Saturday, September 20, 2008
SOCIALISM FOR BANKERS, SAVAGE CAPITALISM FOR EVERYONE ELSE? Bailout Jeopardizes the Entire Progressive Agenda James S. Henry
"“There’s class warfare, all right, but it’s my class, the rich class, that’s making war, and we’re winning.” -- Warren Buffet, June 2008
Ladies and gentlemen: pardon my intemperance, but it is high time for some moral outrage -- and a little good old-fashioned class warfare as well, in the sense of a return to seriously-progressive taxation and equity returns for public financing.
After all, as this week's proposed record-setting Wall Street
bailout with taxpayer money demonstrates once again, those in charge of running this country have no problem whatsoever waging "class warfare" against the rest of us -- the middle classes, workers and the poor -- whenever it suits their interests.
At a time when millions of Americans are facing bankruptcy and the risk of losing their homes without any help whatsoever from Washington DC, the CEOs and speculators who created this mess, and the top 1 percent of households that owns at least 34 percent of financial stocks, and the top 10 percent that owns 85 percent of them, have teamed up with their "bipartisan" cronies in Congress, the US Treasury and the White House to stick us with the bill, plus all of the risk, plus none of the upside.
Upon close inspection, the Treasury's proposal is nothing more than a bum's rush for unlimited power over hundreds of $billions, to be distributed at Secretary Paulson's discretion behind closed doors and without adequate Congressional oversight.
This time they have gone too far.
As discussed below, the cost of this bailout could easily jeopardize our ability to pay for the entire economic reform program that millions of ordinary citizens across both major parties have been demanding.
Some kind of bailout may indeed be needed from the standpoint of managing the so-called "systemic risk" to our financial system.
However, as discussed below, the Paulson plan does not really tackle the real problem head on. Thsi is the fact that many financial institutions, including hundreds of banks, are undercapitalized, and need more equity per dollar of debt, not just fewer bad assets.
To provide that, we may well want to mandate debt restructurings and debt swaps, or provide more equity capital .
If private markets can't deliver and we need to inject public capital into financial services companies on a temporary basis, so be it. But it should only be in return for equity returns that compensate the pubilc for the huge risks that it is taking.
Call that "socialism" if you wish -- I think we are already well beyond that point -- sort of like Chilean economists became in 1983, when the entire private banking sector collapsed and was nationalized -- successfully -- by the heretofore "Los Chicago Boys."
To me, public equity investment, in combination with increased progressive taxation, should be viewed as just one possible way to get these companies the equity they need, while providing fair compensation to the suppliers of capital and participation in any "upside," if there is one.
Absent such measures, progressives certainly have much less reason to support this plan. After all, the increased public debt burdens that it would impose are so large that they could easily jeopardize our ability to pay for the entire economic reform program that millions of ordinary citizens (across both major parties) have been demanding.
From this angle, the Paulson program, in effect, is a cleverly-designed program to "nationalize" hundreds of billions of risky, lousy assets of private financial institutions, without acquiring any public stake in the private institutions themselves, and without raising any tax revenue from the class of people who not only created this mess, but would now like to be bailed out.
Any mega-bailout should come at a high price for those who made it necessary.
In particular, we must make sure that the butcher's bill is paid by the tiny elite that was responsible for creating this mess in the first place.
This is not about retribution. It is about insuring taxpayers are truly rewarded for the risks that they are taking -- isn't that the capitalist way? And it is also about making sure that this kind of thing never happens again.
After all, the real tragedy of this bailout is its opportunity cost. Consider a well-managed $1 trillion "matching" investment in strategic growth sectors like energy and health....If we really wanted to insure our competitive health, we would not be investing $1 trillion in lousy bank portolios generated by the chicanery-prone financial services sector.
CAPITALISTS AT THE TROUGH
In financial terms, this latest Wall Street bailout is likely to cost US taxpayers at least $100-$150 billion per year of new debt service costs -- just for starters.
This estimate is consistent with the $700 billion ("at any point in time") that President Bush and Treasury Secretary Hank Paulson are requesting from Congress this week to fund their virtually-unfettered ("unreviewable by any court") new "Troubled Asset Relief Program." (TARP)
The sheer scale of Paulson's proposal implies that federal authorities plan to acquire at least $3 trillion of mortgage-backed securities, derivatives, and other distressed assets from private firms -- on top of Fannie/ Freddie Mac's $5.3 trillion mortgage securities portfolio. How the Fed and the Treasury actually propose to determine the fair market value of all these untrade-able assets is anyone's guess. But since 40 percent derive from the exuberant, fraud-prone days of 2006-7, they will probably all be subject to steep (60-90 percent) discounts from book value.
That's consistent with the 78 percent "haircut" that Merrill Lynch took on the value of its entire mortgage-backed securities portfolio earlier this month -- actually, more like a 94.6% haircut, the portion that it received in cash.
This implies, by the way, that if the Federal Government were required to "mark to market" their $29 billion March 2008 investment in Bear Stearns' securities, it would now have a cash value of just $1.6 billion. Not a very hopeful sign from a taxpayer's standpoint.
Paulson's latest proposal dictates another sharp increase in the federal debt limit, to $11.313 trillion. This limit stood at just $5.8 trillion when Bush took office in 2001. By October 2007 it stood at $9.8 trillion. Then it jumped again to $10.6 trillion in July 2008, during in the Fannie/Freddie meltdown. As of March 2008, the actual amount of Federal debt outstanding was $9.82, just six months behind the limit and gaining.
All this new TARP debt will be on top of $200 billion of new debt that was issued to buy Fannie/Freddie's preferred stock, plus the assumed risk for their $1.7 trillion of debt and $3.1 trillion of agency mortgage-backed securities.
It is also in addition to the $85 billion 2-year credit line that Federal Reserve just extended to AIG, the $29 billion "non-recourse" loan provided for the Bear Stearns deal noted above; $63 billion of similar Federal Reserve lending to banks this year; $180 billion of newly-available Federal Reserve "reciprocal currency swap lines:" $5 billion of other emergency Treasury buybacks of mortgage-backed securities; $12 billion of Treasury-funded FDIC losses on commercial bank failures this year (including IndyMac's record failure in July); perhaps another $455 billion of Federal Reserve loans already collateralized by very risky bank assets; and the FDIC's request for up to $400 billion of Treasury-backed borrowings to handle the many new bank failures yet to come.
There is also the record $486+ billion budget deficit (net of $180 billion borrowed this year from Social Security trust fund) that the Bush Administration has compiled for 2008/09, drivem in part by the continued $12-$15 billion per month cost of the Iraq and Afghan Wars and the impact of the deepening recession on tax revenues. Longer term, there is also the projected $1.7 trillion to $2.7 trillion "long run" cost of those wars (through 2017).
All told, then, we're talking about borrowing at least another $1-1.4 trillion of federal debt to finance a record level of lousy banking.
COMPARED TO WHAT?
By comparison, Detroit's latest request for a mere $25 billion bailout looks miserly. And if we were in Vienna, we would say, "We wish we could play it on the piano!"
Compared to other bailouts, this is by far the largest ever.
For example, the total amount of debt relief provided to all Third World countries by the World Bank/IMF, export credit agencies, and foreign governments from 1970 to 2006 totaled just $334 billion ($2008), about 8 percent of all the loans. (Henry, 2007). 
The savings and loan bailout in the late 1980s cost just $170 billion ($2008).
And the FDIC's 1984 bailout of Continental Illiinois, the largest bank failure up to this year, was (in $2008) just $8 billion (eventually reduced to $1.6 billion by asset recoveries).
Meanwhile, compared with other countries that are well on their way to building forward-looking "sovereign wealth funds" to make strategic investments all over the world, the US seems to be on a drive to create this introverted "sovereign toxic debt dump."
CASH COST
No one has a very precise idea of how much all this will cost, not only because many of the securities are complex and thinly traded, but also because their value depends to a great extent on the future of the US housing market. Housing prices have already fallen by 20-32 percent in the top 20 markets since mid-2006, and they continue to fall in 11 out of 20 major markets, especially Florida, southern California, and Arizona, where the roller-coaster has been the most steep.
At current T-bond rates (2-4 percent for 2-10 year bonds, the most likely maturities), near-term cash cost of this year's bailu is likely to be an extra $40 to $60 billion a year in interest payments alone.
Furthermore, since the borrowed funds will be invested in high-risk assets, the most important potential costs involve capital risk. There's a good chance that, as in the case of Bear Stearns, we'll ultimately get much less than $.50 for each $1 borrowed and invested. For example, Fannie and Freddie alone could easily be sitting on $500 billion of losses (=$2 trillion/$5.3 trillion* 50% default*50% asset recovery).
This could easily make the long-run cost of this bailout to taxpayers at least $150 billion a year.
No wonder traders on the floor of the New York Stock Exchange reportedly broke out singing "the Internationale" when they heard about the bailout.
But the direct financial costs of the bailout are only the beginning....
HIJACKING THE FUTURE
Last week's events produced terabytes of erudite discussion by an army of Wall Street journalists, prophets and pundits about short-selling rules, "covered bonds," and the structure of the financial services.
This is absolutely par for the course, as modern financial crisis journalism is concerned -- the "story" is always told mainly from the standpoint of what's in it for the industry, the banks, the regulators, and the investors.
For the 90 percent of Americans who own no money-market funds, and less than 15 percent of all stocks and bonds, however, this bailout means just one thing.
All of the money has just been spent. And it has not been spent on you.
For example, unless we demand an increase in taxes on the rich, big banks, and big corporations, as well as some public equity in exchange for the use of all this money, we can expect that the long-term costs of this bailout will "crowd out" almost all of the $140 to $160 billion of new federal programs that Barack Obama proposed. It will certainly make it impossible for Obama to finance his programs without either borrowing even more heavily, or going well beyond the tax increases (on oil companies and the upper middle classes) that he has proposed.
Without such changes, there will be no federal money available for comprehensive health insurance, or the reform of the health care delivery system.
There will be no additional funding for pre-school education, child care, or college tuition.
There will be no additional funding for investments in energy conservation, wind, or solar power.
There will be no additional investments in national infrastructure (e.g., the reconstruction of our aging roads, highways, and bridges to "somewhere.")
Highway privatization and toll roads, here we come.
There will be no money to bail out the millions of Americans who are on the brink of losing their homes.
The supply of housing loans and other credit will remain tight, despite the bailout.
Indeed, if the economic elite has its way, the long-sought dream of "a home for every middle-class American family" may be abandoned as a goal of government policy.
Meanwhile, the government-sponsored consolidation of the financial services industry will make financial services more profitable than ever.
This is good news for the "owners of the means of finance." For the rest of us, it means steeper fees and rates. And if we fail to keep up with the new charges, we'll face the rough justice delivered by the latest bankruptcy "reform," which was rammed through the Congress in 2005 with support from many top Democrats.
There will be no money to shore up the long-run drain on Social Security or Medicare.
Indeed, ironically enough, this latest bank bailout may even increase the financial pressure to privatize these comparatively successful government programs.
There will be no extra money to house our thousands of new homeless people, relieve poverty, rebuild New Orleans, or support immigration reform.
There will be no additional funds for national parks.
Indeed, we might as well start by privatizing our national and state parks, and drilling for oil and gas in the Arctic National Wildlife Refuge, Yosemite, the Grand Canyon, and right off the Santa Barbara coast. We're going to need those federal lease royalties. (Perhaps the oil barons will lend us an advance.)
There will be no funds available for increased homeland security.
There will certainly be no "middle-class" tax cut. Absent a progressive tax reform, the only "cut" the middle class is going to receive is another sharp reduction in living standards.
TRUMPING REAGAN
All told, the Bush/Paulson "permissive banking/ massive bailout" model beats even the old 1980s vintage Reagan formula, which tried to force government down-sizing with huge tax cuts.
Contrary to the sales pitch, those cuts never produced any incremental tax revenues, let alone any significant down-sizing. It has simply proved too easy for the federal government to borrow. And "conservatives" can always find wars, farm subsidies, defense contractors, and "bridges to nowhere" to spend the money on, just as fast as liberals.
