UBC Theses and Dissertations

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UBC Theses and Dissertations

The Latin American debt Vidal, Claudio 1989

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THE LATIN AMERICAN DEBT by B. A, C l a u d i o V i d a l U n i v e r s i d a d de C h i l e , 1965, A THESIS SUBMITTED IN PARTIAL FULFILMENT OF THE REQUIREMENTS FOR THE DEGREE OF MASTER OF ARTS i n THE FACULTY OF BRADUATE STUDIES (Department o f A n t h r o p o l o g y and S o c i o l o g y ) We a c c e p t t h i s T h e s i s as c o n f o r m i n g t o t h e r e q u i r e d s t a n d a r d s THE UNIVERSITY OF BRITISH COLUMBIA September, 1989. (o) C l a u d i o V i d a l , 1989. In presenting this thesis in partial fulfilment of the requirements for an advanced degree at the University of British Columbia, I agree that the Library shall make it freely available for reference and study. I further agree that permission for extensive copying of this thesis for scholarly purposes may be granted by the head of my department or by his or her representatives. It is understood that copying or publication of this thesis for financial gain shall not be allowed without my written permission. Department of f^Ch^C^i?^ The University of British Columbia Vancouver, Canada DE-6 (2/88) A b s t r a c t . The main p u r p o s e o f t h i s s t u d y i s t o c o n t r i b u t e t o a t h e o r y of t h e c a u s e s o f t h e L a t i n A m e r i c a n i n t e r n a t i o n a l d e b t i n t h e framework o f t h e s o c i o l o g y o f change and d e v e l o p m e n t , w h i c h has a n a l y z e d i n t e r n a t i o n a l d e b t o n l y i n p a s s i n g . The s t u d y f i r s t e x amines i n t e r n a t i o n a l d e b t i n t h e n i n e t e e n t h and e a r l y t w e n t i e t h c e n t u r i e s f r o m t h e e l a b o r a t i o n o f the w o r l d - s y s t e m up t o t h e economic d e p r e s s i o n of t h e 1930s. U s i n g d a t a from t h e I n t e r n a t i o n a l M o n e t a r y Fund, t h e Bank f o r I n t e r n a t i o n a l S e t t l e m e n t s , t h e Economic Commission f o r L a t i n A m e r i c a and o t h e r p r i m a r y and s e c o n d a r y s o u r c e s , t h e t h e s i s a n a l y s e s t h e p r o c e s s w h i c h b e g i n s a f t e r t h e Second World War and t h e e f f o r t s t o c r e a t e a new i n t e r n a t i o n a l f i n a n c i a l o r d e r a t B r e t t o n Woods wh i c h has l e d t o t h e c o n t e m p o r a r y d e b t c r i s i s t h a t has been e s p e c i a l l y s e v e r e i n L a t i n A m e r i c a . The s t u d y i n d i c a t e s t h a t d e b t c r i s e s a r e a r e c u r r e n t phenomenon. I t i s s u g g e s t e d t h a t t h e p e r i o d i c o c c u r r e n c e of d e b t c r i s i s i s due t o t h e f u n c t i o n i n g of c a p i t a l i s t p r o d u c t i o n and a c c u m u l a t i o n . I t i s f u r t h e r a r g u e d t h a t t h e c y c l e o f d e b t b e g i n s w i t h an e x c e s s i v e a c c u m u l a t i o n o f money i n t h e f i n a n c i a l m a r k e t s , and t h a t t h i s e x c e s s i v e l i q u i d i t y i s t h e r e s u l t o f d e p r e s s i v e t e n d e n c i e s i n t h e p r o d u c t i v e s e c t o r s of t h e economy. To s o l v e t h e p r o b l e m o f d i m i n i s h e d c i r c u l a t i o n , banks and o t h e r f i n a n c i a l i n s t i t u t i o n s e n e r g e t i c a l l y promote o f f — s h o r e l e n d i n g , w h i c h i n c r e a s e s i n t e r n a t i o n a l i n d e b t e d n e s s . A c o i n c i d e n c e o f i n t e r e s t s between a segment o f t h e r u l i n g e l i t e s i n d e b t o r c o u n t r i e s , and t h e f i n a n c i a l s e c t o r s i n t h e c r e d i t o r c o u n t r i e s t e n d s t o i n c r e a s e t h e d e b t l o a d and e x a c e r b a t e economic p r o b l e m s . T h i s has been p a r t i c u l a r l y t h e c a s e i n L a t i n A m e r i c a s i n c e t h e 1960s w h i c h has l e d t o t h e c r i s i s o f t h e 19B0S. The t h e s i s s u g g e s t s t h a t , c o n t r a r y t o common b e l i e f , t h e i n t e r n a t i o n a l c a p i t a l i s t s y s t e m can emerge from d e b t c r i s i s w i t h added s t r e n g t h . The s e l f - s e r v i n g p a t t e r n o f e l i t e management o f s u c h c r i s i s , however, r e i n f o r c e s and deepens s o c i a l and e c o n o m i c i n e q u a l i t i e s . i i TABLE OF CONTENTS A b s t r a c t i i Acknowledgements i x CHAPTER I . INTRODUCTION S e c t i o n S u b j e c t Page 1.1 O u t l i n e o f t h i s work 2 1.1.1 T h e s i s S u b j e c t and P u r p o s e 2 1.1.2 R e s e a r c h Method 2 1.1.3 R e l e v a n c e o f t h e P r o b l e m 4 1.1.4 The Argument 5 1.1.5 L i m i t a t i o n s of t h i s S t u d y 6 1.1.6 P l a n o f t h e T h e s i s 7 1.2 H y p o t h e s e s .• B 1.3 The I n d e b t e d n e s s P r o c e s s 10 1.4 Debt T h e o r i e s 20 1.5 C h a p t e r Summary 23 CHAPTER I I . DEVELOPMENT THEORIES. 2.1 I n t r o d u c t i o n 25 2.2 M o d e r n i z a t i o n T h e o r y 28 2.2.1 W.W. Rostow 29 2.3 Marx's P o l i t i c a l Economy: Modes o f P r o d u c t i o n 33 2.4 C h a p t e r Summary 39 i i i CHAPTER I I I . NINETEENTH AND EARLY TWENTIETH CENTURY EXPERIENCES. 3.1 Debt C r i s i s : B a s i c C h a r a c t e r i s t i c s . . 4 2 3.2 H i s t o r i c a l E x p e r i e n c e s 45 3.2.1 E a r l y Debt 45 3.2.2 E g y p t 48 3.2.3 T u r k e y 49 3.2.4 L a t i n A m e r i c a i n t h e 1 9 t h C e n t u r y . . . 5 0 3.2.5 A r g e n t i n a and t h e B a r i n g C r i s i s 52 3.2.6 L a t i n A m e r i c a ' s Debt i n t h e E a r l y 2 0 t h C e n t u r y 55 3.2.7 The P e r u v i a n C a s e . 55 CHAPTER IV.ANTECEDENTS OF THE 1980'S DEBT C R I S I S . 4.1 P o s t War B a c k g r o u n d 62 4.2 P o s t War C a p i t a l F l o w s i n L a t i n A m e r i c a 65 4.3 F a l l i n Commodity P r i c e s 69 4.4 D e v a l u a t i o n of t h e D o l l a r 69 4.5 C h a p t e r Summary 73 CHAPTER V. THE LATIN AMERICAN DEBT: CRISIS OR NORMALITY? 5.1 L a t i n A m e r i c a ' s Economic P e r f o r m a n c e 75 5.1.1 I n d i c a t o r s of Economic Growth Between 1950 and 1960 76 5.1.2 Terms o f T r a d e 7B 5.1.3 The C o s t o f O i l 82 5.1.4 C h a p t e r Summary 85 CHAPTER V I . THE INTERNATIONAL FINANCIAL MARKETS 6.1 Bank E x p a n s i o n 87 6.2 The E u r o b a n k s 90 6.2.1 Main C h a r a c t e r i s t i c s o f t h e E u r o b a n k s 94 6.2.2 E a r l y E v o l u t i o n o f t h e E u r o m a r k e t 95 6.3 F a l l i n g r a t e o f p r o f i t s 101 6.4 US C a p i t a l O u t f l o w s 106 6.5 C h a p t e r Summary 108 CHAPTER V I I . DEBT AND P O L I T I C S . 7.1 The M i l i t a r y and t h e Debt 110 7.2 P r o f i t i n g from t h e Debt 117 7.3 C a p i t a l F l i g h t 118 7.4 S o c i a l i z a t i o n o f t h e L o s s e s 123 CHAPTER VIII.CONCLUSIONS. 8.1 T h e s i s Summary 126 8.2 C o n c l u s i o n s 130 APPENDIX I . G l o s s a r y 136 BIBLIOGRAPHY 138 v L i s t o f T a b l e s T a b l e 1: G r o s s E x t e r n a l L i a b i l i t i e s , s e l e c t e d c o u n t r i e s , 1978-1984. US* m i l l i o n s 12 T a b l e 2: A f r i c a n and L a t i n A m e r i c a n Debt. T o t a l (US* m i l l i o n ) and as p e r c e n t a g e o f GNP 15 T a b l e 3: S e r v i c e of D e b t ( S ) . E x p o r t s ( E ) and E/S R a t i o s . S e l e c t e d L a t i n A m e r i c a n C o u n t r i e s . 1970-1983. US* b i l l i o n 17-18 T a b l e 4: I n t e r e s t t o D e v e l o p i n g C o u n t r i e s , 1972-1973, by t y p e o f c r e d i t , "/. 19 T a b l e 5: A r g e n t i n e C a p i t a l I n f l o w s i n t h e 1880s. ( V a l u e d i n G o l d P e s o s * ) 54 T a b l e 6: P e r u v i a n F o r e i g n Debt, 1919-1930. ( M i l l i o n s US* and Pounds S t e r l i n g ) 57 T a b l e 7: US C a p i t a l Movements 1946-61 (US* b i l l i o n 64 T a b l e 8: US D i r e c t I n v e s t m e n t p o s i t i o n Abroad ( P e r c e n t a g e c o m p o s i t i o n , by a r e a ) 66 T a b l e 9: Economic A s s i s t a n c e and P r i v a t e C a p i t a l F l o w s Between t h e US and L a t i n A m e r i c a i n t h e 1960s ( US* mi 1 1 i o n ) 68 T a b l e 10: I n t e r n a t i o n a l P o s i t i o n o f t h e D o l l a r . B i l l i o n 71 T a b l e 11: Annual Growth r a t e s o f GDP, I n d u s t r i a l i z e d M a r k e t E c o n o m i e s (IME) and L a t i n A m e r i c a and t h e C a r i b b e a n (LA & C) 77 T a b l e 12: T r a d e B a l a n c e Between M a r k e t Economy D e v e l o p e d C o u n t r i e s and O i l - i m p o r t i n g U n d e r d e v e l o p e d C o u n t r i e s . ( B i l l i o n o f US D o l l a r s ) 80 T a b l e 13: B a l a n c e on C u r r e n t A c c o u n t s w i t h r e s p e c t t o E x p o r t s L a t i n A m e r i c a and t h e C a r i b b e a n . 26 c o u n t r i e s 81 T a b l e 14: Imports o f f u e l s and l u b r i c a n t s . S e l e c t e d C o u n t r i e s . 1960 t o 1980 84 T a b l e 15: US O v e r s e a s Banks, B r a n c h e s , O v e r s e a s and D o m e s t i c A s s e t s (U.S.* B i l l i o n ) 89 T a b l e 16: BIS e s t i m a t e d s i z e o f t h e E u r o - c u r r e n c y m a r k e t , v i o i l - e x p o r t i n g c o u n t r i e s p a r t i c i p a t i o n . ( US* b i 1 1 i o n ) 98 T a b l e 17: Growth of t h e E u r o m a r k e t 1969-1974 (US* b i l l i o n ) 99 T a b l e 18: M i l i t a r y and s o c i a l e x p e n d i t u r e s . D e v e l o p e d and U n d e r d e v e l o p e d C o u n t r i e s , 1960-1983. US* b i 1 1 i o n . .. .116 v i i L i s t o f F i g u r e s F i g u r e A. W e i g h t e d Index o f Commodity P r i c e s . 1950-1982 11 F i g u r e B. The R a t e o f P r o f i t o f US C o r p o r a t i o n s 103 F i g u r e C. KllPA C o r p o r a t e P r o f i t a f t e r T a x e s ( a s p e r c e n t a g e o f g r o s s n a t i o n a l p r o d u c t ) 105 v x x x Acknowledgements I would l i k e t o e x t e n d my t h a n k s t o t h e members o f my s u p e r v i s o r y c ommittee f o r t h e i r p a r t i c i p a t i o n i n t h i s u n d e r t a k i n g and f o r t h e i r many u s e f u l c r i t i c i s m : Graham J o h n s o n ( A d v i s o r ) , R. S. R a t n e r and Y u n s h i k Chang. In p a r t i c u l a r I want t o e x p r e s s my g r a t i t u d e t o my w i f e , Naomi Y o s h i z a w a , f o r h e r c o n s t a n t s u p p o r t , and my s o n , A l e j a n d r o , f o r h i s p a t i e n c e . F i n a l l y , I want t o thank H e l e n S t u r d y f o r her h e l p t h r o u g h o u t t h i s p r o j e c t . I r e m a i n s o l e l y r e s p o n s i b l e f o r any s h o r t c o m i n g s . i x 1 CHAPTER I . INTRODUCTION 2 CHAPTER I . INTRODUCTION 1.1 O u t l i n e o f t h i s Work. 1.1.1 T h e s i s S u b j e c t and P u r p o s e . T h i s i s a s t u d y o f t h e L a t i n A m e r i c a n i n t e r n a t i o n a l d e b t . I t a t t e m p t s t o e x p l a i n t h e phenomenon i n t h e framework o f t h e s o c i o l o g y o f change and d e v e l o p m e n t , and t o d e v i s e w o r k i n g h y p o t h e s e s t h a t c an h e l p t o - e x p l o r e i n d e t a i l a s p e c t s o f t h e d e b t . The q u e s t i o n s I w i l l p u r s u e a r e : What a r e t h e f a c t o r s r e s p o n s i b l e f o r t h e d e b t ; how a r e t h o s e e l e m e n t s i n t e r c o n n e c t e d ; and, why d i d t h e d e b t e v o l v e i n t o a majo r e c o n o m i c and s o c i a l c r i s i s . 1.1.2 R e s e a r c h Method. To a t t a i n t h e s e g o a l s I w i l l , f i r s t , r e v i e w t h e major p a r a d i g m s o f t h e s o c i o l o g y o f d e v e l o p m e n t r e l e v a n t t o t h e p r o b l e m . S e c o n d , I w i l l s t u d y g e n e r a l a s p e c t s o f t h e i n d e b t e d n e s s p r o c e s s , i n L a t i n A m e r i c a and e l s e w h e r e , as w e l l as t h e e x p e r i e n c e s o f t h e p a s t and p r e s e n t c e n t u r y . F i n a l l y , I w i l l t e s t t h e w o r k i n g h y p o t h e s e s d e r i v e d from t h e o r y . A b a s i c a s s u m p t i o n made i s t h a t s o c i a l r e a l i t y i s b o t h m u 1 t i — f a c e t e d and s y s t e m i c . T h i s c o m p l e x i t y i s f i l l e d w i t h t h e t e n s i o n s i n h e r e n t i n any s y s t e m ; t h e r e f o r e , t h e r e i s no s i m p l e p r o g r e s s i o n i n human s o c i a l d e v e l o p m e n t . On t h e c o n t r a r y , s o c i a l change i s t h e r e s u l t o f t h e r e s o l u t i o n s t o t h e t e n s i o n s o f t h i s m a n y - s i d e d r e a l i t y . T h i s i s a d i a l e c t i c a p p r o a c h t o t h e s t u d y o f s o c i a l phenomena, which i m p l i e s t h a t t h e r e i s no one s u f f i c i e n t c a u s e ; t h a t e a c h s i t u a t i o n u n d e r s t u d y i s s p e c i f i c ; and t h a t , even i n a g e n e r a l t r e n d , p a r t i c u l a r outcomes a r e u n p r e d i c t a b l e . T h i s s t u d y p r o c e e d s f r o m a b s t r a c t t h e o r e t i c a l g e n e r a l i z a t i o n s and c a t e g o r i e s t o w a r d s c o n c r e t e h i s t o r i c a l e v e n t s . By p r o c e e d i n g from t h e a b s t r a c t t o t h e c o n c r e t e , one i s g u i d e d by i d e a l c o n s t r u c t s , w h i l e a t t h e same t i m e one i s a b l e t o t e s t t h e i r v a l i d i t y . The t e s t i n g i s o f a d o u b l e n a t u r e . Dn t h e one hand, i t a s s e s s e s t h e i n t e r n a l c o h e r e n c e o f t h e o r e t i c a l p r o p o s i t i o n s and, on t h e o t h e r h a n d , i t e v a l u a t e s t h e c o r r e s p o n d e n c e o f t h o s e p r o p o s i t i o n s w i t h e m p i r i c a l d a t a . The s o u r c e s o f i n f o r m a t i o n f o r t h i s t h e s i s w i l l be d a t a p r o v i d e d by i n t e r n a t i o n a l a g e n c i e s , m a i n l y t h e W o r l d Bank, I n t e r n a t i o n a l M o n e t a r y Found, t h e U.N. E c o n o m i c Commission f o r L a t i n A m e r i c a and t h e C a r i b b e a n , Bank f o r I n t e r n a t i o n a l S e t t l e m e n t s and t h e OECD, as w e l l as s e c o n d a r y s o u r c e s and h i s t o r i c a l s t u d i e s of d e b t e x p e r i e n c e s i n L a t i n A m e r i c a and o t h e r c o n t i n e n t s . The s t u d y i s based m a i n l y on l i b r a r y r e s e a r c h , u s i n g books, p e r i o d i c a l s , r e p o r t s , machine r e a d a b l e d a t a and t h e l o c a l and i n t e r n a t i o n a l p r e s s . I a l s o r e l y on t h e p e r s o n a l a d v i c e and g u i d a n c e o f t h o s e w i t h e x p e r t i s e i n t h e f i e l d o f economic and s o c i a l d e v e l o p m e n t . 4 1.1.3 R e l e v a n c e o f t h e P r o b l e m . The L a t i n A m e r i c a n i n t e r n a t i o n a l d e b t i s p a r t o f a l a r g e r i n t e r n a t i o n a l i n d e b t e d n e s s p r o b l e m . Debt s e r v i c e i s t h e s o u r c e o f s e r i o u s e c o n o m i c and s o c i a l p r o b l e m s i n t h e d e p e n d e n t 1 c o u n t r i e s . A l s o , t h e p o s s i b i l i t y o f m a s s i v e d e f a u l t i s o f g r e a t c o n c e r n t o t h e c r e d i t o r c o u n t r i e s . I t t h r e a t e n s t h e v i a b i l i t y o f some o f t h e i r l a r g e s t i n t e r n a t i o n a l banks and, more i m p o r t a n t l y , p u t s i n t o q u e s t i o n t h e p r e s e n t i n t e r n a t i o n a l e c onomic and f i n a n c i a l o r d e r . F o r t h e s e r e a s o n s , t h e L a t i n A m e r i c a n i n t e r n a t i o n a l d e b t must be r e g a r d e d as a m a j o r d e v e l o p m e n t a l p r o b l e m , a s i t u a t i o n t h a t r a i s e s q u e s t i o n s a b o u t t h e adeq u a c y o f some p a r a d i g m s o f t h e s o c i o l o g y o f d e v e l o p m e n t . 1.1.4 The Argument. 1. The i n t e r n a t i o n a l d e b t o f L a t i n A m e r i c a and o t h e r d e p e n d e n t r e g i o n s i s t h e r e s u l t o f t h e c o n f l u e n c e o f s e v e r a l f a c t o r s , some p e r t a i n i n g t o t h e I n d u s t r i a l i z e d M a r k e t E c o n o m i e s I mean by de p e n d e n t c o u n t r i e s t h o s e t h a t a r e d e b t -d e p e n d e n t , t h a t i s , t h e b o r r o w e r s o f l a r g e sums of money now u n a b l e t o pay t h e i r d e b t s . My view i s t h a t , a l t h o u g h dependency may be q u i t e s p e c i f i c a t an e a r l y s t a g e - i . e . t h e d e b t , o r f i n a n c i a l d ependency— t h e d e p e n d e n t r e l a t i o n s h i p t e n d s t o expand t o o t h e r a r e a s ; i n s h o r t , t h e d e p e n d e n t r e l a t i o n has a p e r v a s i v e n a t u r e . An example of e x p a n s i v e d e p endency i s t h e f o r c e d a c c e p t a n c e o f economic and s o c i a l p o l i c i e s by t h e d e b t o r c o u n t r i e s , i n o r d e r t o q u a l i f y f o r r e l i e f from c r e d i t o r s and i n t e r n a t i o n a l f i n a n c i a l a g e n c i e s . 5 ( I M E s ) = , and o t h e r s t o t h e d e p e n d e n t c o u n t r i e s . Some o f t h e n e c e s s a r y c o n d i t i o n s f o r t h e d e b t o r i g i n a t e d i n t h e IMEs. F o r example, t h e e x c e s s i v e l i q u i d i t y t h a t l e d t o t h e f o r m a t i o n o f t h e E u r o m a r k e t , and t h e r e s u l t i n g h i g h o f f e r o f f i n a n c i a l r e s o u r c e s i n t h e i n t e r n a t i o n a l money m a r k e t . A t t h e same t i m e , t h e d e b t o r s -t o - b e were a f e r t i l e g r o u n d f o r t h o s e f a c t o r s t o o p e r a t e . F o r i n s t a n c e , due t o s e v e r a l f a c t o r s s u c h as d e v e l o p m e n t a l p r o g r a m s , d e c l i n e i n h a r d c u r r e n c y r e v e n u e s , and o t h e r s , t h e r e was i n t h o s e c o u n t r i e s a r e a l demand f o r money; a l s o t h e r e was a l s o b o r r o w i n g whose o n l y p u r p o s e was t o " h e l p t h e banks o u t o f t h e i r l i q u i d i t y p r o b l e m " ( J o n e s 1 9 8 9 : 3 ) . T h e s e f u n d s were made a v a i l a b l e by t h e p r i v a t e i n t e r n a t i o n a l f i n a n c i a l c e n t r e s , i n s h o r t n o t i c e and w i t h l i t t l e o r no c o n t r o l s as t o i t s f i n a l u s e . By c o m p a r i s o n , t h e IMF and o t h e r i n t e r n a t i o n a l a g e n c i e s , r e q u i r e from t h e i r c l i e n t s t o p r e s e n t d e t a i l e d n a t i o n a l a c c o u n t s and e s t a b l i s h s t r i c t c o n t r o l o v e r t h e u s e o f t h e f u n d s t h e y l e n d . 2. The e v o l u t i o n of t h e d e b t i s marked by t h e boom and b u s t c y c l e s of t h e c a p i t a l i s t e c o n o m i e s i n t h e IMEs. Examples o f t h i s a r e : a. t h e g r o w th o f t h e d e b t as a c o n s e q u e n c e o f t h e i n c r e a s e i n t h e i n t e r e s t r a t e s ; b. d e p r e s s i v e t e n d e n c i e s i n t h e e c o n o m i e s of t h e IMEs t h a t meant a r e d u c t i o n of t h e i r i m p o r t s from t h e •"1 I n d u s t r i a l M a r k e t E c o n o m i e s : a r e t h e members o f t h e O r g a n i z a t i o n o f Economic C o - o p e r a t i o n and D e v e l o p m e n t . 6 d e b t o r c o u n t r i e s , hence i m p a i r i n g t h e a b i l i t y o f t h e l a t t e r t o pay. 3. In t h e c r e d i t o r and d e b t o r c o u n t r i e s , t h e d e b t has i n c r e a s e d t h e a l r e a d y skewed d i s t r i b u t i o n o f w e a l t h , i n f a v o u r o f a r e l a t i v e l y s m a l l segment o f s o c i e t y . 1.1.5 L i m i t a t i o n s o f t h i s S t u d y . The n a t u r e o f t h e r e s e a r c h , r e s t r i c t e d t o t h e i n t e r n a t i o n a l d e b t o f some L a t i n A m e r i c a n c o u n t r i e s , w i l l r e s t r i c t t h e v a l u e o f g e n e r a l i z a t i o n s d e r i v e d from i t . An example o f t h i s l i m i t a t i o n i s t h a t I do n o t s t u d y t h e Cuban i n t e r n a t i o n a l d e b t , w h i c h l i k e l y has a dynamic q u i t e d i f f e r e n t f r o m t h a t o f t h e o t h e r L a t i n A m e r i c a n c o u n t r i e s 3 . A n o t h e r l i m i t a t i o n i s t h e s c a n t a t t e n t i o n I d e v o t e t o t h e r o l e p l a y e d by i n t e r n a t i o n a l f i n a n c i a l a g e n c i e s . The main p u r p o s e of t h e s t u d y i s t o p r o v i d e a c o h e r e n t e x p l a n a t i o n f o r t h e emergence, and d e v e l o p m e n t o f t h e L a t i n A m e r i c a n i n t e r n a t i o n a l d e b t , and t o r e a c h c o n c l u s i o n s t h a t may have a p p l i c a b i l i t y f o r most o f t h e r e g i o n . T h e r e i s no a t t e m p t i n t h i s work t o r e a c h c o n c l u s i o n s t h a t may be v a l i d i n e v e r y c a s e of i n t e r n a t i o n a l i n d e b t e d n e s s , r e g a r d l e s s o f r e g i o n o r h i s t o r i c a l c i r e u r n s t a n c e s . F o r example, Cuba, w h i c h has an e x t e r n a l d e b t o f a p p r o x i m a t e l y US$ 5 b i l l i o n , n e g o t i a t e s w i t h i t s c r e d i t o r s w i t h o u t any p a r t i c i p a t i o n o f t h e IMF o r t h e W orld Bank. 7 1.1.6 P l a n o f t h e T h e s i s . The b a l a n c e o f t h i s c h a p t e r , i s an o v e r v i e w o f t h e p r e s e n t s i t u a t i o n w i t h t h e p u r p o s e of g i v i n g t h e r e a d e r a g e n e r a l i d e a o f t h e p r o b l e m , f o l l o w e d by a r e v i e w o f t h e e x p l a n a t i o n s f o r t h e d e b t found i n t h e s p e c i a l i z e d l i t e r a t u r e . The s e c o n d c h a p t e r i s a s t u d y o f d e v e l o p m e n t t h e o r i e s i n g e n e r a l and t h e argument f o r t h e c h o i c e o f p a r a d i g m . In t h e t h i r d c h a p t e r , t h e r e i s a c h a r a c t e r i z a t i o n o f d e b t c r i s i s , f o l l o w e d by t h e s t u d y o f h i s t o r i c a l e x p e r i e n c e s o f t h i s t y p e o f c r i s i s , i n E g y p t , T u r k e y and L a t i n A m e r i c a d u r i n g t h e n i n e t e e n t h and e a r l y t w e n t i e t h c e n t u r y . The f o u r t h c h a p t e r e x a mines t h e p o s t — w a r e c o n o m i c s i t u a t i o n s i n L a t i n A m e r i c a and t h e U n i t e d S t a t e s . In s o f a r as t h o s e c i r c u m s t a n c e s have a b e a r i n g on t h e e v e n t s o f t h e 1980s, t h e y c o n s t i t u t e t h e l o n g - t e r m , o r h i s t o r i c a l a n t e c e d e n t s o f t h e p r e s e n t d e b t c r i s i s . A n o t h e r r e a s o n f o r t r e a t i n g them i n t h i s s t u d y , i s t h a t many o b s e r v e r s r e l a t e t h e p r e s e n t c r i s i s t o one o r more economic e v e n t s o f t h a t t i m e . C h a p t e r f i v e i s t h e c o r e o f t h e T h e s i s . In t h i s c h a p t e r t h e e v i d e n c e t h a t s u s t a i n s t h e w o r k i n g h y p o t h e s i s i s p r e s e n t e d . As p a r t o f t h e l o n g term b a c k g r o u n d , t h i s c h a p t e r b e g i n s w i t h a d i s c u s s i o n o f t h e economic p e r f o r m a n c e o f t h e r e g i o n d u r i n g t h e 8 1950s and 1960s. The i n t e r n a t i o n a l f i n a n c i a l m a r k e t s and t h e i r r e l a t i o n t o L a t i n A m e r i c a a r e d i s c u s s e d i n some d e t a i l . The f i n a l s egments o f c h a p t e r f i v e l o o k i n t o t h e p o l i t i c s o f t h e d e b t and t h e r e l a t i o n between t h e i n d e b t e d n e s s p r o c e s s and t h e power s t r u c t u r e i n t h e d e b t o r and c r e d i t o r c o u n t r i e s . C h a p t e r s i x f o c u s e s on t h e s t u d y o f t h e E u r o m a r k e t , t h e c e n t r e o f l e n d i n g t o L a t i n A m e r i c a and o t h e r u n d e r d e v e l o p e d r e g i o n s . C h a p t e r s e v e n s t u d i e s t h e p o l i t i c a l c o n s e q u e n c e s o f t h e d e b t f o r t h e a r e a , and f i n a l l y , C h a p t e r e i g h t , C o n c l u s i o n s , b r i n g s t h e main • i d e a s o f t h e T h e s i s t o g e t h e r and a d v a n c e s s u g g e s t i o n s f o r new d e v e l o p m e n t s i n t h e s t u d y o f t h e L a t i n A m e r i c a n i n t e r n a t i o n a l d e b t . 1.2 H y p o t h e s e s I h y p o t h e s i s e t h a t t h e c a u s e s o f t h e i n t e r n a t i o n a l d e b t c r i s i s a r e : 1. The normal f u n c t i o n i n g of t h e economy o f t h e c a p i t a l i s t c o u t r i e s i s marked by c y c l e s o f e x p a n s i o n and c o n t r a c t i o n . D u r i n g i t s e x p a n s i v e s t a g e , t h e t e n d e n c y i s t o o v e r f l o w t h e market w i t h c o m m o d i t i e s . T h i s o v e r s u p p l y i s c a l l a c c u m u l a t i o n c r i s i s . T h i s c r i s i s i s c h a r a c t e r i z e d by a t e m p o r a r y f a l l i n t h e r a t e o f p r o f i t , w h i c h i n t u r n , s l o w s down o r h a l t s t h e c y c l e of c a p i t a l . T h i s d e p r e s s i v e c y c l e c r e a t e s an u n u s u a l abundance o f l o a n a b l e c a p i t a l i n t h e hands of t h e m o n e y - l e n d e r s . 9 T h i s a c c u m u l a t i o n o f l a r g e amounts o f money i n t h e hands o f b a n k i n g i n s t i t u t i o n s i s a l s o known as " e x c e s s i v e l i q u i d i t y i n t h e money-markets". T h i s d e p r e s s i v e t e n d e n c y , r e d u c e s t h e c o n s u m p t i o n of goods e x p o r t e d by t h e u n d e r d e v e l o p e d c o u n t r i e s , b r i n g s down t h e p r i c e o f t h e i r e x p o r t s , and t h e r e f o r e r e s t r i c t s t h e a v a i l a b i l i t y o f h a r d c u r r e n c y . Under t h e s e c i r c u m s t a n c e s , t h e s e c o u n t r i e s a r e l i k e l y t o borrow t o c o v e r budget d e f i c i t s , r a t h e r t h a n t o f i n a n c e e c o n o m i c d e v e l o p m e n t . 2. The e x c e s s i v e l i q u i d i t y o f t h e i n t e r n a t i o n a l money-m a r k e t s , w h i c h r e p r e s e n t s an u n u s u a l l y h i g h o f f e r o f money t o l e n d , t e n d s t o e x a c e r b a t e c o m p e t i t i o n among i n t e r n a t i o n a l b a n k e r s . B o r r o w i n g becomes e a s y and f a s t . In c o n s e q u e n c e , t h e a c t o r s - l e n d e r s and b o r r o w e r s - become d a r i n g and t a k e h i g h r i s k s . T h i s makes t h e market u n s t a b l e , i n c l i n e d t o p a n i c , and t h e r e f o r e , w o r s e n s t h e c r i t i c a l s t a g e o f t h e d e b t . 3 . The p o l i t i c s of t h e d e b t have been and a r e d e t e r m i n e d m a i n l y by t h e c l a s s s t r u c t u r e o f c a p i t a l i s t s o c i e t i e s , t o t h e b e n e f i t o f a segment of t h e r u l i n g e l i t e s . The g e n e r a l t e n d e n c y , i n t h e b o r r o w e r and t h e l e n d e r c o u n t r i e s a l i k e , i s f o r t h e p r o f i t s t o r e m a i n p r i v a t e and t o s o c i a l i z e t h e l o s s e s , by t r a n s f e r r i n g them t o t h e p u b l i c s e c t o r . T h i s i s done u s i n g v a r i e d mechanisms, s u c h as t a x a t i o n and t h e n a t i o n a l i z a t i o n o f t h e p r i v a t e banks and t h e i r d e b t s . 10 1.3 The I n d e b t e d n e s s P r o c e s s . A f t e r t h e o i l shock of 1973-1974 t h e u n d e r d e v e l o p e d o i l - i m p -o r t i n g c o u n t r i e s found t h e m s e l v e s w i t h a s w o l l e n o i l b i l l , r e d u c e d commodity p r i c e s — e x c e p t f o r a s h o r t l i v e d bonanza between 1973-1974— budget d e f i c i t s and e a g e r l e n d e r s i n t h e E u r o p e a n money market (See F i g u r e A ) . The i n c r e a s e o f t h e e x t e r n a l d e b t o f t h e L a t i n A m e r i c a n c o u n t r i e s a f t e r 1975 was t r u l y s p e c t a c u l a r . In t h e p e r i o d f r o m 1978 t o 1984 t h e main L a t i n A m e r i c a n d e b t o r s i n c r e a s e d t h e i r l i a b i l i t i e s as f o l l o w s : A r g e n t i n a , 3.4 t i m e s ; M e x i c o and C h i l e , 2.7 t i m e s ; V e n e z u e l a , 2.0 t i m e s and B r a z i l , 1.9 t i m e s (See T a b l e 1 ) . 11 F I G U R E A WEIGHTED INDEX O F C O M M O D I T Y PRICES 1950-1982 (1974-1976 average =100) 0 1950 1955 I960 1965 1970 1975 1980 *Thiru-three commodities, excluding oil S o i i l t : Bised on The * orld Bank H arid Dnrlopntm Rrpon. \<)t2. T a k e n f r o m : C a s t r o 1982:58. 12 TABLE 1 G r o s s E x t e r n a l L i a b i l i t i e s , s e l e c t e d c o u n t r i e s , 1978-1984. US* m i l l i o n s 1978 1980 1981 1982 1983 1984 A r g . 13, 273. 4 27, 309 .6 33 ,326 . 5 43 ,634. 1 46 ,009. 6 45 ,849.1 B r a . 53, 415. 1 70, 025 .00 79 ,946 .0 91 ,033 . 5 95 , 519. 7 104 ,384 .2 C h i l e 7, 373. 1 12, 115 .B 16 ,626 .7 17 ,248. 2. 18 ,201. 6 19, 959. 1 Mex . 35, 662. 2 57, 141 .6 77 ,916 .4 85 ,830. 3 93 ,697. 5 97, 307.0 Ven . 16, 729. 8 29, 588 .6 31 ,927 .0 31 ,825. 4 32 ,258. 4 34, 246.8 S o u r c e : W o r l d Bank Debt T a b l e s , 1895. 