Ballooning Debts

By Azher Ahmad and Maleeha Shafi

Earlier this year, the Kenyan president moved an IMF-backed bill to raise taxes on consumer goods that caused so much uproar that it was ultimately cancelled. Last year, more than half of its revenue went into debt servicing, with a huge total debt of $80 billion. In addition to this, Down to Earth Magazine reported that 60% of the African low-income countries were in debt distress, which had exacerbated various problems there in the form of inequality, poverty, etc., fueled by the IMF’s predatory lending practices. 

Between 2010 and 2018, the external debt payments by developing countries grew by 85% as a part of government revenue. All this points to the debt trap that has essentially existed in capitalism in the form of development aid, loans, etc. While most of the conventional literature has focused on the debt trap diplomacy of China, which, by starting the Belt and Road Initiative, was said to have made inroads into the internal sovereignty of various poor and middle-income countries, there has been near to no talk of the debt trap diplomacy of the US vis-à-vis the IMF. 

There has been a cross-section of whistleblowers who have time and again exposed the masked intentions of various institutions that were created. John Perkins is one of the people who have written ‘Confessions of an Economic Hit Man’ and revealed how poor countries were made to bow before the US. After the 2nd world, we are said to have reigned in capitalism that has been characterised by expanding markets and freedom, as Hayek and Friedman vociferously put it. Two institutions were created, the IMF and the World Bank. 

However, most people do not know the reason for their emergence. After the great depression of the 1930s, there was the reign of Keynesian economics, which pointed out various failures in capitalism and called for active intervention by various institutions, such as the government. 

These two financial institutions were created to intervene whenever there is a market failure: the World Bank by providing loans to poverty-stricken countries and the IMF by supporting countries in crises for macroeconomic stability. 

However, what we see now is a distorted version that functions on the whims of the Washington consensus, which is baptising and proselytising as many countries as possible into markets for developed countries, which is shocking.

These institutions have played an important role in the resurrection of imperialism of the sort that we had, which was direct conquest of countries. We have a whole list of countries that took loans and got trapped in the trap, plunging the health of their economies into an economic crisis. We have cases from Argentina, Bolivia, Tunisia, Chile, Egypt, Iraq, Africa, etc. that are testaments to the failed policy of fiscal austerity imposed in the form of the structural adjustment program. Also, the interest rate charged by it is different, as the UNDP in its human development report has reported that the IMF charges a whopping 17% interest on developing countries and just 4% on developed countries. 

Anything that is done at the behest of the IMF has various political and economic intentions in mind for the US and other developed countries. How they trap countries into debt is shocking and dangerous. Firstly, various technical persons who have expertise in public policy are sent to various corners of the world. These are hired by private companies and indirectly supported by the US government to study the socio-political and economic environment of various poor countries. They are essentially tasked with persuading the rulers to invest in infrastructure and showing how it could benefit their country. 

The cost of construction of various infrastructural facilities is overestimated by these economic hitmen, and now to finance it, they are asked to take loans from the IMF, which is hefty, and added to that, the US companies are given the responsibility to construct all these facilities, which results in the plunder of local resources and the destruction of local culture, environment, and whatnot. 

The root cause of today’s debt crisis can be traced to the West’s premature inclusion of underdeveloped countries in the international capital market and its tacit approval of their reckless borrowing. Argentina massively borrowed from these institutions in the 1990s, and for some time, it was projected as the most successful project of the IMF. However, after some years, we could see how the debt crisis unfolded, and added to that, what that growth contained was basically socialism for the 1%, which is it had increased the wedge between the poor and the rich. 

We have our neighbour Pakistan, which has 71.4% of GDP as its debt, as it has been given various bailouts. The flipside of bailouts is that the money ultimately flows to the US, and the common people get nothing. Bailouts are given by the government to various MNCs whose condition becomes worse in the time of the crisis. Joseph Stiglitz, a noted Nobel Prize winner, says that rather than pursuing this supply-side monetary economics by bailing out companies, the money given should be spent on various public works that increase the purchasing power, popularly known as helicopter money. 

The policies pursued by the IMf are supply-sided in that they overtly and covertly focus on controlling inflation, which to him has the least impact on improving the employment situation of a country. He also says that in times of crisis, the solution is not to force countries to stop spending on public workers but to increase it as much as possible. Any attempt on the part of the IMf is aimed at increasing the dependency of third-world countries on the US and benefits US companies. 

The IMF recently reported the debt contained 228% of global GDP, which has become so huge that a country has to rely on external sources to fund projects, and in this way it gets trapped into a vicious circle of poverty. At the same time, it is imperative to expose the hypocrisy of the IMF. In Section 3 of Article 6 of the statute, it says that the members may exercise such controls as necessary to regulate international capital movement, which is again false, as the main target is to expose lower-income countries to the susceptibilities of exchange rate risk, speculative risk, and deindustrialization. The debt trap has a crowding effect in that more loans mean that businesses and governments will always have to pay interest, which will reduce the propensity to consume and invest, thereby causing capital flight. Now that we are in the financial period of globalisation, it is important to have capital controls in place as the crisis of the dot.com bubble and the stock market crash have exposed paltry and tawdry free trade. Now that there has been a rise of the far right and neo-conservatism in the west, it shows the value of free trade. 

Tunisia’s public debt in just one year rose by 18% to 90% of the total output, due to the lifting of the capital controls. The solution per se is not in austerity measures but either debt restructuring or wholesale cancellation of debts; otherwise, it would engulf the whole world in its crisis.

Views expressed in the article are the author’s own and do not necessarily represent the editorial stance of Kashmir Observer.  

• The authors are associated with the University ofDelhi.Email:[email protected]

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