Lately, however, it appears that US debt levels may indeed be reaching the point where they could impose a limit on increased spending. Given the sheer size of the new federal debt obligations, foreign creditors,who have recently been supplying more than half of new Federal borrowing, have been muttering about taking their lending elsewhere. And outside the financial services industry, Main Street companies are concerned being "crowded out" by record federal borrowing.
THE ALTERNATIVE -- THE "GET REAL" NEW DEAL
To make sure that real economic reform is still feasible, we need to demand a "Get Real/ New Deal" from Congress right now.
At a minimum, this Get Real/New Deal package should consider measures like:
(1) The restoration of stiff progressive income and estate taxes on the top 1 percent of the population (with net incomes over $500,000 a year and estates over $5 million) -- especially on excessive CEO and hedge fund manager compensation;
(2) Much more aggressive enforcement and tougher penalties against big-ticket corporate and individual tax dodgers;
(3) Tougher regulation of financial institutions -- possibly by a new agency that, unlike the US Federal Reserve, the SEC, and the US Treasury, is not "captive" to the industry;
(4) A crackdown on the offshore havens that have been used by leading banks, corporations, and hedge funds to circumvent our securities and tax laws;
(5) The immediate revision of the punitive bankruptcy law that Congress enacted in 2005 at the behest of this now-bankrupt elite; and
(6) While we are at it, stiff "pro-green" luxury taxes on mega-mansions, private jets, Land Rovers, yachts, and all other energy-inefficient upscale toys.
We also need (7) a National Commission to investigate the root causes of this financial crisis from top to bottom, and actually (unlike the hapless, ineffectual 9/11 Commission) hold people accountable.
Finaily, if the pubilc is going to provide so much of the risk capital for this restructuring, we should demand (8) public equity in the private financial institutions that receive so much of our help.
This will permit taxpayers to share in the upside of this restructuring, rather than just the downside risks.
Along the way, this will require that we explain to Secretary Paulson that this country is not Goldman Sachs. Even after 8 years of President Bush, this is still a democracy.
Secretary Paulson is not going to be given unfettered discretion to hand out closet "liquidity injections" to his buddies on the street -- no matter how worthy they are.
Over time, this progressive Real/ New Deal would help raise the hundreds of billions in new tax revenue needed to offset the costs of this bailout.
This will be essential, if the Federal Government is to be able to afford key reforms like health insurance, clean energy, and investments in education.
These may not matter very much to Wall Street executives, financial analysts, Treasury and Federal Reserve executives, or the more than 120-130 Members of Congress and 40-45 US Senators who earn more than $1 million a year -- and are already covered by a generous "national health care" package of their own design.
But these are the key "systemic risks" that ordinary Americans face.
These reforms may sound ambitious. So is the bailout. And the reforms that we are discussing are only fair.
After all, we the American people have recently been the very model of forgiveness and understanding.
We have tolerated and footed the bill for stolen elections, highly-preventable terrorist attacks, gross mismanagement of "natural" disasters, prolonged, poorly conceived, costly wars, rampant high-level corruption, pervasive violations of the US Constitution, and the systematic looting of the Treasury by politically-connected defense contractors, oil companies, oligopolistic cable TV and telecommunications firms, hedge fund operators, big-ticket tax evaders, and our top classes in general.
Does "class" still matter in America? You betcha -- perhaps more than ever. But enough is enough. Call your Congressperson now. Demand a"Get Real/ New Deal" qualifier to the bailout package before it is too late. We deserve to get much more for our money. So do our kids.
(c) SubmergingMarkets, 2008
September 20, 2008 at 04:41 PM | Permalink | Comments (0) | TrackBack
Thursday, July 24, 2008
"ATTACK OF THE GLOBAL PIRATE BANKERS!" The Great White Sharks at UBS and LGT James S. Henry
(Note: The following is an expanded version of our article that appeared in the July 22, 2008 online edition of The Nation, available here.)
"For what is the crime of burgling a bank, compared with the crime of building one?"
-- Brecht
The Hearing
Last week in Washington we got a rare look inside the global private banking industry, whose high purpose it is to gather up the assets of the world's wealthiest people and many of its worst villains, and shelter them from tax collectors, prosecutors, creditors, disgruntled business associates, family members and each other.
Thursday's standing-room-only hearing on tax haven banks and tax
compliance was held by the US Senate's Permanent Subcommittee on Investigations, chaired by Michigan Senator Carl Levin, a regular critic of tax havens--except when it comes to offshore leasing companies owned by US auto companies. He presented the results of his Committee's six-month investigation of two of Europe's most venerable financial institutions - LGT Group, the largest bank in Liechtenstein and the personal fiefdom of Crown Prince Hans-Adam II and the royal family, with more than $200 billion in client assets; and UBS, Switzerland's largest bank and the world's largest private wealth manager, with $1.9 trillion in client assets and nearly 84,000 employees in fifty countries, including 32,000 in the United States.Kieber
The theatrics included videotaped testimony by Heinrich
Kieber, a Liechtenstein computer expert in a witness protection program with a $7 million bounty on his head, for supplying a list of at least 1,400 LGT clients - some say more than 4,500 - to tax authorities in Europe and the United States; two former American clients of LGT, who took the Fifth Amendment; Martin Liechti, head of UBS international private banking for North and South America, who'd been detained in Miami since April, and who also took the Fifth; Douglas H. Shulman, our sixth IRS commissioner in eight years, who conceded that 
offshore tax evasion must be a "serious, growing" problem even though the IRS has no idea how large it is; and Mark
Branson, CFO of UBS's Global Wealth Management group, who apologized profusely, pledged to cooperate with the IRS (within the limits of Swiss secrecy) and surprised the Committee by announcing that UBS has decided (for the third time since 2002) to "exit" the shady business of providing new secret Swiss accounts to wealthy Americans.
There were also several other potential witnesses whose 
importance was underscored by their absence. Peter S. Lowy, of Beverly Hills, another former LGT client who'd been subpoenaed, is a key member of the Westfield Group, the world's largest shopping mall dynasty, which has interests in and operates 55 US malls and 63 others around the world with a combined value of more than $60 billion, holds the lease for a new shopping mall at the reconstructed World Trade Center, has many other properties in Australia and Israel, and was recently awarded a L3 billion project for the UK's largest shopping mall, in time for the 2012 Olympics.
His lawyer, the renowned Washington fixer Robert S.
Bennett, reported that Lowy was "out of the country" and would appear later, probably also just to take the Fifth. Perhaps he traveled to Australia, where his family is also reportedly facing an LGT-related tax audit. (Bennett's law partner, David Zornow, the head of Skadden, Arps' White Collar Crime practice, represents UBS's Liechti.)
Steven D. Greenfield, a leading New York City toy vendor and private equity investor whose business had been personally recruited by the Crown Prince's brother, went AWOL and did not bother to send a lawyer.
LGT Group declined to follow UBS's contrite example and also failed to appear.
Also missing from the roster were two prominent UBS executives: Robert Wolf, CEO of UBS Americas, who has reportedly raised over $500,000 for Barack Obama, bundled more than $370,850 for him this year from his bank alone, making UBS Obama's fifth-largest corporate donor, and had private dinners with the junior Senator from Illinois; and former Texas Senator Phil Gramm, vice chairman of UBS Securities LLC, a leading lobbyist for UBS until March, and until recently, John McCain's senior economics adviser. (In 1995, while preparing his own ultimately-unsuccessful race for the Republican Presidential nomination, Gramm commented memorably, "I have the most reliable friend you can have in American politics, and that's ready money.") 
While neither of these UBS executives have been directly implicated in the tax scandal, both might reasonably be questioned about precisely what the rest of UBS in the States knew about the Swiss program, what it implies for US tax policy, and whether those who complain about UBS's knowing facilitation of tax fraud are just whining.
While they were on the subject of offshore abuses, the Senate might
also have wanted to depose former top McCain fundraiser James Courter,
who also resigned last week, after it was disclosed that his telecom
firm, IDT, had been fined $1.3 million by the FCC for using a haven
company in the Turks and Caicos to pay bribes to former Haitian
President Jean-Bertrand Aristide.
The Cases
This crowded docket, combined with the UBS mea culpa, almost distracted us from the sordid details of the Levin Committee's actual findings.
UBS: UBS opened its first American branch in 1939, and for all we know, has likely been facilitating tax fraud ever since, but the Senate investigation focused only on 2000 to 2007. During this period, even as UBS was sharply expanding its onshore US operations by acquiring Paine Webber, expanding in investment and retail banking, it also mounted a top-secret effort to recruit wealthy Americans, spirit their money to Switzerland and other havens and conceal their assets from the IRS.
This program, aimed at people with a net worth of $40 million to $50 million each, was staffed by fifty to eighty senior calling officers and 1,000 client advisors. Based in Zurich, Geneva, and Lugano, each officer made two to ten surreptitious trips per year to the United States, calling on thirty to forty existing clients per visit and trying to recruit new ones by attending HNW (high net worth) watering holes like Miami's Art Basel and the UBS Regatta in Newport. By 2007, this program had garnered 20,000 American clients, with offshore assets at UBS alone worth $20 billion.
To achieve these results, UBS established an elaborate formal training program, which coached bankers on how to avoid surveillance by US customs and law enforcement, falsify visas, encrypt communications, secretly move money in and out of the country and market security products even without broker/dealer licenses.
Meanwhile, back in 2001, UBS had signed a formal "qualified intermediary" agreement with the US Treasury. Under this program, it agreed either to withhold taxes against American clients who had Swiss accounts and owned US stocks, or disclose their identities. However, when UBS's American clients refused to go along with these arrangements, the bank just caved in and lied to the US government. Eventually, it concealed 19,000 such clients, partly by helping to form hundreds of offshore companies. This cost the US Treasury an estimated $200 million per year in lost taxes.
In early July 2008, a US court approved a "John Doe" subpoena for UBS, demanding the identities of these 19,000 undisclosed clients. However, as of last week's Senate hearing, UBS has refused to disclose them. While it maintains that it is no longer accepting new Swiss accounts from Americans, it is also insisting on the distinction between "tax fraud" and "tax evasion," reserving full disclosure only for cases involving criminal tax fraud, which is much harder to prove under Swiss law. This means it may be difficult to ever know whether it has kept its commitments.
Ultimately UBS got caught, not by virtue of diligent law enforcement, much less the Senate's investigation, but by sheer accident. In late June, Bradley Birkenfeld, a senior private banker who'd worked with UBS from 2001 until late 2005 out of Switzerland, and then continued to service the same clients from Miami, pleaded guilty to helping dozens of wealthy American clients launder money. His name surfaced when his largest client, Igor Olenicoff, a Russian emigré property developer from Southern California, was accidentally discovered by the IRS to be reporting much less income tax than he needed to justify his $1.6 billion measurement on the Forbes 400 list of billionaires.
With Birkenfeld's help, Olenicoff succeeded in parking several hundred million of unreported assets offshore--including millions in accounts controlled by a Bahamian company that he said had been set by former Russian Premier Boris Yeltsin. Ultimately, Olenicoff settled with the IRS for $52 million in back taxes, one of the largest tax evasion cases in Southern California history, and also agreed to repatriate $346 million from Switzerland and Liechtenstein. In theory he faced up to three years of jail time, but--following standard US practice of going easy on big-ticket tax evaders who have no "priors"--he received only two years probation and three weeks of community service.
As noted, Olenicoff also gave up his UBS private bankers, including Birkenfeld, who plead guilty in June to facilitating tax fraud and is now awaiting sentencing--the first US prosecution of a foreign private banker in history. It was Birkenfeld's revelations, in turn, that led to the disclosure of UBS' program for wealthy Americans, and at least one-half of the Senate investigation.
The most important point is that this entire program would clearly have been impossible without the knowledge and approval of the bank's most senior officials in Switzerland, and probably some senior US executives as well -- although the Committee did not press this point. As former UBS CEO Peter Wuffli once said, "A company is only as ethical as its people." From this standpoint, we have reason to be concerned that UBS's behavior may repeat itself, so long as so many of these same senior executives remain in place.
LGT: For all its pretensions to nobility, Liechtenstein is well-known in the trade as the "place for money with the stains that won't come out," a flexible jurisdiction whose "trusts" and "foundations" are basic necessities for everyone from Colombian drug lords and the Saudi royals to the Suhartos, Marcoses, Russian oligarchs, and Sicilian mafia.
