifty students in three days. By 1992, some 146 IMF riots had played out in thirty-nine countries subjected to structural adjustment. But there was more to come. In 1993, 500,000 protestors in India marched against the IMF and World Bank’s agricultural policies, marking the largest public demonstration in history at that point.