13 The t a b l e shows a slow-down i n t h e f l o w o f money between 1982-1983 due t o M e x i c o ' s q u a s i - d e f a u 1 t ? T h a t y e a r M e x i c o was a i d e d w i t h new l o a n s by i t s c r e d i t o r s , s o t h a t i t c o u l d meet payments on i t s d e b t . T h i s was t h e f i r s t u n d e n i a b l e * s i g n t h a t a l a r g e d e b t o r c o u l d d e f a u l t and t h u s t r i g g e r a c r i s i s i n t h e i n t e r n a t i o n a l b a n k i n g community. The h e l p M e x i c o r e c e i v e d i s r e f l e c t e d i n T a b l e 1. I t s l i a b i l i t i e s d u r i n g t h i s c r i t i c a l p e r i o d i n c r e a s e d by a l m o s t 4— 8.0 b i l l i o n U.S.. The i n c r e a s e i n Mexico's, l i a b i l i t i e s d u r i n g 1982-1983 can be e x p l a i n e d by t h e f a c t t h a t i t s c r e d i t o r s c o u l d n o t a f f o r d t o l e t i t d e f a u l t and t h e r e f o r e c h o s e t o s t a v e o f f t h e c r i s i s by l e n d i n g more money t o M e x i c o , t h u s e n a b l i n g t h e c o u n t r y t o pay i n t e r e s t on t h e d e b t and, more i m p o r t a n t l y , a l l o w i n g t h e N o r t h A m e r i c a n banks t o c l a s s i f y t h e M e x i c a n l o a n s as performing*". I mean by q u a s i - d e f a u l t t h a t a l t h o u g h M e x i c o announced i t s i n a b i l i t y t o pay, i t was o n l y t h a n k s t o t h e prompt i n t e r v e n t i o n o f t h e US monetary a u t h o r i t i e s t h a t t h e c o u n t r y was a b l e t o pay i n t e r e s t on i t s d e b t , t h u s a v o i d i n g a c t u a l d e f a u l t . =' F o r a d i s c u s s i o n o f t h e b a n k e r s ' p s y c h o l o g i c a l mechanisms of d e n i a l of t h e i mpending c r i s i s , s e e G u t t e n t a g and H e r r i n g , 1985. U n i t e d S t a t e s r e g u l a t i o n s r e q u i r e t h a t t h e banks must d e c l a r e a l o a n i s n o t p e r f o r m i n g , o r has n o t been p a i d , i f t h e d e b t o r does n o t pay a t l e a s t i n t e r e s t on i t by t h e end o f t h e f i s c a l y e a r . T h i s means t h a t banks need t o d i v e r t l a r g e amounts of money t o c o v e r l o a n l o s e s , and t h i s r e d u c e s p r o f i t s t o s h a r e h o l d e r s . ( F o r a d i s c u s s i o n o f t h i s s u b j e c t s e e D e l a m a i d e 1984 and S e i b e r 1979) 14 Most o f t h e u n d e r d e v e l o p e d w o r l d ' s d e b t i s c o n c e n t r a t e d i n L a t i n A m e r i c a . E l e v e n o f t h e s e v e n t e e n h i g h l y i n d e b t e d c o u n t r i e s l i s t e d by t h e W o r l d Bank a r e i n L a t i n A m e r i c a (World Bank 1988: x i v ) . T h e s e c o u n t r i e s c a r r y t h e l a r g e s t t o t a l d e b t . In terms o f d e b t as p r o p o r t i o n o f GNP — a n i n d i c a t o r o f t h e r e a l burden t h e d e b t r e p r e s e n t s f o r a c o u n t r y — t h e d a t a p r o v i d e d by t h e U n i t e d N a t i o n s C o n f e r e n c e on T r a d e and Development (1985) s u g g e s t s however t h a t t h e r a t i o debt/GNP i s h i g h e r f o r t h e A f r i c a n c o u n t r i e s t h a n t h o s e i n L a t i n A m e r i c a . T a b l e 2 shows t h a t i n 1975 t h e A f r i c a n d e b t as p e r c e n t a g e o f GNP was 20.37., w h i l e f o r L a t i n A m e r i c a i t was 16.57.. In 1979 t h e d i f f e r e n c e i n c r e a s e d and t h e A f r i c a n debt/GNP r a t i o r e a c h e d 28.27. and t h e L a t i n A m e r i c a n 20.87.. In 1980 and 1982, t h e A f r i c a n r a t i o s were 25.07. and 30.37. r e s p e c t i v e l y , w h i l e f o r t h e same y e a r s t h e L a t i n A m e r i c a n r a t i o was 19.37. and 23.87.. The f a c t t h a t A f r i c a n GNP/Debt r a t i o s a r e a l w a y s h i g h e r , n o t o n l y makes t h e s i t u a t i o n i n t h a t c o n t i n e n t f a r worse t h a n i n o t h e r r e g i o n s , i t s u g g e s t s t h a t l e n d i n g by t h e i n t e r n a t i o n a l banks was done p r i m a r i l y on t h e b a s i s o f t h e i r need t o d i s p o s e of l a r g e amounts o f f u n d s , and n o t on whether t h e b o r r o w i n g c o u n t r i e s had a s t r o n g and p r o m i s i n g economy. L a t i n A m e r i c a , l i k e t h e r e s t o f t h e u n d e r d e v e l o p e d w o r l d , must d e v o t e a h i g h p e r c e n t a g e of i t s r e s o u r c e s t o s e r v i c i n g t h e d e b t . In 1983, t h e r e g i o n s p e n t o v e r $28 b i l l i o n U.S. i n d e b t s e r v i c e , w h i c h r e p r e s e n t s 24.41 p e r c e n t o f t h e r e g i o n ' s 15 TABLE 2 A f r i c a n and L a t i n A m e r i c a n D e b t . T o t a l (US* m i l l i o n ) and a s (7.) o f GNP. 1975 1979 1980 1982 L a t . Am. As (•/.) GNP 65,268 16.5 153,181 20.8 177,594 19.3 239,164 23.8 A f r i c a As (7.) GNP 29,844 20.3 78,095 28.2 87 ,719 25.0 101,232 30.3 S o u r c e : Handbook o f I n t e r n a t i o n a l T r a d e and S t a t i s t i c s : S u p p l e m e n t 1985. Deve1opmen t 16 income f o r e x p o r t s o f goods and s e r v i c e s . In 1978, M e x i c o s p e n t 54.89 p e r c e n t o f i t s income f r o m e x p o r t s i n d e b t s e r v i c e , f o l l o w e d by B r a z i l w i t h a l m o s t 43 p e r c e n t i n 1982. C h i l e d i r e c t e d 40.7 p e r c e n t o f i t s e x p o r t s t o s e r v i c e d e b t i n 1978. Not even V e n e z u e l a , a member o f OPEC, has e s c a p e d h a v i n g t o pay l a r g e sums f o r i t s d e b t . In 1982, t h r e e y e a r s a f t e r t h e s e c o n d o i l shock o f 1979, w h i c h i n c r e a s e d V e n e z u e l a ' s o i l r e v e n u e s , V e n e z u e l a s p e n t 16.55 p e r c e n t o f i t s e x p o r t e a r n i n g s on i t s i n t e r n a t i o n a l d e b t (See T a b l e 3 ) . The OEDC d a t a shows t h a t i n t e r e s r a t e s t h e u n d e r d e v e l o p e d c o u n t r i e s , between 1972-3 and 1983 went from 4.4 p e r c e n t t o 6.7 p e r c e n t , f o r f i x e d i n t e r e s t , and from 8.3 p e r c e n t t o 12.7 p e r c e n t f o r f l o a t i n g i n t e r e s t d u r i n g t h e same p e r i o d . T a b l e 4 shows t h a t w h i l e i n t h e p e r i o d f i x e d i n t e r e s t r o s e 52.27., t h e f l o a t i n g i n t e r e s t r o s e 109.97. between 1972-3 and 1981, t h e peak y e a r . Based on OECD c a l c u l a t i o n s , t h e i n c r e a s e i n i n t e r e s t r a t e s by 1 p e r c e n t r e p r e s e n t e d a d i s b u r s e m e n t o f U.S.$2 b i l l i o n . T h i s means t h a t i n 1981 t h e u n d e r d e v e l o p e d c o u n t r i e s d e b t payments grew by U.S.$13 b i l l i o n , on t h i s a c c o u n t a l o n e ( C a s t r o 1983:90). 17 TABLE 3 S e r v i c e o f D e b t ( S ) . E x p o r t s ( E ) and E/S R a t i o s . S e l e c t e d L a t i n A m e r i c a n C o u n t r i e s . 1970-1983. US$ b i l l i o n . 1970 T o t a l Ex p o r t s E/S R a t i o 2,433.7 18,562.2 13.11 A r g . S e r v . Ex p o r t s E/S R a t i o 462.0 2, 198.0 21 . 52 B r a z i l S e r v , Ex p o r t s E/S R a t i o 388.3 3,117.0 12.45 C h i l e S e r v , E x p o r t s E/S R a t i o 241 .6 1 ,274.0 18.96 Mex. Serv , E x p o r t s E/S R a t i o 691 .3 2,935.0 23. 55 Ven. S e r v , Ex p o r t s E/S R a t i o 82. 1 2,833.0 2.89 1975 1978 6,752.1 47,071.6 14.28 18,423.4 69,908.2 26.35 788.9 3,586.6 21 .99 2,115.9 7,841.3 26.98 1,781.3 9,947.5 17.90 4,488.3 14,458.1 31 .04 501 .7 1,841.9 27.23 1,581.8 6,364.6 24.85 1,215.0 2,983.5 40.72 258.7 6,___ 11,400 54.89 539.3 10,092.0 5.34 749.6 10,854.8 6.9 ( con t . ) 18 TABLE 3 ( c o n t . ) S e r v i c e o f D e b t ( S ) . E x p o r t s ( E ) and E/S R a t i o s . S e l e c t e d L a t i n A m e r i c a n C o u n t r i e s . 1970-19B3. US* b i l l i o n . 1980 1981 1982 1983 5 C. S e r v . 27,022 .2 29,940. 3 32,122.3 28,844 .6 Ex p o r t s 126,843 .3 139,229. 3 123,550.0 118,140 . 5 E/S R a t i o s 21 .30 21 . 50 25.99 24.41 A r g . S e r v 1,987 . 1 2,152. 5 2.294.9 2,291 . 5 Ex p o r t s 11,201 .0 11,823. 4 9,725.2 9,762 . 1 E/S R a t i o 17.74 18.20 23.59 23.47 B r a z i l S e r v . 8,039 .2 9,070. 9 10,098.9 6,792 . 6 E x p o r t s 23,287 .0 26,992. 2 23,486.7 24,36B .9 E/S R a t i o 34.52 33.60 42.90 27.87 C h i l e S e r v . 1 , 374 .8 1,663. 8 1.031.7 886 .0 Ex p o r t s 6,276 .0 5,614. 0 5,153.5 4,801 .9 E/S R a t i o 21 .90 29.63 20.01 18.45 Mex. S e r v . 7,855 .9 8,486. 2 9,400.0 10,972 .6 Ex p o r t s 24,636 .7 30,415. 3 27,722.8 28,630 .0 E/S R a t i o 31 .88 27.90 33.90 38.34 Ven. S e r v . 2,964 .3 2,588. 3 3,220.8 2,655 .8 E x p o r t s 22,231 .4 24,519. 5 20,121.7 17,341 .3 E/S R a t i o 13. 33 10. 55 16. 55 15.31 S o u r c e : W o r l d Bank Debt T a b l e s , 1985. 19 TABLE 4 I n t e r e s t t o D e v e l o p i n g C o u n t r i e s , 1972-1973, by t y p e o f c r e d i t , '/.. Y e a r 72-73 74-76 77-78 79 80 81 F i x e d 4.4 4.9 5.5 5.8 6.0 6.0 F l o a t i n g 8.3 9.9 8.4 12.3 15.5 17.4 82 83 6.3 6.7 17.1 12.7 S o u r c e : OECD, 1983:65. 20 1.4 Debt Theories . Most o b s e r v e r s c i t e two o r more c a u s e s i n t h e i r i n t e r p r e t a -t i o n o f t h e p r e s e n t i n t e r n a t i o n a l d e b t c r i s i s . The most common e x p l a n a t i o n f o r t h e p r e s e n t d e b t c r i s i s has been t o a s c r i b e i t t o t h e n e g a t i v e e f f e c t s of t h e 400 p e r c e n t i n c r e a s e i n t h e p r i c e o f o i l between 1973 and 1974. T h i s c l a i m has two v e r s i o n s . The f i r s t a r g u e s t h a t t h e c r u c i a l e l e m e n t o f t h e p r e s e n t c r i s i s — i n L a t i n A m e r i c a and e l s e w h e r e — i s t h e o i l s h ock o f 1973 ( S e i b e r 1979:64). The s e c o n d v e r s i o n s u g g e s t s t h a t a l t h o u g h t h e r o l e o f t h e o i l c r i s i s was t h e c r u c i a l s p a r k t h a t i g n i t e d t h e c r i s i s , i t d i d n o t c r e a t e t h e c r i s i s by i t s e l f (Bwedberg 19B7; K a h l e r 1985; K o r n e r 1986; S j a a s t a d 19B3). In t h i s s c e n a r i o , t h e r e a r e c o n d i t i o n s f a v o u r a b l e t o a d e b t c r i s i s t h a t owe t h e i r e x i s t e n c e t o a " s t r u c t u r a l l y i n d u c e d s p e c u l a t i v e p r o c e s s i n t h e macroeconomic s y s t e m (Swedber 1987:323)". S i m i l a r t o t h i s v i e w i s t h e one t h a t r e l a t e s t h e d e b t c r i s i s t o t h e w o r l d r e c e s s i o n ( K u c z y n s k y 19B2-1983; Frank 19B4; N a y l o r 19B7). B r a n d f o r d and K u c i n s k i (1988) a r g u e t h a t t h e d e b t i s p a r t o f t h e r e c e s s i v e s i d e o f a K o n d r a t i e f f t y p e o f l o n g wave. T h i s t h e o r y a s s e r t s t h a t t h e economy has r e g u l a r c y c l i c a l movements t h a t l a s t a r o u n d 5 0 y e a r s — twenty f i v e y e a r s of upward t r e n d and a p p r o x i m a t e l y a n o t h e r twenty f i v e y e a r s o f d e p r e s s i o n . The g rowth phase i s due t o t e c h n o l o g i c a l a d v a n c e s and t h e e x p a n s i o n o f commerce, w h i l e th e r e c e s s i v e phase may be due t o 21 f a l l i n g r a t e s o f p r o f i t , c o n t r a d i c t i o n s i n t h e c a p i t a l i s t e c o n o m i e s t h a t p r o d u c e i m b a l a n c e s between p r o d u c t i o n , c o n s u m p t i o n and i n v e s t m e n t , and r e v o l u t i o n s ( B r a d f o r d and K u c i n s k i 1988: 3 6 ) . Some e x p l a n a t i o n s f o r t h e d e b t c r i s i s s u g g e s t a l t e r n a t i v e r e a s o n s n o t r e l a t e d t o o i l p r i c e s , s u c h as i n t e r p r e t a t i o n s e m p h a s i s i n g t h e e f f e c t s o f t h e g r o w t h o f t h e E u r o d o l l a r m a r k e t 7 ( K u c z y n s k y 1982-1983; F e r r e r 1984; P r e b i s h 1985; N a y l o r 1 9 8 7 ) . O t h e r s s e e r a p i d i n d u s t r i a l i z a t i o n i n some of t h e d e b t o r n a t i o n s as t h e main c a u s e o f t h e p r o b l e m , t h a t i s , d e b t - d r i v e n economic g r o w t h ( F r i e d m a n 1987; McCoy 1986-1987). O t h e r s a r g u e t h a t t h e s y n d i c a t e d 3 l e n d i n g by t h e banks worsened t h e s i t u a t i o n , i f n o t t r i g g e r e d i t ( K c u z y n s k y 1982-1983). P r e b i s h (1985) and McCoy (1986-1987) s u g g e s t t h a t t h e c r i s i s was due t o l a c k o f m onetary d i s c i p l i n e . F e l i x a r g u e s t h a t t h e n e g a t i v e t r a d e terms between t h e d e v e l o p e d and u n d e r d e v e l o p e d c o u n t r i e s e x p l a i n t h e phenomenon ( F e l i x 1 9 87:15). H i g h i n t e r e s t r a t e s a r e v i e w e d as a c h r o n i c d e t r i m e n t a l f a c t o r i n t h e g r o w t h o f t h e i n t e r n a t i o n a l d e b t and S a j a a s t a d s u g g e s t s t h a t t h e f a i l u r e t o a n t i c i p a t e t h e e x t r a o r d i n a r y i n c r e a s e i n i n t e r e s t r a t e s i n t h e e a r l y 1960's ~* O r i g i n a l l y , US d o l l a r s d e p o s i t e d o u t s i d e o f t h e U n i t e d S t a t e s , m a i n l y E u r o p e . e At i t s peak most of t h e i n t e r n a t i o n a l l e n d i n g was done by l a r g e g r o u p s o f banks. T h i s s u b j e c t i s t r e a t e d i n more d e t a i l i n C h a p t e r VI of t h i s work. 22 was t h e most i m p o r t a n t f a c t o r i n t h e d e b t e x p l o s i o n ( S j a a s t a d 1983: 305-324).' T h e r e i s agreement amongst most o b s e r v e r s w i t h r e g a r d t o t h e i m p o r t a n t r o l e p l a y e d by two o t h e r e l e m e n t s r e l a t e d t o t h e d e b t : f i r s t , t h e b a n k e r s ' b e h a v i o u r and s e c o n d , c a p i t a l f l i g h t . B o t h s u b j e c t s w i l l be t r e a t e d i n more d e t a i l below; f o r t h e moment, s u f f i c e i t t o s a y t h a t t h e r e a r e many who t h i n k t h a t t h e b a n k e r s a g g r a v a t e d t h e p r o b l e m f i r s t by ' p u s h i n g l o a n s ' and l a t e r a b r u p t l y c u t t i n g them o f f t o t h e i r most t r o u b l e d c u s t o m e r s ( N a y l o r , 1987), and a l s o by s t u b b o r n l y i g n o r i n g r e p e a t e d w a r n i n g s o f t h e coming c r i s i s ( F e l i x 1987: 9) . C a p i t a l f l i g h t , o r t h e e x p o r t o f w e a l t h by n a t i o n a l s o f one c o u n t r y t o a n o t h e r c o u n t r y , i n c r e a s e d d u r i n g t h e c r i t i c a l y e a r s , d r a i n i n g s c a r c e r e s o u r c e s from L a t i n A m e r i c a , and some o b s e r v e r s a r g u e t h a t has been t h e s i n g l e most i m p o r t a n t c a u s e of t h e d e b t c r i s i s . T h i s p r o b l e m has r e a c h e d s u c h p r o p o r t i o n s t h a t one b a n k e r c l a i m s t h a t t h e phenomena has been misnamed; i n s t e a d o f c a p i t a l f l i g h t , i t s h o u l d be c a l l e d s i m p l y ' t h e f t ' ( S h i r a n o , 1 9 8 5:22). B l a i n ( 1 9 8 7 ) , i n a s t u d y o f t h e US d e b t a r g u e s t h a t t h e main r e a s o n f o r t h e g r o w th o f t h e U.S. d e b t , from US$78 m i l l i o n i n 1790 t o US$3.8 t r i l l i o n i n 1976, i s due t o t h e e x p o n e n t i a l g r o w t h o f t h e i n t e r e s t on t h e d e b t s i n c e 1790. 23 F i n a l l y , i n t h e s e a r c h f o r e x p l a n a t i o n s o f t h e L a t i n A m e r i c a n i n t e r n a t i o n a l d e b t , J a c o b o Shatam's work d e s e r v e s m e n t i o n ( 1 9 8 7 ) . Shatam d e s c r i b e s t h e p r o b l e m i n t e r m s o f b o t h e x t e r n a l and i n t e r n a l a s p e c t s , e m p h a s i z i n g t h e l a t t e r , p a r t i c u l a r l y what he c a l l s " . . . t h e c r i s i s o f t h e d e v e l o p m e n t p a t t e r n f o l l o w e d by L a t i n A m e r i c a n s o c i e t i e s , as w e l l as t h e c r i s i s o f t h e i r b a s i c v a l u e s . " ( S h a t a m 1 9 8 8 : 1 ) . He c h a r a c t e r i z e s t h i s d e v e l o p m e n t p a t t e r n as one o f e x p o r t - l e d g r o w t h and o f " s u p e r f l u o u s c o n s u m p t i o n " (Shatam 1 9 8 8 : 2 ) . 1.5 C h a p t e r Summary. In t h i s c h a p t e r I have p r e s e n t e d t h e c e n t r a l p r o b l e m o f t h i s work, t h e argument f o r i t s s o c i o l o g i c a l r e l e v a n c e , t h e main h y p o t h e s e s , an o v e r v i e w o f t h e d e b t c r i s i s and t h e e x p l a n a t i o n s o f i t i n t h e s p e c i a l i z e d l i t e r a t u r e , a s w e l l as t h e l i m i t a t i o n s o f t h e s t u d y . In t h e n e x t C h a p t e r , I w i l l p r e s e n t t h e r e l e v a n t s o c i o l o g i c a l t h e o r i e s o f c hange and d e v e l o p m e n t and i d e n t i f y what I b e l i e v e t o be t h e most a p p r o p r i a t e a n a l y t i c p a r a d i g m , t o b e g i n t h e d e v e l o p m e n t o f a t h e o r y of t h e c a u s e s o f t h e i n t e r n a t i o n a l d e b t . 24 CHAPTER I I . DEVELOPMENT THEORIES 25 CHAPTER I I . DEVELOPMENT THEORIES 2.1 I n t r o d u c t i o n The i n t e r n a t i o n a l d e b t of t h e u n d e r d e v e l o p e d c o u n t r i e s p l a y s a c e n t r a l r o l e i n t h e c r e a t i o n o f p o v e r t y and de p e n d e n c y , and i n s t r e n g t h e n i n g t h e power r e l a t i o n s t h a t f a v o u r a s m a l l segment o f s o c i e t y i n t h o s e c o u n t r i e s . I t i s a p p a r e n t t h a t t h e burden o f t h e i n t e r n a t i o n a l d e b t has widened t h e gap e x i s t i n g between t h e r i c h and poor i n t h e d e b t o r c o u n t r i e s , a s w e l l ad t h e span i n d u s t r i a l i z e d market e c o n o m i e s and t h e u n d e r d e v e l o p e d w o r l d . T h e r e f o r e , t h e s t u d y o f t h e d e b t has a p l a c e a s p a r t o f t h e c o n t i n u i n g e f f o r t t o u n d e r s t a n d s o c i a l i n e q u a l i t y between and w i t h i n c o u n t r i e s . As I w i l l show i n t h e c o u r s e o f t h i s c h a p t e r , models e l a b o r a t e d by s c h o l a r s may i n f l u e n c e p o l i c y , i t i s a l s o t r u e t h a t no model has been i m p l e m e n t e d i n 'pure' f o r m . The i n f l u e n c e t h a t t h e o r i e s e x e r t i s i n d i r e c t and d i s t o r t e d , b u t , n e v e r t h e l e s s , t h o s e t h e o r i e s make t h e i r p r e s e n c e f e l t . I t i s a l s o t r u e t h a t t o a l a r g e e x t e n t d i f f e r e n t c o u n t r i e s p u r s u e d e v e l o p m e n t a l models t h a t seek t h e a t t a i n m e n t o f s i m i l a r g o a l s , a t t i m e s c a l l e d d e v e l o p m e n t , m o d e r n i z a t i o n o r s i m p l y p r o g r e s s . T h i s i s s o , even when t h e r e a r e d i f f e r e n c e s i n t h e i r s o c i a l s t r u c t u r e and p o l i t i c a l a genda. T h e s e s i m i l a r i t i e s o f p u r p o s e , and d i f f e r e n c e s o f p a r a d i g m s h e l p us t o u n d e r s t a n d t h a t t h e e c o n o m i c p o l i c i e s p u r s u e d a r e o f t e n f a r from 26 c o h e r e n t . In a d d i t i o n t o t h i s , p e r c e i v e d o r r e a l t a c t i c a l p o l i t i c a l n eeds on t h e p a r t o f t h e d e c i s i o n - m a k e r s , make t h i n g s even more e r r a t i c and c o m p l i c a t e d f o r t h e o b s e r v e r o f s o c i o - e c o n o m i c d e v e l o p m e n t . In sum, d e v e l o p m e n t a l m o d els must be t a k e n w i t h more than a g r a i n o f s a l t . In t h e k a l e i d o s c o p e o f c h a n g i n g s o c i e t y , t h e onus i s on t h e o b s e r v e r t o d i f f e r e n t i a t e t h e e p h e m e r a l from t h e permanent. In t h e f o l l o w i n g pages I w i l l examine what I c o n s i d e r t h e two more i m p o r t a n t g e n e r a l d e v e l o p m e n t a l t h e o r i e s i n r e l a t i o n t o t h e d e b t c r i s i s : M o d e r n i z a t i o n and Modes o f P r o d u c t i o n . T h e i r i m p o r t a n c e , v i s — a — v i s t h e d e b t , stems m a i n l y from t h e c e n t r a l r o l e t h a t b o t h p a r a d i g m s a s c r i b e t o c a p i t a l i m p o r t s . A l l o w me t o n o t e a t t h i s p o i n t two i m p o r t a n t r e s t r i c t i o n s r e g a r d i n g t h e e x p r e s s i o n c a p i t a l i m p o r t s : F i r s t , a t t h i s s t a g e i n t h e work I u s e i t i n an e x t r e m e l y g e n e r a l way, and t h e r e f o r e , l a c k i n g i n p r e c i s i o n ; and s e c o n d , I am a s s u m i n g t h a t t h e r e i s a n e t t r a n s f e r o f c a p i t a l f r o m t h e I n d u s t r i a l i z e d M arket E c o n o m i e s t o t h e L a t i n A m e r i c a n c o u n t r i e s . I w i l l use c a p i t a l i m p o r t s , meaning t h e t r a n s f e r o f f i n a n c i a l r e s o u r c e s , m a i n l y i n money fo r m 1 0 , from one c o u n t r y t o a n o t h e r . A l t h o u g h i t i s p o s s i b l e t o a r g u e t h a t , i n t h e l a s t i n s t a n c e , money i s a l w a y s c a p i t a l , i t i s e q u a l l y a r g u a b l e t h a t money can be t r e a t e d as commodity, o r t h a t c a p i t a l may be As d i s t i n c t from f i n a n c i a l i n s t r u m e n t s . bonds, S p e c i a l Drawing R i g h t s and o t h e r 27 embodied i n o t h e r forms t h a n money, f o r i n s t a n c e , m a c h i n e r y . I am s u g g e s t i n g t h a t t h e d e t e r m i n a t i o n of what s h o u l d be c o n s i d e r c a p i t a l depends on t h e s t a g e t h a t , a t any g i v e n t i m e , p a r t i c u l a r e l e m e n t s o f t h e economy o c c u p y i n t h e g e n e r a l p r o c e s s o f p r o d u c t i o n and c i r c u l a t i o n . O t h e r r e a s o n s f o r f o c u s i n g on t h e s e two p a r a d i g m s a r e , t h e i n f l u e n c e e x e r t e d by t h e o r i e s o f m o d e r n i z a t i o n i n L a t i n A m e r i c a and t h e U n i t e d S t a t e s p o l i c y - m a k i n g c i r c l e s d u r i n g t h e 1960s and t h e 1970s, as w e l l as among t h e p r i n c i p a l managers of t h e d e b t c r i s i s : t h e IMF and t h e World Bank. T h e s e i n t e r n a t i o n a l f i n a n c i a l i n s t i t u t i o n s c o n t i n u e p r o m o t i n g e x t e r n a l l y o r i e n t e d s o l u t i o n s t o t h e c r i s i s , by i n s i s t i n g on i n c r e a s e e x p o r t s , reduced- i n t e r n a l c o n s u m p t i o n i n o r d e r t o combat i n f l a t i o n , and l i n k i n g i n t e r e s t r a t e s t o be p a i d by t h e d e b t o r s t o c o m m e r c i a l i n t e r e s t r a t e s i n t h e IMEs. These p o l i c i e s r e n d e r t h e e c o n o m i e s o f t h e d e b t o r c o u n t r i e s more v u l n e r a b l e t o t h e ups and downs o f t h e d e v e l o p e d c o u n t r i e s e c o n o m i e s . T h i s i s done i n t h e hope o f a b e t t e r f u t u r e t h a t w i l l e v e n t u a l l y " t r i c k l e - d o w n " t o t h e p o o r . The m a r x i s t p a r a d i g m o f f e r s a c o h e r e n t e x p l a n a t i o n f o r t h e u n d e r s t a n d i n g o f t h e emergence of t h e d e b t , a l l o w i n g f o r t h e b e g i n n i n g o f t h e c o n s t r u c t i o n o f a t h e o r y of t h e c a u s e s , and a t t h e same t i m e , p r o v i d i n g p l a u s i b l e h y p o t h e s i s t o a c c o u n t f o r t h e d i f f e r e n t s t a g e s o f t h e d e b t p r o c e s s , as w e l l as 28 p o s s i b l e outcomes o f t h e c r i s e s . A l t h o u g h t h e i n t e r n a t i o n a l d e b t o f t h e s o c i a l i s t c o u n t r i e s i s e x c l u d e d from t h i s work, I want t o s u g g e s t t h a t t h e m a r x i s t p a r a d i g m i s an a p p r o p r i a t e t o o l f o r a n a l y z i n g t h e d e b t o f t h o s e c o u n t r i e s , i n s o f a r t h e i r i n t e g r a t i o n i n t h e w o r l d economy f o l l o w s t h e p r e v a i l i n g r u l e s , t h a t f a v o u r t h e c a p i t a l i s t s o c i a l and e c o n o m i c o r g a n i z a t i o n o f p r o d u c t i o n and c i r c u l a t i o n o f c o m m o d i t i e s . 1 1 2.2 M o d e r n i z a t i o n T h e o r y . A c c o r d i n g t o i t s p r o p o n e n t s , — Rostow, E i s e n s t a t , Moore,. M a c C l e l l a n d , and o t h e r s — m o d e r n i z a t i o n i s a p r o c e s s o f i n c r e a s e d s o c i a l c o m p l e x i t y and f u n c t i o n a l d i f f e r e n t i a t i o n . T h i s i s a c o n s e q u e n c e o f t h e e x p a n s i o n o f i n d u s t r i a l i z a t i o n , and t h e d i s p l a c e m e n t o f a g r a r i a n s o c i e t i e s . T h i s i s t h e most i n f l u e n t i a l f e a t u r e o f c o n t e m p o r a r y s o c i e t y . Most, i f n o t a l l n a t i o n s , a r e becoming modern, and t h i s p r o c e s s i s a c c o m p l i s h e d w i t h t h e h e l p p r o v i d e d t o t h e poor and u n d e r d e v e l o p e d c o u n t r i e s by t h e i n d u s t r i a l i z e d n a t i o n s ( S t e v e n s o n 1980:214). The p r o c e s s o f m o d e r n i z a t i o n b e g i n s w i t h e a c h c o u n t r y a t a d i f f e r e n t t i m e and s t a g e o f d e v e l o p m e n t . The f o r m e r S p a n i s h c o l o n i e s of L a t i n A m e r i c a e n t e r e d t h e p r o c e s s i n q u i t e F o r a d i s c u s s i o n o f t h i s s u b j e c t i n t h e c o n t e x t o f t h e P e o p l e ' s R e p u b l i c o f C h i n a , s e e C a r c h e d i 1986. 29 d i f f e r e n t c o n d i t i o n s t h a n t h e f o r m e r B r i t i s h c o l o n i e s , s u c h a s I n d i a , o r o t h e r E u r o p e a n c o l o n i e s i n A s i a and A f r i c a . The d i f f e r e n t s t a r t i n g p o i n t s e x p l a i n why t h e p l a c e e a c h c o u n t r y o c c u p i e s t o d a y i s a l s o d i f f e r e n t . B u t , a s E i s e n s t a d t a r g u e s ( 1 9 6 1 ) , t h e y a l l e v e n t u a l l y a r r i v e a t t h e d e v e l o p e d s t a g e , t h a t i s , t o a p o s i t i o n e q u i v a l e n t t o t h a t o f t h e d e v e l o p e d c a p i t a l i s t n a t i o n s . To r e a c h t h i s g o a l , m o d e r n i z a t i o n t h e o r i s t a t t a c h g r e a t i m p o r t a n c e t o t h e r o l e o f t h e e n t r e p r e n e u r and t o c a p i t a l a c c u m u l a t i o n . The a s s u m p t i o n i s t h a t t h e s e c o u n t r i e s a r e g o i n g t h r o u g h t h e same b a s i c s t a g e s i n t h e p r o c e s s o f m o d e r n i z a t i o n , w i t h t h e p a r t i c i p a t i o n o f s i m i l a r b a s i c human and m a t e r i a l e l e m e n t s . I f t h i s i s t h e c a s e , on t h e r o a d t o m o d e r n i t y t h e y w i l l f a c e s i m i l a r p r o b l e m s . A t a c e r t a i n p o i n t i n t h e i r e v o l u t i o n f r o m t r a d i t i o n a l t o modern, t h e r e may be p r o b l e m s w i t h t h e o l d i d e o l o g y , f o r example i n t h e form o f r e l i g i o u s b e l i e f . T h e s e c o u n t r i e s may have a l s o f a c e p r o b l e m s w i t h t h e o r g a n i z a t i o n o f t h e p o l i t i c a l s y s t e m . However, i n e v i t a b l y m o d e r n i z a t i o n w i l l t a k e p l a c e and new economic s t r u c t u r e s w i l l emerge ( E i s e n s t a d t 1 9 6 1 : 1 - 7 ) . 2.2.1 W.W. Rostow Rostow's works (1960; 1961) a r e a p r i m e example o f m o d e r n i z a t i o n t h e o r y . They d e s e r v e s p e c i a l a t t e n t i o n b e c a u s e , d u r i n g t h e 1960s and 1970s — a t i m e t h e E u r o m a r k e t emerged and b o r r o w i n g from i n t e r n a t i o n a l p r i v a t e s o u r c e s began i n L a t i n 30 A m e r i c a — t h i s model was most i n f l u e n t i a l i n t h e U.S. and some L a t i n A m e r i c a n p o l i c y - m a k i n g c i r c l e s . F u r t h e r m o r e , one may a r g u e t h a t t h e b a s i c p r e m i s e s f o r economic d e v e l o p m e n t promoted by t h i s model, a r e a t t h e c o r e o f t h e p o l i c i e s p u r s u e d t o d a y by i n s t i t u t i o n s l i k e t h e I.M.F. and t h e World Bank . Rostow s u g g e s t s t h a t s o c i e t i e s go t h r o u g h f i v e s t a g e s t o w a r d s m o d e r n i t y . Those s t a g e s a r e : t h e t r a d i t i o n a l s o c i e t y ; t h e p r e - c o n d i t i o n s f o r t a k e - o f f ; t a k e o f f ; t h e d r i v e t o m a t u r i t y and t h e age o f mass c o n s u m p t i o n . T r a d i t i o n a l s o c i e t y i s t h a t w h i c h has few d i f f e r e n t i a t e d p r o d u c t i v e f u n c t i o n s . T h e s e s o c i e t i e s have a l i m i t i n t h e i r a g r i c u l t u r a l o u t p u t and, due t o t h i s l i m i t a t i o n , t h e y must d e v o t e a h i g h p e r c e n t a g e o f t h e i r r e s o u r c e s t o a g r i c u l t u r e . A c o n s e q u e n c e o f t h e l i m i t e d a g r i c u l t u r a l o u t p u t i s t h a t t h e s o c i a l s t r u c t u r e i s r i g i d , w i t h l i t t l e v e r t i c a l m o b i l i t y . The s e c o n d s t a g e , t h e p r e - c o n d i t i o n s f o r t a k e o f f , i s d e t e r m i n e d by t h e l e v e l o f s c i e n t i f i c and t e c h n o l o g i c a l a c h i e v e m e n t , "As t e c h n o l o g y and s c i e n c e p r o g r e s s t h i s s t a g e comes a b o u t " . As f o r t h e t h i r d s t a g e - t a k e o f f - , i t i s c h a r a c t e r i z e d by an a c c e p t a n c e o f t h e new t e c h n o l o g i e s , a 5 t o 10 p e r c e n t o f s a v i n g s and i n v e s t m e n t , as w e l l as t h e i n d u s t r i a l i z a t i o n of a g r i c u l t u r e . In t h e f o u r t h s t a g e , t h e d r i v e t o m a t u r i t y , t h a t a c c o r d i n g t o Rostow t a k e s "say f o r t y y e a r s a f t e r t h e end o f t a k e - o f f " (Rostow 1960: 9 ) , s o c i e t y can go beyond t h e o r i g i n a l i n d u s t r i e s and must c h o o s e 31 from t h r e e a l t e r n a t i v e s : a. t h e e s t a b l i s h m e n t o f a w e l f a r e s t a t e b. t h e i n c r e a s e o f c o n s u m p t i o n , o r c. e x t e r n a l e x p a n s i o n . F i n a l l y , d u r i n g t h e p e r i o d o f mass c o n s u m p t i o n t h e r e i s a c o n t i n u e d i n c r e a s e i n t h e a v a i l a b i l i t y o f new t e c h n o l o g y . R e a l income t e n d s t o i n c r e a s e and t h e c o m p o s i t i o n o f t h e w o r k i n g f o r c e c h a n g e s , s h i f t i n g t o w a r d s t h e t e r t i a r y s e c t o r . I t has been a r g u e d t h a t Rostow's "economic r e c i p e s " were " . . . u s e d a l m o s t t o t h e l e t t e r . . . " i n t h e e c o n o m i c p l a n s o f t h e B r a z i l i a n g o v e r n m e n t ' s e c o n o m i c p o l i c i e s i n t h e 1960's. T h o s e p o l i c i e s were c h a r a c t e r i z e d by a s t r o n g commitment t o t h e m o d e r n i z a t i o n o f B r a z i l by i n c r e a s i n g s a v i n g s , f o r t h e b e n e f i t o f t h e e n t r e p r e n e u r i a l s e c t o r ( G o l d e n s t e i n 1 7 8 6:72). A n o t h e r a u t h o r (Webster 1984), s e e s t h e i n f l u e n c e o f m o d e r n i z a t i o n i n t h e a i d programmes t h a t t h e d e v e l o p e d market e c o n o m i e s implement i n t h e t h i r d w o r l d : U n t i l r e l a t i v e l y r e c e n t l y , most a i d has been g i v e n on t h e b a s i s t h a t t h e r e c e i v i n g c o u n t r y l a c k s s u f f i c i e n t d o m e s t i c c a p i t a l f o r " t a k e - o f f " i n t o d e v e l o p m e n t . T h i s i s v e r y much l i k e Rostow's model o f t h e " s t a g e s o f e conomic g r o w t h " , i n w h i c h [...] he a r g u e s t h a t a ' p r e c o n d i t i o n f o r t a k e — o f f i s an a d e q u a t e l e v e l o f c a p i t a l i n v e s t m e n t ' (Webster 1984:151) As W e s b s t e r p o i n t s o u t , t h e a s s u m t i o n i s t h a t d e v e l o p i n g 32 c o u n t r i e s do n o t have enough s a v i n g s needed f o r t h e i r e c onomic " t a k e - o f f " . At t h i s p o i n t , b o r r o w i n g i s c o n s i d e r e d t o be an a c c e p t a b l e s u b s t i t u t e f o r t h e u n a v a i l a b l e i n t e r n a l s a v i n g s . In g e n e r a l , t h e model t r e a t s i n t e r n a t i o n a l b o r r o w i n g n o t o n l y as a n e c e s s a r y component f o r d e v e l o p m e n t , but as t h e above q u o t a t i o n f r o m S t e v e n s o n s u g g e s t ( p . 