As detailed by the Senate investigation, LGT Group has certainly lived up to this reputation in the US market. It maintained a program that was, if anything, even more sophisticated and discreet than that of UBS for large fortunes. Among its specialties: setting up conduit companies in bland places like Canada, allowing clients to transfer money without attracting attention; leaving the designation of "beneficiaries" up to corporations controlled by potential beneficiaries themselves, a neat way of avoiding "know your customer" rules; rarely visiting clients at home, let alone mailing, e-mailing, or phoning them, certainly never from a Liechtenstein post office, Internet address, or area code; shifting the names of trust beneficiaries to very old folks just before death to make it look like a repatriation of capital was an inheritance.
In terms of precise trade craft, indeed, LGT had it all over UBS. It only really got caught red-handed when it tried to modernize and trusted Heinrich Kieber, a fellow citizen and IT expert ,who turned out to be either a valiant whistleblower, a well-paid extortionist (he was paid $7.5 million by the German IRS alone for his DVDs), or both.
The Implications
So what do we learn from all this? Many will consider these
revelations shocking. After all, just as the US government is facing a
$500 billion deficit, millions of Americans are fighting to save their
homes, cars, and college educations from the consequences of predatory
lending, and inequalities of wealth and income are greater than at any
time since the late 1920s, we learn that for decades, the world's
largest banks have been helping wealthy Americans steal billions in tax
revenues from the rest of us. At the very least, this suggests that it
may be time to put the issue of big-ticket tax evasion, offshore and
on, back on the front burner. But we also need historical perspective.
Those who have studied this subject for decades also realize that
achieving reform in this arena is not a matter of a few criminal
prosecutions. It is a continuous game, requiring persistence and
constant adaptations to the opponents, because we are playing against
some of the world's most powerful vested interests, with huge fortunes
at stake.
After all, offshore tax evasion by wealthy Americans is hardly new.
For example, in May 1937, Treasury Secretary Henry Morgenthau, Jr.
wrote a lengthy letter to Franklin Delano Roosevelt, explaining why tax
revenues had failed to meet his expectations despite a sharp rise in
tax rates. Some rich folks didn't mind paying up, given the hard times
so many Americans were facing during the Depression. As Edward Filene,
the Boston department store magnate, famously remarked, "Why shouldn't
the American people take half their money from me? I took all of it
from them." However, according to Morgenthau, many other rich people
busied themselves inventing new ways to dodge taxes, notably by
secreting funds offshore in brand new havens like the Bahamas, Panama,
and.... Newfoundland!
Scroll forward to the Castle Bank and Trust case of the early 1970s,
when another IRS investigation of offshore banking disclosed a list of
several hundred wealthy Americans who'd set up trusts in the Bahamas
and Cayman Islands. Just as the investigation was picking up steam and
the names were about to be publicized, a new IRS Commissioner came in
and shut it down--officially because the otherwise-lawless Nixon
Administration suddenly got concerned about due process. Few names on
the list--a copy of which appears in my forthcoming book, Pirate
Bankers, were ever investigated.
Scroll forward now to the late 1990s, when the Organization for
Economic Cooperation and Development (OECD), the European Union and the
US Treasury once again became excited about offshore tax havens. As the
EU launched its "savings tax directive" on cross-border interest, a
Cayman banker surfaced to report that more than 95 percent of his
nearly 2,000 clients were Americans, and the IRS discovered 1 million
to 2 million Americans using credit cards from offshore banks.
Meanwhile, the OECD's favorite tool became the "blacklist." A list of
thirty-five to forty "havens" was evaluated on the basis of abstract
criteria like the quality of anti-money laundering programs and the
willingness to negotiate information sharing agreements.
Unfortunately this "name and shame" approach didn't have much
success. First, the OECD had no success against jurisdictions like
Monaco, Andorra, and Liechtenstein that are basically shameless.
Second, the OECD's definition of "haven" was highly selective. It
omitted many emerging havens like Dubai, the Malaysian island of
Labuan, Estonia, Singapore, and for certain purposes even Denmark, whose importance has recently
increased. As we'll see, it also ignored the role of major onshore
havens like London and New York, which have been very attractive to the
world's non-resident rich, especially from the developing world.
Third, blacklisting havens focused on the wrong dimension. As
Senator Levin's hearing has underscored, the real problem is a global
pirate banking industry that cuts across individual havens, and
includes many of our largest, most influential commercial and
investment banks, hedge funds, law firms, and accounting firms. From
their standpoint, it doesn't much matter whether a particular haven
survives, so long as others turn up to take their place in providing
anonymity, security, and low-tax returns. Up to now, despite
blacklisting, the supply of new tax haven vehicles has been very
elastic.
On the other hand, as the UBS and LGT cases show, the dominant
players in global private banking are relatively stable
institutions--which makes sense, given their clients' need for stable
sanctuaries. This suggests that it makes more sense to focus on
regulating institutions than regulating or blacklisting physical places.
Until the UBS case, this seemed to be much more difficult than, say,
beating up on some tiny and distant sultry island for shady people.
Even now, after the Birkenfeld case supplied the first private banker
prosecution, we have yet to see the first criminal prosecution of a
top-tier private bank--apart from BCCI in the early 1990s, which had
already failed and was hardly top-tier.
This is not because of a shortage of despicable behavior. For
example, UBS, like most of its competitors in global private banking,
has a long history of engaging in perfidious behavior, apologizing for
it, and then turning back to the future. This includes UBS's
involvement in South Africa's apartheid debt and the accounts scandals
of the 1980s involving the Marcos family; Benazir Bhutto, Mobutu Sese
Seko, Holocaust victims, and Nigerian dictator Sani Abacha in the
1990s; the 2001 Enron bankruptcy, and the Menem arms-purchasing scandal in Argentina; the 2003
Parmalat scandal; the 2004-2006 Iran/ Cuba/Saddam funds transfers
scandal, for which it was fined $100 million by the Federal Reserve;
the 2008 Massachusetts and New York securities fraud cases, and now the Birkenfeld
matter. Furthermore, as the Committee report noted, UBS has a history
of violating even its own policies. From this angle, unapologetic LGT
is at least not hypocritical.
It is also well to remember that UBS and LGT are hardly the only
global private banks involved in recruiting wealthy clients to move
money offshore. The Committee report indicates a long list of other
banks that also provided offshore services to American clients involved
in the UBS and LGT cases--including Citibank (Swiss), HSBC, Barclays
(Birkenfeld's original employer), Credit Suisse, Lloyds TSB, Standard
Chartered, Banque du Gotthard, Centrum, Bank Jacob Safra, and Bank of
Montreal. In addition, there are dozens of other non-US and US banks
that are also active in the offshore US private banking market. This
suggests the shortcomings of a case-by-case prosecutorial approach, and
the value of designing regulations to improve behavior and provide
ongoing feedback about taxpayer compliance.
In principle, one can imagine many such improvements in regulation,
assuming a compliant Congress. For example, as proposed in the "Stop
Haven Abuses Act" (S-681) introduced in 2006 and revised in February 2007 by
Senators Levin, Coleman, and Obama, there would be a rebuttable
presumption that offshore shell corporations and trusts are owned by
those who establish them. This would eliminate the "Q.I. rule"
exception, which allowed hundreds of UBS clients to avoid reporting to
the IRS simply by moving their assets to into shell companies.
We could also institute many other changes, including an increase in
the painfully short, three-year statute of limitations for
investigating and proposing changes in offshore tax liabilities;
tightening up on anti-money laundering legislation; levying withholding
taxes against hedge funds; raising the penalties for abusive tax
shelters, and requiring banks that open offshore entities for US
clients to report them to the US Treasury.
Key Tasks
However, most of these proposed rule changes have the flavor of
stopgaps, technical gimmicks that are still far too focused on
individual taxpayers rather than the private banking industry--the
advisers, enablers, and systems operators. If we're right that this
industry had become an unregulated, untaxed black hole--a
multi-billion-dollar global "bad"--we need to focus on two key tasks.
The first is to create appropriate incentives for the global private
banking industry to do the right thing. We need to find ways to tax the
behavior of tax-evading institutions, their CEOs, senior managers, and
even shareholders, to punish them for more misbehavior, and perhaps
also reward them for bringing the money home with a brief one-time tax
amnesty. In the short run, there have to be more Bradley Birkenfelds,
more exposés, and more penalties for banks and bankers alike. Mere
apologies, however heartfelt, should not be enough.
The second challenge is to organize a global alliance around this
issue. This is more difficult, although steps are already being taken.
Global organizations like Tax Justice International, Oxfam GB, Friends
of the Earth, Global Witness, and Christian Aid are converging on a new
global campaign around the issue of havens and offshore tax evasion.
They've been enlisting support for this effort from countries like
Norway, Chile, Brazil, Spain, and France, organizations like the UNDP,
the World Bank, and even the International Monetary Fund.
This is very exciting, but the organizers face one critical
problem--the fact there are serious conflicts of interest among
developed and developing countries. The fact is that the United States,
the UK and other developed countries not only lose tax revenue to haven
banking; they also profit from it, because their own banks are so
deeply engaged in it, especially when it involves developing countries.
Back in April 1986, this author broke the story that Citibank was
actually taking far more capital out of Latin America and other
developing countries than it was lending to them, despite its
reputation as the largest Third-World lender. Indeed, the business of
helping Third-World elites decapitalize their own countries had become
so large and lucrative that Citi's private banking group was the bank's
single most profitable division.
To achieve that feat, Citigroup resorted to skullduggery and the
flouting of local laws all over the planet. This included repeatedly
sending teams of private bankers undercover to countries like Brazil,
Argentina, and Venezuela; helping to set up thousands of shell
companies and bank accounts in offshore havens and secretly
transferring funds to them; teaching its clients money-laundering
tricks like mis-invoicing and back-to-back loans; designing ways to
communicate with clients that kept their financial secrets safe; and
overall, concealing vast sums of flight capital from Third World tax
authorities (and their competitors), while lobbying Congress to insure
that any foreign capital that arrived in the United States enjoyed
near-zero taxes and near-Swiss secrecy. For a time the resulting tax
breaks and lax banking rules that applied to "nonresident aliens" from
other countries made the United States, in effect, one of the world's
largest tax havens.
In short, from the 1970s to the 1990s, banks like Citigroup,
BankAmerica, and JP Morgan Chase (and UBS, Credit Suisse, RBS, Paribas
and Barclays, etc.) were behaving throughout the Third World just as
badly as UBS has recently been behaving here. And their very success
laid the foundations for the global, private-haven banking industry
with which the IRS is now struggling.
At the time, it seemed that their behavior was hurtful mainly to the
developing world, which wasn't strong enough to hold Senate hearings
and put Citibankers in jail. But lately it has become clear that the
system has grown large enough to consume its creators.
In the last thirty years, fueled by the globalization of financial
services, lousy lending, capital flight, and mind-boggling corruption,
a relatively small number of major banks, law firms, accounting firms,
asset managers, insurance companies, and hedge funds have come to
launder and conceal at least $10 trillion to $15 trillion of private
untaxed anonymous cross-border wealth.
Rich people the world over, including tens of thousands of wealthy
Americans, are now free to opt in to this sophisticated, secretive,
utterly unprincipled global private banking industry. They can become,
in effect, residents of nowhere for tax purposes, citizens of a brave
new virtual country, which offers its inhabitants unprecedented freedom
from the taxes, regulations, and moral restraints that the rest of us
take for granted. They wield enormous political influence even without
paying taxes, merely by making contributions, threatening to withhold
them--or better yet, threatening to abscond with their capital unless
certain conditions are met. In a sense, this is the ultimate
libertarian pipe dream: representation without taxation. But it is a
nightmare for the rest of us, and we must design and organize our way
around it.
Afterword
Let me just add one paragraph for those in the audience who don’t automatically stand up and cheer every time someone figures out a new way to boost tax revenues, even through better law enforcement.
Why should we care whether Davy Jones is clever enough to fiddle with his IRS bill, even by way of offshore banks? Wouldn’t the funds just be wasted if they went to the government rather than to finance Davy’s yacht tender in Marbella? Or won’t the government just borrow and spend anyway, regardless of revenues?
