The Debt Crisis and Doing Everything Wrong

Dr. Parakrama Waidyanatha

It is often said that if the country could recover the embezzled dollars by the ruling politicians and other ‘filthy’ rich, stashed in foreign banks or invested otherwise locally and overseas, all our foreign debts could be settled! An oft-heard slogan these days in public protests against the President and government is : ‘give back our money’! A reputed surgeon was audacious enough to reveal at a You Tube interview the other day, that he is aware of rulers printing illegal money in a large scale at a house in Battaramulla!

Susan George in her famous book titled “A Fate Worse than Debt” published in1988 states with detailed examples, how most third world country political leaders and their henchmen embezzle huge sums from foreign aid and local investments impoverishing them; and eventually the people have to pay back.

In the 1980s, newspapers reported freely about embezzlements of Marcos, the Philippines President and his wife Imelda whose ill-gotten riches were astounding, and she had more than 3,000 pairs of shoes. It was said that the couple cost the country at least 15% of its foreign debt of USD 26 billion. In fact it was also said that Marie Antoinette, the Queen of France who was also notoriously rich, would look a servant woman compared to Imelda. During the French Revolution, when hungry and angry people revolted in front of her castle asking for bread, she is reported to have questioned her aids: ‘if there is no bread why don’t they eat cake?’ The rich hardly know the utter desperation of the poor.

Of the many debt-financed projects of the Philippines, a nuclear power plant costing 2.1 billion USD was one. It was sited at the foot of a volcano against the wishes of experts. It cost the country at least USD350,000 a day, and Marco’s commission was USD 80 million. He overruled the expert committee’s recommendation of a much cheaper nuclear plant; and the crony who arranged the deal, with his share of the loot bought a villa in Vienna. Marcos exiled to Honolulu died in 1989, and Imelda is yet alive at 92. There are very many more examples of Marcos’ misappropriations.

The World Food Assembly(WFA),many years ago, reported that foreign debts was the primary cause of increasing hunger and decreasing food security across many third world countries, especially Sub-Saharan Africa. In the 1980s, says, Susan George in her book, that over $130 billion net repayments minus new loans had moved from Latin America to the Northern banks over a five year period.

The Modus Operandi of Big Banks

Many third world countries are deeply indebted to international banks and are forced to take further loans to repay the old ones. This is because investments of the previous loan monies have not yielded the expected returns apart from misappropriations. Banks are not too worried because much of the new loans having entered the books of the third world comes back into the coffers of International creditors, often large banks such as the City Bank of U.S. They do not care if the national borrowers pay the loans so long as they pay the interest regularly. The banks can be magnanimous as regards the payment of the capital. Payment of the interest is their main concern.

Capital Flight & ‘Suitcase Culture’

Loan money spirited out of the borrowing countries, by the political leaders and their henchmen through illegal means are re-deposited in the banks and re-invested. Good for the banks. The books deliver loans and in no time, a substantial proportion of it is stashed and returned to the banks by corrupt politicians and their henchmen. Nevertheless the money appears in their books as loans. The banks re-invest the money. In short they are paid back twice for a single commitment.

It is said that some aggressive banks such as the City Bank have probably accumulated as much as assets from the poor countries as they have loaned to them. The Bank for international Settlements (BIS), it is reported, estimated that some $ 55 billion was transferred from Latin American Countries over five year period. The same situation obtains with some Sub-Saharan countries. The capital flight from the big ten Latin American debtor countries is said to be equivalent to 70% of their new loans from 1983-85.

From highly indebted Mexico, a banker is reported to have stated that lot of the billions arrived in suitcases carried by bank staff. One banker had mentioned that his bank in the U.S sent a guy with two empty suitcases to Mexico City regularly. One bank, it is reported to have 1,500 people dedicated to this activity in the past. Apparently it continues to happen even now.

It is evident that capital flight takes place here too. It was just the other day, amidst the current public upheaval, that a private jet allegedly flew to Dubai from Colombo carrying two million USD of a businessman.

Much has been proposed by the lending agencies and policy makers on ‘trickle – down’ hypothesis, comparative and competitive advantage in trade, modernization and transfer of technologies from the North to the South, but the impact of all this has been, on the whole small, in comparison to the huge misappropriation of credit from donor agencies by the political leaders.

Many third world countries are now in deep trouble in that their new loans are devoted not for development but for servicing old ones. Sri Lanka will get into the same boat, hopefully, with the expected loan facilities from the International Monetary Fund ( IMF) and other agencies.

Whilst poverty and indebtedness are aggravating in the south, the world’s top two hundred transnational corporations’ annual turnover is equivalent to 30% of the gross world product and the total third world debt amounts to a mere third of their annual sales.

Reducing the North- South Wealth Gap

Much has been discussed by the international aid agencies and the developed countries regarding bridging the gap but with little success.

The Brandt consultation was sponsored by the World Bank in 1980 towards this end, with the participation of elites from First and Third Worlds to review fresh ways of transfer of wealth from the First to the Third World, but the overall outcome has been negligible partly because of the oil price hikes of the OPEC countries in that period which reduced the incomes of developed countries that were expected to extend greater support to the third world.

Ironically, the third world non-oil producing countries were more affected by the high oil prices. With inflation in the West with oil price hikes, the interest rates were increased to reduce inflation which also correspondingly raised the lending interest rates to third world countries. This dramatically increased the cost of debt servicing of developing countries. In addition the economic down-turn in the West, caused the decline of primary commodity prices from the third world countries, a double whammy!

Doing Everything Wrong

In conclusion, apart from financial mismanagement, obstinacy of leaders and wrong policies have been instrumental in the sad plight of many poor countries. A good example is the recent Sri Lanka. Wrong decisions made one after the other such as reducing corporate taxes, banning agrochemicals and converting the country’s entire agriculture to organic virtually overnight have had disastrous economic consequences. In addition the decisions to ban importation of palm oil and cultivation of oil palm and expanding the coconut cover to produce the country’s total vegetable oil demand were fortunately retracted as they were untenable. Consulting experts in the various fields in decision making has been totally ignored, and incompetent people have been appointed to important positions.

With regard to totally converting the country’s agriculture to organic farming, a letter signed by 146 agriculture experts including numerous university academics seeking an appointment to discuss the matter was sent to the President via the then Secretary of Agriculture, who reported having handed it over to him. However, it failed to generate a response! Ironically, now with the virtual collapse of the government, mistake after mistake is being rectified. Nearly all the wrong decisions have been reverted. Better late than never, but is it not already too late?