by Jason Hickel
It would be impossible to overestimate how important the World Bank and the IMF are to the countries of the G7. Not only did they become the most powerful tool in the fight against developmentalism, they also offered a spatial fix to the crisis of Western capitalism, which was bumping up against its own limits in the late 1970s. By turning poor countries into new frontiers for investment, extraction and accumulation, they allow Western capitalism to surmount its limits and carry on without having to confront its own internal contradictions – at least for the time being. It is not a real solution to the crisis, of course; it’s just a way of moving the crisis around geographically. But without it, capitalism in the United States and Europe would have crashed up against market saturation, ecological depletion and class conflict long ago, and may well have collapsed. This is why the World Bank and the IMF are so valued by the US government and Wall Street: they are essential to the continuity of the system.
This helps us make sense of why the World Bank and the IMF have continued to pursue the policies they have. It is not about reducing poverty, despite what their official slogans and marketing materials would have us believe. In fact, the word ‘poverty’ doesn’t appear once in the World Bank’s Articles of Agreement. Rather, the statement of purpose in Article 1 clearly delineates the Bank’s role as ‘to promote private investment’ and ‘to promote the growth of international trade’. According to these standards, the World Bank has been a resounding success, not a failure. And we shouldn’t be surprised. It would be absurd to imagine that a multibillion-dollar institution controlled by Wall Street and the US government would ever be left to ‘fail’.
When we look at it through this lens, it makes sense that all of the World Bank’s past presidents have been not development experts (as one might expect of an organisation devoted to development and poverty reduction), but rather US army bosses and Wall Street executives – people who have a strategic interest in America’s role in the global economic system. Here they are, in order of appearance:
Eugene Meyer, Chairman of the Federal Reserve
John McCloy, US Assistant Secretary of War
Eugene Black, bank executive with Chase
George Woods, bank executive with First Boston Corporation
Robert McNamara, US Secretary of Defense and executive of Ford Motor Company
Alden Clausen, bank executive with Bank of America
Barber Conable, US Congressman
Lewis Preston, bank executive with J. P. Morgan
James Wolfensohn, corporate lawyer and banker
Paul Wolfowitz, US Deputy Secretary of Defense
Robert Zoellick, Deputy Secretary of State and US Trade Representative
The US government’s choice of top brass sends a clear message about the Bank’s true aims. It wasn’t until 2012 that an actual development expert – Jim Yong Kim – was appointed to the top job, in an attempt by President Barack Obama to recuperate the Bank’s reputation.
The Inequality Machine
All of this helps us rethink common misconceptions that most people hold about development aid. Official aid in the form of conditional loans has not been designed to promote development in global South countries, but in many cases to prevent them from pursuing the policies necessary for development and poverty eradication, while creating new opportunities for investors in rich countries. As we have seen, during the 1980s and 1990s the result was slower economic growth, lower wages, more unemployment, fewer public services and rising poverty. It is true that income growth also slowed in the rich world during this period, as a result of the imposition of neoliberal policies at home. But growth rates still hovered around 2 per cent. In the global South, by contrast, income growth rates collapsed to 0.7 per cent, so the difference between the rates of growth in rich and poor countries grew. The global income gap widened as a result. In 1960, the richest fifth of the world’s population earned thirty times more than the poorest fifth, according to the United Nations Human Development Report. By 1995 they earned seventy-four times more.
We can also see the process of increasing inequality in the form of countries’ GDP per capita. The graph on the next page illustrates this trend during the era of structural adjustment.
The gap between the per capita income of the United States and that of all developing regions grew significantly during the 1980s and 1990s, after narrowing in most cases during the developmentalist period. In 1980, the per capita income of the US was around twenty-seven times higher than that of sub-Saharan Africa. Twenty years later it was fifty-two times higher – the inequality ratio had grown by 91 per cent. The same is true for other developing regions. For Latin America, the inequality ratio grew by 42 per cent, and for the Middle East and North Africa it grew by 38 per cent. South Asia, where structural adjustment was not forcibly applied to the same extent, managed to shrink the inequality ratio during this period by 15 per cent, although the absolute gap between the per capita incomes of South Asia and the United States continued to grow.
Source: World Development Indicators
The race-to-the-bottom effect triggered by structural adjustment and globalisation is one of the main drivers behind this ever-widening gap. In the 1960s developing countries were losing $161 billion (in 2015 dollars) each year through what economists call ‘unequal exchange’, the difference between the real value of the goods that a developing country exports and the market prices that it gets for those goods. We can think of this as an expression of undervalued labour. If workers in the developing world had been paid the same as their Western counterparts for the same productivity in the 1960s, they would have earned an additional $161 billion per year for their exports. This disparity was largely the result of colonial policy, which had maintained wages at artificially low levels. But structural adjustment made this system even more inequitable. The German economist Gernot Köhler calculated that annual losses due to underpaid labour and goods rose by a factor of sixteen, reaching $2.66 trillion (in 2015 dollars) by 1995, at the height of the structural adjustment period. In other words, developing countries would have been earning $2.66 trillion more each year for their exports if their labour was paid fairly on the world market. The best way to think of this is as a hidden transfer of value from the global South to the North – a transfer that, in 1995, amounted to thirty-two times the aid budget, and outstripped total flows from the OECD by a factor of thirteen.