Well, in these straightened times, with a gargantuan federal deficit, most state and local governments running out of debt capacity, stagflation, a weak dollar, private debt at record levels, and rising unemployment, just imagine that every extra dollar for that yacht tender is coming right out of the funds available for schools, teachers, hospitals, roads, police, and fire protection – local services. The free lunches have all been mortaged, or given away in capital gains tax cuts for the same social class that is also are evading what little taxes they still have to pay. Meanwhile, $1 spent on a yacht tender goes right to the bottom, while $1 spent on food, salaries, or even roads has a much greater multipler, and benefits a more deserving class.
Perhaps best of all, think of the difference between giving an exra $1 to the hard-working child care worker down the street, compared with $1 to some wealthy scion of a giant shopping mall dynasty who spends his life just trying to spend his inheritance.
***
About James S. Henry
James S. Henry is a New York-based investigative journalist who has
written widely on the problems of tax havens, debt, and development.
His most recent book, The Blood Bankers (Basic Books, 2005), examined
where the money went that was loaned to eight developing nations. His
forthcoming book, Pirate Bankers (2009), examines the history and
structure of the global private banking industry.
July 24, 2008 at 01:06 AM | Permalink
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Saturday, August 19, 2006
BEYOND DEBT RELIEF The Next Stage In the Fight for Global Social Justice James S. Henry
“Third World debt relief” has become a little like Boston’s “Big Dig,” the Middle East “peace process,” and the “ultimate cure for cancer” -- long anticipated, endlessly discussed, and perpetually, it seems, just around the corner.
At the end of the day, after decades of effort, the fact is that very little Third World debt relief has actually been achieved.
There is also mounting evidence that even the paltry amount of debt relief that has been achieved has not done very much good.
This is partly because debt relief tends t
o reinforce questionable policies and bad habits that get developing countries into hock in the first place. It is also because debt relief has reinforced the prerogatives of IMF/World Bank econo-crats, whose policies have often been incredibly detrimental.
Finally, debt relief is also often a very poor substitute for other forms of aid and development finance.
Furthermore, most of the costs of debt relief have been born by ordinary First and Third World taxpayers, while the global banks and Third World elites that have profited enormously from all the lousy projects, capital flight, and corruption that were financed by the debt have escaped scot-free.
This is not to suggest that the debt relief campaign has been utterly pointless.
It has provided a bully pulpit for scores of entertainers, politicians, economists, religious leaders, and NGOs. It has occasionally reminded us of the persistent problems of global poverty and inequality.
I
t has also provided an excuse for some pretty good free concerts.
From the standpoint of actually providing enough increased aid to improve living conditions in debt-ridden countries, however, debt relief has been a disappointment. In the immortal words of Bono himself, "We still haven't found what we're looking for."
Fortunately, there is an alternative strategy that would have much greater impact. But this strategy would require a more combative stance on the part of anti-debt activists, and it would almost certainly not generate nearly as many convivial press conferences or photo opportunities.
“Fact Check, Please”
Surprisingly, there have been few efforts to take stock of debt relief efforts, to see whether this game has really been worth the candle.
It is high time that we took a closer look. After all, it is now more than 30 years since Zaire’s bilateral debts were rescheduled by the Paris Club in 1976, 27 years since UNCTAD’s $6 billion write-off for 45 developing countries in 1977-79, 23 years since the climax of the so-called “Third World debt crisis” in 1983, and more than a decade since the inauguration of the IMF/World Bank’s debt relief program for “Heavily-Indebted Poor Countries” (“HIPCs”) in 1996.
On the debt relief campaign side, it is two decades since the formation of the UK Debt Crisis Network, eight years since the 70,000-strong “Drop the Debt” demos at G-8’s May 1998 meetings in Birmingham, and over a year since the “Live-8/End Poverty Now” fiesta at Gleneagles.
Along the way, there have been Bradley Plans, Mitterand Plans, Lawson Plans, Mizakawa Plans, Sachs Plans, Evian Plans, and more than 200 debt rescheduling by the Paris Club on increasingly generous terms -- Toronto terms (’88-‘91), London (‘91-‘94) terms, Naples terms (’95-96), Lyon terms (’96-99), and Cologne terms (’99-).
Most recently, in the wake of “Live 8,” the G-8, the World Bank, and the IMF launched their “Multilateral Debt Relief Initiative” (“MDRI”) with a great deal of fanfare, declaring that it will be worth at least “$40 to $50 billion” to the two score countries that are eligible.
Realities
Despite all this activity, the fact is that developing country debt is now greater than ever before, and is still increasing in real terms. For most countries, the debt burden – as measured by the ratio of debt service to national income – is even higher than in the early 1980s, at the peak of the so-called “Third World debt crisis.”
By our estimates, as of 2006, the nominal stock of all developing country foreign debt outstanding was $3.24 trillion. This debt generated about $550 billion of debt service payment each year for First World banks, bondholders, and multilateral institutions.
That includes $41 billion a year that was paid by the world’s 60 poorest countries, whose per capita incomes are all below $825 a year. Even after twenty-five years of “debt relief,” this annual bill for debt service still almost entirely offsets the $40-$45 billion of foreign aid that these countries receive each year. Their debt burden also remains higher, relative to national income, than it was the early 1980s.
As discussed below, most heavy debtors also have very little to show for all this debt. So these payments are, in effect, a “shark fee” paid to First World creditors for funds that have long since vanished into the ether – and a not a few offshore private bank accounts.
Present Value
Since most existing Third World debt was contracted at higher interest rates than now prevail, the “present value” of the debt -- a better measure of its true economic cost -- is actually even higher: nearly $3.7 trillion.
China and India alone now account for about $.5 trillion of this developing country “PV debt.” Both countries were relatively careful about foreign borrowing, and they also largely ignored IMF/World Bank policy advice, so their debt burdens are small, relative to national income. But in absolute terms, their debts are large, simply because they are so huge. They can easily afford it -- thanks in part to their non-neoliberal economic strategies, both countries now have high-growth economies and large stockpiles of reserves.
Of the other $3.2 trillion of “PV debt,” however, $2.6 trillion is owed by 26 low-income and 49 middle-income countries that pursued “high debt” growth strategies.
These heavily-indebted countries have about 1.6 billion residents – over a quarter of the world’s population, a share that has been steadily increasing.
After decades of debt relief, their “PV debt/ national income ratios” are all in the relatively-high 60-90 percent range. Debt service consumes 4 to 9 percent of national income each year, more than they spend on education or health, and far more than they receive in foreign aid.
III. Where’s the “Relief”?
These numbers beg a question -- what have all the professional debt relievers at the World Bank, the IMF, and the Paris Club, not to mention debt relief activists, been up to all these years? How much debt relief have they actually secured, who received it, and how helpful has it been?
To begin with, it is not easy to measure “debt relief.” The definitions of debt relief employed by debtor countries, commercial creditors, bilateral creditors, and multilateral organizations like the IMF/World Bank, the OECD, the Paris Club, and the Bank for International Settlements vary significantly, and the reported data is subject to huge discrepancies. This helps to account for the fact that only a handful of systematic attempts to measure debt relief have ever been attempted.
As usual, however, some things can be said. This article provides the most comprehensive estimate of debt relief to date, based on a careful review of these data sources and our own independent analysis.
Overall Relief
Our first key finding is that the actual amount of debt relief provided to all developing countries to date has been pretty modest.
From 1982 through 2005, in comparable $2006 NPV terms, the total value of all low- and middle-income developing country debt that was “relieved” -- rescheduled, written down, or cancelled –- was only $310 billion -- just 7.8 percent of all the pre-relief debt outstanding.
Low-Income Relief
The relief ratio for the world’s 60 poorest countries has been higher – about 28 percent of their pre-relief debt levels. All told, in PV terms, these countries have received about $161 billion of debt relief – more than half of all the debt relief to date. This is now saving the recipient countries about $15.3 billion per year of debt service.
This is certainly nothing to sneeze at. But it is a far cry from the extra $50 billion to $100 billion per year of cash aid that most leading development experts believe will be needed if developing countries are to attain the (rather modest) “Millennium Development Goals” that were set back in 2000 by the UN, with a target date of 2015.
It is also important to remember that most low-income countries have been waiting a very long time for even this modicum of debt relief, most of did not start arriving until the late 1990s. By then, several countries that had not been “highly-indebted” to begin with had become so, just by dint of the delay.
Debt Relief Sources – Low-Income Countries
Our analysis shows that 30 percent of this low-income debt relief has come from the World Bank/ IMF’s HIPC and MDRI programs. Another 30 percent has come from Russia alone, which forgave a substantial load of bilateral debt that were owed to it by Nicaragua, Vietnam, and Yemen, when Russia joined the Paris Club in 1997. In February 2006, Russia also wrote off another $5+ billion debt that was owed by Afghanistan.
Finally, another $65 billion of debt relief for low-income countries was provided by the Paris Club, an association of First World export credit agencies (EGCs) like the US EXIM Bank and the UK’s EGCD. These agencies have a strong “client base” among the ranks of First World exporters, contractors, and engineering firms. All these private entities received significant business from the first round of Third World lending, in the form of orders for large projects. They are now eager to have the EGCs forgive still more loans, at taxpayer expense, in order to clear the way for another round of project finance.
On the other hand, leading global banks like Citigroup, UBS, JPMorganChase, Goldman Sachs, Deutsche Bank, BNP, and ABN-Amro, and Barclays, have provided a grand total of just $1.5 billion of low-income debt relief, mostly by way of the HIPC program.
In the 1970s and early 1980s, of course, these giant international banks led the way in syndicating loans for developing countries. At the same time, many of them also became pioneers in “private banking,” the dubious business of helping Third (and First) World elites park their capital offshore and onshore, as free of taxes and regulations as humanly possible.
Since the early 1990s, apart from China and India, these private banks have largely handed over the task of providing new loans to low-income countries to multilateral institutions like the IMF, the World Bank, and the IDB, as well as to the EGCs. Ironically, this has permitted them to focus on more lucrative Third World markets, including low-debt/ high-growth markets like China and India.
For middle-income countries, while the foreign loan business was booming in the 1970s and early 1980s, these banks became deeply involved in stashing abroad the proceeds of the banks’ own country loan syndicates. For low-income countries, private bankers were more often called upon to recycle the proceeds of loans from the development banks, the IMF, and the EGCs, as well as the proceeds of various government-owned asset rip-offs.
Overall, therefore, from the standpoint of debt relief, these First World financial giants have provided very little debt relief. This is despite the fact that they have not only reaped enormous profits from Third World lending, but also continue to reap enormous profits from Third World private banking. In the wake of the debt crisis, they have also been able to scoop up undervalued financial assets – banks, pension funds, and insurance companies – in countries like Mexico, the Philippines, and Brazil. In good times and in bad, in other words, these private institutions have always found ways to prosper, help their clients launder money, evade taxes, and conceal ill-gotten gains, and they have never been reluctant to profit from social catastrophe.
We will return to these financial giants below, because the history of their involvement in this story suggests one possible antidote for our “debt relief” blues.
B. Middle-Income Relief
So-called “middle-income” countries like Brazil and Mexico have received $149 billion of debt relief –- just 4.3 percent of their $3.4 trillion of pre-relief debt outstanding. As discussed below, most of this was obtained by the early 1990s, by way of Paris Club restructuring and the Brady Plan.
This reflected the high priority given to these large, lucrative, highly-indebted markets in the 1980s by First World banks and governments, mainly because such a large share of their loan portfolios was tied up in them.
That, indeed, was the true meaning of the “Third World debt crisis,” so far as First World bankers, central bankers, officials and, indeed, most First World journalists was concerned. It was viewed primarily as a ‘crisis’ for the banks and their shareholders. Over time, as they managed to reduce their exposure, the “crisis” disappeared from the headlines – except for the countries involved.
Debt Relief Sources – Middle-Income Countries
Overall, private banks provided $75 billion of debt relief to middle-income countries, about half the total. Most of this was achieved through debt swaps and buy-backs. The Paris Club added another $28 billion, mainly by way of traditional bilateral debt rescheduling.