2 1 ) , i t i s t h i s t y p e o f h e l p , o r a i d , t h a t t h e d e v e l o p e d c o u n t r i e s g i v e t o t h e p oor c o u n t r i e s t h a t w h i c h w i l l c a t a p u l t them t o m o d e r n i t y . The s t a b i l i z a t i o n programmes promoted by t h e IMF and t h e W o r l d Bank e m p h a s i z e s i n c r e a s e i n e x p o r t s and c o n t r o l o f i n f l a t i o n as a means t o f a c i l i t a t e c a p i t a l s a v i n g s . W h i l e t h o s e g o a l s a r e p u r s u e d , i n c r e a s e d e x t e r n a l b o r r o w i n g i s c o n s i d e r e d a v i a b l e a l t e r n a t i v e . In c o n t r a s t , d e f a u l t o r even a d e b t o r ' s c l u b a r e r u l e d o u t . M o d e r n i z a t i o n t r e a t s e conomic phenomena from t h e p e r s p e c t i v e t h a t t h e i d e a l g o a l i s t h e example o f t h e d e v e l o p e d c a p i t a l i s t c o u n t r i e s . T h e s e s o c i e t i e s a r e s u p p o s e d t o be p u l l i n g t h e r e s t of t h e w o r l d , p a r t i c u l a r l y t h e u n d e r d e v e l o p e d w o r l d . The i d e a l p o l i t i c a l l e a d e r s h i p i s t h e m o d e r n i z i n g e l i t e , w h i c h s h a r e s the i d e o l o g i c a l p a r a d i g m t o w h i c h t h e r u l i n g c l a s s e s i n t h e d e v e l o p e d c a p i t a l i s t c o u n t r i e s a r e c o m m i t t e d . A c o r o l l a r y of t h e i n f l u e n c e o f t h e modern w o r l d upon t h e t r a d i t i o n a l , o r t r a n s i t i o n a l one, i s t h a t e x t e r n a l f o r c e s a r e t h e ones t h a t d e t e r m i n e t h e r o u t e t o d e v e l o p m e n t and m o d e r n i t y , w i t h t h e m o d e r n i z i n g e l i t e s p l a y i n g t h e r o l e o f a g e n t s , o r c o n d u i t s o f 33 a p r o c e s s t h a t r e m a i n s e s s e n t i a l l y e x o g e n o u s . The model t a k e s m o d e r n i t y n o t o n l y as i n e v i t a b l e , b u t a s d e s i r a b l e f o r t h e m a j o r i t y o f t h e p o p u l a t i o n i n t h e t r a n s i t i o n a l s o c i e t y , s i n c e i t assumes t h a t t h e b e n e f i t s o f m o d e r n i z a t i o n w i l l r e a c h a l l . I t o v e r l o o k s t h a t f a c t t h a t t h e r e i s no i n c e n t i v e f o r t h e m o d e r n i z i n g e l i t e s t o s h a r e , o r t r i c k 1 e — d o w n , t h e b e n e f i t s o f m o d e r n i t y , but r a t h e r t o a c c u m u l a t e f o r t h e i r b e n e f i t , and e v e n t u a l l y , even e x p o r t most o f t h e a c c u m u l a t e d money. 2.3 Marx's P o l i t i c a l Economy: Modes o f P r o d u c t i o n . Modes o f p r o d u c t i o n r e f e r s t o s o c i a l r e l a t i o n s o f p r o d u c t i o n . They a r e c l a s s r e l a t i o n s d e t e r m i n e d by t h e p o s i t i o n d i f f e r e n t g r o u p s o c c u p y v i s - a — v i s t h e s o c i a l means o f p r o d u c t i o n . In n a t i o n a l u n i t s i t i s t h e c a s e t h a t more t h a n one form o f r e l a t i o n s o f p r o d u c t i o n may e x i s t ; t h a t i s , t h e r e may be a c o — e x i s t e n c e o f new and o l d modes o f p r o d u c t i o n . In m a r x i s t t h e o r y t h i s i s known as s o c i a l f o r m a t i o n . From what has been a l r e a d y s a i d , i t i s c l e a r t h a t t h i s a p p r o a c h c o n d u c t s t h e a n a l y s i s o f s o c i a l change from t h e p e r s p e c t i v e o f t h e i n t e r n a l d y n a m i c s p r o d u c e d by t h e r e s o l u t i o n o f c o n f l i c t i n g i n t e r e s t s i n s o c i e t y . " [ s o c i a l f o r m a t i o n s ] . . . i s more c o n c e r n e d w i t h t h e n a t i o n a l u n i t s w i t h i n w h i c h c o e x i s t d i s t i n c t s y s t e m s o f p r o d u c t i o n o f u n e q u a l i n f l u e n c e and dynamism and i n t e r a c t i n g i n r e l a t i o n s h i p s o f d o m i n a t i o n / d e p e n d e n c y " ( A r m s t r o n g and McGee 1987:28). 34 T h i s and o t h e r c o n c e p t s a r e t h e p r o d u c t o f t h e p r o l i f i c i n t e l l e c t o f K a r l Marx. And i t i s Marx's a n a l y s i s o f c a p i t a l i s t s o c i e t y t h a t p r o v i d e s t h e t h e o r e t i c a l b a s i s f o r t h e p r e s e n t s t u d y o f t h e L a t i n A m e r i c a n i n t e r n a t i o n a l d e b t . P u b l i c , o r n a t i o n a l d e b t , i s one o f t h e e l e m e n t s t h a t Marx s i n g l e s o u t as c o n t r i b u t i n g t o t h e f o r m a t i o n o f c a p i t a l i n i t s e a r l y s t a g e . A t t h e same t i m e , t h e n a t i o n a l d e b t i s a s i g n o f t h e d e v e l o p m e n t o f t h e c a p i t a l i s t s y s t e m and o f i t s e x p a n s i o n , i n g e o g r a p h i c a l terms as w e l l as g r o w t h i n c o m p l e x i t y . " With t h e n a t i o n a l d e b t a r o s e an i n t e r n a t i o n a l c r e d i t s y s t e m , w h i c h o f t e n c o n c e a l s one o f t h e s o u r c e s o f p r i m i t i v e a c c u m u l a t i o n i n t h i s o r t h a t p e o p l e " (Marx 1978, v o l I : 707) Marx d e s c r i b e s t h e d e v e l o p m e n t o f c a p i t a l i s m as a complex p r o c e s s t h a t b e g i n s w i t h s e v e r a l f o r m s o f c a p i t a l a c c u m u l a t i o n , t h e p r i m i t i v e a c c u m u l a t i o n o f c a p i t a l i s a m u l t i f a c e t e d p r o c e s s t h a t i n v o l v e d v a r i o u s methods of a p p r o p r i a t i o n o f w e a l t h ; among them t h e e n c l o s u r e movement, t h a t d e p r i v e d t h e p e a s a n t s from a c c e s s t o communal l a n d and o t h e r r e s o u r c e s 3 " ^ t h e t a x a t i o n s y s t e m ; c o l o n i a l p l u n d e r ; u s u r y and m e r chant c a p i t a l ; and, as t h e above q u o t a t i o n s u g g e s t s , t h e c r e d i t s y s t e m . The p r i m i t i v e a c c u m u l a t i o n o f ^ A s i m i l a r p r o c e s s has t a k e n p l a c e r e c e n t l y i n B r a z i l . "At t h e h e i g h t o f t h e ' m i r a c l e ' i n 1970, 29.5 m i l l i o n B r a z i l i a n s , m o s t l y r u r a l w o r k e r s , no l o n g e r l i v e d i n t h e p l a c e t h e y had been b o r n . I t was a r e p e t i t i o n , on a much v a s t e r s c a l e , o f t h e e n c l o s u r e s i n m e d i e v a l E n g l a n d t h a t p r e c e d e d t h e i n d u s t r i a l r e v o l u t i o n " ( B r a n d f o r d and K u c i n s k y 1988:80) 35 c a p i t a l i s o n l y one s t e p i n t h e d e v e l o p m e n t o f t h e c a p i t a l i s t s y s t e m . What l i e s a t t h e h e a r t o f i t i s t h e emergence o f ' f r e e l a b o u r ' i n t h e market p l a c e . In t h e c h a p t e r e n t i t l e d " H i s t o r i c a l T e n d e n c y o f C a p i t a l A c c u m u l a t i o n " (Capital, v o l I) Marx agues t h a t t h e b i r t h and d e v e l o p m e n t o f c a p i t a l i s m h i n g e s , among o t h e r t h i n g s , on t h e d e s t r u c t i o n o f p r e -c a p i t a l i s t f o r m s o f p r i v a t e p r o p e r t y , w h i l e a t t h e same t i m e , t h e c a p i t a l i s t s y s t e m i s based on t h e s o c i a l i z a t i o n o f p r o d u c t i o n , a t h i g h e r and h i g h e r l e v e l s . The s o c i a l i z a t i o n o f p r o d u c t i o n r e q u i r e s t h e o r g a n i z a t i o n o f a new form of s t a t e , a n a t i o n a l s t a t e t h a t can e x e r t power t o subdue t h o s e t h a t o ppose t h e p r o c e s s o f i n c r e a s i n g e x p r o p r i a t i o n o f t h e many, t h e c o n c e n t r a t i o n o f p r o p e r t y o f means o f p r o d u c t i o n i n few hands, and t h e expanded s o c i a l i z a t i o n o f t h e p r o d u c t i v e p r o c e s s . The c o n c e n t r a t i o n o f c a p i t a l i s an e v e r p r e s e n t t e n d e n c y o f t h e s y s t e m . The market i s open t o a l l c o m m o d i t i e s , i n c l u d i n g t h e c a p i t a l i s t e n t e r p r i s e . T h a t i s , i n o r d e r t o s u r v i v e a s v i a b l e b u s i n e s s t h e c a p i t a l i s t e n t e r p r i s e must do two t h i n g s a t t h e same t i m e : 1. I t must be a b l e t o a p p r o p r i a t e s u r p 1 u s — v a 1 u e . In o t h e r words, i t must make a p r o f i t . 2 . I t must m a i n t a i n , i f n o t e n l a r g e , i t s p o r t i o n o f t h e ma r k e t . To a c c o m p l i s h t h i s , t o keep o r e n l a r g e a p i e c e o f t h e 36 market, i t i s n e c e s s a r y t o i n c r e a s e p r o d u c t i v i t y , and a means t o do t h a t i s by i n c r e a s i n g t h e o r g a n i c c o m p o s i t i o n o f c a p i t a l . Marx a r g u e s t h a t h i g h e r i n v e s t m e n t i n t e c h n o l o g i c a l i n n o v a t i o n r e d u c e s t h e r a t e o f p r o f i t f o r t h e i n d i v i d u a l c a p i t a l i s t , f o l l o w e d by a r e d u c t i o n a c r o s s i n d u s t r y i n t h e whole c o u n t r y , and l a t e r a b r o a d . T h a t i s , t h e r e i s a t e n d e n c y t o a r e d u c t i o n o f p r o f i t t h a t becomes i n t e r n a t i o n a l , and t h e r e f o r e , has t h e p o t e n t i a l o f d e p r e s s i n g t h e w o r l d economy. The Law o f t h e T e n d e n c y of t h e R a t e o f P r o f i t t o F a l l (Capital, C h a p t e r X I I I , v o l . I l l ) has c o u n t e r a c t i n g t e n d e n c i e s , t h a t i s , mechanisms t o w h i c h t h e c a p i t a l i s t can r e s o r t i n o r d e r t o r e — e s t a b l i s h t h e p r o f i t r a t e a t a c c e p t a b l e l e v e l s . The i m p o r t a n c e o f b r i n g i n g up t h i s s u b j e c t h e r e i s t h a t when t h e r e i s a d i m i n u t i o n o f t h e r a t e o f p r o f i t , t h e r e i s _ a c o n c o m i t a n t t e n d e n c y t o a r e d u c t i o n i n c a p i t a l i n v e s t m e n t and an e x t r a o r d i n a r y i n c r e a s e i n t h e a v a i l a b i l i t y o f money: "As soon as a s t o p p a g e [ i n t h e p r o c e s s o f r e p r o d u c t i o n of c a p i t a l ] t a k e s p l a c e , as a r e s u l t o f d e l a y e d r e t u r n s , g l u t t e d m a r k e t s , o r f a l l i n g p r i c e s , a s u p e r a b u n d a n c e o f i n d u s t r i a l c a p i t a l becomes a v a i l a b l e , b u t i n a form i n which c a n n o t p e r f o r m i t s f u n c t i o n s " (Marx 197B: v o l . I l l : 483 ) . What happened i n t h e c a s e o f t h e L a t i n A m e r i c a n i n t e r n a t i o n a l d e b t , i s t h a t an e x t r a o r d i n a r y i n c r e a s e i n t h e amount of money a v a i l a b l e i n t h e Eu r o p e a n money market f a c i l i t a t e d l e n d i n g . I t i s n o t t h e c a s e t h a t t h e c a p i t a l i s t s y s t e m d u r i n g s u c h t i m e s o f economic c r i s i s c a n n o t f i n d i n v e s t m e n t o u t l e t s , b u t r a t h e r t h a t more t h a n u s u a l amounts of money a r e a v a i l a b l e , t o g e t h e r w i t h a d e p r e s s i v e wave i n t h e l o c a l i n d u s t r y , and r e t u r n s on l o a n s made a b r o a d a r e h i g h , " I f c a p i t a l i s s e n t a b r o a d , t h i s i s n o t done b e c a u s e i t a b s o l u t e l y c o u l d n o t be a p p l i e d a t home, but b e c a u s e i t can be employed a t a h i g h e r r a t e o f p r o f i t i n a f o r e i g n c o u n t r y " (Marx 197S, v o l . 111:256). Marx's t h e o r i e s o f c a p i t a l a c c u m u l a t i o n — o f w h i c h t h e n a t i o n a l d e b t i s but one o f i t s m e c h a n i s m — t h e c y c l i c a l c r i s i s t h a t t h e v e r y p r o c e s s o f a c c u m u l a t i o n f o s t e r s , w i t h i t s c o n c o m i t a n t p r o b l e m s o f e x c e s s i v e l i q u i d i t y i n t h e money market and i t s e f f e c t s , w h i c h a r e o f p a r t i c u l a r i n t e r e s t i n t h i s work, and t h e p o l i t i c a l mechanisms t h e c a p i t a l i s t s t a t e u s e s t o overcome t h e c r i s i s , c o n s t i t u t e a c o h e r e n t t h e o r e t i c a l s t a r t i n g p o i n t a b o u t t h e L a t i n A m e r i c a n I n t e r n a t i o n a l d e b t . N a t i o n a l d e b t s have e x i s t e d p r i o r t o t h e emergence o f c a p i t a l i s m , b u t c a p i t a l i s m b r o u g h t w i t h i t p e r i o d i c e c o n o m i c c r i s i s , and a l s o , t h e r e f o r e , p e r i o d i c d e b t c r i s e s . T h i s i s n o t a c l a i m i n t h e s e n s e t h a t a l l d e b t s a r e e q u a l , but o n l y t h a t , g i v e n c e r t a i n c o n d i t i o n s , s u c h a s a r e c e s s i v e t e n d e n c y i n i n d u s t r y , and an i n c r e a s e i n t h e amounts o f l o a n a b l e money, t h e p r o s p e c t s f o r i n t e r n a t i o n a l i n d e b t e d n e s s a r e h i g h . In t h e f o l l o w i n g c h a p t e r I w i l l s t u d y some o f t h e h i s t o r i c a l e xamples o f i n t e r n a t i o n a l d e b t c r i s e s d u r i n g t h e c a p i t a l i s t e r a . Those examples show t h a t i n e v e r y c a s e t h e p r o c e s s 38 o r i g i n a t e s i n t h e most d e v e l o p e d c a p i t a l i s t c o u n t r i e s , and a l s o t h a t t h e r e have been no c a s e where an i n t e r n a t i o n a l d e b t c r i s i s has been s o l v e d by " n o r m a l " mechanisms, t h a t i s repayment o f d e b t i n f u l l and i n t i m e . F i n a l l y , i n a l l c a s e s t h e r e i s a s m a l l g r o u p w i t h i n t h e economic e l i t e s t h a t b e n e f i t s from t h e d e b t , i n b o t h t h e c r e d i t o r and d e b t o r coun t r i e s . 39 2.7 C h a p t e r Summary In t h i s C h a p t e r I have b r i e f l y examined what I i d e n t i f y a s t h e main models i n t h e s o c i o l o g y o f d e v e l o p m e n t t h a t a r e r e l e v a n t t o t h e L a t i n A m e r i c a n d e b t . M o d e r n i z a t i o n and modes o f p r o d u c t i o n p a r a d i g m s p r o v i d e p a r t i a l a n s w e r s t o t h e r e s e a r c h q u e s t i o n s posed i n t h i s work. No model can s a t i s f a c t o r i l y answer a l l q u e s t i o n s c o n c e r n i n g s u c h complex p r o b l e m s . A t b e s t , a t h e o r e t i c a l model can p r o v i d e a n a l y t i c a l t o o l s t o s h e d l i g h t on t h e main a s p e c t s o f a p r o b l e m , h o p e f u l l y w i t h e l e g a n c e . In t h e r e v i e w of M o d e r n i z a t i o n t h e o r y i t was made c l e a r t h a t t h i s p a r a d i g m i n d u l g e s i n t o o bro a d g e n e r a l i z a t i o n s , l a c k i n g a h i s t o r i c a l p e r s p e c t i v e . The l a c k of h i s t o r i c a l r e f e r e n t s i s one of m o d e r n i z a t i o n t h e o r y ' s most s e r i o u s s h o r t c o m i n g s . W i t h o u t h i s t o r i c a l p r e c i s i o n , a n y t h i n g c an be s a i d t h a t s o u n d s l i k e s c i e n c e , a l t h o u g h i n r e a l i t y i t i s what S a m i r Amin c a l l " e s o t e r i c games". Modes of p r o d u c t i o n , and, i n p a r t i c u l a r , Marx's s t u d y o f t h e d e v e l o p m e n t of c a p i t a l i s m , a r e most r e l e v a n t t o u n d e r s t a n d t h e L a t i n A m e r i c a n d e b t p r o b l e m . Of p a r t i c u l a r i m p o r t a n c e f o r t h i s T h e s i s i s Marx's a n a l y s i s o f t h e p r o c e s s o f c a p i t a l i s t a c c u m u l a t i o n , t h e t e n d e n c y t o b u i l d a p r o d u c t i v e o v e r c a p a c i t y , t h e e n s u i n g r e c e s s i v e t e n d e n c i e s , and t h e e x c e s s i v e l i q u i d i t y , 40 a l l o f w h i c h c o r r e s p o n d s w i t h t h e main f e a t u r e o f t h e p r o b l e m a d d r e s s i n t h i s T h e s i s . F i n a l l y , Marx a r g u e s t h a t s o c i e t y s o l v e s i t s c r i s i s t h r o u g h c l a s s s t r u g g l e , w hether v i o l e n t o r o t h e r w i s e . T h i s i s a l s o c o n s i s t e n t w i t h t h e ways d i f f e r e n t segments o f s o c i e t y a r e d e a l i n g w i t h t h e p r e s e n t d e b t c r i s i s i n L a t i n A m e r i c a , as t h e l a t e s t r i o t s i n C a r a c a s make so t r a g i c a l l y c l e a r . 41 CHAPTER I I I . NINETEENTH AND EARLY TWENTIETH CENTURY EXPERIENCES. 42 CHAPTER I I I . NINETEENTH AND EARLY TWENTIETH CENTURY EXPERIENCES. 3.1 Debt C r i s i s : B a s i c C h a r a c t e r i s t i c s A d e b t c r i s i s w i l l o c c u r when a d e b t o r c a n n o t meet o b l i g a -t i o n s t o pay a l o a n and d e f a u l t s , o r i n o r d e r t o a v o i d d e f a u l t , t h e c r e d i t o r r e s o r t s t o r e m e d i a l a c t i o n s s u c h as r e c y c l i n g l o a n s 1 ' w r i t e - o f f s , and r e d u c i n g i n t e r e s t s . A n o t h e r c h a r a c t e r i s t i c o f c r i s i s i s t h a t i t must be r e c o g n i z e d as s u c h by t h e c r e d i t o r o r t h e b o r r o w e r . Debt c r i s i s i s an o l d phenomenon w i t h no b o u n d a r i e s . A l l d e b t c r i s e s , p a s t and p r e s e n t , can be d i v i d e d i n two main s t a g e s . The f i r s t i s t h e b u i l d - u p s t a g e , and t h e s e c o n d one i s t h e c r i s i s s t a g e p r o p e r . D u r i n g t h e f i r s t s t a g e t h e r e a r e some f e a t u r e s t h a t a r e a l m o s t a l w a y s p r e s e n t , w h e t h e r i n c o n j u n c t i o n o r i s o l a t e d . T h e s e c h a r a c t e r i s t i c s a r e ; t h e e x c e s s i v e l i q u i d i t y o f t h e money market; h i g h s p r e a d s * ; r i s i n g p r i c e of some c o m m o d i t i e s ; a g g r e s s i v e l e n d i n g p r a c t i c e s ; c o -r r u p t i o n ; d i s a s t e r myopia; c a p i t a l i n v e s t m e n t i n l a r g e e c onomic p r o j e c t s i n t h e b o r r o w i n g c o u n t r i e s , and heavy e x p e n d i t u r e s i n weapons (See C h a p t e r V I I ) . 3"~* F o r t h e meaning o f terms used h e r e s e e A p p e n d i x I, G l o s s a r y . 43 The s e c o n d s t a g e b e g i n s w i t h s i g n s o f p o s s i b l e d e f a u l t , w h i c h can be a s h a r p d e c l i n e i n t h e p r i c e o f c o m m o d i t i e s p r o d u c e d by t h e b o r r o w e r , s e r i o u s l y j e o p a r d i z i n g i t s a b i l i t y t o pay. A t t h i s p o i n t i t i s i m p o r t a n t t o s t r e s s t h a t t h e f i r s t s i g n s o f d e f a u l t must n o t be c o n f u s e d w i t h t h e i n a b i l i t y o f t h e d e b t o r n a t i o n t o c a r r y a l a r g e d e b t . T h a t i n a b i l i t y i s u s u a l l y p r e s e n t l o n g b e f o r e d e f a u l t becomes a r e a l t h r e a t , but i s v e r y o f t e n i g n o r e d by b o t h s i d e s , t h e c r e d i t o r as w e l l as t h e d e b t o r . I m e n t i o n e d above t h a t t h e l e n d e r a t t i t u d e o f i g n o r i n g t h e i m p e n d i n g c r i s i s i s c a l l e d d i s a s t e r myopia. The f i r s t s i g n s o f p o s s i b l e d e f a u l t a r e sometimes f o l l o w e d by p a n i c among t h e l e n d e r s . When t h e p r o s p e c t s o f d e f a u l t b-ecome u n d e n i a b l e , t h e p a r t i e s may l o o k f o r some s o l u t i o n s s u c h a s t h e l e n d e r s ' agreement t o r e - s c h e d u l e t h e d e b t , o r t o p r o v i d e new l o a n s t h a t would be more manageable t o t h e d e b t o r . The c r e d i t o r may a l s o s e l l t h e d e b t i n t h e market a t a d i s c o u n t i n o r d e r t o c u t l o s s e s . O t h e r a s p e c t s o f t h e c r i t i c a l s t a g e a r e t h e s o c i a l i z a t i o n o f t h e n e g a t i v e c o n s e q u e n c e s o f t h e d e b t i n b o t h c o u n t r i e s , t h e c r e d i t o r and t h e d e b t o r . The i n t e r n a t i o n a l d e b t i s t h e s o u r c e o f huge p r o f i t s f o r s m a l l g r o u p s i n t h e c r e d i t o r and d e b t o r n a t i o n s . ( T h i s s u b j e c t w i l l be d i s c u s s e d f u r t h e r i n C h a p t e r V I I . ) 44 A n o t h e r f e a t u r e of t h e c r i t i c a l s t a g e i s t h e i n s i s t e n c e on t h e p a r t o f t h e c r e d i t o r on f u l l payment r e g a r d l e s s of how l o n g i t may t a k e . In t h e 1 9 t h c e n t u r y and b e g i n n i n g o f t h e 2 0 t h , t h e use o f f o r c e and o t h e r f o r m s o f c o e r c i o n t o e n f o r c e payment were o f t e n i n v o k e d . In t h e f o l l o w i n g segment o f t h i s c h a p t e r I w i l l examine some h i s t o r i c a l e x a m p l e s o f d e b t c r i s e s i n L a t i n A m e r i c a and o t h e r r e g i o n s o f t h e w o r l d . T h e s e c a s e s i l l u s t r a t e some o f t h e f e a t u r e s o f d e b t c r i s i s I have o u t l i n e d . In t h e f o l l o w i n g c h a p t e r I w i l l f o c u s o n l y on t h e p r e s e n t L a t i n A m e r i c a n d e b t c r i s i s . W i th v a r y i n g d e g r e e s o f i n t e n s i t y i n i t s n e g a t i v e e f f e c t s and p r e s e n t i n g a t l e a s t two o r more o f t h e b a s i c f e a t u r e s i n d i c a t e d above, t h e r e have been d e b t c r i s i s i n t h e A m e r i c a s and o t h e r c o n t i n e n t s i n t h e 1 9 t h and 2 0 t h c e n t u r i e s . These c r i s e s had t h e i r c e n t r e m a i n l y - b u t n o t e x c l u s i v e l y — i n E u r o p e and A m e r i c a , and took p l a c e i n 180B-1B10; 1B23-1825; 1835-1B45; 1856-1861; 1885-1B90; 1910-1913; ( D e l a m a i d e 1984:96-97; GA T T - F l y 1985:8) 1937 ( F e l i x 1987:30). The c o n t e m p o r a r y c r i s i s , c an be c a l l e d t h e 1982 o r M e x i c a n d e b t c r i s i s , b e c a u s e i t was on A u g u s t o f 1982 when M e x i c o s t o p p e d payments on i t s d e b t p r i n c i p a l 1't D u r i n g t h e l a t e s t d e b t c r i s i s t h e f i r s t d e f a u l t e r s were N o r t h Korea and Rumania i n 1975 ( D e l a m a i d e , 1984:71-72), but t h e i r d e b t s were c o n s i d e r a b l y s m a l l e r t h a n t h a t o f M e x i c o and d i d n o t r a i s e t h e p a n i c t h a t t h e l a t t e r c a s e d i d . 4 5 3.2 H i s t o r i c a l E x p e r i e n c e s 3.2.1 E a r l y Debt The p r e s e n t i n t e r n a t i o n a l L a t i n A m e r i c a n d e b t i s i n many r e s p e c t s s i m i l a r t o and a t t h e same time d i f f e r e n t from p a s t e x p e r i e n c e s of i n d e b t e d n e s s . The c u r r e n t c r i s i s i s c h a r a c t e r i z e d by t h e e x p o s u r e o f t h e l a r g e i n t e r n a t i o n a l banks f u n d s , w h i c h was n o t t h e r u l e i n t h e p a s t when t h e banks l i m i t e d t h e m s e l v e s a l m o s t e x c l u s i v e l y t o t h e r o l e o f i n t e r m e d i a r i e s , s e l l i n g bonds i s s u e d by t h e b o r r o w i n g c o u n t r i e s . I n t e r n a t i o n a l b o r r o w i n g i s a v e r y o l d p r a c t i c e . I t e x i s t e d b e f o r e t h e emergence o f c a p i t a l i s m , as w e l l a s d u r i n g a l l i t s s t a g e s 1 ' . H i s t o r i c a l l y t h e r e have been d i f f e r e n t t y p e s o f i n d e b t e d n e s s . T h e r e was t h e i n d e b t e d n e s s o f t h e e a r l y s t a g e s o f E u r o p e a n c o l o n i a l i s m , when t h e E u r o p e a n r u l i n g c l a s s e s borrowed t o f i n a n c e e x p l o r a t i o n . L a t e r some o f t h e s e powers borrowed t o f i n a n c e a p a r a s i t i c c l a s s a s d i d S p a i n , o r t o pay a r m i e s , o r t o b u i l d an ec o n o m i c i n f r a s t r u c t u r e o f r o a d s , r a i l w a y s , dams, c a n a l s , e t c . In some c a s e s l e n d i n g was us e d t o e x e r t p o l i t i c a l i n f l u e n c e o r s i m p l y t o j u s t i f y c o e r c i o n . Y e t , p u b l i c i n d e b t e d n e s s i s epiphenomena1 t o t h e b i r t h , e s t a b l i s h m e n t and growth o f t h e c a p i t a l i s t s y s t e m i n E u r o p e as F o r a d i s c u s s i o n o f p u b l i c d e b t s i n c e a n t i q u i t y and w i t h p a r t i c u l a r e m p h a s i s on t h e v i e w s o f t h e c l a s s i c e c o n o m i s t s , s e e L a b b e n s , 1987. 46 t h e hegemonic form o f r e l a t i o n s o f p r o d u c t i o n . C a p i t a l i s t d e v e l o p m e n t depends e s s e n t i a l l y on t h e e x i s t e n c e of a f r e e m a r k e t o f l a b o u r (Marx 1 9 7 8 : v o l . I, 1 6 7 ) , but by i t s e l f t h i s l a b o u r market i s n o t a s u f f i c i e n t c o n d i t i o n . T h e r e a r e o t h e r n e c e s s a r y c o n d i t i o n s , s u c h as t h e c i r c u l a t i o n o f money and c o m m o d i t i e s , as w e l l a s t h e a c c u m u l a t i o n o f c a p i t a l f o r i n v e s t m e n t . The e a r l y s t a g e s o f E u r o p e a n c a p i t a l i s m were p a r t i a l l y f i n a n c e d w i t h borrowed money, a c c o r d i n g t o K o r n e r "Dutch m a n u f a c t u r i n g [was] b u i l t up w i t h t h e a i d o f I t a l i a n c a p i t a l . D u t c h c a p i t a l h e l p e d t o f i n a n c e E n g l i s h f a c t o r i e s and t o l a u n c h t h e i n d u s t r i a l r e v o l u t i o n ( K o r n e r 1 986:13)". F u r t h e r m o r e , huge amounts o f w e a l t h i n g o l d and s i l v e r were e x t r a c t e d by t h e E u r o p e a n s from t h e i r c o l o n i a l p o s s e s s i o n s , t h u s g r e a t l y h e l p i n g t o f i n a n c e t h e d e v e l o p m e n t o f t h e i r e c o n o m i e s . D i g b y n o t e s t h a t e s t i m a t e s had been made a c c o r d i n g t o w h i c h between P l a s s e y and W a t e r l o o - a p e r i o d o f c r u c i a l impor— t a n c e f o r t h e d e v e l o p m e n t o f B r i t i s h c a p i t a l i s m - between £ 5 0 0 , 0 0 0 , 0 0 0 and £ 1 , 0 0 0 , 0 0 0 , 0 0 0 w e a l t h o f t r e a s u r e was t a k e n by B r i t a i n from I n d i a . The v a s t n e s s o f t h i s sum can be v i s u a l i z e d when one c o n s i d e r s t h a t a t t h e t u r n o f t h e c e n t u r y t h e a g g r e g a t e c a p i t a l o f a l l j o i n t s t o c k c ompanies o p e r a t i n g i n I n d i a amounted t o £ 3 6 , 0 0 0 , 0 0 0 . . . t h e a u t h o r i t a -t i v e I n d i a n s t a t i s t i c i a n s , K.T. Shah and K.J. Khambate, c a l c u l a t e d t h a t i n t h e e a r l y d e c a d e s o f t h e c u r r e n t c e n t u r y B r i t a i n a p p r o p r i a t e d a n n u a l l y under one t i t l e o r a n o t h e r o v e r 10 p e r c e n t o f I n d i a ' s g r o s s n a t i o n a l income (Baran 1957:145). 47 D u r i n g t h e f i f t e e n t h and s i x t e e n t h c e n t u r y l a r g e amounts o f w e a l t h , i n s i l v e r and g o l d , were t r a n s f e r r e d f r o m L a t i n A m e r i c a t o E u r o p e . I t has been e s t i m a t e d t h a t between 1503 and 1660 a t o t a l of 1B5,000 k i l o g r a m s o f g o l d and 16,000,000 k i l o g r a m s o f s i l v e r , t h e e q u i v a l e n t o f t h r e e t i m e s t h e E u r o p e a n r e s e r v e s , were t r a n s f e r r e d from L a t i n A m e r i c a t o S p a i n ( G a l e a n o 1973:33). T h e s e f i g u r e s do n o t i n c l u d e t h e l a r g e amounts Df g o l d and s i l v e r smuggled from L a t i n A m e r i c a t o t h e P h i l i p p i n e s and C h i n a ( G a l e a n o 1973:33; Wolf 1982:153). Most of t h e w e a l t h t a k e n from L a t i n A m e r i c a t o S p a i n d i d n o t r e m a i n t h e r e . A f t e r a r r i v i n g i n S e v i l l e , most o f i t l e f t S p a i n t o pay f o r t h e Crown's d e b t s t o German, Genoese, and F l e m i s h b a n k e r s . O n l y a p o r t i o n r e m a i n e d i n t h e p e n i n s u l a t o pay S p a n i s h b a n k e r s ( G a l e a n o 1 9 73:34). A n o t h e r p a r t o f i t was d e s t i n e d t o pay f o r i n d u s t r i a l goods t h a t S p a i n and i t s c o l o n i e s bought from E n g l a n d , F r a n c e and o t h e r E u r o p e a n c o u n t r i e s . In s p i t e o f t h e huge amounts o f w e a l t h t r a n s f e r r e d t o t h e m e t r o p o l i t a n powers, c a p i t a l i s t d e v e l o p m e n t r e q u i r e d l o a n s , new r e l a t i o n s o f p r o d u c t i o n , t e c h n o l o g i c a l i n n o v a t i o n s and t h e e x t e n s i o n o f t h e m a r k e t s . T h a t i s , t h e d e v e l o p m e n t of t h e new s o c i a l o r g a n i z a t i o n t h a t emerged from t h e M i d d l e Ages i s f u n d a m e n t a l l y a p r o c e s s o f i n t e r n a l r e - o r g a n i z a t i o n r a t h e r than t h e r e s u l t of e x t e r n a l e v e n t s s u c h as t h e t r a n s f e r o f w e a l t h t o E u r o p e . In f a c t , t h e example o f S p a i n , makes c l e a r t h a t i n s p i t e o f t h e f l o o d o f w e a l t h S p a i n ' s c a p i t a l i s t 48 d e v e l o p m e n t was much s l o w e r t h a n t h a t o f o t h e r E u r o p e a n c o u n t r i e s . 