But another major driving force behind the growing inequality gap is the debt system itself. Not only because it paved the way for structural adjustment, but also because of the plain fact of debt service, which constitutes a river of wealth that flows from the periphery of the world system to the core. During the first decade of structural adjustment, the South sent out an average of $125 billion each year in interest payments on external debt. This flow stayed roughly steady through the next two decades, but has shot up to an average of $175 billion annually in recent years. Altogether, since the debt crisis began in 1980, the South has handed over a total of $4.2 trillion in interest payments to foreign creditors, mostly in the North. If we include payments on principal, we see that developing countries made total debt service payments of $238 billion per year during the 1980s, rising dramatically through the 1990s to $440 billion per year in 2000, and then to more than $732 billion per year by 2013. Altogether, during the whole period since 1980, the South has made debt service payments totalling $13 trillion. The graph on the next page illustrates the scale of these payments.
This is a problem because these outflows drain away vital resources that might otherwise be spent on eradicating poverty. Lebanon, for instance, spends 52 per cent of its budget on debt service, and only 23 per cent on health and education combined.
Source: World Bank, International Debt Statistics
Indeed, the amount that the global South spends collectively on debt service each year vastly outstrips the amount that the UN tells us is necessary to eradicate poverty entirely; you could cancel all debt payments and ca
ncel global poverty in the same swoop, if you could muster the political will.
A key reason for the growing size of the debt burden has to do with the nature of compound interest. Consider this thought experiment. If you start with $1 trillion dollars in debt, compounded at an interest rate of 10 per cent per year it will become $117 trillion in fifty years and $13.78 quadrillion in 100 years. The multiplier of compound interest is powerful almost beyond our imagination. Between 1973 and 1993, global South debt grew from $100 billion to $1.5 trillion. Of the $1.5 trillion, only $400 billion was actually borrowed money. The rest was piled up simply as a result of compound interest. So despite the monumental effort that developing countries make to repay their loans, they are only chipping away at an ever-growing mountain of compound interest and not even beginning to touch the principal that lies beneath, which threatens to persist for ever.
One final point to bear in mind. Despite the imposition of dozens of structural adjustment programmes across the global South – which, remember, were intended to reduce debt – debt stocks have not reduced much at all. In fact, they have increased. External debt as a percentage of gross national income in the global South was 25 per cent in 1980, when the debt crisis struck. At the end of the first decade of structural adjustment, it was up to 38 per cent. By the end of the second decade, it was 39 per cent. In other words, structural adjustment failed even on its own putative terms. The ‘remedy’ prescribed for the debt crisis beginning in the 1980s made the disease worse.
The Hidden Power of Debt
Whenever I explain the history of structural adjustment in lectures and talks, I am always asked the same question: why would global South countries agree to this? Why didn’t they just default on their loans instead of submitting to remote-control power by Washington?
Technically, they could have. Defaulting on the debt would have liberated the global South from the stranglehold of the international banks, forcing the banks to absorb the fallout from their risky lending. But in reality this was not an option, for there was always the threat of US military invasion if countries decided to default. Having witnessed the experiences of Iran, Guatemala, the Congo and Chile, the governments of global South countries knew that to threaten Washington’s economic interests – or, indeed, even the interests of powerful US banks – was to invite the possibility of a US-backed coup. This threat was always very real. The developing world had no choice but to play by Washington’s rules.
This brutal fact crystallised very clearly in the story of Thomas Sankara, which came to serve as a kind of cautionary tale. When he became president of Burkina Faso in the 1980s, Sankara – a thirty-three-year-old known for his warm smile and trendy beret – made the debt issue one of his main concerns. Affectionately known as Africa’s Che, he is remembered for a speech he delivered at Addis Ababa in 1987 at the headquarters of the Organization of African Unity, to a room packed full of heads of state and government ministers from across the continent. The audience was gripped by the words of the young man who stood so bravely before them. He said things they would never dare to say. Some exchanged glances of shocked disbelief, others looked worried, half expecting him to be shot mid-sentence. His passion rippled through the room, and when he finished the audience erupted in thunderous applause. One could almost feel a revolution stirring.