The US Treasury added $47 billion, by way of the Baker Plan (1985-89) and the Brady Plan (1989-95.) On its own, the Baker Plan actually increased middle-income country debt by $77 billion, consuming $45 billion of US taxpayer subsidies in the process.
From 1995 to 2002, the US Treasury, the World Bank, and the IMF also provided short-term financial relief to several large middle-income countries like Argentina, Brazil, Mexico, and Indonesia. In theory, these were pure reschedulings, with all loans paid back with interest, and no net impact on “PV debt” levels.
In practice, several of these bailouts were completely mismanaged. Indonesia, Mexico, and Argentina were all permitted to use their emergency dollar loans to bail out dozens of domestic banks and companies -- which just happened to be connected to influential members of the local elite, who were also “not unknown” to leading private bankers and US Treasury Secretaries.
So a large share of these bailout loans was wasted on outright graft. On the other hand, countries were still expected to service the bailout loans, often at very high interest rates. Given their reluctance to raise taxes, especially on capital, most countries repaid the bailout loans by boosting domestic debt – in effect, by printing money. For example, Mexico’s bailout in the mid-1990s ended up costing the country’s taxpayers more than $70 billion, while Indonesia’s bailouts ended up costing the country at least $50 billion. In effect, the bailouts actually ended up increasing overall country debt levels, just as the Baker Plan had done. Our estimates of debt relief have generously omitted the impact of these bailouts, which would make the total amount of debt relief even smaller.
Overall, during the 1970s and 1980s, middle-income countries like Argentina, Brazil, Indonesia, Iraq, Mexico, the Philippines, Russia, Turkey, and Venezuela became the world’s largest debtors. Combined with the fact that they have also received so little debt relief since the early 1990s, this helps us to understand why their debt service costs soared to all-time highs since 2000, in real terms, and relative to national income. Recent debt relief programs have focused almost entirely on low-income countries, ignoring the situation of heavily-indebted middle-income countries. This is another strategic choice that debt relievers may want to reconsider.
The Political Economy of “Debt Relief”
So what’s gone wrong with debt relief? Why has so little been achieved after all these years? Whose interests have been served, and whose have been ignored or gored? Is there a different strategy that could have been more effective?
A. The Roots of the “Debt” Crisis
To understand this disappointing debt relief track record, it will be helpful to review the origins of the so-called “Third World debt crisis.” This continuing crisis had its roots in the fact that from the early 1970s to 2003, developing countries absorbed more than $6.8 trillion of foreign loans, aid, and investment, much more foreign capital than they had ever before received.
A handful of developing countries managed this enormous capital influx more or less successfully -- for example, Asian countries like Korea, China, India, Korea, Malaysia, and Vietnam. For a variety of historical reasons, they were able to resist the influence of First World development banks and private banks. Today they are the real winners in the globalization sweepstakes, ranking among the world’s fastest growing economies and the First World’s most important suppliers, customers, and potential competitors.
Our concern here is not with this handful of winners, but with the great majority of the world’s 150 developing countries. In general, compared with the winners, they have been much more open to unrestricted foreign capital and trade since the 1970s, as well as policy advice from the “BWIs” (the Bretton Woods institutions – the World Bank and the IMF). For many countries this close encounter with global capitalism has proved to be troublesome – indeed, for many, disastrous.
In effect, these countries have conducted a very risky policy experiment for several decades. By now the results are clear. Across country income levels, these countries have paid a very heavy price for unfettered access and dependence on foreign banks. Indeed, we are hard-pressed to find a single exception to the miserable track record of this “wide open, debt-heavy, bank-promoted” growth strategy.
Lousy Regimes and Unproductive Debts
Overall, we estimate that more than a trillion dollars – at least 25 to 35 percent -- of the $3.7 trillion foreign debt that compiled by low- and middle-income countries from 1970 to 2004 either disappeared into poorly-planned, corruption-ridden "development" projects, or was simply stolen outright.
For several of the largest debtors, like the Philippines, Indonesia, Mexico, Brazil, Venezuela, Argentina, and Nigeria, the share of the debt that was wasted was even higher. Indeed, one of the most important patterns underlying the “debt crisis” was that borrowing, wasteful projects, capital flight, and corruption were all concentrated in a comparative handful of countries. As we’ll argue, this is crucial fact for those who seek to revitalize the debt relief movement to understand, because it implies that the interests at stake are far greater than those that have come to the surface in the struggle for “low income” debt relief.
Low-Income Heavy Borrowers
In the case of the 48 low-income countries that eventually qualified for debt relief from the BWIs under the HIPC and MDRI programs, a similar pattern of concentration applies. In the early 1980s, the real value of these countries’ debts increased by 70 percent in just six years. By the time the World Bank got around to launching HIPC in 1996, their debts had increased another 7-10 percent. Just 11 of these low-income countries –- including Bolivia, Congo Republic, Cote d’Ivoire, DR Congo, Ethiopia, Ghana, Mozambique, Myanmar, Nicaragua, Sudan, and Zambia -- accounted for 68 percent of this group’s debt increase from 1980 to 1986.
All these top low-income borrowers were not only desperately poor to begin with, but they were also either “weak open states” run by kleptocratic dictators, or were caught up in bloody civil wars – in most cases, both at once. Sometimes the causality flowed in both directions -- excess debt could exacerbate political instability. But the primary relationship was the unsavory combination of weak states, corrupt leaders, wide open capital markets, and symbiotic relationships with “easy money” and seductive bankers.
Extending this analysis to the key middle-income debtors noted above, we find similar long-run patterns of mis-government, weak states, and wide-open banking.
All this suggests that the heaviest debtors got into troubles for reasons that only were only superficially related to the usual villains in the orthodox neoliberal account of debt crises -- “exogenous shocks,” “policy errors,“ “liquidity crises,” and – when pushed to acknowledge the existence of corruption and capital flight – a “lack of transparency in the management of natural resources.” Those countries that are deepest in debt and most in need of relief today include countries that have long been among the most consistently mis-governed, wide-open, and “mis-banked.” While natural resource wealth like minerals and oil have indeed often turned out to contribute to economic mismanagement, their presence is not a sufficient condition for such mismanagement – the decisive question is the relationship between foreign and domestic elites.
From the standpoint of debt relief, this pattern presents a dilemma –Without insisting on deep political reforms, simply providing countries with more relief alone might accomplish little – they are likely to dig themselves right back into a hole. After all, corrupt dictatorships like the Central African Republic have been more or less continuously in arrears on their foreign debts since at least 1971!
The Debt/Flight Cycle
Servicing these huge unproductive debts took a large bite out of these countries’ export earnings and government revenues, draining funds that were badly needed for health, education, and other forms of public investment, and helping to produce crisis after financial crisis. Growth, investment, and employment were throttled by the continuing need – enforced by First World creditors -- to generate enough foreign exchange to service the loans.
Meanwhile, even as all this foreign capital was rushing in, an unprecedented quantity of flight capital – including a substantial portion of the loan proceeds – headed for the exits.
Of course Third World capital flight is an old story, associated with long-standing factors like individual country political risk, unstable currencies, bank secrecy, the rise of “offshore havens,” and the absence of global income tax enforcement.
But the dramatic increase in poorly-managed financial inflows to the developing world in the 1970s and early 1980s – especially foreign loans and aid – boosted these capital outflows by an order of magnitude. They basically overwhelmed existing political institutions in many countries, producing the largest tidal wave of flight capital in history, and fundamentally revolutionizing offshore private banking markets.
We simply cannot account for this sharp increase in flight capital unless we take into accounts its close relationship to all this “lousy lending and loose aid.”
Poorly-controlled lending and foreign aid contributed to the rise of global flight capital in the first place. From one standpoint it did so in a purely mathematical sense, by providing the foreign exchange that was needed to finance capital flight. But that doesn’t explain why these new “loanable funds” didn’t become a net addition to investment in the borrowers’ economies. The loans also stimulated additional capital flight, for several reasons: (1) they destabilized the economies of many newly-indebted countries, providing more capital than they could productively absorb in a short period of time; (2) the inflows provided sources of government revenue that were not directly responsible to taxpayers. This generated enormous opportunities for corruption and waste, partly by way of poorly-planned projects with weak financial controls, and partly by providing Finance Ministers, central bankers, and other insiders with dollars they could use to speculate against their own currencies; (3) the debt flows laid the foundations for a new, highly-efficient global haven network, which made it possible to spirit funds offshore and stash them in anonymous, tax-evading investments. It is no coincidence that this network was dominated by the very same global banks that led the way in Third World syndicated lending.
All this combined to encourage Third World officials and wealthy elites to move a significant share of their private wealth offshore, even as their own governments were borrowing more heavily abroad than ever before.
Part of the resulting flight wave took the form of large stocks of strong-currency “mattress money” that was hoarded by residents of Third World countries -- especially $100 bills, Swiss francs, Deutschmarks, British pounds, and after 2002, €100, €200, and €500 notes. By 2006, for example, the total stock of US currency outstanding was $912 billion. At least two-thirds of it was held offshore, especially in developing countries with a history of devaluations.
An even larger amount of capital flight was accounted by private “elite” funds that were spirited to offshore banking havens – often, it turns out, with the clandestine assistance of the very same First World banks, law firms, and accounting firms.
The outflows that resulted from this “debt-flight” cycle were massive -- by my estimates, an average of $160 billion per year (in real $2000), each year, on average, from 1977 to 2003.
Furthermore, a great deal of this flight capital was permitted to accumulate offshore in tax-free investments, especially bank deposits and government bonds by nonresidents, which were specifically exempted from taxation by First World countries. By the early 1990s, he total stock of untaxed Third World private flight wealth soon came to exceed the stock of all Third World foreign debt.
Indeed, for the largest “debtors,” like Venezuela, Nigeria, Argentina, and Mexico – the same countries that dominated borrowing -- the value of all the foreign flight wealth owned by their elites is almost certainly now worth several times the value of their outstanding foreign debts.
For so-called “debtor” countries, therefore, the real problem was never simply a “debt” problem; it was an “asset” problem – a problem of collecting taxes, controlling corruption, managing state-owned resources, and recovering foreign loot. All this, in turn, was based on the fact that a huge share of private wealth had simply flown the coop, under the “watchful eyes” of the BWIs, other multilateral institutions, Wall Street, and the City of London.
Meanwhile, these countries’ public sectors – and ultimately ordinary taxpayers – were stuck with having to service all these unproductive debts, while their legal systems, banking systems, and capital markets also ended up riddled with corruption.
Conventional economists have not ignored these phenomena completely. But they have tended to compartmentalize them into “institutional” problems like “corruption” and “transparency,” and have treated them as “endogenous” to particular countries. In this approach, the individual country is the appropriate unit of analysis. In fact, however, such local problems were greatly exacerbated by a global problem – the structure of the transnational system for financing development, on the one hand, and for stashing vast quantities of untaxed private capital -- from whatever source derived -- on the other.
Human Capital Flight
This underground river of financial flight was also accompanied by an increased outflow of “human capital” as well, as large parts of the developing world became jobless and unlivable, and a significant share of its precious skilled labor decamped for growth poles like Silicon Valley and other booming First World labor markets. My own estimate for the net economic value of this displaced Third World “human flight” wealth, as of 2006, is $2.5 to $3.0 trillion.
This offshore human capital does send home a stream of remittance income that is now estimated at $100 billion- $200 billion a year. But much of this is wasted on high transfer costs and other misspending. Clearly, a country that chooses to depend heavily on labor exports – as the Philippines, Mexico, Haiti, and Ecuador have done, is a poor substitute for generating jobs and incomes at home.
Summary – Roots of the Crisis
Overall, the impact of the patterns just described on Third World incomes and welfare has been devastating. Except for the handful of globalization winners that managed to avoid the “debt trap” and neoliberal nostrums, real incomes in the Third World basically stagnated or declined from 1980 to 2005. While growth has revived since then, especially among commodity exporters, large parts of the developing world are still struggling to regain their pre-1980 levels of consumption, social spending, and domestic tranquility.
In addition to prolonged stagnation, many countries have also experienced sharp increases in unemployment, poverty, inequality, environmental degradation, insecurity, crime, violence, and political instability, all of which were exacerbated by the debt-flight crisis.