3.2.2 Egypt E g y p t ' s 1 9 t h c e n t u r y i n d e b t e d n e s s was l a r g e l y due t o l a r g e i n v e s t m e n t i n economic d e v e l o p m e n t n o t i m m e d i a t e l y b e n e f i c i a l t o t h e E g y p t i a n s , b u t c l e a r l y t o t h e a d v a n t a g e o f t h e main Eu r o p e a n powers, p a r t i c u l a r l y E n g l a n d and F r a n c e . From 1862 t o 1876, E g y p t ' s i n d e b t e d n e s s grew from £ 3 . 2 m i l l i o n t o £ 6 8 . 5 m i l l i o n . The money was borrowed from E n g l a n d and F r a n c e t o pay f o r t h e m o d e r n i z a t i o n o f t h e c o u n t r y 1 6 , t h e c o n s t r u c t i o n o f i r r i g a t i o n p l a n t s , new r o a d s and t h e m o d e r n i z a t i o n o f t h e army. More i m p o r t a n t l y , t h e c o n s t r u c t i o n o f t h e Suez C a n a l p l u n g e d E g y p t i n t o an unmanageable d e b t . I t was assumed by b o t h , t h e l e n d e r and t h e E g y p t i a n a u t h o r i t i e s , t h a t E g y p t would be a b l e t o r e p a y t h e l o a n s w i t h t h e p r o f i t f r o m t h e s a l e o f c o t t o n . The p r i c e o f c o t t o n had s h o t — u p b e c a u s e . t h e A m e r i c a n C i v i l War had c u t s u p p l i e s of c o t t o n from A m e r i c a and t h e r e f o r e economic p r o s p e c t s f o r E g y p t were good. The end o f t h e A m e r i c a n C i v i l War meant d i s a s t e r f o r t h e E g y p t i a n econom-y. Two t h i r d s o f t h e s t a t e budget and 50"/. o f e x p o r t e a r n i n g s were d e s t i n e d t o pay f o r t h e i r f o r e i g n o b l i g a t i o n s ( K o r n e r "My c o u n t r y i s no l o n g e r p a r t of A f r i c a , we a r e p a r t o f E u r o p e " - t h i s was t h e motto w i t h w h i c h t h e E g y p t i a n khedivs ( V i c e r o y ) I s m a i l , from 1863 onwards a t t e m p t e d t o a c c e l e r a t e t h e m o d e r n i z a t i o n and ' E u r o p e i z a t i o n ' o f E g y p t " ( K o r n e r 1986: 1 4 ) . 49 1986:15); c o n s e q u e n t l y , B r i t a i n and F r a n c e f o r c e d E g y p t t o a c c e p t an i n t e r n a t i o n a l c o n t r o l o r g a n , t h e Commission de la Dette Egyptienne whose t a s k was t o e n s u r e t h e repayment o f l o a n s . The economic c r i s i s became a p o l i t i c a l one due t o m a s s i v e d i s c o n t e n t . The B r i t i s h u s e d r e v o l t by t h e p e a s a n t s and t h e n a t i o n a l i s t f o r c e s a s a p r e t e x t t o o c c u p y and annex t h e c o u n t r y i n 1882 ( K o r n e r 1986:15). 3.2.3 T u r k e y The T u r k i s h d e b t was t h e p r o d u c t o f p o l i t i c a l r a t h e r t h a n economic c o n s i d e r a t i o n s . I f t h e c a s e o f I s m a i l i n E g y p t s u g g e s t s t h e image o f an e n l i g h t e n e d a u t o c r a t , t h e T u r k i s h example s u g g e s t s t h a t o f a f r i g h t e n e d a u t o c r a c y . The T u r k i s h d r i v e t o w a r d s m o d e r n i z a t i o n was g r e a t l y s t i m u l a t e d by t h e f e a r o f R u s s i a n e x p a n s i o n . T u r k e y began b o r r o w i n g i n o r d e r t o f i n a n c e t h e army and t h e c o n s t r u c t i o n o f r a i l w a y s and p o r t s . Her main l e n d e r s were E n g l a n d , F r a n c e , and l a t e r Germany. K o r n e r r e p o r t s t h a t t h e T u r k i s h d e b t grew f r o m 5.5 m i l l i o n T u r k i s h pounds i n 1874 t o 218 m i l l i o n i n 1885 ( K o r n e r 1987:15) and, as i n t h e E g y p t i a n c a s e , T u r k e y had t o a c c e p t i n t e r n a t i o n a l c o n t r o l o v e r i t s f i n a n c e s e n f o r c e a d by t h e Conseil d'Administration de la Dette Publique Ottomane, t h a t c o l l e c t e d t a x e s on s e v e r a l i t e m s and r e c e i v e d 107. o f a l l r a i l w a y income ( I b i d . , 1 6 ) . 50 3.2.4 L a t i n A m e r i c a i n t h e 1 9 t h C e n t u r y . As soon as t h e L a t i n A m e r i c a n c o u n t r i e s g a i n e d t h e i r p o l i t i -c a l i n d e p e n d e n c e from S p a i n t h e y f e l l i n t o d e b t w i t h B r i t i s h banks. Some a u t h o r s even a r g u e t h a t some of t h e L a t i n A m e r i c a n i n d e p e n d e n c e wars were f i n a n c e d w i t h B r i t i s h c a p i t a l ( K o r n e r 1986:16; D e l a m a i d e 1984:96). Those d e b t s became unmanageable v e r y q u i c k l y . Most i n t e r n a t i o n a l b a n k i n g a c t i v i t y a t t h a t t i m e c o n s i s t e d o f f l o a t i n g f o r e i g n bonds, t h a t i s , t h e banks a c t e d as middlemen and u n d e r w r i t e r s i n t h e s a l e o f bonds i s s u e d by s o v e r e i g n c o u n t r i e s . The banks' p r o f i t s came m a i n l y from c o m m i s s i o n s and f e e s . The main l e n d e r t o L a t i n A m e r i c a was t h e B r i t i s h B a r i n g B r o t h e r s Bank, an i n s t i t u t i o n w h i c h had been i n v o l v e d i n l a r g e s c a l e i n t e r n a t i o n a l f i n a n c i n g f o r some t i m e . F o r example, i n 1817 t h e B a r i n g Bank l o a n e d 100 m i l l i o n f r a n c s t o F r a n c e , t o h e l p i t r e c u p e r a t e from t h e a f t e r m a t h o f t h e N a p o l e o n i c wars. T h i s was a l s o t h e bank t h a t f i n a n c e d t h e A m e r i c a n p u r c h a s e of A l a s k a from R u s s i a . D e a l i n g w i t h t h e B r i t i s h b a n k e r s was n e v e r e a s y f o r t h e new L a t i n A m e r i c a n n a t i o n s . In 1824, A r g e n t i n a n e g o t i a t e d a l o a n t o Buenos A i r e s p r o v i n c e f o r £1 m i l l i o n i n g o l d . A f t e r i n t e r e s t , c o m m i s s i o n s , f e e s and o t h e r bank g r a t u i t i e s o n l y £ 5 7 0 , 0 0 0 i n "bank n o t e s " a r r i v e d i n Buenos A i r e s . The 51 A r g e n t i n e a n s had t o pay t h i s l o a n i n g o l d , and i t took them u n t i l t h e b e g i n n i n g o f t h i s c e n t u r y t o f i n a l l y c a n c e l t h i s d e b t , a f t e r i t had r e a c h e d £4 m i l l i o n ( G a l e a n o 1973:217-218). Rene de C h a t e a u b r i a n d — q u o t e d by G a l e a n o — s a i d t h a t between 1822 and 1826 B r i t a i n had e x t e n d e d l o a n s f o r £21 mi 11 i o n but a f t e r d e d u c t i o n o f i n t e r e s t s and middlemen's c o m m i s s i o n s s c a r c e l y £7 m i l l i o n had a c t u a l l y r e a c h e d L a t i n A m e r i c a ( I b i d , 2 1 6 ) " . I f t h e d e b t o r c o u n t r i e s f a i l e d t o meet t h e i r o b l i g a t i o n s , a l l k i n d s o f p r e s s u r e s were put upon them, i n c l u d i n g open m i l i t a r y o c c u p a t i o n . The E u r o p e a n example i n E g y p t and t h e Ottoman E m p i r e — t a k i n g o v e r t h o s e c o u n t r i e s ' f i n a n c e s , p a r t i c u l a r l y t h e i r c u s t o m s — was w i d e l y u s e d i n L a t i n A m e r i c a , e s p e c i a l l y by t h e U n i t e d S t a t e s . In 1858, U.S. P r e s i d e n t James Buchanan f o r c e d N i c a r a g u a t o g r a n t t h e U.S. f r e e t r a n s i t as w e l l as t h e e x a c t i o n o f t a x e s on h e r t e r r i t o r y . E a r l i e r , i n 1856 W i l l i a m W a l k e r had f o r c i b l y t a k e n c o n t r o l o f t h e c o u n t r y , a p p o i n t e d h i m s e l f P r e s i d e n t , and t o g e t h e r w i t h d i p l o m a t i c r e c o g n i t i o n , W a s h i n g t o n e x t e n d e d a l o a n t o t h e Walker g overnment. W a l k e r ' s f i r s t a c t i o n s as s e l f - a p p o i n t e d P r e s i d e n t were t o d e c l a r e E n g l i s h a s t h e o f f i c i a l l a n g u a g e and t o r e s t o r e s l a v e r y ( G u e r r a 1 9 7 8:16). In 1904, T h e o d o r e R o o s e v e l t announced t h a t t h e U.S. was w i l l i n g t o i n t e r v e n e i n any L a t i n A m e r i c a n c o u n t r y t h a t d i d n o t pay i t s d e b t s ( G u e r r a 1978:pp.16-23). T h a t same y e a r R o o s e v e l t s e n t tax c o l l e c t o r s 52 t o t h e D o m i n i c a n R e p u b l i c t o c o l l e c t c u s t o m s r e v e n u e s "for E u r o p e a n c r e d i t o r s ( D e l a m a i d e 1984: 1 0 0 ) . R o o s e v e l t was keen on i m p l e m e n t i n g t h e Monroe D o c t r i n e o f 1823 and t o do so he had t o p r e v e n t E u r o p e a n g u n b o a t s from r e p e a t i n g t h e i r bombard-ment o f L a t i n A m e r i c a n c i t i e s as Germans and B r i t i s h had done i n V e n e z u e l a i n o r d e r t o c o l l e c t d e b t s . In 1911, Honduras was f o r c e d t o a c c e p t a U.S.$10 m i l l i o n l o a n , i n e x c h a n g e f o r U.S. c o n t r o l o v e r i t s customs and o t h e r p r i v i l e g e s ( G u e r r a 1978:24). In 1914 U.S. t r o o p s l a n d e d i n H a i t i t o s e c u r e t h a t c o u n t r y ' s N a t i o n a l Bank's g o l d r e s e r v e s t o pay f o r d e b t s ( D e l a m a i d e 1984:100; G u e r r a 1978:24-25) XT 3.2.5 A r g e n t i n a and t h e B a r i n g C r i s i s Any f i n a n c i a l c r i s i s has a s y m m e t r i c a l e f f e c t s on t h e c r e d i t -o r and t h e d e b t o r and t h e r e a r e a l m o s t no e x c e p t i o n s t o t h a t r u l e . Thus what i s u n i q u e t o t h e B a r i n g C r i s i s o f 1890s, i s t h a t f o r t h e f i r s t t i m e , t h e e f f e c t s o f d e f a u l t were d e e p l y f e l t by t h e c r e d i t o r . I t a l m o s t b r o k e t h e B a r i n g B r o t h e r s Bank. As a c o n s e q u e n c e o f t h e A r g e n t i n e a n and Uruguayan d e f a u l t i n 1890 t h e r e was a run on t h e B a r i n g Bank. T h i s G u e r r a r e p o r t s t h a t t h e i n v a s i o n was n o t o n l y t o s e c u r e H a i t i ' s g o l d but a l s o t o f o r c e t h e c o u n t r y t o c e d e two i s l a n d s t o t h e US. D e l a m a i d e g i v e s 1915 as t h e d a t e o f t h e m i l i t a r y i n t e r -v e n t i o n . 1914 c o r r e s p o n d s t o t h e d a t e o f t h e m i l i t a r y i n t e r v e n t i o n t o t a k e o v e r t h e g o l d , and t h e 1915 i n t e r v e n t i o n was aimed a t p r e v e n t i n g Dr. R o s a l v o Bobo, a n a t i o n a l i s t , from t a k i n g o f f i c e as P r e s i d e n t . The M a r i n e s r e m a i n e d i n H a i t i f r o m 1915 u n t i l 1934 ( G u e r r a e t a l , 1978: 2 5 ) . 53 c r i s i s d i d n o t l e a d t o t h e Bank's f a i l u r e , t h a n k s t o t h e i n t e r v e n t i o n o f t h e Bank o f E n g l a n d , R o t h s c h i l d , G l y n , M i l l s , t h e B r i t i s h T r e a s u r y , th e F r e n c h Bank, C u r r i e ' s , and J . S . Morgan, a l l o f w h i c h a c t e d as l e n d e r s o f l a s t r e s o r t (Sampson 1981:36). The f i n a n c i a l r e s o u r c e s borrowed by A r g e n t i n a were d e s t i n e d a l m o s t e x c l u s i v e l y f o r t h e b e n e f i t o f t h e o l i g a r c h y , t h e m i l i t a r y , and t h e B r i t i s h , , w h i c h w i t h t h e u s e o f p u b l i c f u n d s , f i n a n c e d t h e many " B r i t i s h " r a i l w a y s b u i l t i n t h e c o u n t r y . A r g e n t i n e a n c a p i t a l i m p o r t s o f t h e 1880s a r e summarized i n T a b l e 5. F e l i x (1987) n o t e s t h a t t h e l a r g e sums o f p u b l i c s e c t o r b o r r o w i n g a r e m i s l e a d i n g s i n c e o n l y a s m a l l p o r t i o n o f t h o s e f u n d s were d e s t i n e d t o f i n a n c e p u b l i c works. Most o f t h e money went t o pay f o r t h e p u r c h a s e o f f a r m s , " r e s i d e n t i a l and c o m m e r c i a l c o n s t r u c t i o n . . . as w e l l as t h e b u r g e o n i n g l a n d e d and c o m m e r c i a l e l i t e " ( F e l i x 1 9 8 7 : 6 ) . The A r g e n t i n e a n r u l i n g c l a s s was f i n a n c i n g r a i l w a y s t h a t were B r i t i s h p r o p e r t y ; t h e e x p a n s i o n t o w a r d s the newly open pampas xf* and t h e c r e a t i o n o f t h e new haciendas 1* 5" i n t h e i n t e r i o r o f t h e c o u n t r y . 1 S G r a s s l a n d s t h a t c o v e r a l a r g e p a r t o f t h e c o u n t r y and a r e i d e a l f o r t h e c a t t l e i n d u s t r y . L a r g e l a n d h o l d i n g s . 54 TABLE 5 A r g e n t i n e C a p i t a l I n f l o w s i n t h e 1880s. ( V a l u e d i n G o l d P e s o s * ) P u b l i c S e c t o r A c c o u n t P r i v a t e S e c t o r A c c o u n t 1880-1885 105,000,000 44,300,000 1886-1889 465,000,000 425,000,000 * The A r g e n t i n e g o l d peso e q u a l l e d 0.2 pound s t e r l i n g , o r a b o u t 97 c e n t s U.S. S o u r c e : F e l i x , 1987: 7. 55 3.2.6 L a t i n A m e r i c a ' s Debt i n t h e E a r l y 2 0 t h C e n t u r y The L a t i n A m e r i c a n d e b t c r i s i s o f t h e 1930s f o l l o w e d t h e same p a t h as t h e , p r e v i o u s o n e s , i n which t h e main l e n d e r ' s a g e n t s were t h e p r i v a t e banks. The l a r g e E u r o p e a n and N o r t h A m e r i c a n banks i n v o l v e d were m o s t l y i n t e r m e d i a r i e s , f l o a t i n g bonds i s s u e d by f o r e i g n g o v e r n m e n t s i n t h e banks' home f i n a n c i a l m a r k e t s . In t h e i n i t i a l s t a g e t h e r e was a l e n d i n g boom, m a i n l y from t h e U n i t e d S t a t e s . B r i t a i n had been d i s p l a c e d by t h e A m e r i c a n s as t h e more i m p o r t a n t f i n a n c i a l c e n t r e a f t e r t h e F i r s t W o rld War. T h i s boom was r e f l e c t e d i n th e i n c r e a s e i n t h e l e n d i n g t o L a t i n A m e r i c a , f r o m 1914 t o 1929 t h e r e g i o n i n c r e a s e d i t s b o r r o w i n g from US$2.2 b i l l i o n t o U.S.$4.1 b i l l i o n ( K o r n e r 1986:17). B r i t i s h f i n a n c i a l m a r k e t s f l o a t e d a t o t a l o f a p p r o x i m a t e l y U.S.$4.1 b i l l i o n i n L a t i n A m e r i c a n bonds d u r i n g t h e 1920s, w h i l e t h e U.S. h a n d l e d a r o u n d U.S.$9.3 b i l l i o n between 1920 and 1930, f o r a l l f o r e i g n bonds and n o t o n l y t h e L a t i n A m e r i c a n 3.2.7 The P e r u v i a n Case Between 1920 and 1930 t w o - t h i r d s of a l l i n t e r n a t i o n a l l e n d i n g — a p p r o x i m a t e l y U.S.$9.3 b i l l i o n — o r i g i n a t e d i n N o r t h A m e r i c a ( F e l i x 1 984:4). B e g i n n i n g i n 1925 t h e U n i t e d S t a t e s took t h e l e a d i n l e n d i n g t o L a t i n A m e r i c a and t h i s C a l c u l a t e d on t h e b a s i s o f t h e f i g u r e s p r o v i d e d by F e l i x , 1984: 14. 56 t r e n d c o n t i n u e d u n t i l 1930. The heavy A m e r i c a n l e n d i n g c o n t i n u e d f o r a l m o s t t e n y e a r s p r i o r t o t h e c r i s i s o f 1930, i n what r e p r e s e n t s a p a t t e r n t h a t r e p e a t s i t s e l f i n a l m o s t a l l d e b t c r i s e s . A good c a s e i n p o i n t i s P e r u i n t h e 1930s, as i l l u s t r a t e d i n T a b l e 6. The s i g n i f i c a n c e o f t h e f i g u r e s i s t h a t t h e r e i s a r a p i d g r o w t h o f l e n d i n g . N o t i c e t h e g r o w t h o f t h e U.S. p o r t i o n o f t h e P e r u v i a n d e b t between 1923 and 1930. Between 1923 and 1924 i t a l m o s t q u a d r u p l e d , and t h e n i t jumps t e n t i m e s from 1924 t o 192S, when i t began t o d e c l i n e . P e r u i s a p r i m e example o f t h e t y p e of i n d e b t e d n e s s p r o c e s s t h a t may be c a l l e d p r o g r e s s a t any c o s t , where " p r o g r e s s " i s an e x p e n s i v e i m p o r t i t e m f i n a n c e d w i t h f o r e i g n c r e d i t . In t h e f i r s t h a l f o f t h e 1920s, t h e t h e n P e r u v i a n P r e s i d e n t , A u g u s t o L e g i a , wanted t o r i d P e r u o f t h e l a n d e d o l i g a r c h y as t h e main p o l i t i c a l f o r c e i n t h e c o u n t r y , and i n t e n d e d t o use t h e s t a t e p o l i t i c a l and economic power t o do s o . S t a l l i n g s o b s e r v e s t h a t i n s p i t e o f h i s e f f o r t s L e g i a was u n a b l e t o s e c u r e s u b s t a n t i a l l o a n s f r om t h e U.S. u n t i l 1924. T h a t y e a r t h e s i t u a t i o n c hanged d r a m a t i c a l l y . The U.S. i n v e s t o r s became " e n t r a n c e d " w i t h t h e h i g h i n t e r e s t r a t e o f f o r e i g n bonds, amongst them t h o s e o f P e r u ( S t a l l i n g s 1 985:168). But s p e c u l a t i o n i n t h e U.S. s t o c k market s o a r e d and, as a c o n s e q u e n c e , by 1929 t h e r e were no f u n d s a v a i l a b l e f o r t h e L e g i a government. W i t h th e l a c k o f money p u b l i c works came t o a h a l t , unemployment i n t h e c o n s t r u c t i o n s e c t o r r o s e t o 707., government e x p e n d i t u r e s were 57 TABLE 6 P e r u v i a n F o r e i g n D e b t , 1919-1930.(Mi11 i o n s US* and Pounds S t e r l i n g ) Y e a r Debt i n US* Debt i n Pounds T o t a l = U S « * 1919 1.0 4.4 1920 1.0 3.7 1921 0.9 3.5 1922 2.4 2.7 14.4 1923 2.1 3.4 17.7 1924 8.8 3.3 23.4 1925 13.5 3.2 29.0 1926 30. 5 3.1 45.6 1927 66.4 3.0 81 .0 1928 90.7 4.9 114 . 5 1929 89.7 3.6 107.2 1930 88. 5 3.5 105.3 * The t o t a l i n US* was o b t a i n by c o n v e r t i n g t h e B r i t i s h pounds a t t h e i r a v e r a g e a n n u a l e x c h a n g e r a t e i n New Y o r k . S o u r c e : S t a l l i n g s , 1985: 266. 58 c u t , and t o make m a t t e r s worse, t h e p r i c e o f e x p o r t c o m m o d i t i e s were d e p r e s s e d , making t h e economic s i t u a t i o n e x t r e m e l y d i f f i c u l t and l e a d i n g t o p o l i t i c a l u n r e s t . In A u g u s t 1930 a m i l i t a r y coup d e p o s e d L e g i a , who d i e d i n p r i s o n two y e a r s l a t e r . S a n e h e z - C e r r o , t h e l e a d e r o f t h e m i l i t a r y u p r i s i n g h e l p e d t o r e s t o r e t h e o l i g a r c h y t o p o l i t i c a l power, f a c i l i t a t e d by t h e " . . . f a c t t h a t t h e i r [ t h e o l i g a r c h y ' s ] e conomic power had been c u t back b ut n e v e r e l i m i n a t e d " ( S t a l l i n g s 1985:269). These e v e n t s d e m o n s t r a t e a b a s i c p a t t e r n t h a t c l o s e l y r e s e m b l e s t h e f o r m a t i v e p r o c e s s o f d e b t c r i s i s a s we know i t t o d a y . At f i r s t , t h e r e a r e h i g h y i e l d s f o r t h e i n v e s t o r s , banks o r bond h o l d e r s , i n t h e f o r e i g n p l a c e m e n t o f f u n d s ; s e c o n d , t h e r e i s a " b u l l i s h * " s t o c k market i n t h e c a p i t a l i s t d e v e l o p e d c o u n t r i e s ; t h i r d , t h e h i g h demand i n t h e money m a r k e t s i n c r e a s e s t h e p r i c e o f money, t h u s d r i v i n g i n t e r e s t r a t e s up and a t t h e same t i m e c r e a t i n g t h e t e n d e n c y t o r e d u c e f u n d s ; f o u r t h , a d e p r e s s i o n u s u a l l y f o l l o w s t h e boom and t h i s d e p r e s s i o n l o w e r s t h e p r i c e o f raw m a t e r i a l s and o t h e r c o m m o d i t i e s e x p o r t e d by t h e u n d e r d e v e l o p e d c o u n t r i e s . A l l of t h e s e f a c t o r s combine t o make i t d i f f i c u l t t o r a i s e t h e f u n d s t o pay t h e d e b t s and even more d i f f i c u l t t o c o n t i n u e w i t h any economic d e v e l o p m e n t p r o g r a m s . A t t h e same t i m e t h e money m a r k e t s a r e c l o s e d t o t h e u n d e r d e v e l o p e d c o u n t r i e s . W i t h v a r i a t i o n s , t h i s i s t h e p a t t e r n t h a t r e p e a t s i t s e l f . 59 D u r i n g t h e boom o f t h e 1920s p r o s p e c t i v e b o r r o w e r s were a c t i v e l y p u r s u e d ( F e l i x 1984:19),and t h e s p e c u l a t i o n a s s o c i a t e d w i t h t h i s t y p e o f l e n d i n g was rampant. S p e c u l a t i o n i n c r e a s e d b e c a u s e t h e d i f f e r e n c e between t h e n o m i n a l v a l u e o f t h e L a t i n A m e r i c a n bonds and t h e i r r e t a i l p r i c e r e a c h e d 147.. To a l a r g e e x t e n t t h i s s p r e a d was t o pay f i n d e r s f e e s , o v e r s e a s a g e n t s and d i r e c t b r i b e s t o o f f i c i a l s from b o r r o w i n g c o u n t r i e s , as t h e U.S. S e n a t e h e a r i n g s — t h a t t r a d i t i o n a l f o r m o f U.S. C o n g r e s s i o n a l e x o r c i s m — documented i n t h e wake o f t h e c r i s i s ( F e l i x 1987:19). A w e l l p u b l i c i z e d c a s e o f c o r r u p t i o n was t h a t o f t h e P e r u v i a n P r e s i d e n t ' s s o n , Juan L e g i a , who was p a i d U.S.$145,000 by t h e " . . . J . and W. S e l i g m a n and N a t i o n a l C i t y Bank ( p r e d e c e s s o r o f C i t i c o r p ) . A c c o r d i n g t o B a r b a r a S t a l l i n g s " . . . T h i s Bank had f l o a t e d U.S.$85 m i l l i o n i n P e r u v i a n bonds, o f a t o t a l o f U.S.$135 m i l l i o n p l a c e d i n t h e m arket by P e r u between 1924-1928, a f i g u r e w h i c h r e p r e s e n t s more t h a n t e n t i m e s what P e r u borrowed i n t h e p r e v i o u s t e n y e a r s ( S t a l l i n g s 1985:168). 60 CHAPTER IV. ANTECEDENTS OF THE 1 9 B 0 S DEBT CR I S I S 61 CHAPTER IV. ANTECEDENTS QF THE 1980'S DEBT C R I S I S . The a n t e c e d e n t s o f t h i s d e b t c r i s i s can be d i v i d e d i n t o two p e r i o d s : one, c o r r e s p o n d i n g t o t h e e s t a b l i s h m e n t o f a new p o s t Second W o r l d War economic o r d e r . T h i s new i n t e r n a t i o n a l economic o r g a n i z a t i o n i s c h a r a c t e r i z e d by t h e emergence o f t h e U n i t e d S t a t e s as t h e most i n f l u e n t i a l e c onomic power. The sec o n d p e r i o d b e g i n s i n t h e s e c o n d h a l f o f t h e 1970s, and i s marked by t h e c o n f l u e n c e o f t h r e e , a l m o s t s i m u l t a n e o u s , e v e n t s . The f i r s t was a s t e a d y i n c r e a s e i n t h e i n t e r e s t r a t e s p a i d by t h e d e b t o r c o u n t r i e s i n t h e s e c o n d h a l f o f t h e 1970s and b e g i n n i n g of t h e 1980s = i; t h e s e c o n d , a d e c l i n e i n r e v e n u e s o f hard c u r r e n c y due t o a d r o p i n t h e p r i c e o f p r i m a r y c o m m o d i t i e s p r o d u c e d by t h e u n d e r d e v e l o p e d c o u n t r i e s ; and the t h i r d , t h e i n c r e a s e i n t h e p r i c e o f o i l i n 1973-1974. The d e c r e a s e i n t h e p r i c e o f t h i r d w o r l d p r o d u c t s has been a r e g u l a r o c c u r r e n c e s i n c e t h e end o f t h e Second World War. The e x o r b i t a n t i n c r e a s e i n i n t e r e s t and t h e o i l shock a r e d i s -t i n c t i v e o f t h e l a t e 1970s and t h e 1980s. In s p i t e o f t h e i r i m p o r t a n c e , t h e s e l a t e s t e v e n t s by t h e m s e l v e s do n o t p r o v i d e a s u f f i c i e n t e x p l a n a t i o n f o r t h e i n t e r n a t i o n a l d e b t . The d e c l i n e i n r e v e n u e s , t h e i n c r e a s e i n i n t e r e s t r a t e s and t h e o i l s h o c k , must be e x p l a i n e d by See T a b l e 10 and d i s c u s s i o n o f i t a t t h e end of t h i s c h a p t e r . 62 r e c o u r s e t o t h e s t u d y o f t h e main p o s t - w a r economic and f i n a n c i a l t r e n d s a f f e c t i n g t h e IMEs, as w e l l as t h o s e o f t h e u n d e r d e v e l o p e d c o u n t r i e s , p a r t i c u l a r l y o f L a t i n A m e r i c a . I i d e n t i f y as e v e n t s r e l e v a n t t o t h e p r e s e n t c r i s i s t h e f o i l owing : a. P o s t war c a p i t a l f l o w s i n t h e IMEs, s p e c i f i c a l l y t h e U.S. . b. C a p i t a l movements i n L a t i n A m e r i c a a f t e r t h e war. c. The i n t e r n a t i o n a l p o s i t i o n o f t h e U.S. d o l l a r . In t h e f o l l o w i n g pages I w i l l d i s c u s s t h e s e e v e n t s under t h e s u b — h e a d i n g Post-War B a c k g r o u n d . The C h a p t e r w i l l t h e n f o c u s on t h e I n d e b t e d n e s s P r o c e s s and t h e T h e o r i e s t h a t t r y t o e x p l a i n t h e c u r r e n t d e b t c r i s i s , i n c l u d i n g my own t h o u g h t s on t h e m a t t e r . 4.1 P o s t War B a c k g r o u n d F o l l o w i n g t h e end of t h e Second World War, t h e U n i t e d S t a t e s emerged as t h e o n l y i n d u s t r i a l i z e d c o u n t r y t h a t d u r i n g t h e war had g a i n e d i n f i n a n c i a l and i n d u s t r i a l s t r e n g t h . Most o f t h e o t h e r major powers had s u f f e r e d m a s s i v e human and m a t e r i a l l o s s e s and had t o b e g i n a p r o c e s s of r e c o n s t r u c t i o n . The U.S. e x t e n d e d a h e l p i n g hand t o some o f i t s f o r m e r a l l i e s and i t s two main f o r m e r o p p o n e n t s -Germany and J a p a n - t h r o u g h 63 a v a r i e t y o f economic m e a s u r e s 2 ^ By t h e 1950s, t h e main U.S. i n v e s t m e n t was d i r e c t e d t o w a r d s E u r o p e , a l t h o u g h f o r a s h o r t p e r i o d , between 1946 and 1948, U.S. p r i v a t e i n v e s t m e n t was l a r g e r i n L a t i n A m e r i c a t h a n e l s e w h e r e =7' Column 2 i n T a b l e 7 shows t h e l a r g e g o v e r n m e n t a l a s s i s t a n c e p r o v i d e d by t h e U.S. t o E u r o p e i n t h e p e r i o d a f t e r t h e war w h i c h r e a c h e d U.S.$2.38 b i l l i o n . By t h e mid 1950s t h e U.S. government was d i s p l a c e d by t h e p r i v a t e s e c t o r as main s u p p l i e r o f c a p i t a l t o E u r o p e . P r i v a t e s e c t o r p a r t i c i p a t i o n i n c r e a s e d f r o m U.S.$0.15 b i l l i o n i n 1946-8 t o U.S.$1.74 b i l l i o n . As w i l l be s e e n l a t e r , t h i s change i n p r i v a t e i n v e s t m e n t was l a r g e l y due t o t h e move o f some of t h e M u l t i n a t i o n a l C o r p o r a t i o n s (MNC) and M u l t i n a t i o n a l Banks' (MNB) f i n a n c i a l a c t i v i t i e s t o E u r o p e , as w e l l as o t h e r f orms o f m i g r a t i o n o f c a p i t a l o u t o f t h e U.S. i n t h e l a t e 1950s and e a r l y 1960s. The most i m p o r t a n t f o r m o f e conomic a s s i s t a n c e e x t e n d e d by t h e US t o i t s a l l i e s i n t h e p o s t - w a r p e r i o d was t h e M a r s h a l l P l a n . I t r e p r e s e n t e d a d i s b u r s e m e n t c l o s e t o U.S.$ 13 b i l l i o n ( B r a n d f o r d and K u c i n s k i 1988:38) 2 3 G r i f f i t h - J o n e s , 1984: 28. i TABLE 7 US C a p i t a l Movements 1946-61 (US* b i l l i o n ) 1946-8' 1949-55* 1956-61* Europe & Latin Other Europe & L*tin Other Europe & Latin Other Total Canada America Countries Total Canada America Countries Total Canada America Countries US capital I net) -3 .52 -2.54 -0.38 -0.60 -1 .30 -0 .60 -0.33 -0.38 -4.12 -1.65 -0 .99 -1.47 Private -0 .77 -0.15 -0.32 -0.28 -1.04 -0.54 -0.24 -0.26 -3 .30 -1 .74 -0.69 -0.82 .Government -2 .75 -2.38 -0.06 - 0 J 2 -0 .26 -0 .05 -0.09 -0.12 -0.82 0.09 -0 .30 -0.61 Notet: a. Annual average*, b. Including international institutions. Sourca: US Department of Commerce. Balance of Payments Supplement (1961). Taken from: G r i f f i t h - J o n e s 1984:27. 65 4.2 P o s t War C a p i t a l F l o w s i n L a t i n A m e r i c a T a b l e 7 shows t h a t L a t i n A m e r i c a d i d n o t r e c e i v e a s i g -n i f i c a n t amount o f c a p i t a l t r a n s f e r from t h e U.S., d u r i n g t h e p e r i o d from 1946 t o 1961. A l t h o u g h due t o t h e i m p l e m e n t a t i o n o f t h e A l l i a n c e f o r P r o g r e s s t h e r e was a s i g n i f i c a n t i n c r e a s e of a l m o s t 300 p e r c e n t i n t h e e a r l y 1960s, as i l l u s t r a t e d i n T a b l e S, o v e r a l l t h e r e was a n e t d e c l i n e f o r L a t i n A m e r i c a as a r e c i p i e n t o f U.S. i n v e s t m e n t i n t h e p o s t war p e r i o d . From 1946 t o 1948 , U.S. c a p i t a l movements were a l m o s t e x -c l u s i v e l y o f p u b l i c o r i g i n and d i r e c t e d t o w e s t e r n E u r o p e . Of a g r a n d t o t a l o f U.S.$3.52 b i l l i o n f o r a l l r e c i p i e n t s , U.S.$2.54 b i l l i o n were d e s t i n e d t o t h e o l d c o n t i n e n t . The p r i v a t e s e c t o r ' s c o n t r i b u t i o n d u r i n g t h i s t i m e was U.S.$0.77 b i l l i o n . The g o v e r n m e n t a l i n v o l v e m e n t was a c c o u n t e d f o r by t h e l a r g e i n v e s t m e n t s d e s t i n e d t o t h e r e c o n s t r u c t i o n o f E u r o p e . An i m p o r t a n t change took p l a c e a t t h e end o f t h e 1940s and the b e g i n n i n g o f t h e 1950s. The U.S. p r i v a t e s e c t o r ' s f i n a n c i a l a s s i s t a n c e t o E u r o p e f e l l t o U.S.$0.54 b i l l i o n and a t t h e same t i m e t h e g o v e r n m e n t a l c o n t r i b u t i o n became a l m o s t n e g l i g i b l e a t U.S.