Sankara had thrown down a gauntlet at the feet of the president of France, his region’s former colonial power. He challenged the postcolonial order by striking at its very core: debt. ‘Debt must be seen from the standpoint of its origins,’ Sankara said. ‘And the origins of debt lie in colonialism. Our creditors are those who had colonised us before. They managed us then and they manage us now. But we did not ask for this debt,’ he continued. ‘And therefore we will not repay it. Debt is neocolonialism. It is a cleverly managed reconquest of Africa. Each one of us becomes a financial slave. We are told to repay. We are told it is a moral issue. But it is not.’ And then he delivered the clincher: ‘The debt cannot be repaid. If we don’t repay, the lenders will not die. That is for sure. But if we do repay, we will die. That is also for sure.’ Sankara was considered dangerous not only because he threatened to default on Burkina Faso’s debt, but because he was spreading that idea across the continent. He was on the verge of galvanising a continent-wide debt-resistance movement – and from the perspective of Western creditors, it had to be stopped. Three months after his speech, Sankara was assassinated in a coup widely believed to have been backed by France, which brought Blaise Compaoré to power – a dictator who ruled for twenty-seven years.
The use of violence to enforce debt payments in the global South has a very long history. When Venezuela refused to pay its foreign debts in 1902, Britain, Germany and France responded by sending navy gunboats to blockade the country’s ports. In 1916, the US invaded the Dominican Republic and seized control of the country’s customs agency to enforce debt repayment – a seizure that lasted for twenty-five years. The coup against Sankara is only the most recent example.
Of course, if a number of developing countries were to default at the same time, as part of a united front, they might have a better chance. But this would require global South leaders – and their political elites – to be unified and proactive about the issue, and many of them have good reasons to turn a blind eye: after all, they benefit personally from new loans, plummeting wages and close relationships with Western powers, and they can always avoid the impact of a debt crisis by stowing their personal wealth offshore. In any case, now that structural adjustment has run its course, default is no longer really an option. Global South countries are now totally dependent on foreign investment for survival. Default would mean being frozen out of the global financial system, and this would spell immediate economic collapse. Consider Greece in 2015: when the left-wing Syriza party came to power they planned to default on the country’s debts, but the threat of losing foreign investment – and the recession that would follow – frightened them into submission.
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Unlike Thomas Sankara, I have never been assassinated for talking against debt; I’m just an academic, not a head of state. But I do find that people get very passionate about the issue. When I teach my students about the history of debt in the global South, even the more progressive ones will insist that the debts should be repaid. After all, the thinking goes, they took out the loans in the first place – so aren’t they obligated to repay? I retort by pointing out that many of the initial loans were taken out by unelected dictators, or that the principal has already been paid off three or four times over, or that the economic policies imposed by the lenders failed so it makes sense that they should absorb the loss.
But none of this convinces. The feeling that debts have to be repaid is so deeply entrenched in our culture that it is almost impossible to dislodge. It is not just an economic claim, it is a highly moral one. It’s about giving people what they are due. It’s about accepting one’s responsibilities. It’s about fulfilling one’s obligations. Refusing to pay a debt seems like reneging on a promise – it’s just wrong. And this is why debt is so powerful. The anthropologist David Graeber puts it nicely when he says, ‘There’s no better way to justify relations founded on violence, to make such relations seem moral, than by reframing them in the language of debt – above all, because it immediately makes it seem that it’s the victim who’s doing something wrong.’There have been some efforts to challenge the framing around debt, and to call it what it is. In the early 1990s, a coalition of academics and NGOs formed the Jubilee 2000 campaign, which was later joined by churches and celebrities and grew powerful enough to exert significant pressure on Western politicians to drop $90 billion of debt owed by the world’s poorest nations. In response to popular pressure, the IMF instituted a debt-relief programme for Highly Indebted Poor Countries (HIPCs) in 1996, and the Paris and London clubs soon promised debt relief for middle-income countries. In 2005, the IMF responded to yet further pressure during the G8 summit in Gleneagles and expan
ded debt relief through the Multilateral Debt Reduction Initiative.
It sounds nice. But there’s a catch. In all of these cases, debt relief is tied to stringent conditions that require countries to liberalise and privatise their economies – in other words, debt relief has become a mechanism to impose further structural adjustment. As economist Jeffrey Sachs put it, it was ‘belt-tightening for people who cannot afford belts’.
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If you’ve ever found yourself wondering what is responsible for global poverty today, this is your answer. And yet because the institutions that have overseen this destruction enjoy legal immunity, they will never be held to account.
But the impact of neoliberalism has been manifest not only on flows of money. It has also altered flows of power. One of the key tenets of development is that it is supposed to enhance people’s control over their own lives and fates, and ultimately promote human freedom. The World Bank itself defines development as promoting ‘economic and political freedom’, and ‘freedom of choice’. This claim is very familiar to us. Yet the history outlined above suggests the opposite. Interventions by the World Bank and the IMF in the name of development have shifted political power away from democratically elected decision-making bodies and placed it in the hands of remote, unelected bureaucrats. Economic and political freedom has been attacked, ironically, in the name of economic and political freedom. Structural adjustment is a powerful manifestation of this paradox, but it has also been perpetrated in other, more insidious ways.