Of course, instability was sometimes beneficial – in Argentina, Bolivia, Brazil, Chile, Guatemala, Indonesia, Kenya, Mexico, the Philippines, and South Africa, financial crises helped to undermine autocratic regimes. But we should be able to democratize without so much hardship.
All these Third World troubles provided a striking contrast to the First World’s relative prosperity during this period. To be sure, there were brief hiccups at the hands of oil price spikes in 1973 and 1979, plus recessions of 1982-83, 1990-91, and 2001-03. Japan stagnated in the 1990s, and France and Germany also experienced prolonged doldrums. But these were the exceptions. Overall, a large share of the world’s poor basically treaded water, while most First World residents paddled by. (continued on page 27)
B. “Can’t Get No Relief!”
Whatever one thinks of neoliberal policies, therefore, it is very hard to make this track record look like an achievement. This perspective should help us to view “debt relief” in a different light.
Given this history, we might well have expected that at least by now, First World governments, the BWIs, and even the global private banking industry would have acknowledged their partial responsibility, pitched in, and offered to share a large portion of the bill.
Obviously this hasn’t happened. As the sidebar discusses, this is not because of any principled opposition to “debt relief” per se. Indeed, debt relief turns out to be a venerable capitalist institution, at least where the debtors in question have clout.
Nor was it possible for the countries themselves to agree on a unilateral moratorium on debt service. More generally, while a handful of individual countries -- Argentina in 2001-2, Russia after World War I, and Cuba in the early 1960s and 1980s –- have declared debt moratoria on their own, Third World debtors as a whole have never been able to marshal the collective will needed to take this step.
Given this, the only alternative has been to rely on voluntary actions by First World creditors, as accelerated by appeals to conscience. We’ve seen the rather modest results that this approach has achieved.
Several key factors are at work here:
• Sticks. Most developing countries believe they are too dependent on the trade finance and aid to risk outright defiance of international creditors.
• Carrots. Many members of the Third World elite have been “bought in.” One common reward is the opportunity to participate in international ventures and receive foreign loans and investments. Beyond that, there is a whole range of other incentives, including offshore accounts, insider profits, and outright bribes and kickbacks. There are also more subtle forms of influence -- Dow Jones board seats (Mexico’s Salinas), positions at prestigious universities, banks and BWIs (Mexico’s Zedillo at Yale, Argentina’s Cavallo at NYU, (Bolivia’s ex-Finance Minister Juan Cariaga) and any number of other former officials at the World Bank/ IFC) participation in other exclusive organizations (for example, the Council of the Americas, the Council on Foreign Relations, or the Inter-American Dialogue), and even more subtle forms of ideological influence. These intra-developing world networks have been relatively weak.
• The Banking Cartel. Compared with the debtor countries, the global financial services industry is very well organized. Country specialists at leading banks and BWIs have dealt with the same debt problems over and over again, while on the country side, dozens of debt negotiators have come and gone. Specialists like Citigroup’s William Rhodes and Chase’s Francis Mason were adept at isolating more militant countries and exploiting inter-country rivalries. Boilerplate language in standard country loan and bond contracts – for example, jurisdiction and cross-default clauses – also helped to perpetuate the “creditor cartel.”
• Declining Political Competition. After 1990, the Soviet Empire ceased to be a serious competitor for Third World affections. Interestingly, from that point on, the real value of total First World aid and aid per capita to developing countries fell until late 1990s. Meanwhile, First World banks completed write-downs of Third World loans, and the BWIs and other official institutions displaced them as the principle source of new low-income loans. With credit risk effectively transferred to the public sector, and the largest debtors focused on the neoliberal reforms that the BWIs were demanding in exchange for debt relief, debtor country support for joint relief atrophied.
With country debtors so fragmented, “small-scale” debt relief became just another instrument of neoliberal reform, while the cause of “large-scale” debt relief was relegated to the NGO community, without much developing country involvement. The resulting “movement” was a loosely-run coalition of First World NGOs and well-meaning celebrities. Lacking a strong political base, the movement mounted a series of intermittent media campaigns. It also assumed the supplicant position of appealing to the “better selves” of politicians like Tony Blair and George Bush, central bankers, and BWI bureaucrats – a hard-nosed, flea-bitten bunch if ever there was one.
The Best-Laid Plans…
One factor that certainly has not played a role in the failure to achieve substantial debt relief is a shortage of clever proposals from the First World policy establishment.
Indeed, ever since Third World borrowing took off in the 1970s, there has been a plethora of schemes for “international credit commissions,” “debt facilities,” debt buybacks, debt-equity swaps, and “exit bonds.” In the last decade, as frustrations with HIPC grew, there have also been proposals for a new “sovereign debt restructuring agency,” global bankruptcy courts, and modifications in the boilerplate contracts noted above.
These proposals provided grist for a steady stream of journal articles and conferences, but very few made much practical difference. The overall pattern was one of cautious incrementalism -- a series of modest proposals, each one just slightly more ambitious than its predecessor, and all doomed to be ineffectual – but with the saving grace that at least no powerful financial interests would be offended.
A. The Baker Plan
The majority of today’s Third World population was not even born in October 1985 when Reagan’s second Treasury Secretary, James A. Baker III, announced his “Baker Plan” for debt relief. This acknowledged the fact that the market-based debt rescheduling approach to the debt crisis pursued by commercial banks since 1982 wasn’t working. Indeed, traditional rescheduling was aggravating the problem, because banks had ceased to provide new loans, while continuing to role over back-due interest at higher and higher interest rates.
The Baker Plan hoped to change this by offering a combination of new loans funded by US taxpayers and the MFIs, plus some private bank loans, in exchange for “market reforms” in the recipient countries. It was motivated by the conventional notion that the 1980s debt crisis was basically a short-term “liquidity” problem, not a reflection of deeper structural interests. Supposedly a fresh round of (government-subsidized) new loans, conditioned on reforms, would allow debtor countries to “grow their way” out of the “temporary” crisis.
By 1989, the Baker had produced a grand total of $32 billion of new loans, mainly to 15 middle-income countries like Mexico and Brazil. This was achieved at a cost of $45 billion to First World taxpayers, by way of the US Treasury. By comparison, the gross external debt of all developing countries at the time was about $1 trillion, so the amount of relief provided was relatively small. Indeed, to the extent that the Plan added $77 billion to Third World debt, it actually constituted negative debt relief.
Finally, of course, both Plans omitted almost all low-income countries completely, partly because First World exposure to them was limited, and partly because at that point, the notion of writing down “development loans” was still anathema to the World Bank and the IMF.
B. “Market-Based” Debt Relief
While observers were waiting for the Baker Plan to work in the late 1980s, private banks were also busy retiring to manage some $26 billion of debt on their own, by way of so-called “market-based” methods, including buy-backs and debt swaps. Some of these techniques had harmful consequences for the countries involved. They also tended to reinforce the de facto “takeover” of the Third World debt problem by the BWIs and other official lenders. With our support, however, they succeeded in offsetting part of the Baker Plans’ harmful effect on debt levels, however.
C. The Brady Plan
When these two approaches failed to make much of a dent in the problem, James Baker’s successor, former Wall Street investment banker Nick Brady came up with a more aggressive debt swap plan in March 1989. The key motivator was not just generosity. Brazil’s February 1987 attempted moratorium on interest payments had set a dangerous precedent, and Mexico’s rigged July 1988 Presidential transition, combined with its huge debt overhang and declining oil prices, suggested that a more widespread default might occur unless more debt relief were forthcoming.
Under Brady’s plan, first implemented by Mexico in July 1989, private banks agreed to swap their country loans at 30-35 percent discounts for a menu of new country bonds, whose interest and principle were securitized by bonds issued by US Treasury, the World Bank, the IMF, and Japan’s Export-Import Bank – backed up, in turn, by reserves from the debtor countries.
By the end of the Brady Plan in 1993, this “semi-voluntary” incentives scheme had provided another relatively small dose of relief, mainly to about 16 Latin American, middle-income countries like Argentina, Brazil, and Mexico, plus US favorites like Poland, the Philippines, and Jordan. With the help of taxpayer subsidies, it also succeeded in virtually wiping out the debts owed by several small developing countries – Guyana, Mozambique, Niger, and Uganda – to private banks. By 1994, just prior to Mexico’s “Tequila Crisis,” the Brady Plan had yielded about $124 billion (in $2006 NPV terms) of debt reduction – at a cost of $66 billion in taxpayer subsidies. To date, it remains the largest – and most costly -- initiative in the entire debt relief arena.
Some have argued that Brady Plan also had a beneficial indirect effect on the total amount of new loans and investments received by debtor countries in 1989-93, by way of its impact on equity markets and direct investment. However, these gains were more than offset by increased capital flight, leaving a net benefit to developing countries that was almost certainly lower than the initial First World tax subsidies.
Furthermore, any such gains were largely wiped out by the subsequent financial crises in Mexico, Argentina, Brazil, Nigeria, Peru, and the Philippines in 1995-99. These were partly due to the brief surge of undisciplined borrowing, facilitated by the Brady Plan Indeed, while the early 1990s produced a reduction in debt service relative to exports and national income for the 16 countries, by the end of 1990s, most of the “Brady Bunch” had seen their debt burdens return to pre-Plan levels.
Overall, therefore, this provides a graphic illustration of the point noted earlier: without basic institutional reform – not just “market” reforms within one country, but more general reforms of the global financial system – debt relief in one period may just lead to increased borrowing and another crisis in the next.
D. “Traditional” Bilateral Relief – Low Income Countries
As noted, these early debt relief initiatives were focused mainly on the world’s largest debtors, although a handful of low-income countries took advantage of them. By the late 1980s, there was a growing recognition of the trend described earlier – that the debts of low-income countries were exploding.
These countries were also paying astronomical debt service bills, despite the fact that they had all qualified for “concessional” finance. By 1986, 19 out of the (future) 38 HIPC low-income countries were devoting at least 5 percent of national income to servicing their foreign debts, and many countries were paying much more. On average, debt service consumed over a third of their export revenues, compared with less than 10 percent a decade earlier. And the “present value” of their low-income country debt had continued to rise throughout the Baker/Brady Plan period. By 1992, the debt was three times the l980 level, and well above the 1986 level. Finally, from 1985 on, private bank lending to low-countries had only been exceeded by lending by development banks and export credit agencies.
One of the first to recognize the need for a closer focus on low-income debt was another UK Chancellor, Nigel Lawson. In 1987 he proposed that the Paris Club refocus its negotiations with debtor countries on trying to reduce their “debt overhang” – the present value of their expected future debt service payments. This was a striking contrast to conventional debt relief, where the goal of rescheduling had always been to avoid write-downs and preserve the loans’ present value by stretching out repayment. Once again, that had assumed that the key debt problem was one of “illiquidity” and that the nasty random shocks would soon reverse themselves. As Lawson and other observers had come to recognize, in the absence of serious intervention, the resulting “debt overhang” might just become permanent.
Lawson’s proposal launched the Paris Club on a prolonged series of debt restructurings. In the next decade, it conducted 90 bilateral restructurings with 73 individual countries, on increasingly-generous term sheets. By 1998, this effort – supplemented by assistance for debt swaps from the World Bank/IDA’s Debt Facility -- had produced another $95 billion of debt relief.
E. HIPC
In September 1996, the BWIs established the “HIPC Initiative,” their first comprehensive debt relief program ever, targeted at “heavily-indebted developing countries.” They didn’t take this initiative unilaterally – they were responding to numerous complaints from NGOs and the debtor countries, who said that existing relief programs were not doing enough for the world’s poorest, most insolvent countries, and that it was also high time for multilateral lenders like the IMF and the World Bank to finally share the costs.
Initially the program was supposed to include the 41 low-income countries that had been included on the World Bank’s first list of “HIPCs” in 1994. That list was supposed to have been determined by objective criteria, including real income levels and the “sustainability” of projected debt service levels, relative to projected exports. But such criteria are of course anything but objective, especially where acute foreign policy interests are concerned. The original list of countries would have included all those with per capita incomes less than $695 in 1993, plus (a) PV debt to income ratios of at least 80 percent, or (b) debt service to export ratios of at least 220 percent. Those criteria would have admitted such major debtors as Angola, Nigeria, Kenya, Vietnam and Yemen. On the other hand, it would have also omitted future HIPCs like Malawi, Guyana, and Gambia. As of 1996, the countries on this original HIPC list accounted for $244 billion of debt and 672 million people – about 63 percent of all low-income country debt and more than a third of all low-income country residents.