$0.05 b i l l i o n . D u r i n g t h e s e v e n y e a r s p e r i o d from 1949 t o 1955, t h e p r i v a t e s e c t o r a l s o d e c r e a s e d i t s p a r t i c i p a t i o n i n f i n a n c i a l a s s i s t a n c e t o E u r o p e , a l t h o u g h n o t as d r a s t i c a l l y as t h e o f f i c i a l s o u r c e s . D u r i n g two 66 TABLE S US D i r e c t I n v e s t m e n t P o s i t i o n A b r o a d ( p e r c e n t a g e c o m p o s i t i o n , by a r e a ) 1950 1957 1966 1979 A l l a r e a s 100.0 100.0 100.0 100.0 D e v e l o p e d c o u n t r i e s 48.0 5.1 68.1 71.6 D e v e l o p i n g c o u n t r i e s 48.0 40.5 26.8 24.8 L a t i n A m e r i c a (40.6) (31.4) (18.9) (19.1) O t h e r s 4.0 3.4 5.1 4.6 S o u r c e : D a t a t a k e n from S u r v e y o f C u r r e n t B u s i n e s s , US D e p a r t m e n t o f Commerce ( F e b r u a r y 1 9 8 1 ) . C h o i c e o f y e a r s i s based on t h o s e f o r w h i c h t h e i n f o r m a t i o n r e f l e c t s a benchmark s u r v e y , whereas i n t e r m e d i a t e y e a r s a r e o n l y based on sample i n f o r m a t i o n . F o r e x p l a n a t i o n , s e e O.G. W h i c h a r d ' T r e n d s i n t h e US D i r e c t I n v e s t m e n t P o s i t i o n A b road 1950-70', i n S u r v e y o f C u r r e n t B u s i n e s s . Taken f r o m : G r i f f i t h - J o n e s 1984:28. 67 p e r i o d s , f r o m 1946 t o 194B and from 1949 t o 1955, L a t i n A m e r i c a r e c e i v e d , on a v e r a g e , U.S.$0.35 b i l l i o n . T a b l e 8 i l l u s t r a t e s t h e c h a n g e s i n t h e f l o w s o f f i n a n c i a l r e s o u r c e s t o d e v e l o p e d and u n d e r d e v e l o p e d c o u n t r i e s . Between 1950 and 1979, t h e d e v e l o p e d c o u n t r i e s i n c r e a s e d t h e i r s h a r e o f d i r e c t U.S. i n v e s t m e n t by 23.6 p e r c e n t w h i l e t h e u n d e r d e v e l o p e d c o u n t r i e s l o s s 23.2 p e r c e n t . Most o f t h e l o s s o f t h e u n d e r d e v e l o p e d c o u n t r i e s i s c o n c e n t r a t e d i n L a t i n A m e r i c a , w h i c h saw i t s s h a r e o f U.S. i n v e s t m e n t r e d u c e d from 40.6 p e r c e n t i n t h e 1950s t o 19.1 p e r c e n t i n t h e l a t e 1970s. In f a c t d u r i n g t h i s p e r i o d , 1950 t o 1979, t h e L a t i n A m e r i c a n c o u n t r i e s were n e t e x p o r t e r s o f c a p i t a l . C a p i t a l i n f l o w s were o f f s e t by p r o f i t r e m i t t a n c e s and o t h e r f o r m s o f f i n a n c i a l o u t -f l o w s u c h a s r o y a l t i e s , f e e s , e t c . T a b l e 9 summarizes t h e n e t c a p i t a l f l o w s and economic a s s i s t a n c e between t h e U.S. and L a t i n A m e r i c a d u r i n g t h e p e r i o d from 1961 t o 1969. The t h i r d column shows a n e g a t i v e f l o w f o r L a t i n A m e r i c a c l o s e t o U.S.$6 b i l l i o n . 68 TABLE 9 Economic A s s i s t a n c e and P r i v a t e C a p i t a l F l o w s between t h e US and L a t i n A m e r i c a i n t h e 1960s (US* m i l l i o n ) TG L-A x TN L - A = TF L—A 3 10,286 4,819 (5,738) 1. T o t a l G r o s s economic a s s i s t a n c e t o L a t i n A m e r i c a 1961-1969. I n c l u d e s a l l l AID f u n d s , Food f o r Freedom, l o n g term E x p o r t - I m p o r t Bank l o a n and o t h e r US e c o o m i c programmes. ( E x c l u d e s a s s i s t a n c e f r o m i n t e r n a t i o n a l a g e n c i e s where US i s i m p o r t a n t c o n t r i b u t o r ) . R e f e r s t o o b l i g a t i o n s and l o a n a u t h o r i z a t i o n s . 2. T o t a l Net US d i r e c t d i s b u r s e m e n t s t o L a t i n A m e r i c a 1961-1969. I n c l u d e s same i t e m a s as ( 1 ) , but r e f e r s t o n e t d i s b u r s e m e n t s , l e s s r e p a y m e n t s and i n t e r e s t s . 3. T o t a l Net Flow o f c a p i t a l from t h e U.S. i n t o L a t i n A m e r i c a 1961-1968. Net d i r e c t i n v e s t m e n t minus p r o f i t r e m i t t a n c e s t o US. Taken f r o m : G r i f f i t h - J o n e s 1984:34. 69 4 . 3 F a l l i n Commodity P r i c e s An i m p o r t a n t p a r t o f t h e d y n a m i c s o f t h e d e b t i s t h e c o n t i n u e d d e t e r i o r a t i o n o f t h e p r i c e o f t h e p r i m a r y c o m m o d i t i e s e x p o r t e d by t h e u n d e r d e v e l o p e d c o u n t r i e s . As w i l l be seen below, i t has been a r g u e d ( F e l i x 1987:15) t h a t t h e d e c l i n e i n t h e p r i c e of t h e s e c o m m o d i t i e s i s one o f t h e main r e a s o n s f o r t h e p r e s e n t d e b t c r i s i s . F i g u r e A i l l u s t r a t e s t h i s d e c l i n e from 1950 t o t h e p r e s e n t f o r most p r i m a r y c o m m o d i t i e s , t h e e x c e p t i o n b e i n g o i l . N o t i c e t h a t F i g u r e A shows t h e p r i c e of o i l s t e a d i l y l o s i n g v a l u e f o r a p p r o x i m a t e l y twenty y e a r s p r i o r t o t h e s h a r p i n c r e a s e o f t h e 1970s. N a y l o r (1984) s e e s i n t h e l e n g t h y d e c l i n e o f t h e p r i c e o f o i l , one o f t h e r e a s o n s f o r t h e o i l boom i n 1973-1974. 4.4 D e v a l u a t i o n o f t h e D o l l a r A f t e r t h e Korean war, U.S. economic p r e e m i n e n c e began t o d e c l i n e . T h i s t r e n d became more p r o n o u n c e d d u r i n g t h e V i e t Nam war. As a c o n s e q u e n c e of t h e demand on t h e U.S. g o l d r e s e r v e s by f o r e i g n e r s , t h e l a r g e U.S. g o l d r e s e r v e s o f t h e e a r l y 1950s began t o d w i n d l e i n t h e l a t e 1950s and e a r l y 1960s. The amount of g o l d i n t h e hands o f t h e U.S. government was s m a l l e r than t h e amount o f d o l l a r s h e l d a b r o a d . T h i s s i t u a t i o n became so d i s t u r b i n g f o r t h e U.S. monetary a u t h o r i t i e s t h a t , i n 1971 R i c h a r d N i x o n u n i l a t e r a l l y a b r o g a t e d t h e l i n k between t h e 70 d o l l a r and g o l d w h i c h had been e s t a b l i s h e d a t B r e t t o n Woods-T a b l e 10 shows t h e i n c r e a s i n g i m b a l a n c e between t h e U.S. g o l d r e s e r v e s and l i a b i l i t i e s h e l d a b r o a d i n t h e y e a r s between 1960 and 1980. From 1960 t o 1970 U.S. g o l d r e s e r v e s d e c l i n e d by a l m o s t 31.5 p e r c e n t and, as T a b l e 10 shows, t h e r e s e r v e s were s t a b i l i z e d a f t e r N i x o n ' s move i n 1971. However, d u r i n g t h e same p e r i o d , 1960 t o 1980, t h e U.S. l i a b i l i t i e s i n f o r e i g n hands, t h a t i s , t h e U.S. i n t e r n a t i o n a l d e b t , grew a t a h e f t y p a c e . The U.S. i n t e r n a t i o n a l d e b t more t h a n d o u b l e d i n t h e p e r i o d 1960-1970, and a g a i n more t h a n d o u b l e d between 1970 and 1980. The o v e r a l l i n c r e a s e o f t h e U.S. l i a b i l i t i e s from 1960 t o 1980 m u l t i p l i e d f i v e f o l d . I t i s i m p o r t a n t t o n o t e t h a t t h e 1971 a c t i o n o f t h e N i x o n a d m i n i s t r a t i o n r e p r e s e n t e d a s u b -s t a n t i a l d e v a l u a t i o n o f t h e d o l l a r . T h i s was f o l l o w e d by two more d e v a l u a t i o n s i n t h e same y e a r . The n e t e f f e c t o f t h o s e a c t i o n s — d e - l i n k i n g t h e d o l l a r f r o m g o l d and t h e s u b s e q u e n t d e v a l u a t i o n s o f t h e d o l l a r was t o l e a v e t h e w o r l d f l o o d e d w i t h i n o r g a n i c d o l l a r s 3 " * . F i n a l l y , as p a r t of t h e p r o c e s s o f r e - o r g a n i z a t i o n o f t h e w o r l d economy and i n p a r t i c u l a r o f i t s f l o w o f money, i n t h e 10 y e a r s f r o m t h e mid-1950's t o t h e mid-1960's, N o r t h A m e r i c a n M u l t i n a t i o n a l C o r p o r a t i o n s (MNCs) began t o move l a r g e amounts of money o u t o f t h e U.S. i n o r d e r t o f i n a n c e t h e i r o p e r a t i o n s I t means by i n o r g a n i c t h a t t h e c u r r e n c y does n o t have any b a c k i n g , w h e t h e r i n g o l d o r i n c r e a s e d p r o d u c t i o n . 71 TABLE 10 I n t e r n a t i o n a l P o s i t i o n o f t h e D o l l a r . ( B i l l i o n ) G o l d R e s e r v e s L i a b i l i t i e s i n f o r e i g n hands. 1960 1970 19B0 17 .8 1 11 .9 1 11.2 2 40. 9 97.0 3 202.9 * 1. Economic R e p o r t o f t h e P r e s i d e n t . 2. F e d e r a l R e s e r v e B u l l e t i n , November, 1982, p.330. 3. I n t e r n a t i o n a l Economic R e p o r t o f t h e P r e s i d e n t , 1975, GPO, p.143. 4. Main Economic I n d i c a t o r s , December, 1982. p.86. Taken f r o m : C a s t r o 1983:78. 72 a b r o a d , p a r t i c u l a r l y i n E u r o p e . The U.S. a u t h o r i t i e s t r i e d t o stem t h a t c u r r e n t , and t h e U.S. C o n g r e s s p a s s e d l e g i s l a t i o n i n t e n d e d t o p r e v e n t c a p i t a l f l i g h t ( d i s c u s s e d i n t h e n e x t c h a p t e r ) . T h e l e g i s l a t i o n d i d n o t s o l v e t h e p r o b l e m , and even more f u n d s l e f t f o r E u r o p e i n t h e s e c o n d h a l f o f t h e 1960s. T h i s m i g r a t i o n o f money from t h e U n i t e d S t a t e s was an i m p o r t a n t e l e m e n t i n t h e d e v e l o p m e n t of t h e E u r o p e a n Money M a r k e t . The r o l e o f t h e E u r o m a r k e t i s s t u d i e d i n d e t a i l i n C h a p t e r V I . F o r t h e moment, my p u r p o s e i s t o show t h a t i n t h e complex and c o n v o l u t e d p r o c e s s t h a t i s t h e d e b t c r i s i s , s e v e r a l e l e m e n t s were a t p l a y , t h e i r r e l a t i v e i m p o r t a n c e c h a n g i n g w i t h changed c i r c u m s t a n c e s . Among t h e e l e m e n t s a l r e a d y m e n t i o n e d h e r e a r e t h e f l o w o f money f o r p o l i t i c a l r a t h e r t h a n e c o n o m i c r e a s o n s , as was t h e c a s e w i t h t h e M a r s h a l l P l a n ; t h e v a r i a t i o n o f commodity p r i c e s , t h e d e v a l u a t i o n o f t h e d o l l a r , and c a p i t a l f l i g h t * from t h e U.S.. In t h e p r o c e s s o f i n d e b t e d n e s s t h e r e a r e a l s o o t h e r a s p e c t s , p a r t i c u l a r l y t h e o p t i m i s t i c p e r c e p t i o n t h a t b o r r o w e r s and l e n d e r s had (and I would a r g u e s t i l l have) as t o what the economic p r o s p e c t s of t h e i r t r a n s a c t i o n s . T h e s e p e r c e p t i o n s a r e q u i t e o f t e n based on w i s h f u l t h i n k i n g , p r e - c o n c e i v e d i d e a s , o r v e s t e d i n t e r e s t . The p u b l i c r e l a t i o n s image of t h e b a n k e r o r h i g h government o f f i c i a l d e c i d i n g on f i n a n c i a l 73 m a t t e r s based on s t r i c t l y o b j e c t i v e d a t a , o f t e n b e a r s l i t t l e r e s e m b l a n c e t o t h e i r de f a c t o i n v o l v e m e n t . 4.5 C h a p t e r Summary In t h i s c h a p t e r , I have p r e s e n t e d t h e b a c k g r o u n d f o r t h e p r e s e n t L a t i n A m e r i c a n i n t e r n a t i o n a l d e b t , and an o v e r v i e w o f t h e p r e v a i l i n g c l a i m s t h a t t r y t o e x p l a i n t h i s phenomenon. Debt c r i s e s a r e n o t new o r e x c l u s i v e t o t h e r e g i o n . The main f e a t u r e s o f d e b t c r i s i s d i s c u s s e d above a r e f o u n d i n t h e p a s t , b o t h i n L a t i n A m e r i c a and e l s e w h e r e . The d i s c u s s i o n i n C h a p t e r I I I o f t h e c a s e s o f E g y p t and T u r k e y i n t h e l a s t c e n t u r y , a s w e l l as t h a t o f L a t i n A m e r i c a i n t h e n i n e t e e n t h c e n t u r y and t h e b e g i n n i n g o f t h e t w e n t i e t h c e n t u r y , s u g g e s t t h a t d e b t c r i s e s a r e a c y c l i c a l o c c u r r e n c e i n t h e d e v e l o p m e n t o f c a p i t a l i s m , a permanent, a l b e i t i n t e r m i t t e n t f e a t u r e i n t h e h i s t o r i c a l w o r k i n g s o f t h e s y s t e m . In t h e n e x t C h a p t e r I w i l l c o n s i d e r e v e n t s t h a t took p l a c e between 1950 and 1980, w h i c h a r e more d i r e c t l y r e l a t e d t o t h e p r e s e n t c r i s i s . 74 CHAPTER V. THE LATIN AMERICAN DEBT: C R I S I S OR NORMALITY? 75 CHAPTER V. THE LATIN AMERICAN DEBT: CRISIS OR NORMALITY? 5.1 L a t i n A m e r i c a ' s E c o n o m i c P e r f o r m a n c e In t h i s p a r t o f t h i s s t u d y I p r e s e n t e v i d e n c e t h a t s u p p o r t s my f i r s t w o r k i n g h y p o t h e s i s , t h a t i s , t h a t t h e o r i g i n o f t h e d e b t i s i n a c r i s i s o f a c c u m u l a t i o n w i t h i n t h e c a p i t a l i s t s y s t e m , c h a r a c t e r i z e d by p r o d u c t i v e o v e r c a p a c i t y t h a t , i n t u r n , l e a d s t o f a l l i n g p r o f i t s , r e d u c e d c a p i t a l i n v e s t m e n t and e x c e s s i v e l i q u i d i t y i n t h e money m a r k e t s . I a r g u e t h a t t h e d e b t c r i s i s i s one a s p e c t o f a g e n e r a l i z e d phenomenon t h a t , from t i m e t o t i m e , a f f e c t s t h e c a p i t a l i s t s y s t e m . When I s a y t h a t t h e c a p i t a l i s t s y s t e m i s g o i n g t h r o u g h a c r i s i s I do n o t i m p l y i t s coming d e m i s e , o r any c a t a s t r o p h i c e v e n t s on t h e i n t e r n a t i o n a l s c e n e . My c o n c e r n a t t h i s t i m e i s how t h e c r i s i s i s r e l a t e d t o t h e L a t i n A m e r i c a n i n t e r n a t i o n a l d e b t . The n a t u r e of s u c h a c r i s i s i s complex, i t i s r e l a t e d t o o v e r p r o d u c t i o n , f a l l i n g p r o f i t s and u n d e r c o n s u m p t i o n , but i t would be e r r o n e o u s t o s i n g l e o u t one c a u s e , s t r u c t u r a l o r o t h e r w i s e , as a s u f f i c i e n t e x p l a n a t i o n f o r t h i s k i n d o f e v e n t . T h e r e a r e o t h e r e l e m e n t s t h a t o p e r a t e a t an i n d i v i d u a l and c o l l e c t i v e l e v e l , s u c h as p a n i c s , h i g h e x p e c t a t i o n s , b e l i e f s s h a r e d by many p e o p l e i n t h e c o r r e c t n e s s of p o l i c i e s — i . e . 76 growth by i n d e b t e d n e s s - , o r s i m p l y , s h o r t - s i g h t e d g r e e d . I t i s p o s s i b l e t o assume t h a t t h e L a t i n A m e r i c a n d e b t may be o f i n d i g e n o u s o r i g i n , and t h a t t h e r o l e o f t h e i n t e r n a t i o n a l banks s h o u l d be c h a r a c t e r i z e d , f o r i n s t a n c e , as a f a i l e d a t t e m p t t o h e l p c o v e r budget d e f i c i t s . In t h e f o l l o w i n g pages I w i l l examine some o f t h e main r e g i o n a l e conomic i n d i c a t o r s and put them i n t h e p e r s p e c t i v e o f t h e g l o b a l economy. I w i l l do t h i s f o r two p u r p o s e s : f i r s t , i n o r d e r t o d e t e r m i n e t h e p e r f o r m a n c e o f t h e r e g i o n i n r e l a t i o n t o t h e economy o f t h e OECD c o u n t r i e s , and I w i l l pay p a r t i c u l a r a t t e n t i o n t o economic g r o w t h , t e r m s o f t r a d e , and government e x p e n d i t u r e s ; s e c o n d , i n o r d e r t o show how t h e v a r i a t i o n s i n t h e g l o b a l economy a f f e c t e d t h e s i t u a t i o n i n L a t i n A m e r i c a , and i n p a r t i c u l a r , how t h o s e v a r i a t i o n s had a d i r e c t i n f l u e n c e on t h e L a t i n A m e r i c a n d e b t . T h i s r e v i e w o f t h e L a t i n A m e r i c a n economic p e r f o r m a n c e i s r e s t r i c t e d t o t h e p e r i o d s p a n n i n g from 1950 t o a p p r o x i m a t e l y 1985. 5.1.1 I n d i c a t o r s o f E c o n o m i c Growth Between 1950 and 1985. At t h e t i m e of t h e o i l s h o c k , and i m m e d i a t e l y a f t e r i t , t h e economy o f t h e r e g i o n was p e r f o r m i n g w e l l . The d a t a i n T a b l e I I show t h a t from 1965 u n t i l 1980 t h e g r o w t h of t h e GDP f o r L a t i n A m e r i c a n and C a r i b b e a n (LA&C) o i l i m p o r t e r s was h i g h e r than t h a t of t h e I n d u s t r i a l i z e d Market E c o n o m i e s (IME), 77 TABLE 11 A n n u a l Growth r a t e s o f GDP, I n d u s t r i a l i z e d M a r k e t E c o n o m i e s (IME) and L a t i n A m e r i c a and t h e C a r i b b e a n (LA & C) 1965-73* 1973-B0 19B1 1982 1983 1984 = I M E 4.7 2 . 8 1.4 - 0 . 3 2.6 4 . 8 LA & C 7.1 5.4 0.1 -1.7 - 7 . 0 0.6 1 The o v e r l a p p i n g o f t h e y e a r s ( i . e . 1965-73 and a g a i n 1973—80) c o r r e s p o n d s t o t h e s o u r c e . •"" P r o j e c t e d . S o u r c e : W o r l d Development R e p o r t 1985. p.149 78 i n c l u d i n g t h e two p e r i o d s o f o i l p r i c e i n c r e a s e s — 1 9 7 3 - 1 9 7 4 and 1979. I t i s a f t e r 1980 t h a t t h e r e was a s h a r p d r o p i n t h e GDP p e r c e n t a g e growth o f t h e s e c o u n t r i e s . T h e s e d a t a a r e c o n f i r m e d by f i g u r e s p r o v i d e d by ECLAC. From 1950-60 t o 1981, t h e r e g i o n a l GDP, a t market p r i c e s , grew a t an a v e r a g e of 5.66 p e r c e n t and i t s d e c l i n e began by a slump i n 1982 t o 1.77., a d e p r e s s i o n o f -1.07. i n 1982 and -3.17. i n 1983. I m m e d i a t e l y a f t e r t h e M e x i c a n d e b t c r i s i s t h e r e was an upward t r e n d o f 3.37. g r o w t h i n t h e r e g i o n ' s GDP (ECLAC 1985) 5.1.2 Terms o f T r a d e . Among t h e e l e m e n t s t o c o n s i d e r as p a r t o f t h e e c o n o m i c b a c k g r o u n d f o r t h e L a t i n A m e r i c a n i n t e r n a t i o n a l d e b t a r e t h e d e t e r i o r a t i n g t e r m s o f t r a d e o f t h e r e g i o n v i s - a - v i s t h e d e v e l o p e d m arket e c o n o m i e s . T h i s n e g a t i v e t e n d e n c y i n r e g i o n a l commerce i s n o t a new phenomenon but r a t h e r an endemic one. As d e p e n d e n t e c o n o m i e s , t h e L a t i n A m e r i c a n and C a r i b b e a n c o u n t r i e s , a r e v e r y r e s p o n s i v e t o t h e economic v a r i a t i o n t h a t t a k e s p l a c e i n t h e d e v e l o p e d c o u n t r i e s . When the IMEs a r e p e r f o r m i n g w e l l , t h e t e n d e n c y i s f o r t h e u n d e r d e v e l o p e d c o u n t r i e s t o show a f a v o u r a b l e t e n d e n c y i n t h e i r terms of t r a d e , p a r t i c u l a r l y due t o i n c r e a s e d demand f o r t h e p r i m a r y m a t e r i a l s t h e y p r o v i d e t o t h e i n d u s t r i a l i z e d w o r l d . A l t h o u g h t h e i n c r e a s e d demand f o r p r i m a r y m a t e r i a l s i s p o s i t i v e i n t h e 79 s h o r t term, i n t h e l o n g term t h i s s i t u a t i o n may be a s o u r c e o f i n s t a b i l i t y , p a r t i c u l a r y when t h e r e i s a d e p r e s s i v e t r e n d i n the IMEs. Thus, t h e d e p r e s s i v e economic f l u c t u a t i o n s o f t h e d e v e l o p e d c o u n t r i e s t e n d s t o n e g a t i v e l y a f f e c t t h a t o f t h e u n d e r d e v e l o p e d w o r l d . T h i s i m p a c t may be so s e v e r e t h a t r e c o v e r y based on t h e i r own economic p e r f o r m a n c e can be e x t r e m e l y d i f f i c u l t f o r t h e u n d e r d e v e l o p e d c o u n t r i e s . When t h e c a s e i s t h a t t h e economic p e r f o r m a n c e o f t h e IME i s d e p r e s s e d , i n a s h o r t p e r i o d o f t i m e economic g r o w t h i n t h e u n d e r d e v e l o p e d c o u n t r i e s w i l l t e n d t o d e c l i n e . T h i s i s n o t t h e c a s e f o r t h e IEMs. T h e s e c o u n t r i e s can a b s o r b economic s h o c k s o r i g i n a t i n g i n t h e u n d e r d e v e l o p e d c o u n t r i e s , s u c h as an i n c r e a s e i n t h e p r i c e o f o i l . An example o f t h i s i s J a p a n , w h i c h i s t o t a l l y d e p e n d e n t on o i l i m p o r t s , and y e t i t s economic p e r f o r m a n c e seems t o have been u n t o u c h e d due t o t h e i n c r e a s e d p r i c e o f o i l . T a b l e s 12 and 13 i l l u s t r a t e b o t h s i t u a t i o n s f o r t h e p e r i o d 1973 t o 1980. When p r i m a r y c o m m o d i t i e s a r e w e i g h t e d a g a i n s t m a n u f a c t u r e d goods, T a b l e 12 shows a p o s i t i v e t r a d e b a l a n c e f o r the u n d e r d e v e l o p e d w o r l d . The t a b l e c o v e r s t h e p e r i o d from 1973 t o 1980, and r e f l e c t s a t r a d e d e f i c i t f o r t h e d e v e l o p e d e c o n o m i e s on two i t e m s : p r i m a r y c o m m o d i t i e s and m a n u f a c t u r e d goods. The f i r s t d e f i c i t i s o f U.S.$3 b i l l i o n i n 1973 and a se c o n d o f U.S.$12.2 b i l l i o n i n 1980. 80 TABLE 12 T r a d e B a l a n c e Between M a r k e t Economy D e v e l o p e d C o u n t r i e s and O i 1 — i m p o r t i n g U n d e r d e v e l o p e d C o u n t r i e s . ( B i l l i o n o f US D o l l a r s ) 1973 1980 M a n u f a c t u r e d Goods 23.7 60.4 P r i m a r y C o m m o d i t i e s -20.7 -48.2 B a l a n c e a l l goods 3.0 12.2 S o u r c e : GATT. El Comercio Internacional en 1980-1981, Geneva 1981 p.24. Taken f r o m , C a s t r o 1983: 5 6 . 81 TABLE 13 B a l a n c e on C u r r e n t A c c o u n t s w i t h r e s p e c t t o E x p o r t s 1 " L a t i n A m e r i c a and t h e C a r i b b e a n . 26 C o u n t r i e s 3 1950 1960 1970 1975 1980 1981 1982 1983 1984 L.A. n.a. 12.4 18.7 31.9 24.8 33.1 39.0 8.3 n.a. O i l Exp.4.1 0.5 16.9 17.8 7.4 21.1 26.7 13.8 12.8 N-O-Exp.n 3. a. 24.1 20.1 43.6 41.0 45.0 51.2 29.8 n.a. 1. A c c o r d i n g t o b a l a n c e o f payments v a l u e s . The 26 C o u n t r i e s a r e : A r g e n t i n a , B a r b a d o s , B o l i v i a , B r a z i l , C o l o m b i a , C o s t a R i c a , C h i l e , E c u a d o r , E l S a l v a d o r , S u a t e m a l a , Guyana, H a i t i , H o n duras, J a m a i c a , M e x i c o , N i c a r a g u a , Panama, P a r a g u a y , P e r u , D o m i n i c a n R e p u b l i c , S u r i n a m e , T r i n i d a d and Tobago, Uruguay and V e n e z u e l a . The o i 1 - e x p o r t i n g c o u n t r i e s a r e : B o l i v i a , E c u a d o r , M e x i c o , P e r u , T r i n i d a d and Tobago, and V e n e z u e l a . 3 " Non O i 1 - E x p o r t i n g C o u n t r i e s S o u r c e : ECLAC. S t a t i s t i c a l Y e a r b o o k f o r L a t i n A m e r i c a and t h e C a r i b b e a n , 1985. p l 8 6 . 82 ECLAC ' s d a t a r e f l e c t a b r o a d e r s i t u a t i o n , b o t h i n terms o f t i m e and a l s o b e c a u s e t h e y c o n s i d e r a l l e x p o r t s . The d a t a i n T a b l e 13 i n d i c a t e t h a t t h e s i t u a t i o n o f L a t i n A m e r i c a i s one o f c h r o n i c endemic t r a d e d e f i c i t s , and t h i s i s so even among t h e r e g i o n ' s o i l e x p o r t i n g c o u n t r i e s . 5.1.3 The C o s t o f O i l I a r g u e d , above, t h a t one of t h e more commonly c i t e d r e a s o n s f o r t h e L a t i n A m e r i c a n i n t e r n a t i o n a l d e b t has been t h e o i l s h o c k s o f 1973-1974, and t h e s e c o n d i n c r e a s e i n t h e p r i c e o f o i l i n 1979 = : : =. T h e r e i s no d o u b t t h a t f o r some c o u n t r i e s o f t h e r e g i o n t h e i n c r e a s e i n t h e i r o i l e x p e n d i t u r e s was a s e r i o u s e conomic blow, but t h i s e x p l a n a t i o n i s p a r t i a l and f l a w e d ; p a r t i a l , i n s o f a r as i t a s c r i b e s t h e p r o b l e m o n l y t o t h e o i l s h o c k , and f l a w e d b e c a u s e i f one c o n s i d e r t h a t two o f t h e l a r g e s t r e g i o n a l d e b t o r s — M e x i c o and V e n e z u e l a — a r e a t t h e same t i m e two o f t h e main o i l e x p o r t i n g c o u n t r i e s i n t h e c o n t i n e n t , i t i s o b v i o u s t h a t more t h a n t h e o i l shock i s a t p l a y i n t h e d y n a m i c s o f t h e d e b t . Some L a t i n A m e r i c a n c o u n t r i e s had t o s p e n t l a r g e amounts o f money t o meet t h e i r e n e r g y n e e d s . T a b l e 14 d e t a i l s t h e p e r — 2 = 1 See S e c t i o n 1.4 Debt T e o r i e s . 83 c e n t a g e o f t h e v a l u e o f a l l i m p o r t s t h a t were d e s t i n e d t o t h e p u r c h a s e o f o i l and o t h e r l u b r i c a n t s . The c a s e t h a t i m m e d i a t e l y c a l l s f o r a t t e n t i o n i s t h a t o f B r a z i l . The B r a z i l i a n o i l b i l l r e p r e s e n t e d i n 1980 an i n c r e d i b l e 42.0*/. o f i t s i m p o r t ' s v a l u e . A r g e n t i n a , M e x i c o and V e n e z u e l a show a d e c l i n e i n t h e c o s t o f o i l and l u b r i c a n t s f r o m 1960 t o 1980, and C h i l e had a c o s t i n c r e a s e o f more t h a n 80"/.. The o v e r a l l i n c r e a s e i n t h e p e r c e n t a g e o f t h e c o s t o f p e t r o l e u m - r e l a t e d i m p o r t s f o r t h i s g r o u p o f c o u n t r i e s i s a l m o s t e x c l u s i v e l y due t o t h e b u l k y B r a z i l i a n b i l l , and t o a l e s s e r e x t e n t t o t h e C h i l e a n . A c c o r d i n g t o t h e s e d a t a , i n 1960 t h e p e r c e n t a g e o f i m p o r t e x p e n d i t u r e s f o r o i l was 46.7. The c o s t went down i n 1970, t o 27.77., and r o s e a g a i n i n 1975 and 1980, t o 64.17. and 73.67., r e s p e c t i v e l y . I t i s i m p o r t a n t t o n o t e t h a t A r g e n t i n a and C h i l e have s t e a d i l y i n c r e a s e d t h e i r p r o d u c t i o n o f p e t r o l e u m and r e l a t e d p r o d u c t s , p a r t i c u l a r l y n a t u r a l g a s , o f w h i c h b o t h c o u n t r i e s a r e n e t e x p o r t e r s . T h e r e f o r e t h e i n c r e a s e i n t h e c o s t o f o i l f o r t h i s g r o u p o f c o u n t r i e s i s borne a l m o s t e x c l u s i v e l y by B r a z i l , w h i c h has no o i l . The c o s t i n c r e a s e e x p e r i e n c e d by C h i l e l i k e t h a t o f V e n e z u e l a between 1975 and 1980, i s most p r o b a b l y due t o t h e i m p o r t o f s p e c i a l l u b r i c a n t s n o t p r o d u c e d i n t h e c o u n t r y . 84 TABLE 14 I m p o r t s o f f u e l s and l u b r i c a n t s . S e l e c t e d C o u n t r i e s . 1960 t o 19S0 1960 1970 1975 1980 A r g e n t i n a 13.4 4.7 13.0 10.1 B r a z i l 17.9 13.2 25.9 42.0 C h i l e 10.5 6.0 19.7 18.9 M e x i c o 3.9 2.8 5.0 1.7 V e n e z u e l a 1.0 1.0 0.5 0.9 S o u r c e : U.N. S t a t i s t i c a l Y e a r b o o k f o r L a t i n A m e r i c a and t h e C a r i b b e a n , 1986. p. 186. 8 5 5.1.4 C h a p t e r Summary. Up t o t h i s p o i n t I have shown t h a t t h e L a t i n A m e r i c a n economy was p e r f o r m i n g r a t h e r w e l l d u r i n g t h e 1960s and d u r i n g t h e f i r s t h a l f of t h e 1970s. I have a l s o d i s c u s s e d t h e n e g a t i v e e f f e c t s o f t h e i n c r e a s e i n t h e c o s t o f o i l , showing t h a t t h e y had a s i g n i f i c a n t e f f e c t on o n l y one o f t h e major r e g i o n a l d e b t o r s , B r a z i l , and a moderate i m p a c t on o t h e r l a r g e d e b t o r s , s u c h as A r g e n t i n a and C h i l e . And i t i s o b v i o u s t h a t t h e e f f e c t o f t h e o i l shock i n V e n e z u e l a and M e x i c o , c o u n t r i e s t h a t a r e among t h e w o r l d ' s l a r g e s t o i l e x p o r t e r s , was e c o n o m i c a l l y b e n e f i c i a l . I t r e m a i n s t o be s e e n what i n f l u e n c e o t h e r f a c t o r s had i n t h e d e b t d y n a m i c s , s u c h as t h e p o l i c i e s f o l l o w e d by t h e i n t e r n a t i o n a l b a n k i n g i n d u s t r y . T h i s i s t h e s u b j e c t o f t h e n e x t s e c t i o n o f t h e T h e s i s . 86 CHAPTER V I . THE INTERNATIONAL FINANCIAL MARKETS 87 CHAPTER V I . THE INTERNATIONAL FINANCIAL MARKETS 6.1 Bank E x p a n s i o n S i n c e t h e 1 9 t h and 2 0 t h c e n t u r y t h e b a n k i n g b u s i n e s s has r e a c h e d beyond n a t i o n a l b o r d e r s , t h u s becoming i n t e r n a t i o n a l i z e d . B a n k i n g b u s i n e s s a b r o a d has g e n e r a t e d much o f t h e p r o f i t s o f t h e b a n k i n g c e n t r e s . T h i s r e a c h i n g - o u t i s t r a d i t i o n a l w i t h i n t h e f i n a n c i a l b u s i n e s s . The g e o g r a p h i c a l e x p a n s i o n o f b a n k i n g o p e r a t i o n s may f a l l o w t h e g r o w t h and e x p a n s i o n o f t r a d e and m a n u f a c t u r i n g , but a t t i m e s t h e e x p a n s i o n f o l l o w s t h e c r i s i s o f t r a d e and i n d u s t r y . The g o l d e n r u l e o f b a n k i n g e x p a n s i o n and c o n t r a c t i o n i s t h a t p r o f i t -m a x i m i z i n g p l a y t h e d e c i s i v e r o l e . T h i s e x p a n s i o n may be n e c e s s a r y t o f i n a n c e i n t e r n a t i o n a l i n v e s t m e n t o f i t s own n a t i o n a l s , o r l o c a l i n d u s t r i e s o r m e r c h a n t s , o r i t may be d i r e c t e d t o u n p r o d u c t i v e i n v e s t m e n t , s u c h as d e f i c i t f i n a n c i n g . The p o i n t i s t h a t b a n k i n g e x p a n s i o n must n o t be g e n e r a l i z e d . E a c h e x p e r i e n c e has i t s own c a u s e s , and what m a t t e r s i s t o i d e n t i f y w h i c h o f a number o f p o s s i b l e c a u s e s a r e t h e ones b e h i n d t h e p r e s e n t d e b t c r i s i s . Whether i t i s an e x p a n s i o n o f commerce and i n d u s t r y , o r , on t h e c o n t r a r y , a s i g n of a r e c e s s i v e t r e n d , t h e p o s s i b l e outcomes must perforce be q u i t e d i f f e r e n t . In t h e e p o c h o f modern i m p e r i a l i s m d e s c r i b e d by L e n i n , banks 88 have had a s p e c t a c u l a r growth ( L e n i n 1964, C h a p t e r s I I , I I I and I V ) . T h i s was a t r i p l e e x p a n s i o n : t h e a l r e a d y m e n t i o n e d g e o g r a p h i c a l e x p a n s i o n , growth i n t e r m s o f a s s e t s , and i n c r e a s e d p o l i t i c a l i n f l u e n c e . The b a n k e r s d i d n o t l i m i t t h e m s e l v e s t o b e i n g m o n e y - l e n d e r s . They took c o n t r o l o f e n t e r p r i s e s and became i n v o l v e d i n f i n a n c i n g monopoly c o n s t r u c t i o n ( L e n i n , 1964: 2 4 5 ) . In r e c e n t t i m e s bank e x p a n s i o n was a g a i n s t i m u l a t e d by t h e e x p a n s i o n o f i n d u s t r y , more r e c e n t l y by t h e d e v e l o p m e n t o f t h e MNCs. T a b l e 15 shows t h e g r o w t h o f t h e U.S. banks a b r o a d . From e i g h t l a r g e banks i n 1960 t o 130 i n 1979 and from 131 b r a n c h e s i n 1960 t o 800 i n 1979. T h i s e x p a n s i o n c a n be e x p l a i n e d by t h e d a t a i n column f o u r of T a b l e 15. The column t e l l s us t h a t t h e banks' o v e r s e a s a s s e t s grew from U.S. $3.5 b i l l i o n i n 1960, t o U.S.* 462.7 b i l l i o n i n 1981. T h i s r e p r e s e n t s a g r o w t h o f 132.2 t i m e s i n a s s e t s f o r t h e p e r i o d , w h i l e a t t h e same time th e banks' d o m e s t i c a s s e t s growth was 7.14 t i m e s , from 225.7 b i l l i o n (U.S.) t o 1,613.5 b i l l i o n . In t h e f i r s t h a l f of t h e 1970s, p r i v a t e b a n k e r s began t o t a k e a more a c t i v e r o l e i n s u p p l y i n g t h e f i n a n c i a l needs o f g o v e r n m e n t s . U n t i l t h e n , t h i s r o l e was a l m o s t e n t i r e l y r e s t r i c t e d t o i n t e r n a t i o n a l i n s t i t u t i o n s s u c h as t h e World Bank, t h e I n t e r n a t i o n a l M o n e t a r y Fund, r e g i o n a l banks, and d e v e l o p m e n t a g e n c i e s , and as p a r t of t h e government t o 89 government b u s i n e s s . T h i s a c t i v i t y on t h e p a r t o f p r i v a t e b a n k e r s was prompted by t h e e x e s s i v e l i q u i d i t y o f t h e banks. TABLE 15 US O v e r s e a s Banks, B r a n c h e s , O v e r s e a s and D o m e s t i c A s s e t s (U.S.* B i l l i o n ) Y e a r Banks B r a n c h e s O v e r s e a s A s s e t s D o m e s t i c A s s e t s I960 8 131 3.5 225.7 1967 15 295 15.7 448.9 1970 79 583 77.4 546.5 1974 129 737 115.0 872 1979 130 800 364.0 1,335.4 1981 N.A. N.A. 462.7 1,613.5 Taken from: Hawley, 1987:6. 90 6.2 The E u r o b a n k s Eurobank was t h e T e l e x a d d r e s s f o r t h e S o v i e t bank i n F r a n c e — L e Banque de l a F r a n c e du N o r d — used by t h e new P e o p l e s ' R e p u b l i c of C h i n a i n 1949 t o t r a n s f e r t h e i r f u n d s from t h e U n i t e d S t a t e s t o E u r o p e . The move was prompted by f e a r s t h a t t h e U.S. government would f r e e z e t h o s e f u n d s . T h i s seems t o be t h e o r i g i n o f t h e name of t h e bank's c o n s o r t i a o p e r a t i n g now i n E u r o p e and e l s e w h e r e ( D e l a m a i d e 19B4: 45; Sampson 1981: 109; Swerdberg 1987: 324; N a y l o r 1987: 37-38; S e i b e r 1979: 6 8 ) . The S o v i e t U n i o n and t h e P e o p l e ' s R e p u b l i c o f C h i n a , a f r a i d t h a t i n t h e h e a t o f t h e M c C a r t h y e r a t h e y c o u l d l o s e c o n t r o l o v e r t h e i r f u n d s d e p o s i t e d i n U.S. banks, d e c i d e d t o move them t o E u r o p e . Rene P. H i g o n n e t (1985) r e p o r t s t h a t t h e f i r s t E u r o d o l l a r t r a n s a c t i o n took p l a c e when a l o a n f o r U.S.* 800,000 was i s s u e d , on F e b r u a r y 28, 1957, by t h e Moscow Narodny Bank — i n L o n d o n — t h r o u g h a London merchant bank ( H i g o n n e t 1985: 2 7 ) . As t h i s a u t h o r n o t e s , what m a t t e r s i s t h a t t h e t r a n s a c t i o n was c a r r i e d o u t — l o a n e d and p a i d f o r — i n U.S. d o l l a r s o u t s i d e of t h e U n i t e d S t a t e s . A f a c t o r t o t a k e i n t o c o n s i d e r a t i o n i m p o r t a n c e o f t h e t r a n s a c t i o n c a r r i e d banks, i s t h a t i n t h e l a t e 1950s, a l l when e v a l u a t i n g t h e o u t by t h e B r i t i s h E u r o p e a n monetary 91 a u t h o r i t i e s had imposed r e s t r i c t i o n s on c a p i t a l o u t f l o w s , s i m i l a r t o t h o s e put i n p l a c e by t h e A m e r i c a n s . The r e s u l t a g g r a v a t e d t h e s c a r c i t y of h a r d c u r r e n c y a v a i l a b l e t o f i n a n c e o f f — s h o r e o p e r a t i o n s . B r i t a i n , c o n s i d e r e d s i n c e t h e N a p o l e o n i c t i m e s t h e i n t e r n a t i o n a l money-market par e x c e l l e n c e , had put r e s t r i c t i o n s on c a p i t a l o u t f l o w s i n 1957, t h e same y e a r t h e t r a n s a c t i o n w i t h the Narodny Bank took p l a c e . T h i s r e s t r i c t i o n p r o h i b i t e d l o a n s t o n o n - r e s i d e n t s by banks o f t h e U n i t e d Kingdom ( S e i b e r , 1979: 6 S ) . As m e n t i o n e d , s i m i l a r r e s t r i c t i o n were i n p l a c e o r were f o r t h c o m i n g i n t h e U n i t e d S t a t e s , Germany and o t h e r i n d u s t r i a l i z e d c o u n t r i e s . The E x c h e q u e r — t h e B r i t i s h M i n i s t r y o f F i n a n c e — was n o t c o n c e r n e d w i t h t r a n s a c t i o n s i n o t h e r c u r r e n c i e s . I t s i n t e r e s t was t o l i m i t p o s s i b l e m i g r a t i o n s o f B r i t i s h pounds. By a l l o w i n g t h e f r e e movement o f o t h e r c u r r e n c i e s i n E n g l a n d , t h e B r i t i s h m onetary a u t h o r i t i e s f a c i l i t a t e d t h e b i r t h of t h e E u r o b a n k s . By e x e m p t i n g t h o s e t r a n s a c t i o n o f t h e d e p o s i t s t h a t banks have t o make w i t h t h e i r c e n t r a l banks as an i n s u r a n c e on p o s s i b l e l o s s e s - l o a n l o s s p r o v i s i o n s - , t h e new f a c i l i t y , t h e E u r o l o a n , became v e r y a t t r a c t i v e t o t h e banks, f u r t h e r s t i m u l a t i n g i t s d e v e l o p m e n t . These d e p o s i t s w i t h t h e c e n t r a l banks do n o t pay i n t e r e s t 92 t o t h e d e p o s i t o r , i n t h i s c a s e t h e p r i v a t e f i n a n c i a l banks. No c e n t r a l bank pays i n t e r e s t on t h i s k i n d o f d e p o s i t . An i m p o r t a n t e f f e c t o f t h i s e x e m p t i o n i s t h a t i t a l l o w s t h e p r i v a t e banks t o c h a r g e l e s s f o r t h e i r l o a n s , w h i l e a t t h e same t i m e e n a b l i n g them t o m a i n t a i n a good m a r g i n o f p r o f i t ( s p r e a d ) . S i n c e t h e p r i v a t e banks a r e f o r c e d t o make a non-i n t e r e s t d e p o s i t as a form o f i n s u r a n c e a g a i n s t p o s s i b l e l o s s e s , t h i s means t h a t an amount o f money t h a t o t h e r w i s e c o u l d be g e n e r a t i n g p r o f i t s i s i d l e . To compensate f o r t h a t , t h e banks c h a r g e h i g h e r i n t e r e s t . Once t h e i n s u r a n c e r e q u i r e m e n t i s removed, t h e banks can c h a r g e l o w e r i n t e r e s t r a t e s and a t t h e same t i m e m a i n t a i n , o r even i n c r e a s e , t h e t r a d i t i o n a l m a r g i n o f p r o f i t a b i l i t y . The i m p o r t a n c e o f t h e b i r t h o f t h e E u r o b a n k s and t h e d o l l a r o p e r a t i o n s i n E u r o p e i s t h a t t h e E u r o p e a n banks, B r i t i s h i n t h e f i r s t p l a c e , were a b l e t o engage i n new forms o f o p e r a t i o n s — t h a t were v e r y p r o f i t a b l e . A l s o , a t t h e same t i m e , t h e y began t o work w i t h new c u s t o m e r s . The new c u s t o m e r s were i n d e p e n d e n t c o u n t r i e s i n t e r e s t e d i n s e c u r i n g l o a n s w i t h o u t t h e d e l a y s and o t h e r d i f f i c u l t i e s t h a t were e n t a i l e d i n d e a l i n g w i t h i n t e r n a t i o n a l f i n a n c i a l a g e n c i e s . T h e s e new d e v e l o p m e n t s were v e r y t i m e l y , s i n c e by t h e l a t e 1960s and e a r l y 1970s, t h e r e l a t i o n s between N o r t h A m e r i c a n banks and t h e l a r g e c o r p o r a t i o n s were s t r a i n e d . 93 I have d e s c r i b e d how t h e E u r o b a n k s came i n t o e x i s t e n c e b e c a u s e t h e r e was an i n c r e a s e i n t h e US d o l l a r s i n E u r o p e . An i n c r e a s e was i n t u r n due t o t h r e e e v e n t s : f i r s t , l a r g e U.S. a i d and e x p e n s e s i n t h e o l d c o n t i n e n t , s e c o n d , t h e r e was a m i g r a t i o n o f p a r t o f t h e a c t i v i t i e s o f N o r t h A m e r i c a n C o r p o r a t i o n s and A m e r i c a n Banks t o E u r o p e a s a c o n s e q u e n c e o f t h e r e l a t i v e d e c l i n e o f t h e i r a c t i v i t i e s i n t h e U n i t e d S t a t e s . T h i r d , t h e r e was a b e t t e r b u s i n e s s c l i m a t e i n E u r o p e a t t h a t t i m e . Indeed t h e b u s i n e s s c l i m a t e f o r banks i n t h e U n i t e d S t a t e s was n o t v e r y good. M i n t z and S c h w a r t z ( 1 9 8 6 ) , s a y t h a t i n t h e 1970s l a r g e c o r p o r a t i o n s i n t h e U n i t e d S t a t e s were r e d u c i n g d i v i d e n d s p a i d t o t h e i r s h a r e h o l d e r s i n o r d e r t o i n c r e a s e t h e i r c a p i t a l f u n d s and t h e r e f o r e r e d u c e t h e i r b o r r o w i n g f rom t h e banks. The banks moved t o c hange t h a t by i m p l e m e n t i n g s e v e r a l s t r a t e g i e s , s u c h a s , dumping s t o c k s f r o m t h e c o m p a n i e s t h a t were n o t b o r r o w i n g i n o r d e r t o d e p r e s s t h e p r i c e o f t h o s e s h a r e s i n t h e s t o c k m a r k e t . T h i s s t r a t a g e m put t h e c o r p o r a t i o n s i n a d e l i c a t e s i t u a t i o n . They had t o d e c i d e whether t o s u s t a i n t h e l o s s e s p r o v o k e d by t h e bank's a c t i o n s , o r pay f o r t h e l o a n s t h e banks wanted them t o t a k e . The c o r p o r a t i o n s c h o o s e t o a c c e p t t h e l o a n s . A n o t h e r s t r a t e g y was t o promote l e g i s l a t i o n aimed a t f o r c i n g t h e c o r p o r a t i o n s t o pay h i g h e r d i v i d e n d s . In t h i s c a s e , t h e c o r p o r a t i o n s would n o t have t h e a b i l i t y t o s a v e t h e money n e c e s s a r y t o i n v e s t i n new deve1opmen t s . 94 The e x c e s s i v e l i q u i d i t y began w i t h t h e t r a n s f e r o f d o l l a r s from t h e U n i t e d S t a t e s I t was f u r t h e r s t i m u l a t e d by d e p o s i t s o f t h e E u r o p e a n c e n t r a l banks i n t h e same m a r k e t , p l u s t h e l a t e r r e - c y c l i n g o f p a r t o f t h e OPEC s u r p l u s e s , t o w h i c h was added t h e f a c t t h a t t h e s e o p e r a t i o n s d i d n o t r e q u i r e l o a n -l o s s p r o v i s i o n s w i t h t h e E u r o p e a n c e n t r a l b a n k s . T h e s e were a l l s u f f i c i e n t s t i m u l i f o r t h e banks t o l e n d t o u n d e r d e v e l o p e d c o u n t r i e s ( In p a r t i c u l a r l o a n e d t o L a t i n A m e r i c a , as we have seen i n C h a p t e r V ) , w h i c h had a good e c o n o m i c p e r f o r m a n c e a t t h a t t i m e , showing a h e a l t h y e c o n o m i c g r o w t h , w i t h i n t e r n a l p o l i t i c a l s t a b i l i t y — i n t h e s e n s e o f p r e s e r v a t i o n o f t h e s t a t u s quo - i n many c a s e s g u a r a n t i e d by t h e p r e s e n c e o f m i l i t a r y r e g i m e s . 6.2.1 M a i n C h a r a c t e r i s t i c s o f t h e E u r o b a n k s . Terms s u c h a s , E u r o p e a n Money M a r k e t ( s ) , E u r o b a n k s , I n t e r -n a t i o n a l F i n a n c i a l M a r k e t s , and o t h e r s , a r e used h e r e i n a l i b e r a l way. T h e r e a r e d i f f e r e n c e s i n t h e meaning of t h e s e terms f o r d i f f e r e n t a u t h o r s . More i m p o r t a n t , b e c a u s e o f t h e r a p i d l y c h a n g i n g r e a l i t y t h a t t h e s e words a r e i n t e n d e d t o d e s c r i b e , t h e s e terms have changed t h e i r meaning o v e r t i m e . The E u r o p e a n Money M a r k e t i s made up o f s e v e r a l d i f f e r e n t i n s t r u m e n t s and p r o c e d u r e s o f t r a n s a c t i o n s . As an example o f t h i s v a r i e t y I q u o t e D e l a m a i d e (1984) , who d e f i n e s t h e 95 f o l l o w i n g i n s t i t u t i o n s and i n s t r u m e n t s : E u r o m a r k e t , f r e e - f l o a t i n g e x c h a n g e o f E u r o c u r r e n c i e s g r a v i t a t i n g t o w a r d s London. (Today t h e r e i s no p a r t i c u l a r 1 oca 1 i t y ) . E u r o c u r r e n c i e s , n a t i o n a l c u r r e n c i e s h e l d o u t s i d e t h e i r c o u n t r y o f o r i g i n ; t h e y must be c o n v e r t i b l e s . E u r o c r e d i t , s y n d i c a t e d l o a n s f u n d e d by E u r o c u r r e n c i e s . E u r o b o n d s , t h o s e (bonds) o f f e r e d o u t s i d e t h e c o u n t r y o f t h e c u r r e n c y t h e y a r e d e n o m i n a t e d . ( T h e r e a r e h y b r i d v e r s i o n s ) . E u r o b a n k , j o i n t v e n t u r e o f c o n s o r t i u m banks e s p e c i a l l y e s t a b l i s h f o r t h e p u r p o s e [ o f o p e r a t i n g i n t h e E u r o m a r k e t ] ( D e l a m a i d e 1984: 4 5 ) . 6.2.2 E a r l y E v o l u t i o n o f t h e E u r o m a r k e t 1957 F i r s t E u r o - d o l l a r t r a n s a c t i o n . 1958 E u r o p e r e t u r n s t o e x t e r n a l c o n v e r t i b i l i t y . 1963 F i r s t a v a i l a b l e s t a t i s t i c s from t h e Bank f o r I n t e r n a t i o n a l S e t t l e m e n t s ( B I S ) . The s i z e o f t h e market by t h i s d a t e i s $3,650 U.S., up f r o m $270 U.S. i n 1957. 1964 A t t h e end o f 1964 t h e m a r k e t s ' s i z e was $7.5 b i l l i o n U.S. ( B I S 1966:146). 96 1965 By March o f t h i s y e a r t h e s i z e of t h e market had r e a c h e d $9 b i l l i o n U.S., and a t y e a r ' s end, t h e market had grown t o a p p r o x i m a t e l y $11.5 b i l l i o n U . S . ( B I S 1966:145). Today i t i s i n c o r r e c t t o t a l k a b o u t t h e E u r o m a r k e t s i n c e t h e a c t i v i t y , o r i g i n a l l y c a r r i e d o u t a l m o s t e x c l u s i v e l y i n E u r o p e , i s d i s s e m i n a t e d t h r o u g h o u t t h e w o r l d . I t i n c l u d e s s m a l l and poor c o u n t r i e s , a l t h o u g h i t has i n c r e a s i n g l y a t t r a c t e d t h e i n t e r e s t o f l a r g e f i n a n c i a l c e n t r e s . The I n t e r n a t i o n a l F i n a n c i a l F a c i l i t y was e s t a b l i s h i n New York i n 1981, w h i c h i s t o say t h a t New York has an o f f - s h o r e b a n k i n g c e n t r e i n i t s m i d s t ( J o h n s t o n 1983:34). The i m p o r t a n c e o f t h e m u l t i n a t i o n a l banks f o r t h e i n t e r n a -t i o n a l d e b t i s e v i d e n t . The E u r o m a r k e t was a t t h e c e n t r e o f th e i n d e b t e d n e s s p r o c e s s b e f o r e t h e r e was a c r i s i s , and s t i l l i s i n t h a t p o s i t i o n . In f a c t , t h e E u r o m a r k e t i s one o f t h e c o n s t a n t e l e m e n t s o f t h e p r e s e n t d e b t c r i s i s . T h i s i s n o t t h e c a s e o f t h e o f f i c i a l i n t e r n a t i o n a l f i n a n c i a l i n s t i t u t i o n s , s u c h as t h e IMF o r t h e World Bank, w h i c h b e g i n t o p l a y a s i g n i f i c a n t r o l e o n l y a f t e r t h e p r i v a t e i n s t i t u t i o n s f o u n d t h e m s e l v e s i n s e r i o u s t r o u b l e . The E u r o m a r k e t has a number o f i n t e r e s t i n g f e a t u r e s , s u c h as t h e f a c t t h a t i n i t s e a r l y s t a g e i t o p e r a t e d a l m o s t 97 e x c l u s i v e l y i n US d o l l a r s , s t i l l i t s main c u r r e n c y . O t h e r f e a t u r e s t h a t d i s t i n g u i s h t h i s f i n a n c i a l m a r k e t a r e i t s l a c k of r e g u l a t i o n s , and i t s i n c r e d i b l e p a c e o f g r o w t h . I t s g r o w t h i s i n d e e d a m a z i n g , from U.S.* 20 b i l l i o n i n 1967, t o U.S.* 200 b i l l i o n i n 1975 and t o U.S.$2 t r i l l i o n i n 1982 ( S e i b e r 1979: 44; D e l a m a i d e 1984: 5 1 ) . The o i l s h o c k s o f 1973 and 1979 n e g a t i v e l y a f f e c t e d t h e b a l a n c e o f payments o f o i 1 - i m p o r t i n g c o u n t r i e s . A t t h e same t i m e , t h e i n c r e s e i n t h e p r i c e o f o i l p u t i n t h e hands o f o i l e x p o r t e r s l a r g e amounts o f money. Y e t , t h e o i 1 - e x p o r t e r s p r e s e n c e i n t h e E u r o m a r k e t has been a l w a y s r e l a t i v e l y modest. T h e i r n e t p a r t i c i p a t i o n as c r e d i t o r s — t h a t i s , s u b t r a c t i n g t h e i r b o r r o w i n g f rom t h e i r d e p o s i t s — i n t h e E u r o m a r k e t i n t h e p e r i o d o f t h e two o i l - s h o c k s , between 1973 and 1979, n e v e r went beyond 157. o f t h e t o t a l s i z e o f t h e m a r k e t . In g r o s s t e r m s , t h a t i s o n l y as c r e d i t o r s , w i t h o u t d i s c o u n t i n g t h e i r b o r r o w i n g f rom t h e market, t h e i r s h a r e was s l i g h t l y below 19 p e r c e n t . T a b l e 16 p r o v i d e s d e t a i l e d f i g u r e s f r o m 1974 t o 1979, i n c l u d i n g t h e p a r t i c i p a t i o n o f t h e o i 1 - e x p o r t i n g c o u n t r i e s . As f o r t h e p e r i o d p r i o r t o t h e o i l s h o c k , t h e Bank f o r I n t e r n a t i o n a l S e t t l e m e n t s ' R e p o r t of J u n e 1 0 t h 1975 ( p . 1 4 1 ) , e s t i m a t e d t h e g r o w t h o f t h e E u r o - c u r r e n c y m a r k e t s i n c e 1969 u n t i l 1974. From U.S.$44 b i l l i o n , o n 1969 t o U.S.$177 b i l l i o n , i n 1974. (See T a b l e 1 7 ) . 98 TABLE 16 BIS e s t i m a t e d s i z e o f t h e E u r o - c u r r e n c y m a r k e t , o i l - e x p o r t i n g c o u n t r i e s p a r t i c i p a t i o n . (US* b i l l i o n ) Y e a r Brand O i l - E x p O i l - E x p P a r t i c i p a t i o n T o t a l S o u r c e 2 U s e r 3 7. o f S. T o t a l 1974 177 29.1 1975 205 34.6 1976 247 45.2 1977 300 54.0 1978 375 54.7 1979 475 81.0 B r o s s Net 3.5 16.44 14.46 5.3 16.87 14.24 9.6 18.29 14.41 15.6 18.00 12.80 24.30 14.58 8.10 30.4 17.05 10.65 S o u r c e : B I S A n n u a l R e p o r t . S e v e r a l i s s u e s . 99 TABLE 17 Growth o f t h e E u r o m a r k e t 1969-1974 (US* b i l l i o n ) Y e a r U S * ( b i l l i o n ) 1969 44.0 1970 57.0 1971 71.0 1972 92.0 1973 132. 0 1 1974 177.0 l . T h e BIS R e p o r t o f June 1 0 t h , 1974, p.172-3 i n f o r m s t h a t " . . . t h e M i d d l e E a s t . . . c o n t i u e d t o be n e t s u p p l i e r o f f u n d s , a l t h o u g h at. $1.1 m i l l i a r d . . . t h e i n f l o w . . . were on a much s m a l l e r s c a l e t h a n i n p r e v i o u s y e a r s . . . F o r t h e f i r s t t i m e t h e M i d d l e E a s t was a l s o o f some i m p o r t a n c e as b o r r o w e r o f E u r o -f u n d s i n 1973, t h e E u r o - b a n k s ' c l a i m s on t h a t a r e a showing an i n c r e a s e o f $0.9 m i l l i a r d . " 100 T h e r e a r e t h r e e o t h e r c h a r a c t e r i s t i c s o f t h i s m a r k e t . F i r s t , t h e speed o f i t s o p e r a t i o n s a l m o s t s i n c e i t s i n c e p t i o n , f a c i l i t a t e d by R e u t e r s ' d e c i s i o n t o put a t t h e d i s p o s i t i o n o f t h e i n t e r n a t i o n a l b a n k e r s t h e i r c o m m u n i c a t i o n f a c i l i t i e s ( N a y l o r 1 9 8 7 ) . A n o t h e r i m p o r t a n t and n o v e l c h a r a c t e r i s t i c o f t h i s market i s t h a t one o f t h e p l a y e r s , s o v e r e i g n b o r r o w e r s , do n o t need c o l l a t e r a l ( D e l a m a i d e 1 9 8 4 : 4 8 ) . F i n a l l y , t h e f a c t t h a t i t r e p r e s e n t s t h e t o t a l break-down o f t h e B r e t t o n Woods s y s t e m o f f i x e d - e x c h a n g e r a t e s p a r i t i e s ( J o h n s t o n 1983: 20 - 2 1 ) . Why was t h e r e a U.S. d o l l a r m a r k e t o u t s i d e of t h e U n i t e d S t a t e s , and how d i d i t come t o grow a t s u c h p a c e ? . I have a l r e a d y m e n t i o n e d ( C h a p t e r IV) t h a t t h e U n i t e d S t a t e s government, t h e MNCs and t h e M u l t i n a t i o n a l Banks t r a n s f e r r e d l a r g e amounts o f d o l l a r s t o E u r o p e and J a p a n . P r i o r t o 1970 th e E u r o c u r r e n c y market was t h e domain o f t h e MNCs and p u b l i c b o r r o w e r s f r o m t h e i n d u s t r i a l i z e d c o u n t r i e s ( S e i b e r 1979: 4 5 ) . But t h e r e seems t o have been p o l i t i c a l r e a s o n s f o r t h e r a p i d e x p a n s i o n o f t h i s m a r k e t . I t has been s u g g e s t e d t h a t , s i n c e t h e N o r t h A m e r i c a n d o l l a r became t h e i n t e r n a t i o n a l c u r r e n c y par e x c e l l e n c e a f t e r B r e t t o n Woods, and t h i s s i t u a t i o n c a r r i e s w i t h i t b e n e f i t s f o r t h e i s s u i n g c o u n t r y ^% " . . . t h e E u r o p e a n s s t a t e s t o l e r a t i o n , i f n o t a c t i v e e n c o u r a g e m e n t , o f t h e "* F o r a d i s c u s s i o n of t h e b e n e f i t s o f ssignBurale, s e e Hawley 1987. 101 E u r o c u r r e n c y s y s t e m r a p i d g r o w t h , b e g i n n i n g i n t h e 1960s, [was] a means t o break t h e d o l l a r monopoly o f t h e U.S. banks and t h e U.S. government" (Hawley 1987: 9 ) . What t h i s a u t h o r i s s u g g e s t i n g i s t h a t l a r g e amounts o f d o l l a r s i n t h e hands o f E u r o p e a n and J a p a n e s e c e n t r a l banks, p r i v a t e i n d i v i d u a l s and i n s t i t u t i o n s can be an e f f e c t i v e means t o i n f l u e n c e t h e N o r t h A m e r i c a n economy. 6.3 F a l l i n g r a t e o f p r o f i t s . I t i s beyond t h e s c o p e o f t h i s work t o d i s c u s s a t l e n g t h Marx's Law o f t h e Tendency o f t h e R a t e o f P r o f i t t o F a l l , w h i c h has a c e n t r a l p l a c e i n h i s u n d e r s t a n d i n g o f c a p i t a l i s m . I t f u n c t i o n s p a r t i c u l a r l y as t h e t r i g g e r i n g mechanism t h a t s e t s i n m o t i o n c y c l i c a l c r i s e s o f t h e s y s t e m . The p u r p o s e o f t h i s segment o f t h e work i s t o p r e s e n t t h e argument t h a t a f a l l i n t h e r a t e o f p r o f i t i n t h e U n i t e d S t a t e s i m m e d i a t e l y a f t e r t h e Second World War, i s a t t h e c e n t r e o f t h e r e a s o n s why c a p i t a l began t o move t o w a r d s E u r o p e , g r e a t l y h e l p i n g t o e s t a b l i s h and d e v e l o p t h e E u r o m a r k e t . A n o t h e r i m p o r t a n t p o i n t i s t h a t , f a l l i n g p r o f i t s i n d u c e v e r y s t r o n g s p e c u l a t i v e t e n d e n c i e s . . T h a t i s , t h e c y c l e o f c a p i t a l i s n o t c o m p l e t e d and a s u p e r abundance o f money f l o o d s t h e f i n a n c i a l m a r k e t s . The s t a g e i s s e t f o r s p e c u l a t i o n i n s e v e r a l f o r m s , among them l e n d i n g a t h i g h i n t e r e s t , and m o n o p o l i s t i c 102 and o l i g o p o l i s t i c t e n d e n c i e s , s u c h as t h o s e v i s i b l e now i n t h e U.S. economy. T h a t i s what t h e L B O s ^ and m e r g e r s r e p r e s e n t : t h e s o l u t i o n t h e s y s t e m t r i e s i n o r d e r t o s o l v e a p r o f o u n d c r i s i s o f a c c u m u l a t i o n . The f a c t t h a t p r o f i t s o f N o r t h A m e r i c a n c o r p o r a t i o n s were s t e a d i l y d e c l i n i n g s i n c e t h e e a r l y 1950s, as i l l u s t r a t e d i n F i g u r e B, l e n d s s u p p o r t t o t h e s p e c u l a t i o n t h a t t h e U.S. M u l t i n a t i o n a l s were m i g r a t i n g n o t o n l y i n o r d e r t o e s t a b l i s h t h e m s e l v e s i n a new m arket, but a l s o i n s e a r c h of h i g h e r p r o f i t s . The h i g h p r o f i t s o b t a i n e d by t h e s e c o r p o r a t i o n s i n t h e U n i t e d S t a t e s d u r i n g t h e war due t o c o n t r o l s on wages were r a p i d l y d e c l i n i n g , and a l t h o u g h s a l a r i e s i n E u r o p e and J a p a n were much lo w e r t h a n i n t h e U n i t e d S t a t e s , t h e E u r o p e a n s and J a p a n e s e were r a p i d l y r e a c h i n g t h e U n i t e d S t a t e s s t a n d a r d s . The v a r i a b l e s i n v o l v e d i n d e t e r m i n i n g t h e r a t e of p r o f i t a c c o r d i n g t o Dumenil e t a l a r e : wages, c a p i t a l i n v e s t m e n t and i n d u s t r i a l c a p a c i t y u t i l i z a t i o n . Dumenil a r g u e s t h a t i n s p i t e o f t h e l a r g e wage i n c r e a s e s i n J a p a n and Germany a f t e r t h e Second World War, t h e c a p i t a l i n v e s t m e n t i n t h o s e c o u n t r i e s "*" L e v e r a g e Buy Out. T h i s e x p r e s s i o n i s u s e d t o d e s c r i b e t h e a c q u i s i t i o n o f c o m p a n i e s , l a r g e l y f i n a n c e d w i t h l o a n s c o n t r a c t e d by t h e b u y e r . T h i s means t h a t , f o r i n s t a n c e , many medium and s m a l l s h a r e - h o l d e r s a r e p a i d handsome sums f o r t h e i r s h a r e s , l e a v i n g t h e company i n t h e hands o f a r e d u c e d number of p e o p l e , o r t u r n i n g i t t o t a l l y p r i v a t e ; i n o t h e r words, c a p i t a l i s t a c c u m u l a t i o n w i t h o u t c a p i t a l i s t i n v e s t m e n t . 103 104 i n c r e a s e d . In t u r n , c a p i t a l i n v e s t m e n t i n c r e a s e d t h e i r t e c h n o l o g i c a l c a p a c i t y , h e l p i n g them t o s urmount t h e i r low economic p o s t - w a r p o s i t i o n v i s - a - v i s t h e U n i t e d S t a t e s . A t t h e same t i m e t h e y were a b l e t o i n c r e a s e s a l a r i e s and s u s t a i n h i g h l e v e l s o f i n f l a t i o n . F i g u r e B shows a g e n e r a l d e c l i n e i n t h e r a t e o f p r o f i t f o r t h e U.S. C o r p o r a t i o n s f r o m 1952 u n t i l a v i g o r o u s r e c o v e r y i n 1961. T h i s r e c o v e r y l a s t e d a s h o r t p e r i o d o f t i m e , u n t i l 1964, t o be f o l l o w e d by a s h a r p and p e r s i s t e n t d e c l i n e u n t i l 1970. In s p i t e o f a s h o r t - l i v e d r e c o v e r y i n 1972 and 1973, a n e g a t i v e t r e n d p e r s i s t e d u n t i l 1980. Mennis (1984) u s s e s a n o t h e r measure o f t h e N o r t h A m e r i c a n C o r p o r a t i o n ' s p r o f i t s , d i f f e r e n t from t h a t o f D u m e i l . I t t a k e s i n t o c o n s i d e r a t i o n t a x e s payments, a s shown i n F i g u r e C. Memmis's comments a r e more o p t i m i s t i c . He a r g u e s t h a t a t 5.87. a v e r a g e s i n c e 1952 "...no p a r t i c u l a r t r e n d seems d i s c e r n i b l e so t h a t t h e s h a r e o f p r o f i t s , a l t h o u g h v o l a t i l e , does n o t seems t o be s h r i n k i n g o v e r t i m e (Nemmis, 1984: 5 1 ) . . " . However, F i g u r e C shows t h a t a t no t i m e a f t e r 1952 — t h e s t a r t i n g y e a r — was t h e r a t e of p r o f i t r e - e s t a b l i s h e d a t t h e l e v e l o f t h a t y e a r . T h i s i s i n b a s i c a greement w i t h t h e Dumenil e t a l argument, t h a t t h e r e i s a g e n e r a l t e n d e n c y of t h e r a t e o f p r o f i t t o f a l l . T h i s t e n d e n c y i s u p s e t a t i r -r e g u l a r i n t e r v a l s by s p o r a d i c r e c o v e r i e s , p a r t i c u l a r l y d u r i n g 105 FIGURE C .1 •• NIPA Corpora;* ProStj ihz: Taxes, 195C-19S2 (as a percent of gross national product) Percent 10 8 6 2 • «s % ol GNP • Average for -\ 1950-1932 ! ! I I ! I ! ! 1 i 1 ! t 1 I 1 ! 1 t 1 I ! 1 !  1 1 ! 1 1 t ! 1 ! 1 1.950 1 9 5 5 1 S 5 0 1 9 6 5 1 9 7 0 1 9 7 5 1 9 8 0 1 9 B 5 Yea.T Sourer NT?A. U.S. Drp*ranen! al Conurwrot. Taken from: M e n n i s 1984:52. 106 p e r i o d s o f war i n t h e c a s e o f t h e U n i t e d S t a t e s economy^ and — a s a m i r r o r i m a g e — i n t h e p o s t - w a r p e r i o d s f o r J a p a n and Germany. 6.4 US C a p i t a l Outflows B e g i n n i n g i n t h e l a t e 1950s, t h e U n i t e d S t a t e s began t o c a r r y b a l a n c e o f payments d e f i c i t s t h a t were r e l a t i v e l y s m a l l a t t h e t i m e . Y e t t h e m onetary a u t h o r i t i e s i n t h e U n i t e d S t a t e s t r i e d t o c o n t r o l t h e d e f i c i t by s e t t i n g i n p l a c e r e g u l a t i o n s d e s t i n e d t o slow-down t h e f l o w o f p r i v a t e c a p i t a l . T h e s e a t t e m p t s had e x a c t l y t h e o p p o s i t e e f f e c t . N o r t h A m e r i c a n p r i v a t e c a p i t a l i n t h e e a r l y 1960s was l e a d i n g t o w a r d s E u r o p e . Money was i n v e s t e d by M u l t i n a t i o n a l C o r p o r a t i o n s t h a t began t o move some o f t h e i r o p e r a t i o n s t o E u r o p e and were soon f o l l o w e d by t h e Banks. What t h e E u r o p e a n c o n t i n e n t c o u l d o f f e r t o t h e M u l t i n a t i o n a l C o r p o r a t i o n s (MNCs) was c h e a p and q u a l i f i e d l a b o u r , as w e l l a s a l a r g e market and h i g h e r p r o f i t s ( D e l a m a i d e , 1984: 4 5 ) . A l t h o u g h i t i s w o r t h r e p e a t i n g t h a t i t was t h e U n i t e d S t a t e s government t h a t began e x p o r t i n g money, w i t h i n t h e framework o f t h e M a r s h a l l P l a n , i t was a l s o a b l e t o f i n a n c e i t s m i l i t a r y a l l i a n c e s . In December o f 1964, t h e t o t a l f o r e i g n c l a i m s by U.S. banks — 156 o f them — was U.S.