Qualifications
For a variety of reasons – including shifting admissions criteria, the desire of the BWIs to contain costs, and sheer geopolitics – this initial list was soon altered. Seven countries, including several large low-income debtors like Kenya, Nigeria, and Angola, were eliminated, while nine much smaller countries suddenly qualified for relief. When the dust settled, there were still precisely 41 countries on the HIPC debt relief list. However, compared with the original list, as of 1996, they now only accounted for 39 percent of all low-income country debt –- indeed, only 6 percent of all developing country debt -- and just 23 percent of all low-income country residents.
This downsizing was partly just due to BWI self-interest. The World Bank is a self-perpetuating bureaucracy, funded by its own long-term bond sales, as well as by First World contributions. It is always very concerned about securing its own cash flow and debt rating.
In principle, contributions from the BWI’s First World members could always make up any shortfalls. In practice, however, the World Bank liked to avoid having to solicit contributions from the US Congress – it always meant difficult hearings where the Bank had to explain where Togo or the Comoros was, and why it deserved assistance.
Initially the BWIs had proposed to fund HIPC debt relief by liquidating part of the IMF’s huge 3.22 metric tons of gold reserves, whose market value had increased to several times book value. Indeed, in 1999-2000, the IMF had conducted a round-trip sale and buyback of 12.9 million ounces with Brazil and Mexico, booking the profit to fund HIPC’s initial costs. Here, however, another powerful set of interests intruded. The BWIs’ proposal for a much larger gold sale were successfully scuttled by the World Gold Council’s lobby, whose membership includes 23 leading global gold mining companies, including the US’ Newmont Mining, South Africa’s AngloGold, and Canada’s Barrick Gold Corp.
So debt relief turned out to be something that the BWIs had to fund on a “pay as you go” basis, through bond sales and periodic contributions from its First World members. The larger the amount of debt relief, the smaller the World Bank’s own loan portfolio, and the more it feared that its own bond rating and financial independence might be jeopardized. So it had an innate bias in favor of providing less debt relief.
As for the precise list of qualifying countries, there were many anomalies. For example, as of the mid-1990s, Angola, Kenya, Nigeria, and Yemen all had higher debt burdens and lower per capita incomes than many of the countries on the final HIPC list, but they were excluded.
On the other hand, at the behest of France, HIPC analysts also designed specific rules so that the Ivory Coast would be included, despite the fact that it had a higher per capita income and lower debt burdens than many other countries on the list. Guyana, a bauxite-rich former British colony in northeast South America with a population of just 750,000 and a real per capita income of $3600 – clearly a “middle income” country, if anyone cared to object – was also admitted.
Meanwhile, HIPC excluded 29 other mainly middle-income countries that had been classified by the World Bank itself as “severely indebted,” including “dirty debt” leaders like Argentina, Ecuador, Indonesia, Pakistan, and the Philippines. In many cases their debt burdens were much heavier than those that were admitted to the HIPC club. (continued below)
All these exclusions were important, because it turned out that while the “HIPC 38” did reduce their debt service payments by about $2 billion a year from 1996 to 2003, debt service payments by non-HIPC low income countries actually increased by several times this figure.
Overall, the BWI’s filters with respect to “sustainable debt” and income were inconsistently applied. They were intended to contain the size of debt relief and focus it on tiny, more malleable countries.
The Long March
Debt critics were naturally a little disappointed at HIPC’s modest scope, relative to the size of all outstanding Third World debt. But at least they thought they could count on the BWIs to provide speedy debt relief to those countries on the HIPC list.
Unfortunately, even for those countries, the journey usually proved to be a very long march. The World Bank and the IMF decided to impose a long, drawn-out, tortuous process before countries actually got any relief, conditioning it on a menu of all the BWIs favorite neoliberal reforms, including privatization, tariff cuts, and balanced budgets.
This was especially hard to account, in light of the fact that the HIPCs on the final list were hardly prime prospects for First World banks, contractors, or equipment suppliers. Fully half had populations smaller than New Jersey’s, with per capita incomes averaging less than $1100, and average life expectancies of just 49 years. So offering this crowd debt relief was unlikely to set a dangerous “moral hazard” precedent.
Nevertheless, under the original 1996 “HIPC I” scheme, countries were supposed to spend three years implementing such reforms under the WB/IMF’s watchful eye before they reached a “decision point.” Then a debt relief package would be assembled and a modest amount of debt service relief would be approved.
Countries were then supposed to continue their good behavior for another 3 years before reaching the “completion point,” at which point they’d finally see a serious reduction in debt service.
Even then, they wouldn’t receive a total debt write-off, but only a partial subsidy, reducing debt service to a level that the WB/IMF considered “sustainable,” relative to projected exports.
Along the way, countries were also expected to draw up an IMF/World Bank-approved “Poverty Reduction Strategy Paper,” negotiate a “Poverty Reduction and Growth Facility,” and engage the IMF and the World Bank in regular, rather intrusive “Staff Monitoring Programs.”
To some extent, all this policy paternalism was justified by the fact that, as we’ve seen, many of these countries were unstable, poorly-governed, war-torn places. This is the old “more sand, same rat-holes” aid dilemma noted earlier – those countries most in need of assistance are also often precisely the ones with the most limited ability to use it wisely. Furthermore, under the influence of neoliberal policies, state institutions in many of these countries have become even weaker.
However, from the standpoint of delivering debt relief in a timely fashion, the BWI’s strictures clearly went beyond the pal. Many BWI technocrats adopted a kind of righteous, almost creditor-like stance toward the countries – perhaps because, after all, the BWIs are substantial creditors. They may also prefer gradual debt relief because this preserves their control. In any case, all of this is a poor substitute for the more constructive neutral role that, say, a “trustee in bankruptcy” would typically play in bankruptcy proceedings.
Combined with country backwardness, this creditor-cum-neoliberal-reformer mentality had predictable results. Indeed, if HIPC’s true goal was to avoid giving meaningful debt relief, it almost succeeded! By 2000, just six countries – Bolivia, Burkina Faso, Guyana, Mali, Mozambique, and Uganda - had managed to reach “completion,” and zero debt relief had been dispensed. Eventually, HIPC I afforded a grand total of $3.7 billion of debt relief to these six countries. Even this amount was not distributed immediately in most cases, but was spread out over decades. For example, Uganda’s debt service relief from the World Bank was stretched out over 23 years, Mozambique’s over 31 years, and Guyana will still be collecting $1 million per year of debt relief in 2050!
Would that First World creditors and the BWIs had been anywhere near as circumspect about making loans to developing countries as they have been about administering debt relief!
HIPC II
In June 1999, following the massive “Drop the Debt” rallies at the May 1998 G-8 meeting in Birmingham, the WB/IMF launched “HIPC II,” supposedly a faster, more generous version of HIPC I. But even this version soon proved to be embarrassingly slow. By 2006, of the 38 countries on the initial HIPC list way back in 1996, just 18 had reached the “completion point.” Eleven others had reached their “decision points,” after a median wait of 49 months, but five of these were reporting “slow progress.” Of the other original nine, just one was both ready to qualify and interested in participating.
To fill out the ranks, in 2006 the WB/IMF identified six more low-income countries that might still be able to qualify for HIPC relief before the curtains finally descend in December 2006. However, only two of these were both ready and willing to try for this deadline.
All told, compared with the original target group, at the end, HIPC was down to providing debt relief to countries that accounted for just 18 percent of outstanding low-income debt and 13 percent of the world’s low income population.
The HIPC Sweepstakes
Those countries that managed to navigate all the HIPC hurdles did finally receive some debt relief – all told, for HIPC I and HIPC II, a grand total reduction in debt service of $832 million per year for 2001-2006, compared with debt payments in 1998-99. This sum was divided among for all 27 countries that had reached their completion or decision points.
Some countries did much better than others. For example, middle-income Guyana progressed quickly through the program, qualifying for debt relief to the tune of $937 per capita from both HIPCs – compared with the “HIPC 38’s” average of just $75 per capita. Indeed, Guyana became something of a pro at debt relief – by 2006, it had achieved a record total of $2971 for each of its citizens, from all debt relief programs to date.
Sao Tome, Nicaragua, Congo Republic, Guinea-Bissau, Zambia, Bolivia, DR Congo, Mozambique, Mauritania, Sierra Leone, Ghana, and Burundi also did relatively well on a per capita basis, all realizing more than $100 of HIPC relief per citizen.
In terms of the share of all HIPC relief received, the clear winner was DR Congo, Mobutu’s old stomping ground, which commanded an astounding 18.2 percent of al HIPC relief, and, indeed, nearly 8 percent of all First World debt relief received by low-income countries.
In these terms, other winners included Nicaragua (9.5% of HIPC, 10.8% of all relief), Zambia (7.2%/4.9%), Ethiopia (5.7%/5.5%), Ghana (6.2%/2.6%), Tanzania (5.8%/4.8%), Bolivia (3.7%/4.2%) and Mozambique (5.8%/6.7%), which single-handedly captured 55 percent of HIPC I’s $3.7 billion benefit.
Compared with our original list of “war-torn debt-heavy dictatorships,” there is a huge overlap: The top ten low-income borrowers in 1980-86 accounted for more than half of both HIPC relief and all First World debt relief distributed from 1988 through 2006. On the other hand, many other indebted low-income countries received much less debt relief, both in per capita and absolute terms.
This per country/ per capita debt relief analysis, presented here for the first time, underscores several of the most serious problems with using debt relief as a substitute for development aid.
Of course it is difficult to insure that reductions in debt service (or the increased borrowing that occur in the aftermath of debt reductions) will be applied to worthy causes. (“The Control Problem.”)
Even apart from that, as noted in the accompanying tables, the amount of relief available varies wildly across countries, according to factors that may have very little to do with development needs. (“The Correlation Problem.”)
The BWIs in charge of the HIPC program tried to tackle the “Control Problem” by insisting on country “poverty reduction” programs and policy reforms, and by monitoring government spending, and so forth. Whether or not that has worked is a matter of dispute – there is a strong case to be made that most of this conditionality was counterproductive. Clearly it succeeded in slowing down the distribution of relief.
But there is nothing that HIPC could do about the “Correlation” problem – the lack of proportionality between debt relief and development needs. Relying on debt relief, in other words, inevitably means that some of the worst-governed, most profligate countries in the world may reap the greatest rewards.
Overall HIPC Results
As noted, HIPC does appear to have reduced foreign debt service burdens somewhat, especially for the 18 countries that managed to complete the program – although domestic debt service may be another story.
However, 11 of the original 38 HIPC countries still had higher debt service/income ratios in 2004 than in 1996. Indeed, to this day, poor Burundi is still laboring under a PV debt/income ratio of 91 percent!
Furthermore, debt service ratios had already declined for 25 out of the 38 countries from 1986 to 1996, prior to HIPC’s existence. Debt service burdens also declined for many other low-income countries that didn’t enroll in HIPC, as well as for the 9 “pre-decision point” countries that have so far received no relief from it. So it is not easy to call the HIPC program a “success,” even for those countries that have been able to reach the finish line.
What is also indisputable is that the total amount of debt relief achieved by HIPC to date has been very modest. While conventional press accounts often refer to HIPC as providing at least “$50 to $60 billion” of debt relief to developing countries, the more accurate estimate is at most $41.3 billion by 2006. This is less than 10 percent of all low-income country debt outstanding.
Of this, $7.6 billion was awarded to the original six countries in the HIPC I program, and another $33.7 billion is expected to be received by the other 23 countries that have at least reached the “decision point.” The potential cost of providing relief to the remaining 9 to 15 countries that might still qualify for HIPC is estimated at $21 billion, but very little of this will ever be forthcoming. Indeed, the timing and levels of relief are still highly uncertain for half of the 11 “decision point” countries.