* 9.5 b i l l i o n (Hawley 1987: 7 1 ) . Between 1957 and 1960 t h e N o r t h A m e r i c a n d i r e c t i n v e s t m e n t i n 107 s u b s i d i a r i e s i n Western E u r o p e and Canada r o s e s t e a d i l y . T h i s g rowth was l a r g e r f o r E u r o p e . The N o r t h A m e r i c a n monetary a u t h o r i t i e s i n t r o d u c e d s e v e r a l r e g u l a t i o n s aimed a t c u r b i n g c a p i t a l f l i g h t . F i r s t was t h e Revenue A c t o f 1962. I t was f o l l o w e d by t h e I n t e r e s t E q u a l i z a t i o n Tax i n 1963 and 1971, t h e V o l u n t a r y C a p i t a l C o n t r o l P rograms o f 1965 and 1967, t h e M a n d a t o r y C a p i t a l C o n t r o l P r o g r a m s i n 1968 and 1971. The US monetary a u t h o r i t i e s a l s o made a t t e m p t s t o r e g u l a t e t h e E u r o p e a n money market i n 1979 and 1980. = 2 e These a d m i n i s t r a t i v e measures n o t o n l y f a i l e d b u t , on t h e c o n t r a r y , t h e y l a r g e l y s t i m u l a t e d c a p i t a l f l i g h t , t o t h e p o i n t t h a t i t can be s a i d t h a t t h e s e p o l i c i e s were a d i r e c t and immediate c a u s e f o r t h e emergence and r a p i d g r o w t h o f t h e E u r o d o 1 1 a r . M a r i l y n S e i b e r n o t e s t h a t t h e g r o w t h o f t h e E u r o m a r k e t was a r e s p o n s e t o t h e need o f t h e M u l t i n a t i o n a l C o r p o r a t i o n s f o r a more s p e c i a l i z e d money-market. T h e s e c o r p o r a t i o n s had " . . . t h e need f o r a more s o p h i s t i c a t e d i n t e r n a t i o n a l c a p i t a l m a r k e t " (1979: 6 9 ) . "*" F o r a d e t a i l e d d i s c u s s i o n o f t h e s e measures and t h e i r e f f e c t s on t h e N o r t h A m e r i c a n economy, s e e Hawley 1987, and a l s o S e i b e r 1979. 10B 6.5 C h a p t e r Summary In t h i s C h a p t e r I have p r e s e n t e d e v i d e n c e t h a t t h e E u r o m a r k e t , c e n t r a l p l a y e r i n t h e i n t e r n a t i o n a l i n d e b t e d n e s s p r o c e s s e s o f L a t i n A m e r i c a , i s r e l a t e d t o e c o n o m i c , f i n a n c i a l and m onetary e v e n t s t h a t took p l a c e i n t h e IMEs. F u r t h e r m o r e , t h e d i s c u s s i o n i n d i c a t e s t h a t t h e emergence and g r o w t h of t h e E u r o m a r k e t i s t h e p r o d u c t o f e x c e s s i v e l i q u i d i t y c r e a t e d by t h e e conomic c r i s i s . T h i s s u p p o r t s my h y p o t h e s e s one and two, t h a t i s , t h a t b e h i n d t h e e x c e s s i v e l i q u i d i t y ( h y p o t h e s i s 2) t h e r e i s an e conomic d e p r e s s i o n ( h y p o t h e s i s 1 ) . In t h e f o l l o w i n g C h a p t e r , I w i l l d i s c u s s t h e management of t h e d e b t . I w i l l p r e s e n t e v i d e n c e s u p p o r t i n g my t h i r d h y p o t h e s i s , t h a t i s t h a t t h e r e s o l u t i o n o f t h e d e b t c r i s i s f o l l o w s and r e i n f o r c e s t h e e x i s t i n g s o c i a l p a t t e r n s o f i n e q u a l i t y , i n t h e d e b t o r and c r e d i t o r c o u n t r i e s a l i k e . 109 CHAPTER VII DEBT AND POLITICS. 110 CHAPTER V I I . DEBT AND P O L I T I C S . In t h i s p a r t o f t h e T h e s i s I w i l l p r e s e n t e v i d e n c e t h a t s u p p o r t s my t h i r d w o r k i n g h y p o t h e s i s : t h a t t h e c l a s s s t r u c t u r e d e t e r m i n e s t h e p o l i t i c a l d e c i s i o n s t a k e n a b o u t t h e d e b t and t h a t t h e s e d e c i s i o n s t e n d t o r e i n f o r c e t h e s o c i a l s t r u c t u r e and i n c r e a s e t h e u n e q u a l d i s t r i b u t i o n o f w e a l t h i n b o t h t h e IMEs and t h e d e p e n d e n t c o u n t r i e s . 7.1 The M i l i t a r y and t h e D e b t . By c o m p a r i s o n w i t h t h e d e c l i n i n g b u s i n e s s i n t h e U n i t e d S t a t e s and E u r o p e , t h e p r o s p e c t s and r e a l i t y o f l e n d i n g t o u n d e r d e v e l o p e d c o u n t r i e s i n t h e 1970s was b e t t e r . The banks engaged e n e r g e t i c a l l y i n t h i s r e - d i s c o v e r e d m a r k e t , p a r t i c u l a r l y L a t i n A m e r i c a . I t has been e s t i m a t e d t h a t l e n d i n g t o t h e r e g i o n i n c r e a s e d d u r i n g t h i s p e r i o d a t a p p r o x i m a t e l y a 307. a n n u a l r a t e , w h i c h was w e l l above t h e i n c r e a s e o f t h e banks' c a p i t a l o f 157. t o 207. (ECLAC 1985a: 5 6 ) . The p r e s e n c e o f m i l i t a r y r e g i m e s i n L a t i n A m e r i c a d u r i n g t h e 1960s and 1970s, s u c h as t h o s e of B r a z i l , A r g e n t i n a , C h i l e and Uruguay, f i r m b e l i e v e r s i n t h e c o n s e r v a t i v e m onetary p o l i c i e s I l l o f t h e C h i c a g o S c h o o l o f E c o n o m i c s ^ a c t e d as an i n c e n t i v e f o r t h e banks t o engage i n g e n e r o u s l e n d i n g . To a l a r g e e x t e n t t h e e c o n o m i c ' m i r a c l e s ' i n t h o s e c o u n t r i e s were f i n a n c e d w i t h l o a n s . One o f t h e c o u n t r i e s t h a t r e c e i v e d much p r a i s e was B r a z i l . The c o u n t r y ' s d e b t jumped from U.S.* 12.6 b i l l i o n i n December o f 1973, t o U.S.* 31 b i l l i o n a t t h e end o f 1977 and r e p r e s e n t e d 67. o f B r a z i l ' s GNP by 1979 (Malan 1979: 9 4 ) . T h i s was t h e r e s u l t o f a d e l i b e r a t e p o l i t i c a l and e c o n o m i c s t r a t e g y , e l o q u e n t l y r e p r e s e n t e d by i t s a r c h i t e c t ' s own words, D e l f i m N e t o : " . . . f o r e i g n d e b t i s an i n t e g r a l component o f o u r d e v e l o p m e n t s t r a t e g y " ( G A T T - F l y , 1985:27). Indeed Neto e n j o y e d a tremendous s u c c e s s i n h i s p o l i c y , a s t h e b r i s k p a c e o f g r o w t h o f t h e B r a z i l i a n d e b t between 1970 and 1983 makes c 1 e a r . B r a z i l ' s GNP i s t h e 1 0 t h l a r g e s t i n t h e w o r l d , and as K u r i a n n o t e d , " i t has grown s t e a d i l y s i n c e 1968 a v e r a g i n g above 107. a n n u a l l y ( K u r i a n 1979: 3 8 4 ) . The m i l i t a r y coup t h a t d e p o s e d J o a o G o u l a r t , t h e B r a z i l i a n P r e s i d e n t , was s t a g e d i n 1964. The i m p r e s s i v e economic growth i s r e p o r t e d i n 1968. The B r a z i l i a n coup and e n s u i n g m i l i t a r y d i c t a t o r s h i p a r e an i m p o r t a n t p a r t o f t h e s o - c a l l e d economic m i r a c l e s . In B r a z i l , a s i n C h i l e , In , C h i l e and o t h e r L a t i n A m e r i c a n c o u n t r i e s , m i l i t a r y r e g i m e s i m p l e m e n t e d s t r i c t s u p p l y - s i d e e c o n o m i c p o l i c i e s s u g g e s t e d by M i l t o n F r i e d m a n and A r n o l d H a r b e r g e r , from t h e U n i v e r s i t y o f C h i c a g o S c h o o l o f E c o n o m i c s . F o r a c r i t i q u e o f t h o s e p o l i c i e s i n C h i l e s e e F r a n k 1976. 112 A r g e n t i n a , Uruguay and o t h e r c o u n t r i e s , t h e m o n e t a r i s t p o l i c i e s i m p l e m e n t e d by t h e r i g h t - w i n g m i l i t a r y meant r o l l i n g back s o c i a l programs, r e s t r i c t e d p o p u l a r c o n s u m p t i o n , i n c r e a s e d c o n s p i c u o u s c o n s u m p t i o n o f i m p o r t e d goods, and a t t h e same t i m e , an u p s u r g e o f e x p o r t s o f f o o d . Thus, t h e s e p o l i c i e s meant a d r a s t i c d e t e r i o r a t i o n i n t h e q u a l i t y o f l i f e f o r t h e l a r g e s t segments o f t h e p o p u l a t i o n i n L a t i n A m e r i c a . T h i s backward t r e n d i s c l o s e l y l i n k e d t o t h e i n d e b t e d n e s s p r o c e s s . The economic p o l i c i e s i m p l e m e n t e d by t h e m i l i t a r y a c t e d as a g u a r a n t e e f o r t h e i n t e r n a t i o n a l b a n k e r s . The l a t t e r c o u l d r e s t a s s u r e d t h a t t h e l o c a l economy would c o n t i n u e p e r f o r m i n g i n s u c h a way as t o be a b l e t o pay f o r t h e l o a n s . Incomes from e x p o r t s would f l o w i n t o t h e s e e c o n o m i e s , even i f t h i s meant t h a t i n t h e a l r e a d y d e p r e s s e d i n t e r n a t i o n a l m a r k e t s , c o m m o d i t i e s would have t o be s o l d below t h e i r c o m m e r c i a l l y v i a b l e p r i c e s . T h i s m i r a c l e was -and s t i l l i s -p e r f o r m e d t h a n k s t o t h e d e p r e s s i o n o f s a l a r i e s below t h e minimum r e q u i r e d f o r t h e w o r k e r t o r e p l e n i s h t h e e n e r g y expended i n p r o d u c t i o n , as w e l l as h e r / h i s own r e p r o d u c t i o n . 3d The economic p o l i c i e s o f t h e m i l i t a r y , n o t a b l y B r a z i l A r g e n t i n a and Uruguay, were a t o t a l f a i l u r e . Those p o l i c i e s F o r a d i s c u s s i o n o f s u p e r - e x p l o i t a t i o n s e e , Marx, C a p i t a l , v o l I, C h a p t e r X, XI and XXV. 113 c o u l d n o t be c o n t i n u e d w i t h o u t some r e - a r r a n g e m e n t o f t h e p o l i t i c a l s c e n e , as i n B r a z i l , where t h e h i g h l y v i s i b l e m i l i t a r y p r e s e n c e was r e d u c e d t o make room f o r t h e i l l u s i o n o f c i v i l i a n g o v e r n m e n t . The B r a z i l i a n m i l i t a r y l e f t i n p l a c e a C o n s t i t u t i o n t h a t f orms p a r t o f what t h e y c a l l " p r o t e c t e d d e m o c r a c y " . T h i s n o v e l c o n c e p t i s n o t h i n g more than a t h i n c o v e r f o r t h e i r c o n t i n u i n g h o l d i n g o f r e a l power. T h e s e C o n s t i t u t i o n s - t h e r e i s a s i m i l a r C o n s t i t u t i o n i n C h i l e - do n o t p r o t e c t democracy a g a i n s t t h e m i l i t a r y . In A r g e n t i n a , t h e e c o n o m i c d e b a c l e f o r w h i c h t h e m i l i t a r y a r e d i r e c t l y r e s p o n s i b l y was b e h i n d t h e i r r e t u r n t o t h e b a r r a c k s , as much as was t h e i r p i t i f u l p e r f o r m a n c e d u r i n g t h e M a l v i n a s war. R i o r d a n R o e t t (1984) p u t s t h i s s i t u a t i o n i n t e r m s t h a t a r e somewhat amusin g . He s a y s t h a t "In b o t h c o u n t r i e s [ C h i l e and Uruguay i n t h i s c a s e ] e c o n o m i c a d v e r s i t y 3 1 had p l a y e d an i m p o r t a n t p a r t i n r o b b i n g t h e m i l i t a r y o f t h e i r c l a i m t o be e f f i c i e n t modern a d m i n i s t r a t o r s " ( R o e t t 1984: 7 1 2 ) . The ' a d v e r s i t y ' R o e t t i s t a l k i n g a b o u t was most u n e v e n l y d i s t r i b u t e d i n t h o s e c o u n t r i e s , where, w h i l e most o f t h e p o p u l a t i o n had been i m p o v e r i s h e d a few had e n r i c h e d t h e m s e l v e s . In so d o i n g , t h e y mortgaged t h e i r c o u n t r i e s . I w i l l d i s c u s s t h i s s u b j e c t f u r t h e r when d e a l i n g w i t h c a p i t a l f l i g h t . As f o r t h e c l a i m by t h e m i l i t a r y t o be 'modern E m p h a s i s added. 114 a d m i n i s t r a t o r s ' , t h e y f a i l e d i n s p i t e o f t h e f a c t t h a t t h e y had a monopoly o f f o r c e , a l l t h e r e s o u r c e s o f t h e s t a t e , and were n o t a c c o u n t a b l e t o anybody. As a s e q u e l a e o f t h e i n t o l e r a b l e s i t u a t i o n c r e a t e d by t h e e c o n o m i c p o l i c i e s imposed by t h e m o n e t a r i s t m i l i t a r y , i n B r a z i l , P e r u , t h e D o m i n i c a n R e p u b l i c and o t h e r c o u n t r i e s i n t h e r e g i o n , some o f t h e w o r s t o u t b r e a k s o f s o c i a l u n r e s t took p l a c e i n 1983 ( R o e t t 1984:700). T h e r e has been a t a c t i c a l r e t r e a t on t h e p a r t o f t h e m i l i t a r y . The change i n t h e p o l i t i c a l s c e n e i s l a r g e l y s u p e r f i c i a l and, p r o b a b l y , t e m p o r a l . The B r a z i l i a n p r e s i d e n t i s a m i l i t a r y t i g e r i n c i v i l i a n c l o t h e s . The A r g e n t i n e a n s , now under P r e s i d e n t A l f o n s i n ' s r e f o r m i s t r o l e , have been s a n i t i z i n g t h e m i l i t a r y b u t t h e i n s t i t u t i o n s a r e u n c h a n g e d . In C h i l e t h e r e have been no s i g n i f i c a n t c h a n g e s a t a l l . C o n s i d e r a b l e amounts o f economic r e s o u r c e s o f t h e r e g i o n a r e s p e n t on arms and o t h e r m i l i t a r y r e l a t e d a c t i v i t i e s . I t has been r e p o r t e d t h a t , o u t o f t h e U.S.$ 950 b i l l i o n owed by t h e u n d e r d e v e l o p e d c o u n t r i e s , arms i m p o r t s r e p r e s e n t 257. o f t h e d e b t burden ( E p p - T i e s s e n , 1987:19). The ominous s t e a d y i n c r e a s e i n m i l i t a r y e x p e n d i t u r e s by t h e u n d e r d e v e l o p e d c o u n t r i e s i s p r o b a b l y b e s t i l l u s t r a t e d by t h e i n c r e a s e i n t h e p e r c e n t a g e o f GNP d e v o t e d t o m i l i t a r y e x p e n d i t u r e s . The u n d e r d e v e l o p e d w o r l d s u r p a s s e d t h e d e v e l o p e d c o u n t r i e s on t h i s 115 a c c o u n t i n 1983 by s p e n d i n g 5.57. o f t h e i r GNP i n t h e m i l i t a r y , w h i l e t h e d e v e l o p e d c o u n t r i e s s p e n t 5.47.. (See T a b l e 1 8 ) . Murray P a l m e r (1982: 56) has s u g g e s t e d t h a t t h e i n c r e a s e i n m i l i t a r y e x p e n d i t u r e s was l a r g e l y due t o i n c r e a s e s i n arms s a l e s . In i t s t u r n , arms s a l e s grew as a c o n s e q u e n c e o f t h e r e l a x a t i o n o f c o n t r o l o v e r arms e x p o r t s i n t h e U n i t e d S t a t e s . P a l m e r ' s argument i s t h a t t h e U n i t e d S t a t e s needed t o i m p r o v e i t s w o r s e n i n g b a l a n c e o f payments and t o make up f o r a d r o p i n arms s a l e s a f t e r t h e V i e t Nam war. He s t a t e s t h a t : " . . . t h e U.S. had 527. o f t h e s h a r e o f arms t r a n s f e r t o t h e T h i r d W o r l d between 1967 and 1976, a c c o r d i n g t o [ t h e ] U.S. C o n t r o l and Disarmament Agency f i g u r e s , t h e S o v i e t U n i o n had 277. d u r i n g t h e same p e r i o d . . . In t h e 1950s and 1960s, U.S. f o r e i g n m i l i t a r y s a l e s t o T h i r d W orld were r e l a t i v e l y s m a l l , a v e r a g i n g [U.S.]$ 230 m i l l i o n a y e a r . . . [ b e t w e e n ] . . . 1970 and 1978 [ t h e s e s a l e s grew from] * 351.8 mi 11 i o n 3 f . . t o [U.S.] $ 11 b i l l i o n , o r 817. o f A m e r i c a ' s w o r l d w i d e t o t a l of $13.5 b i l l i o n " . The L a t i n A m e r i c a n r e g i o n d e s t i n e s huge r e s o u r c e s t o i t s m i l i t a r y , b o t h i n l o c a l and h a r d c u r r e n c y . A c c o r d i n g t o t h e C h i l e a n r e s e a r c h e r A u g u s t o V a r a s , " . . . r e a l i s t i c s a v i n g s on m i l i t a r y e x p e n d i t u r e s m a i n t a i n e d d u r i n g a c o u p l e o f d e c a d e s c o u l d r e p r e s e n t a volume o f r e s o u r c e s e q u i v a l e n t t o t h e whole GNP o f S o u t h A m e r i c a i n a y e a r " (1986: 9 0 ) . The s e f i g u r e s a r e f o r m i l i t a r y s a l e s a g r e e m e n t s ( a s oppose d t o a c t u a l d e l i v e r i e s ) t o c o u n t r i e s i n L a t i n A m e r i c a , A f r i c a , t h e M i d d l e E a s t and A s i a ( e x c l u d i n g J a p a n . They do n o t i n c l u d e c o m m e r c i a l (company-to-government) s a l e s . NARMIC, 1979. F o o t n o t e i n t h e o r i g i n a l . 116 TABLE 18 M i l i t a r y and s o c i a l e x p e n d i t u r e s . D e v e l o p e d 1 and U n d e r d e v e l o p e d 3 C o u n t r i e s , 1960-1983. US* b i l l i o n . 1960 1965 1970 1975 1980 1981 1982 1983 ME U.-" 33 45 70 102 120 140 153 162 A l U.* n.a. 2.1 3.8 8.5 22.8 22.8 31.1 28.2 ME D. "/.GNP = 6.9 6.2 5.8 4.9 5.0 5.0 5.3 5.4 ME U7.GNP * . 3.6 3.8 4.3 4.3 4.3 4.9 5.2 5.5 1 D e v e l o p e d c o u n t r i e s i n c l u d e : A u s t r i a , Canada , B e l g i u m , Denmark, F r a n c e , W. Germany, I c e l a n d , I r e l a n d , I t a l y , Luxemburg, N e t h e r l a n d , Norway, U.K., U. S., B u l g a r i a , C z e c h o s l o v a q u i a , E.Germany, Hungary, P o l a n d , Romania, U.R.S.S., Sweden, S w i t z e r l a n d , I s r a e l , A u s t r a l i a , New Z e l a n d and J a p a n . 2 The U n d e r d e v e l o p e d c o u n t r i e s a r e 114 i n t o t a l and i n c l u d e L a t i n A m e r i c a , s e v e n E u r o p e a n c o u n t r i e s ( A l b a n i a , G r e c e , M a l t a , P o r t u g a l , S p a i n , T u r k e y and Y u g o s l a v i a ) and A s i a ( e x c e p t I s r a e l and J a p a n ) . 3 M i l i t a r y E x p e n d i t u r e s U n d e r d e v e l o p e d C o u n t r i e s . 4 Arms I m p o r t s U n d e r d e v e l o p e d C o u n t r i e s . 5 M i l i t a r y E x p e n d i t u r e s D e v e l o p e d C o u n t r i e s , as p e r c e n t a g e of GNP. 6 M i l i t a r y E x p e n d i t u r e s n d e r d e v e 1 oped C o u n t r i e s , a s p e r c e n t a g e of GNP. S o u r c e : R u t h L e g e r S i v a r d . W o r l d M i l i t a r y and S o c i a l E x p e n d i t u r e s , 1985. W a s h i n g t o n : World P r i o r i t i e s , 1985: 34. 117 7.2 P r o f i t i n g f r o m t h e Debt T h e r e seems t o be a r e l a t i o n between t h e huge sums d e s t i n e d t o s e r v i c e t h e d e b t , and q u a l i t y o f l i f e f o r t h e p o o r e s t p e o p l e i n t h e d e b t o r c o u n t r i e s . I t i s a l m o s t i m p o s s i b l e t o e s t a b l i s h a s t a t i s t i c a l l y m e a n i n g f u l c o r r e l a t i o n between s e r v i c e o f t h e d e b t and d e c l i n i n g l i v i n g c o n d i t i o n s . N e v e r t h e l e s s , w h i l e e x p l o i t a t i o n and u n r e s t were g r o w i n g i n L a t i n A m e r i c a , some i n t e r n a t i o n a l banks were r e a p i n g huge p r o f i t s f r o m t h e i r b u s i n e s s i n t h e a r e a . I t i s i m p o s s i b l e t o p r o v e c a u s a l i t y between t h e e x t r a c t i o n o f e c o n o m i c r e s o u r c e s from t h e a r e a and t h e mass movement o f p r o t e s t , a l t h o u g h t h e p r o t e s t e r s ' u n s c i e n t i f i c a l l y ' i d e n t i f y t h e l o c a l g o v e r n m e n t , t h e i n t e r n a t i o n a l b a n k e r s and f i n a n c i a l i n s t i t u t i o n s as t h e c u l p r i t s f o r t h e i r w r e t c h e d c o n d i t i o n s . A good c a s e i n p o i n t i s t h e C a n a d i a n banks. " I f t h e s i x l a r g e s t [ C a n a d i a n ] banks were t o r e d u c e t h e i r i n t e r e s t s t o L a t i n A m e r i c a by 57. - t a k i n g t h e s e r a t e s below U.S. p r i m e - t h e y would s e e c u t s i n t h e i r o v e r a l l p r o f i t f o r 19S4 o f : - 207. f o r t h e R o y a l Bank. - 327. f o r t h e C a n a d i a n I m p e r i a l Bank o f Commerce. - 347. f o r t h e Bank o f M o n t r e a l . - 257. f o r t h e Bank o f Nova S c o t i a . - 177. f o r t h e T o r o n t o - D o m i n i o n Bank. - 507. f o r t h e N a t i o n a l Bank. ( G A T T - F l y , 1985:40) The s,ame s o u r c e s u g g e s t s t h a t i n 1985, t h e n i n e b i g g e s t U.S. 118 banks have l e n t t o t h e f o u r l a r g e s t d e b t o r s i n L a t i n A m e r i c a — B r a z i l , M e x i c o , A r g e n t i n a and V e n e z u e l a — , t h e e q u i v a l e n t of 135"/. o f t h e i r combined c a p i t a l . F o r t h e i r p a r t , t h e C a n a d i a n c h a r t e r e d banks have committed t h e e q u i v a l e n t o f 1197. o f t h e i r s h a r e h o l d e r s ' c a p i t a l ( G A T T - F l y 1985: 7 2 ) . The h i g h commitment of f u n d s by C a n a d i a n and N o r t h A m e r i c a n banks i s u n d e r s t a n d a b l e i n view o f t h e p r o f i t s t h e y were e x t r a c t i n g from t h e r e g i o n . I t i s r e a s o n a b l e t o assume t h a t s i m i l a r k i n d o f p r o f i t s were o b t a i n e d from o t h e r u n d e r d e v e l o p e d r e g i o n s o f t h e wor1d. H i g h as t h e p r e s s u r e s e x e r t e d on t h e economy o f L a t i n A m e r i c a by t h e i n t e r n a t i o n a l banks a r e , i t would be e r r o n e o u s t o blame them f o r a l l t h e p r o b l e m s f a c i n g t h e r e g i o n . The l o c a l e l i t e s had p r o f i t e d a s much - i f n o t more- than t h e i n t e r n a t i o n a l banks, from t h e m i s e r y b r o u g h t upon t h e p o o r e s t segments o f s o c i e t y i n t h e u n d e r d e v e l o p e d w o r l d . In what f o l l o w s I p r e s e n t o n l y p a r t i a l p r o o f o f t h i s a s s e r t i o n . The t r u e e x t e n t o f c a p i t a l f l i g h t i s i m p o s s i b l e t o d e t e r m i n e . 7.3 C a p i t a l F l i g h t The b o u r g e o i s i e o f t h e u n d e r d e v e l o p e d c o u n t r i e s i s an i n -t e g r a l and a c t i v e p a r t o f t h e c a p i t a l i s t s y s t e m . In o r d e r t o u n d e r s t a n d t h e i n d e b t e d n e s s p r o c e s s one must pay a t t e n t i o n t o t h e a c t i o n s o f t h i s g r o u p . I q u o t e d above t h e s t a t e m e n t made 119 by D e l f i m N e to r e l a t i n g t h e B r a z i l i a n d e b t t o d e v e l o p m e n t . O t h e r c o u n t r i e s a l s o i n c u r r e d d e b t s t o pay f o r i n d u s t r i a l i z a t i o n . V e n e z u e l a and M e x i c o i n v e s t e d i n t h e d e v e l o p m e n t o f t h e i r p e t r o c h e m i c a l i n d u s t r y . B u t t h i s i s o n l y one s i d e o f t h e c o i n . The o t h e r s i d e i s t h a t l a r g e amounts money of were w i t h d r a w n from some o f t h e L a t i n A m e r i c a n c o u n t r i e s , i n c l u d i n g t h o s e t h a t i n v e s t e d h e a v i l y i n ec o n o m i c d e v e l o p m e n t . P r o b a b l y t h e b e s t example i s M e x i c o . The M e x i c a n P r e s i d e n t L o p e z P o r t i l l o a c c u s e d t h e i n t e r n a t i o n a l banks — p a r t i c u l a r l y t h o s e o f t h e U n i t e d S t a t e s — o f f o m e n t i n g c a p i t a l f l i g h t and t h u s " . . . c o l l e c t i n g a t b o t h e n d s . " ( N a y l o r , 1 987:62). The P r e s i d e n t was r e f e r r i n g t o t h e f o l l o w i n g p r o c e s s : S t e p one: W e a l t h y M e x i c a n s t a k e t h e i r money t o d e p o s i t w i t h t h e i n t e r n a t i o n a l banks. T h i s t r a n s f e r was l a r g e l y s t i m u l a t e d i n t h e e a r l y 1980s by t h e h i g h i n t e r e s t r a t e s i n t h e U n i t e d S t a t e s . S t e p two: t h e banks l e n d t o M e x i c o t o pay f o r d e v e l o p m e n t , c o v e r d e f i c i t , o r a l l e v i a t e t h e i r e x c e s s i v e l i q u i d i t y p r o b l e m . S t e p t h r e e : (And t h i s Lopez P o r t i l l o o m i t t e d ) The M e x i c a n s o c i e t y i s o r g a n i z e d i n s u c h way t h a t most o f t h e money w i l l end up i n t h e hands of t h o s e t h a t a r e t a k i n g i t o u t s i d e of t h e c o u n t r y i n t h e f i r s t p l a c e . 120 S t e p f o u r : The banks c o l l e c t i n t e r e s t from M e x i c o , and a t t h e same t i m e r e c e i v e more money from w e a l t h y M e x i c a n s , w h i c h e n a b l e s them t o keep on l e n d i n g . The h y p o t h e t i c a l s i t u a t i o n d e s c r i b e d i n t h e p r e c e d i n g p a r a g r a p h s becomes l e s s h y p o t h e t i c a l i f one c o n s i d e r s t h e a c t u a l f i g u r e s . I t has been e s t i m a t e d t h a t i n t h e t h r e e y e a r s p r e c e d i n g t h e 1982 M e x i c a n d e b t c r i s i s , a l m o s t US* 39 b i l l i o n l e f t M e x i c o — t w e n t y f i v e b i l l i o n t o buy r e a l s t a t e ( l a t e r r a i s e d t o U.S.* 31 b i l l i o n ) and U.S.* 14 b i l l i o n d e p o s i t e d i n U.S. a c c o u n t s . By t h e end o f 1984, t h e e s t i m a t e was from a minimum o f U.S.* 37 b i l l i o n t o a maximum o f U.S.* 60 b i l l i o n ( N a y l o r , 1987:62) The Morgan G u a r a n t y T r u s t ( 1 9 8 6 ) , c a l c u l a t e d t h a t c a p i t a l f l i g h t from L a t i n A m e r i c a between 1976-1985 — o n l y t e n c o u n t r i e s ^ amounts t o US* 123 b i l l i o n . In some c a s e s t h e amounts o f money t h a t had been s p i r i t e d o u t o f t h e s e c o u n t r i e s i s a l m o s t t h e same owed t o i n t e r n a t i o n a l c r e d i t o r s . A r g e n t i n a i s t h e most s t r i k i n g example; t h e same i n s t i t u t i o n , t h e Morgan G u a r a n t y T r u s t , m e a s u r i n g t h e i m p a c t o f c a p i t a l f l i g h t on t h e g r o s s e x t e r n a l d e b t , r e p o r t s t h a t i f t h e money t h a t l e f t L a t i n The c o u n t r i e s i n c l u d e d by t h e Morgan G u a r a n t y a r e : A r g e n t i n a , B o l i v i a , B r a z i l , C h i l e , C o l o m b i a , E c u a d o r , M e x i c o , P e r u , Uruguay and V e n e z u e l a . 121 A m e r i c a i s s u b t r a c t e d from t h e d e b t , t h e l a t t e r would s t a n d a t U.S.*1 b i l l i o n f o r A r g e n t i n a i n 1985, down f r o m US* 50 b i l l i o n ; t h e B r a z i l i a n d e b t t o U.S.* 92 b i l l i o n , down from U.S.* 106; M e x i c o ' s ,U.S.* 12 b i l l i o n , down from U.S.* 97 bi1 1 i o n . S i n c e p e o p l e t h a t have t h e s e l a r g e d e p o s i t s and i n v e s t m e n t s i n o t h e r c o u n t r i e s a r e members o f t h e r u l i n g e l i t e s , o r c l o s e l y r e l a t e d t o them, i t i s o n l y r e a s o n a b l e t o assume t h a t t h e i r i n t e r e s t may be i n t h e m a i n t e n a n c e o f t h e d e b t s t a t u s quo. The l a r g e amounts o f f u n d s d e p o s i t e d o u t s i d e o f t h e i r c o u n t r y by t h e p r i v i l e g e d g r o u p s , s p e c i f i c a l l y i n t h e U n i t e d S t a t e s , may h e l p t o e x p l a i n why i t was t h a t when M e x i c o g o t i n t o f i n a n c i a l t r o u b l e , i t r e f u s e d t h e o f f e r o f US* 12 b i l l i o n f rom S a u d i A r a b i a , and a c c e p t e d , i n s t e a d , US* 1 b i l l i o n i n c a s h from t h e U n i t e d S t a t e s and f o u r more b i l l i o n i n c r e d i t , f o r a t o t a l o f U.S.* 5 b i l l i o n . The S a u d i ' s o f f e r was a s o f t l o a n (low i n t e r e s t and e a s y payment), i n t e n d e d a t l u r i n g M e x i c o i n t o becoming a member of DPEC. On t h e o t h e r hand, t h e ' a i d ' p a c k a g e p r o v i d e d by t h e U n i t e d S t a t e s t o M e x i c o would have r e p r e s e n t e d a 307. i n t e r e s t i f i t had been e x t e n d e d as a c a s h l o a n ( N a y l o r , 1987:65). T h e r e a r e r e a s o n s t o t h i n k t h a t t h e money d e p o s i t e d i n U.S. banks by w e a l t h y L a t i n A m e r i c a n s i s a s t r o n g g u a r a n t e e t h a t a d e f a u l t i s u n l i k e l y s i n c e t h e r e i s a l w a y s t h e f e a r t h a t t h e 122 U.S. p o l i t i c a l a u t h o r i t i e s may r e t a l i a t e by f r e e z i n g t h o s e f u n d s . T h i s happened w i t h t h e n e a r l y U.S.* 5 b i l l i o n i n I r a n i a n a s s e t s a f t e r t h e Shah's f a l l . A n o t h e r a s p e c t o f t h e p o l i t i c s o f t h e i n t e r n a t i o n a l d e b t i s t h e a b s e n c e o f a d e b t o r ' s c l u b . The main r e a s o n f o r s u c h g l a r i n g o m i s s i o n on t h e p a r t o f t h e d e b t o r s i s t h a t t h e l a r g e s t amongst them, p a r t i c u l a r l y M e x i c o , e x p e c t t o b e n e f i t f r o m t h e t h r e a t t o t h e U.S. t o c o n s i d e r s e r i o u s l y t h e c r e a t i o n o f s u c h c l u b . The f a c t i s t h a t u n t i l now M e x i c o has g a i n e d e s p e c i a l t r e a t m e n t f r om t h e U n i t e d S t a t e s . I t i s most l i k e l y t h a t t h i s w i l l c o n t i n u e t o be s o , b a r r i n g u n e x p e c t e d events 3 -*. P a r t o f t h e r e s o u r c e s t h a t t h e r e g i o n had i m p o r t e d go t o t h e m a i n t e n a n c e o f t h e s t a t u s quo. Governments s p e n t l a r g e amounts o f money on t h e m i l i t a r y , n o t o n l y i n t h e p u r c h a s e o f h a r dware, but a l s o by p r o v i d i n g them w i t h d i r e c t e c o n o m i c b e n e f i t s , w h ether t h r o u g h h i g h s a l a r i e s o r as a d m i n i s t r a t o r s o f p u b l i c e n t e r p r i s e s . T h i s r e p r e s e n t e d c o n s i d e r a b l e e c o n o m i c b e n e f i t s f o r t h e m i l i t a r y , and t h e r e a l p o s s i b i l i t y o f d e v e l o p i n g t h e i r own e c o n o m i c power. T h i s i s what has happened i n A r g e n t i n a , C h i l e , B r a z i l , among-other c o u n t r i e s . B u t , t h e more i m p o r t a n t r o l e o f t h e m i l i t a r y , t h a t o f k e e p i n g s o c i a l o r d e r , r e m a i n s t h e main c o n c e r n o f t h e r u l i n g c l a s s e s , i n c l u d i n g t h e m i l i t a r y i t s e l f . To t h i s p u r p o s e huge amounts o f The l a s t r o u n d o f d e b t n e g o t i a t i o n s a g a i n gave M e x i c o a s p e c i a l t r e a t m e n t , v i s — a — v i s t h e U.S. government and banks. 123 money a r e a l l o c a t e d . A g a i n , i t i s d i f f i c u l t t o p r o v e t h a t h a r d c u r r e n c y a c q u i r e d t h r o u g h d e b t went t o p u r c h a s e m i l i t a r y h a rdware, but i t i s e q u a l l y d i f f i c u l t t o i m a g i n e t h a t i t d i d n o t . 7.4 S o c i a l i z a t i o n o f t h e L o s s e s . The l o s s e s o f t h e i n t e r n a t i o n a l banks and t h o s e o f t h e banks i n t h e d e b t o r c o u n t r i e s have been n a t i o n a l i z e d . Two e xamples o f t h i s a r e M e x i c o and Canada. In M e x i c o , where t h e banks were n a t i o n a l i z e d w i t h much b r a v a d o , i t l o o k e d as i f t h e R e v o l u t i o n a r y I n s t i t u t i o n a l P a r t y , t h e M e x i c a n r u l i n g P a r t y f o r t h e l a s t 60 y e a r s o r s o , was g e t t i n g more R e v o l u t i o n a r y t h a n I n s t i t u t i o n a l . The r e a l i t y i s t h a t , t o g e t h e r w i t h t h e banks, t h e g o vernment n a t i o n a l i z e d t h e d e b t s t h a t t h o s e banks had i n c u r r e d a b r o a d . In t h i s way, t h o s e d e b t s changed from b e i n g p a r t o f t h e M e x i c a n i n t e r n a t i o n a l p r i v a t e d e b t , t o becoming p a r t o f t h e M e x i c a n i n t e r n a t i o n a l p u b l i c d e b t . In Canada t h e r e i s a somewhat s i m i l a r p r o c e s s u n d e r way. The S u p e r i n t e n d e n t o f F i n a n c i a l I n s t i t u t i o n s , Mr. M i c h a e l M a c k e n z i e , has t h e power t o f i x t h e amount of t a x b r e a k s t h a t t h e C a n a d i a n banks may g e t f o r t h e i r r e s e r v e s t o c o v e r bad l o a n s . The G l o b e and M a i l , F e b r u a r y 11, 1988 r e p o r t s : "In 124 p r i v a t e t a l k s w i t h b a n k e r s , Mr. M a c k e n z i e has d i s c u s s e d i n c r e a s i n g t h e t a x - d e d u c t i b l e r e s e r v e s t o between 40 and 50 p e r c e n t o f e x p o s u r e . " In g r o s s terms t h e amount s e t a s i d e l a s t y e a r by t h e C a n a d i a n banks t o c o v e r p o t e n t i a l l o s s e s was Can.$ 3.2 b i l l i o n . T h a t means t h a t t h e tax break g i v e n t o t h e banks r e p r e s e n t s between Can$ 1.28 and Can*1.6 b i l l i o n . T h i s l o o k s v e r y much l i k e a form o f s o c i a l i z i n g t h e l o s s e s , and a t t h e same t i m e k e e p i n g p r o f i t s p r i v a t e . S i m i l a r p r o c e s s e s a r e t a k i n g p l a c e i n C h i l e and o t h e r c o u n t r i e s , where g o v e r n m e n t s have i n t e r v e n e d t o t a k e o v e r t h e i n t e r n a t i o n a l o b l i g a t i o n s o f p r i v a t e d e b t o r s , when t h o s e p r i v a t e d e b t o r s d i d n o t a l r e a d y have a s t a t e g u a r a n t e e f o r t h e i r o b l i g a t i o n s . T h i s i s o n l y one a s p e c t of t h e u n d e m o c r a t i c n a t u r e of t h e d e b t . The d e b t i s a m a t t e r o f p u b l i c i n t e r e s t w h i c h has been l e f t t o u n e l e c t e d b u r e a u c r a t s i n t h e c e n t r a l banks and o t h e r f i n a n c i a l i n s t i t u t i o n s , t o s o l v e i t as t h e y s e e f i t , i n c o n j u n c t i o n w i t h b u r e a u c r a t s o f some i n t e r n a t i o n a l a g e n c i e s , s u c h as t h e World Bank and t h e I n t e r n a t i o n a l M o netary Fund. T h i s happens i n t h e c r e d i t o r and d e b t o r c o u n t r i e s a l i k e . T hose who b e a r t h e b r u n t o f t h e d e b t , t h e l a r g e s t segments of t h e p o p u l a t i o n i n d e b t o r and c r e d i t o r c o u n t r i e s have v e r y l i t t l e p r o s p e c t t h a t t h e i r i n t e r e s t s w i l l be p r o t e c t e d . 125 CHAPTER V I I I . CONCLUSIONS 126 CHAPTER V I I I . CONCLUSIONS 8.1 T h e s i s Summary The main p u r p o s e o f t h i s work has been t o e x p l a i n t h e L a t i n A m e r i c a n i n t e r n a t i o n a l d e b t from t h e p e r s p e c t i v e o f t h e s o c i o l o g y o f s o c i a l change and d e v e l o p m e n t . In o t h e r words, how does t h i s b r a n c h o f s o c i o l o g y a c c o u n t f o r t h e d e b t , and w hich o f i t s more i n f l u e n t i a l p a r a d i g m s p r o v i d e s a d e q u a t e a n a l y t i c a l i n s t r u m e n t s t o d e a l w i t h t h i s p r o b l e m ? In t h e f i r s t c h a p t e r I c h a r a c t e r i z e t h e d e b t c r i s i s a s a complex phenomenon, l a r g e l y d e t e r m i n e d by t h e e conomic c h a n g e s t a k i n g p l a c e i n t h e IMEs. A n o t h e r i m p o r t a n t f e a t u r e of t h e d e b t , s t r e s s e d t h r o u g h o u t t h i s work, i s t h e i n c r e a s i n g i n t e r n a l i n e q u a l i t y t h a t t h e d e b t f o s t e r s , i n t h e l e n d e r and b o r r o w e r c o u n t r i e s a l i k e . I put f o r w a r d t h e h y p o t h e s i s t h a t a t t h e c o r e o f t h e p r o b l e m i s the t e n d e n c y t o c y c l i c a l a c c u m u l a t i o n c r i s e s t h a t a f f e c t t h e c a p i t a l i s t s y s t e m . I a l s o a r g u e t h a t as t h e a c c u m u l a t i o n c r i s e s e v o l v e , t h e r e i s an e x t r a o r d i n a r y s u r p l u s o f money a v a i l a b l e w h i c h makes l e n d i n g e a s y . F i n a l l y , I a r g u e t h a t a l l t h e s e p r o c e s s e s t a k e p l a c e i n a s o c i a l o r d e r t h a t t e n d s t o be r e i n f o r c e d by t h e a c c u m u l a t i o n o f d e b t and t h e mismanagement o f t h e e n s u i n g c r i s i s . 127 The r e v i e w o f two major s o c i o l o g i c a l t h e o r e t i c a l m o d e l s , m o d e r n i z a t i o n , and modes o f p r o d u c t i o n , s u g g e s t t h a t t h e f i r s t t h e o r y , m o d e r n i z a t i o n , by n o t t a k i n g i n t o c o n s i d e r a t i o n h i s t o r i c a l l y s p e c i f i c c i r c u m s t a n c e s , becomes q u i t e m e t a p h y s i c a l . By ' m e t a p h y s i c a l ' I mean, t h a t t h e model d o e s n o t s u c c e s s f u l l y d e a l w i t h c o n c r e t e r e a l i t y . H i s t o r i c s p e c i f i c i t y c a l l s f o r a n a l y s i s o f t h e many v a r i a b l e s o f a s i t u a t i o n , t o g e t h e r w i t h t h e i r i n t e r r e l a t i o n s . I a r g u e t h a t t h i s form o f c o n c r e t e n e s s - c h a r a c t e r i z e d by t h e c o n f l u e n c e o f s e v e r a l and d i s s i m i l a r f a c t o r s t h a t a f f e c t e a c h o t h e r , r e s u l t i n s p e c i f i c o r t y p i c a l o utcomes. F o r example, many o f t h e p r i n c i p l e s t h a t L e o n a r d o Da V i n c i d e v i s e d f o r h i s d e s i g n s o f f l y i n g m a c h i n e s were c o r r e c t . But i n o r d e r t o be a b l e t o p r o d u c e a w o r k i n g model, i t was n e c e s s a r y t o a c q u i r e m a t e r i a l t e c h n o l o g y n o t a v a i l a b l e t o him. I t was n e c e s s a r y t o m a i n t a i n a g r o u p o f t e c h n i c i a n s c a p a b l e o f p r o d u c i n g s u c h m a t e r i a l s a s w e l l as p u t t i n g t o g e t h e r t h e f i n a l p r o d u c t . I t was a l s o n e c e s s a r y t o m a i n t a i n t h e a c q u i s i t i o n , t r a n s f e r and a c c u m u l a t i o n o f t h e knowledge t h a t c o u l d have made p o s s i b l e s u c h t e c h n o l o g y . In sum, I am d e s c r i b i n g t h e complex h i s t o r i c a l p r o c e s s t h a t a l l o w s us t o u n d e r s t a n d t h e r e q u i r e m e n t f o r s o c i a l i n s t i t u t i o n s , r e p r e s e n t e d i n my example, by t h e p r o f e s s i o n a l a s s o c i a t i o n o f t e c h n i c i a n s : m a t e r i a l and i m m a t e r i a l c u l t u r e . In my example, t h e s e a r e : f i r s t , t h e knowledge t h a t i s p a s s e d on from one g e n e r a t i o n t o a n o t h e r embodied i n t o o l s , i n s t r u m e n t s , a r t i f a c t s , p h y s i c a l 128 r e c i p i e n t s o f i n f o r m a t i o n s u c h as books; s e c o n d , a c u l t u r e t h a t a c c e p t s t h e p o s s i b i l i t y and d e s i r a b i l i t y o f d e f y i n g g r a v i t y . A l l t h e s e f a c t o r s , and p r o b a b l y q u i t e a few t h a t I may be o v e r l o o k i n g , a r e what make p o s s i b l e a s p e c i f i c and o r i g i n a l outcome. The p o i n t I am making i s t h a t , s w e e p i n g g e n e r a l i z a t i o n s , s u c h as t h o s e I s e e i n m o d e r n i z a t i o n t h e o r y , r e l y m a i n l y , i f n o t e x c l u s i v e l y , on a b s t r a c t t h e o r e t i c a l p r i n c i p l e s ; t h e y a r e m e t a p h y s i c a l c o n s t r u c t s d e v o i d o f h i s t o r i c a l r e f e r e n t s , and hence o f c o n e r e t e n e s s . One o f t h e major f l a w s o f t h i s model i s i t s v i e w o f c r i s e s as s i m p l y t e m p o r a r y o b s t a c l e s t o an o t h e r w i s e smooth r o u t e t o i n d u s t r i a l i z e d c a p i t a l i s m . M o d e r n i z a t i o n c o n s i d e r s e x t e r n a l i n f l u e n c e s as p o s i t i v e - i n s o f a r a s m o d e r n i t y i s a d e s i r a b l e g o a l - w h i c h goes c o n t r a r y t o what the e v i d e n c e from the L a t i n A m e r i c a n i n t e r n a t i o n a l d e b t i n d i c a t e s . Modes of p r o d u c t i o n t h e o r y , and s p e c i f i c a l l y , K a r l Marx's a n a l y s i s o f c a p i t a l i s t s o c i e t y , i s t h e most s u i t a b l e a n a l y t i c a l i n s t r u m e n t f o r d e a l i n g w i t h t h e d e b t p r o b l e m . M a r x i s t a n a l y s i s t a k e s i n t o c o n s i d e r a t i o n t h e i n t e r n a l p r o c e s s e s o f a s o c i e t y , as w e l l as e x t e r n a l i n f l u e n c e s , and i t does so r e q u i r i n g s p e c i f i c i t y o f h i s t o r i c a l c i r c u m s t a n c e s . T h a t i s , m a r x i s t a n a l y s i s r e l a t e s a b s t r a c t p r o p o s i t i o n s t o 129 e m p i r i c a l r e a l i t y . F u r t h e r m o r e , Marx i s s p e c i f i c a l l y c o n c e r n e d w i t h n a t i o n a l d e b t , b o t h a s a d e v i c e o f c a p i t a l i s t a c c u m u l a t i o n and as an i n s t r u m e n t o f e x p a n s i o n and i m p e r i a l i s t d o m i n a t i o n . M a r x i s t t h e o r y can d e a l w i t h s p e c i f i c a s p e c t s o f t h e p r e s e n t d e b t c r i s i s , s u c h as t h e c r i s i s o f a c c u m u l a t i o n , f a l l i n g r a t e s o f p r o f i t s , e x c e s s i v e l i q u i d i t y i n t h e money m a r k e t s and f i n a n c i a l hegemony ( L e n i n 1 9 6 4 ) . T h e s e a r e t h e main r e a s o n s why I c h o o s e Modes o f P r o d u c t i o n as t h e a p p r o p r i a t e p a r a d i g m . B e g i n n i n g w i t h t h e h i s t o r i c a l e x p e r i e n c e s o f t h e 1 9 t h and 2 0 t h c e n t u r y , t h e e v i d e n c e i n d i c a t e s t h a t t h e g e n e s i s o f t h e i n d e b t e d n e s s p r o c e s s i s i n t h e d e v e l o p e d c o u n t r i e s , t h a t i n d e e d t h e b urden c r e a t e d by t h e d e b t i s u n e v e n l y d i s t r i b u t e d i n s o c i e t y and, f i n a l l y , t h a t p o l i t i c a l p r o b l e m s may n o t a l w a y s be s o l v e d by t h e r u l i n g e l i t e s t o t h e i r a d v a n t a g e . I c o n t i n u e t o examine t h e p o s t - W o r l d War II e c o n o m i c s i t u a t i o n i n o r d e r t o p r o v i d e t h e n e c e s s a r y b a c k g r o u n d f o r u n d e r s t a n d i n g t h e p r e s e n t c r i s e s . T h i s p o s t - w a r p e r i o d can be c h a r a c t e r i z e d as a t i m e when U.S. supremacy was f i r m l y e s t a b l i s h e d , and a l s o as a p e r i o d t h a t saw t h e emergence o f a s o c i a l i s t community and t h e c o l l a p s e o f t h e c o l o n i a l w o r l d . U.S. d o m i n a t i o n has a l w a y s been p a r t i c u l a r l y s t r o n g i n L a t i n A m e r i c a ; t h e r e f o r e , t h e p o s t war p e r i o d i s most i m p o r t a n t f o r u n d e r s t a n d i n g L a t i n A m e r i c a n a f f a i r s . I d e m o n s t r a t e d t h a t t h e 130 p e r i o d p r i o r t o t h e 1982 M e x i c a n d e b t c r i s i s can be g e n e r a l l y c h a r a c t e r i z e d as one o f h i g h e c o n o m i c g r o w t h i n L a t i n A m e r i c a , t h u s l e n d i n g s u p p o r t t o t h e i d e a t h a t t h e b a s i c c o n d i t i o n s f o r t h e d e b t a r e n o t endogenous t o t h e r e g i o n . The l a s t two c h a p t e r s c o n t r i b u t e d most o f t h e i n f o r m a t i o n t h a t s u s t a i n t h e major w o r k i n g h y p o t h e s e s ; t h a t i s , f i r s t , t h e m e t r o p o l i t a n n a t u r e of t h e g e n e s i s o f t h e d e b t p r o b l e m : s e c o n d , t h e p r e s s u r e s c r e a t e d i n and a r o u n d t h e f i n a n c i a l m a r k e t s by e x c e s s i v e l i q u i d i t y . In C h a p t e r V I I I p r o v i d e d e v i d e n c e t h a t t h e c h a r a c t e r i s t i c r e s p o n s e t o t h e p r o b l e m r e i n f o r c e s s o c i a l i n e q u a l i t y . 8.2 C o n c l u s i o n s In t h e c o u r s e o f t h i s work, I have d e m o n s t r a t e d , t h a t t h e p r e s e n t L a t i n A m e r i c a n I n t e r n a t i o n a l d e b t can o n l y be u n d e r s t o o d as a s t r u c t u r a l p r o b l e m t h a t i s p a r t o f t h e normal f u n c t i o n i n g o f t h e c a p i t a l i s t s y s t e m . T h e s e s t r u c t u r a l mechanisms t h a t o p e r a t e i n t h e d e b t c r i s i s a r e o f e x o g e n o u s and i n t e r n a l o r i g i n . The s p a r k t h a t t r i g g e r e d t h e p r o c e s s was e x t e r n a l t o t h e r e g i o n , b u t t h i s f a c t s h o u l d n o t o b s c u r e t h e i m p o r t a n t r o l e p l a y e d by human a g e n c y , w h e t h e r a t a c l a s s o r i n d i v i d u a l l e v e l . W i t h o u t t h e p o l i t i c a l d e c i s i o n t o i n c u r i n t e r n a t i o n a l i n d e b t e d n e s s on t h e p a r t o f t h e r u l i n g c l a s s e s , t h e d e b t c o u l d n o t have r e s u l t e d . What I want t o s t r e s s h e r e 131 i s t h a t some b o r r o w i n g was done t o ' a l l e v i a t e ' t h e l i q u i d i t y p r o b l e m o f t h e i n t e r n a t i o n a l b anks. The f a l s e r e s o l u t i o n t o t h e d e b t p r o b l e m f o l l o w s c l a s s l i n e s a c r o s s b o r d e r s a s i s shown by t h e a n a l y s i s o f c a p i t a l f l i g h t t o t h e c r e d i t o r c o u n t r i e s . A l a r g e p o r t i o n o f t h e d e b t c o u l d be p a i d w i t h t h e p r i v a t e d e p o s i t s from d e b t o r c o u n t r i e s h e l d by t h e i n t e r n a t i o n a l banks. The huge amounts o f money t h a t have been s p i r i t e d o u t o f t h e r e g i o n r e - e n f o r c e s t h e common i n t e r e s t s o f t h e r u l i n g e l i t e s i n some u n d e r d e v e l o p e d c o u n t r i e s and t h e IME's. T h i s r e i n f o r c e d e x t e r n a l a l l i a n c e o f a segment o f t h e l o c a l r u l i n g e l i t e a p p e a r s t o r e s t r i c t t h e p o s s i b i l i t y o f i n t e r n a l compromise f o r t h e r e s o l u t i o n o f t h e d e b t p r o b l e m on t h e p a r t o f t h e r u l i n g c l a s s e s . I t i s u s u a l l y t h e c a s e t h a t t h e i m p o r t s \ e x p o r t s s e c t o r , as w e l l a s t h e b a n k i n g i n d u s t r y , have v e s t e d i n t e r e s t s i n t h e m a i n t e n a n c e o f t h e s t a t u s quo. The i n d u s t r i a l s e c t o r , p r o d u c i n g f o r t h e i n t e r n a l m arket, a g r i c u l t u r e and t h e m i d d l e c l a s s and t h e b l u e c o l l a r w o r k e r s , i n g e n e r a l , s t a n d t o l o s e from t h e d e b t s i t u a t i o n . In B r a z i l , i t was t h e a l l i a n c e of t h e i n d u s t r i a l i s t s ( m a i n l y from Sao P a u l o ) , m i d d l e c l a s s and i n d u s t r i a l w o r k e r s , t h a t f i n a l l y f o r c e d t h e m i l i t a r y t o s t e p a s i d e , a l l o w i n g f o r some d e g r e e o f democracy, and t h e end t o "growth w i t h d e b t " . The B r a z i l i a n example i s one form o f r e s o l u t i o n t o t h e i n t e r n a l p o l i t i c a l p r o b l e m s c r e a t e d by t h e d e b t . I t s u g g e s t s t h a t , i n t h e w o r s t 132 p o s s i b l e s c e n a r i o f o r t h e r u l i n g c l a s s , i t i s a l w a y s p o s s i b l e t o t r a n s f e r t h e d e b t burden t o t h e g e n e r a l p o p u l a t i o n . A mechanism w i d e l y u s e d i s i n c r e a s i n g i n d i r e c t t a x e s . An i m p o r t a n t i m p l i c a t i o n o f t h i s s t u d y i s t h a t deep economic c r i s i s a f f e c t i n g t h e c a p i t a l i s t s y s t e m may be overcome by t h e r u l i n g e l i t e s b u t , more i m p o r t a n t l y , t h e y may f u r t h e r i n c r e a s e t h e i r e c o n o m i c and p o l i t i c a l power. T h i s becomes s t r i k i n g l y c l e a r when one t a k e s i n t o c o n s i d e r a t i o n t h e p o l i t i c s o f t h e d e b t ; t h e p r e s e n t c r i s i s has become - l i k e o t h e r s b e f o r e i t -a n o t h e r i n s t r u m e n t o f c a p i t a l a c c u m u l a t i o n and p o l i t i c a l d o m i n a t i o n . The r e g r e s s i v e p o l i c i e s i m p l e m e n t e d i n o r d e r t o pay f o r t h e d e b t e f f e c t i v e l y d e s t r o y some of t h e g a i n s o b t a i n e d by t h e w o r k i n g p e o p l e t h r o u g h l o n g s t r u g g l e . The p o i n t i s t h a t t h e ' s t a b i l i z a t i o n ' programs n o t o n l y a r e a g u a r a n t e e t h a t payments on t h e d e b t may c o n t i n u e , but a l s o , and more i m p o r t a n t l y , t h a t l a b o u r c o s t i s r e d u c e d , and t h a t p o l i t i c a l l i b e r t i e s a r e s u p p r e s s e d ; i n s h o r t , t h a t t h e r u l i n g c l a s s e s c o n t i n u e t o expand t h e i r power. The p o l i t i c a l i m p l i c a t i o n o f t h i s t y p e o f s y s t e m i c p r o b l e m f o r p o p u l a r and p r o g r e s s i v e s e c t o r s i s t h a t a s e r i o u s c r i s i s s u c h as t h i s shows t h a t t h e s y s t e m can c o l l a p s e , but t h a t w i l l o n l y happen i f t h e p o l i t i c a l s t r u g g l e l e a d s t o t h e e x h a u s t i o n o f t h e r e s o u r c e s a v a i l a b l e t o t h e d o m i n a n t c l a s s e s . In s h o r t , 133 what m a t t e r s f o r p o l i t i c a l r e v o l u t i o n i s n o t o n l y t h e weakness o f t h e s y s t e m , but a l s o t h e s t r e n g t h o f t h o s e c o n t e s t i n g t h e s t a t u s quo. L e t us remember t h a t t h e c r a s h o f t h e New York s t o c k m arket was most c a l a m i t o u s , and y e t t h e s y s t e m seems t o have r e c o v e r e d w i t h r e l a t i v e l y few r e s i d u a l p r o b l e m s . S i m i l a r l y , t h e p r e s e n t i n t e r n a t i o n a l d e b t c r i s i s a f f e c t s t h e p o o r e s t c o u n t r i e s more s e v e r e l y , and t h e d e v e l o p e d ones l e s s s o . What i s p r o b a b l y more i m p o r t a n t i s t h a t t h e c a u s e s o f t h e d e b t c r i s i s a r e s t i l l p r e s e n t . The merger, and LBO~'s f r e n zy a r e p r o o f o f t h i s . T h e r e can be no q u e s t i o n t h a t t h e c a p i t a l i s t s y s t e m g o e s t h r o u g h deep c o n v u l s i o n s p e r i o d i c a l l y , b u t i t i s a l s o e v i d e n t t h a t , so f a r , i t has been a b l e t o recover from most o f them. The s y s t e m i s s t i l l d e v e l o p i n g , and by i t s own dynamic, r e s t r i c t i n g more and more o f i t s a b i l i t y t o s o l v e i t s own c r i s e s . T h i s s e e m i n g l y c o n t r a d i c t o r y s t a t e m e n t needs e x p l a n a t i o n . The d e b t c r i s i s i s a good c a s e i n p o i n t . As has been made c l e a r i n t h i s work, t h e i n t e r n a t i o n a l d e b t c r i s i s i s a s t a g e i n a p r o c e s s t h a t began w i t h an a c c u m u l a t i o n and p r o d u c t i o n c r i s i s i n t h e US. T h a t s i t u a t i o n was p a r t i a l l y s o l v e d by t h e US i n d u s t r y and b a n k i n g , by r e s o r t i n g t o L e v e r a g e B y - Q u t , i s a c o r p o r a t e t a k e o v e r u s u a l l y f i n a n c e d w i t h h i g h d e b t s . T h i s i s becoming endemic i n t h e N o r t h A m e r i c a n Economy. F o r a d i s c u s s i o n o f t h i s and o t h e r r e l a t e d s u b j e c t s , ( S e e R e i c h 1983). 134 g e o g r a p h i c a l e x p a n s i o n o f t h e i r a c t i v i t i e s . In t h e i r way was a s e r i e s o f a c t s , laws and o t h e r f o r m s o f r e g u l a t i o n s d e s i g n e d t o p r o t e c t t h e s y s t e m from e conomic u p h e a v a l s , t h a t e x p l i c i t l y p r e v e n t e d t h e m i g r a t i o n o f m o n e y - c a p i t a l . The M u l t i n a t i o n a l C o r p o r a t i o n s and Banks s i m p l y i g n o r e d t h o s e r e g u l a t i o n s . T h o s e laws r e p r e s e n t e d a h i n d r a n c e t o t h e i r d e v e l o p m e n t . A t t h e same t i me, by e x p a n d i n g , t h e s e i n s t i t u t i o n s s e t t h e c o n d i t i o n s f o r an even l a r g e r p r o b l e m : t h e i n t e r n a t i o n a l d e b t . T h i s i s s o , b e c a u s e t h e new w o r l d f i n a n c i a l o r g a n i z a t i o n , p l u s o t h e r e v e n t s i n t h e p r o c e s s o f c a p i t a l i s t d e v e l o p m e n t , c r e a t e d t h e c o n d i t i o n s f o r t h e r e - c r e a t i o n o f t h e p r o c e s s o f c a p i t a l i s t a c c u m u l a t i o n on an even l a r g e r s c a l e . T h i s a c c u m u l a t i o n a t a g l o b a l s c a l e l e a d s t o r e s t r i c t i v e c o n s u m p t i o n among t h e p o o r e s t p a r t i c i p a n t s i n t h e g l o b a l economy. T h i s s i t u a t i o n l i m i t s t h e e x p o r t m a r k e t s f o r t h e i n d u s t r i a l e c o n o m i e s . Thus t h e c o n d i t i o n s f o r a n o t h e r c y c l e o f low c a p i t a l i n v e s t m e n t , e x c e s s i v e l i q u i d i t y , f i n a n c i a l s p e c u l a t i o n , r e c e s s i o n and c r i s i s have been r e - c r e a t e d . T h e r e a r e many a s p e c t s o f t h e d e b t t h a t I have m e n t i o n e d b r i e f l y and t h a t r e q u i r e more s t u d y . One of them i s t h e s o c i a l - p s y c h o l o g i c a l a s p e c t s o f l e n d i n g , what has been c a l l e d 'herd b e h a v i o u r o f t h e b a n k e r s ' , ' d i s a s t e r m y o p i a ' , ' c o g n i t i v e d i s s o n a n c e ' and ' a v a i l a b i l i t y h e u r i s t i c s " ( G u t t e n t a g and H e r r i n g 1 9 85). A n o t h e r a r e a n o t t o u c h e d upon i n t h i s work i s t h e Cuban d e b t w h i c h s t a n d s a t a p p r o x i m a t e l y US$5 b i l l i o n . I t 135 i s s a f e t o assume t h a t i t may r e q u i r e , i n some r e s p e c t s , a somewhat d i f f e r e n t a p p r o a c h t o t h a t o f t h e r e s t o f L a t i n A m e r i c a . The p o l i t i c s o f t h e d e b t a r e o n l y p a r t i a l l y t r e a t e d i n t h i s work. I m p o r t a n t i s s u e s n o t d e a l t w i t h a r e t h e new p o l i t i c a l a l l i a n c e s between i n d u s t r i a l i s t s , t h e m i d d l e c l a s s e s , and b l u e c o l l a r w o r k e r s a g a i n s t t h e m i l i t a r y and t h e e x p o r t i n g s e c t o r s o f t h e r u l i n g c l a s s e s , as i s t h e c a s e i n B r a z i l ( F r i e d l i n 1 9 86), as w e l l as s i m i l a r c o n v e r g e n c e s a t an i n t e r n a t i o n a l l e v e l , s u c h as t h a t o f Cuba and most c o u n t r i e s i n t h e r e g i o n . 136 APPENDIX G l o s s a r y 137 B u l l i s h S t o c k M a r k e t : E x p r e s s i o n u s e d t o d e s c r i b e a v e r y a c t i v e s t o c k market and c h a r a c t e r i z e d by t h e r a p i d i n c r e a s e o f s t o c k p r i c e s . D i s a s t e r M y o p i a : r e f e r s t o t h e l e n d e r and b o r r o w e r a t t i t u d e o f i g n o r i n g c l e a r s i g n s o f t h e im p e n d i n g c r i s i s (See G u t t e n t a g and H e r r i n g 1 9 85). M i d d l e - i n c o m e e c o n o m i e s : t h e World Bank d e f i n e s a s m i d d l e -income c o u n t r i e s w i t h a 1983 GNP o f U.S.$400, o r more. MNCs: M u l t i n a t i o n a l C o r p o r a t i o n s . N o minal v a l u e o f a l o a n : 1. t h e f a c e v a l u e o f a l o a n . Most l o a n s t o u n d e r d e v e l o p e d c o u n t r i e s t o d a y have a v a l u e l o w e r t h a n t h e n o m i n a l . F o r example, some o b l i g a t i o n s ( l o a n s ) a r e s o l d a t 60 p e r c e n t o r l e s s than t h e i r f a c e v a l u e . 2. I t a l s o r e f e r s t o t h e c o s t o f money a f t e r d e d u c t i n g i n f l a t i o n . I t may be t h e c a s e t h a t i f i n f l a t i o n i s h i g h e r t h a n i n t e r e s t , t h e n o m i n a l v a l u e i s a p l u s b u t t h e r e a l v a l u e i s n e g a t i v e . F o r example, i f a l o a n c o s t 5"/. a y e a r and i n f l a t i o n i s 107. a y e a r , t h e r e a l c o s t o f money i s minus 57., i n t h i s c a s e t h e r e i s a n e t g a i n f o r t h e b o r r o w e r . R e c y c l i n g l o a n s : a l o a n t o a d e b t o r i s s u e f o r t h e p u r p o s e o f a l l o w i n g t h e payment o f arreas on p r i n c i p a l o r i n t e r e s t . S e l l i n g a d e b t : The s e l l i n g o f a d e b t o r s ' o b l i g a t i o n s i n t h e i n t e r n a t i o n a l m a r k e t , u s u a l l y a t a d i s c o u n t . Some L a t i n A m e r i c a n d e b t s a r e been s o l d t o d a y a t between 40 t o 60 p e r c e n t o f t h e i r n o m i n a l — o r f a c e — v a l u e . T h i s means t h a t a n o m i n a l d e b t o f 10 m i l l i o n U.S.* may be bought a t 4 t o 6 m i l l i o n U.S.*. S p r e a d : The d i f f e r e n c e between t h e i n t e r e s t c h a r g e d by a bank t o i t s c u s t o m e r s and t h e i n t e r e s t t h e bank pays t o i t s C e n t r a l Bank. In o t h e r words, t h e s p r e a d i s t h e banks' p r o f i t from money t r a n s a c t i o n s . 138 BIBLIOGRAPHY 139 Amin , S a m i r . L' a c c u m u l a t i o n A n t h r o p o s , 1970, a l ' e c h e l l e m o n d i a l e . P a r i s : E d i t i o n s A r m s t r o n g , Warwik and T e r e n c e G. McGee, T h e a t r e s o f A c c u m u l a t i o n : S t u d i e s i n A s i a n and L a t i n A m e r i c a n U r b a n i z a t i o n . London & New Y o r k : Methuen and Co. L t d , Bank f o r I n t e r n a t i o n a l . S e t t l e m e n t s (BIS) A n n u a l R e p o r t 8 t h June 1964 A n n u a l R e p o r t 1 4 t h J u n e 1965. A n n u a l R e p o r t 1 3 t h J u n e 1966 A n n u a l R e p o r t 9 t h June 1969. A n n u a l R e p o r t 1 8 t h J u n e 1973. A n n u a l R e p o r t 1 0 t h J u n e 1974. A n n u a l R e p o r t 8 t h J u n e 1975. A n n u a l R e p o r t 1 4 t h J u n e 1976. A n n u a l R e p o r t 1 3 t h June 1977. A n n u a l R e p o r t 1 2 t h J u n e 1978. A n n u a l R e p o r t 1 1 t h June 1979. A n n u a l R e p o r t 9 t h J u n e 1980. B a s l e : bank f o r I n t e r n a t i o n a l S e t t l e m e n t s . 1985, B a r a n , Pau1. The P o l i t i c a l Economy o f G r o w t h . Review, I n c . , 1957. New Y o r k , London: M o n t h l y B l a i n , R o b e r t R. " U n i t e d S t a t e s p u b l i c and p r i v a t e d e b t : 1790 t o 2000", I n t e r n a t i o n a l S o c i a l S c i e n c e s J o u r n a l . No.114, Nov, 577-591. 1987: B o o t h , D a v i d "Andre Gunder F r a n k : an i n t r o d u c t i o n and a p p r e c i a t i o n " . In Beyond t h e S o c i o l o g y o f D e v e l o p m e n t : Economy and S o c i e t y i n L a t i n A m e r i c a and A f r i c a . I v a r O x a a l , Tony B a r n e t t and D a v i d Booth ( E d s . ) . London: R u t l e d g e and Kegan P a u l , 1975: 50-85. Bock, K e n n e t h . " T h e o r i e s o f P r o g r e s s , D e v e l o p m e n t , E v o l u t i o n " , o f S o c i o l o g i c a l A n a l y s i s , B o t t o m o r e and N i s b e t New Y o r k : B a s i c Books I n c . 1978:39-79. i n A H i s t o r y ( E d s . ) , B r a n d f o r , Sue and B e r n a r d o K u c i n s k i . The Debt S q u a d s . London, New J e r s e y : Zed Books, 1988. B r e n n e r , R o b e r t . "The O r i g i n s of C a p i t a l i s t D e v e l o p m e n t : a C r i t i q u e o f N e o - S m i t h i a n Marxism", A/ew Left Review, J u l y / A u g . 1977: 25-92. 140 C a r c h e d i , G u g l i e l m o . " C o m p a r a t i v e a d v a n t a g e s , c a p i t a l a c c u m u l a t i o n and s o c i a l i s m " , Economy and Society,Volume 15 Number 4 November 1986: 427-444. C a s t r o , F i d e l The W o r l d E c o n o m i c and S o c i a l C r i s i s . Havana: P u b l i s h i n g O f f i c e o f t h e C o u n c i l o f S t a t e , 1983. D e l a m a i d e , D a r r e l . Debt Shock. T o r o n t o : L e s t e r and Orpen Denys, 1984. ECLAC ( U n i t e d N a t i o n s Economic Commission f o r L a t i n A m e r i c a and t h e C a r i b b e a n ) . E x t e r n a l Debt i n L a t i n A m e r i c a : A d j u s t m e n t P o l i c i e s and R e n e g o t i a t i o n s . P r e p a r e d by A n d r e s B i a n c h i , R o b e r t De V i n and J o s e p h Ramos, o f t h e E c o n o m i c D i v i s i o n o f ECLAC. 1985a. S t a t i s t i c a l Y e a rbook f o r L a t i n A m e r i c a and t h e C a r i b b e a n . S a n t i a g o , C h i l e : CEPAL, 1985b. E i s e n s t a d t , N.S. 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