Once again, all these figures refer to the present values of expected future debt service relief, not to current cash transfers. As of 2006, only a third of HIPC I’s relief and less than 20 percent of HIPC II’s had actually been “banked” – an average of less than $1 billion of cash savings per year, to be divided up among all these very poor countries.
The High Costs of HIPC Relief
Even these modest savings were not cost-free to the countries involved. To comply with the BWI’s demands for HIPC relief, developing countries were required to the usual panoply of neoliberal reforms, many of which had perverse political and economic side effects. There are many examples that illustrate this point.
F. MDRI
Our final stop on the debt relief train is the “Multilateral Debt Relief Initiative” (“MDRI”), announced with so much fanfare at the July 2005 G-8 meetings. On closer inspection, this debt relief plan was even less impressive and generous than HIPC.
By 2004, many debtor countries and First World NGOs had finally had it with HIPC. However, MDRI only really came together because the UK Chancellor, Gordon Brown, saw a chance to earn some political capital, make up for the UK’s lagging foreign aid contributions, and heal some of the bad feelings that had been generated by the UK’s support for the Iraq War, all at very little cost.
With HIPC already set to expire, and with so much low-income debt still outstanding, Brown decided to work closely – and indeed help to fund -- the Live 8/”End Poverty Now” alliance’s “free” concerts. The collaboration with the NGOs was facilitated by the fact that one of Brown’s senior advisors, a former UBS banker, was an Oxfam board member, while Tony Blair’s senior advisor on debt policy was Oxfam’s former Policy Director.
These connections no doubt smoothed the reception for Brown’s proposals in the NGO world, but they ultimately failed to achieve very much incremental debt relief for poor countries.
To begin with, the actual cash value of the debt relief provided by MDRI is far less than the "$40 to $50 billion" that was widely touted in the press.
The face value of the IMF, World Bank, and African Development bank debts of the low-income countries that may be eligible for cancellation adds up to about $38.2 billion.
But MDRI’s debt relief, like HIPC’s will not distributed in one fell swoop. Given the concessional interest rates that already applied to most of the loans in question, and that fact that many of them were already in arrears, the actual debt service savings that these countries may realize from the program is just $.95 billion per year, on average, distributed over the next 37 years, to be divided among 42 countries.
This may appear to be a modest sum to First World residents who are used to seeing much larger sums spent on farm subsidies, submarines, highway programs, and invasions of distant countries. But it is undeniably a large share of the $2.9 billion that the top 19 likely qualifiers for the program spend each year on education, or the $2.4 billion they spend on public health.
Still, the G-8 debt cancellation gets us just 6 percent of the way home toward, say, the Blair/Brown Commission for Africa’s proposed $25-$30 billion per year of increased aid for low-income countries in Africa.
It also compares rather unfavorably with the $1.3 billion per week that the Iraq War was costing in 2005, and the $2 billion a week that it is costing now.
Furthermore, to qualify for this MDRI relief, countries will still have to go through many of the same hoops that HIPC put them through. At least 8 countries among the 42 – including large debtors like Somalia and the Sudan -- may never meet these qualifications.
Even for the top 19 countries that are likely to qualify, MDRI will still leaves them with $23.5 billion of higher-priced bilateral government debt and private debt that are outside the program, with an annual debt service bill of $800 million a year. And here again, of course, the point bears repeating – the countries have virtually nothing to show for all these debts.
Finally, even assuming - optimistically - that MDRI’s 42 potential beneficiaries would otherwise continue to pay the $.7 billion to $1.3 billion of debt service owed to the BWIs and the AfDB over the next 37 years without arrearages or defaults, the "net present value" of this debt cancellation is not $40 billion, but at most $15 billion. In fact, given the likelihood that some debtors may not qualify for the program, the PV of expected MDRI debt relief is really closer to $10 billion.
In fact, from the standpoint of World Bank and African Development Bank bondholders, they may well prefer to have their member countries to take them out of these "dog countries."
Indeed, that might even be a very profitable deal for the World Bank, since its cost of funds is not the 3-3.5 percent paid – if and when they pay -- by these low-income debtors, but at least 4.7 to 5 percent. Assuming that the members of the World Bank’s Executive Board will honor their pledges, exchanging a stream of highly-uncertain debt service payments from these benighted countries for $10 billion to $15 billion of cold hard cash may look like a pretty good deal for the Bank. Certainly it is better than having to play bill collector to all those nasty hell-holes.
And I bet you thought “debt relief” was all about generosity!
VI. Summary – A Modest Proposal
So what are the key lessons from this saga for would-be debt relievers? And where should debt campaigners focus their energies now?
1. Beyond the BWIs.
As we’ve argued, it is no accident that twenty-five years after the debt crisis, some of the poorest countries on the planet, as well as many middle-income countries, continue to be struggling with their foreign debts.
If we accept the basic premise of debt relief – that debtors who have become hopelessly in debt deserve a chance to wipe the slate clean, once and for all, then our conventional approach to debt relief, as administered by the IMF, World Bank, the US Treasury, and the Paris Club, is a failure. Not only has it failed to deliver the goods, but it has also had very high operating costs, in term of delays, administration, and excessive conditionality.
Evidently it was not enough that so much of loans that these countries borrowed was wasted, stolen and laundered right under the noses of our leading banks. Debtor countries were then expected to jump through elaborate BWI policy hoops, testing out all their favorite policy prescriptions in order to avoid having to continue paying for it for the rest of their lives.
In particular, the huge World Bank and IMF bureaucracies have proved to be far better at rationing debt relief than at making sure that impoverished countries don’t get up to their eyeballs in debt in the first place.
Indeed, Russia alone – which is itself still heavily-indebted -- has been far more generous and expeditious with developing countries than the BWIs.
If we are really serious about providing substantial amounts of debt relief, we will to find or design new institutions to administer debt relief.
2. Beyond Narrow Debt Relief.
It not really surprising that First World governments and the BWIs tend to side with international creditors -- as, indeed, governments have often sided with landlords, enclosers, gamekeepers, slave-owners, and other propertied interests.
What is surprising is that, despite the very high stakes for developing countries, and the availability of so much potential mass support for a fairer solution, the debt relief campaign has been so ineffective.
This is no doubt partly just because it is difficult to sustain a global not-for-profit campaign across multiple activists and NGOs. It is also because the campaign faces powerful entrenched interests.
But another difficulty may be of our own making. Compared with the dire needs of many countries and the sheer volume of “dubious debt” and capital flight, we believe that the debt relief movements’ demands have simply been far too meek.
To make a real difference, the debt relief movement needs to get much tougher on two closely-related but necessarily more contentious aspects of the “debt” problem:
(1) Dubious debt, contracted by non-democratic or dishonest governments and wasted on overpriced projects, shady bank bailouts, cut-rate privatizations, capital flight, and corruption. As noted earlier, my own rough estimate is that such debt may account for at least a third of the $3.7 trillion of developing country debt outstanding.
(2) The huge stock of anonymous, untaxed Third World flight wealth that now sits offshore – much of it originally financed by dubious loans, as well as by resource diversions, privatization rip-offs, and other financial chicanery.
Most of this wealth – estimated at $4 trillion to $5 trillion for the Third World alone – has been invested in First World assets, where it generates tax-free returns for its owners and handsome fees for the global private banking industry.
Obviously the sums at stake here are much larger the debt relief campaign has tacked so far. The issue also affects middle-income debtor countries as well as low-income ones. Finally, it also begs the question of the on-going responsibility of leading private global financial institutions, law firms, and accounting firms that built the pipelines for Third World flight capital, and continue to service it. Since the 1980s, several of these institutions have become many times larger and more influential than the World Bank or the IMF.
If the debt relief movement had the will to tackle such problems, there is much that could be done.
For example, we could imagine:
(1) Systematic debt audits, and a global asset recovery institution that helped developing countries recovery stolen assets;
(2) Revitalization of the “odious debt” doctrine, which specifies that debts contracted by dictatorships and/ or spent on non-public purposes or personal enrichment are unenforceable.
(3) Promotion of international tax cooperation and information exchange between First and Third World tax authorities – including as one early step the creation of a “Tax Department” at the World Bank, which doesn’t even have one!
(4) Codes of conduct for transnational banks, law firms, accounting firms, and corporations, prohibiting their active facilitation of dubious lending, money laundering, and tax evasion.
(5) The enactment of a uniform, minimum, multilateral withholding tax on offshore “anonymous” capital – the proceeds of could be used to fund development relief.
Many other ideas along these lines are conceivable. Obviously a great deal of organization and education across multiple NGOs would be needed to tackle even one of them. But the most important requirement is nerve – the willingness to move beyond the debt movement’s all-too-narrow focus, to tackle the real issues in this arena.
3. The Limits of Debt Relief
Earlier in this essay, we expressed serious doubts about the "more sand, same rat-holes" approach to wiping out debts, increasing aid and "ending poverty."
As we argued, most of the prime candidates for debt relief would also have great difficulty in managing it. This skeptical viewpoint has recently received even more support -- there are disturbing reports that the corrupt leaders of poorly-governed, resource-rich countries like DR Congo and Malawi are squandering the debt relief that they’ve recently received on fresh rounds of dubious borrowing and arms purchases.
The fundamental problem, glossed over by many debt movement campaigners, is that combating poverty is not just a question of malaria nets, vaccines, and drinking water. Ultimately it requires deep-rooted structural change, including popular mobilization, and the redistribution of social assets like political power, land, education, and technology. These are concepts that BWI technocrats, let alone film stars and rock stars, may never understand.
On the other hand, it remains the case that poor people in debt-ridden countries are in dire need of almost any short-term relief whatsoever. In that spirit, it would be wonderful to see the debt movement, the G-8, and the BWIs join hands just one more time and finally deliver on their long-standing rhetorical commitment to deliver substantial debt relief.
As we’ve just seen, the 1.6 billion people who reside in heavily-indebted developing countries are still waiting.
***
(c) SubmergingMarkets, 2006
August 19, 2006 at 01:23 AM | Permalink
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Friday, June 17, 2005
DEBT RELIEF MYTHOLOGY One Week in Iraq's Worth, No Less! James S. Henry and Andrew D. Hellman
You know that it is high time to read the fine print and sharpen the pencil when Treasury Secretary John Snow, Angelina Jolie, Al Franken, Bono, Bob Geldof, the World Bank's Paul Wolfowitz, and the UK's Gordon Brown all line up on the same side of the field to cheer some change or other in First World policies with respect to the developing world.
This was indeed a "feel good" week for First World development buffs, as a group of G-8 Finance Ministers, warming up for next month's giant confab in Gleneagles, Scotland, announced that they had finally agreed on "$40 billion of debt relief" for 18 poor, heavily-indebted countries in Latin America and Africa.
In his typically understated fashion, the UK's Gordon Brown, Chancellor of the Exchequer and heir-apparent to Tony Blair, called the measure an "historic breakthrough," the "most comprehensive statement that finance ministers have ever made on issues of debt, development, health, and poverty" -- even if he did say so himself!
Perhaps so. Of course any amount of debt relief, no matter how picayune, is to be welcomed, especially by the 282 million impoverished inhabitants of these 18 benighted countries, whose median per capita income is $1153 per year ($PPP). Indeed, at least 75 percent of these poor folk somehow manage to survive on less than $2 per day, with an average daily income of just US$.98. Fully half of these countries boast life-expectancies at birth of less than 50 years.
At the risk of appearing to be
slightly cynical, however, we may wish to pause for a few seconds before popping the champagne bottles, tapping the kegs, and inviting our starving Third World brethren over for a few brewskis, a jol, and a brai to celebrate the "end of poverty" in our time.
As discussed below, in the words of one famous aging rocker, when it comes to debt relief, "We still haven't found what we're looking for."
LONG TIME A COMIN'
In the first place, the 18
particular countries selected for this dose of debt relief were not
chosen at random, or on the basis of need alone. They are a subset of 69 countries that are regarded by the World Bank and the UN as "heavily" or
"severely" indebted.
The select 18 are the ones that, for a variety
of serendipitous reasons, just happen to have enrolled in and survived the arduous "HIPC" process that was established by the World Bank/IMF in 1996, supposedly to help poor countries sharply reduce their debt burdens.
Unfortunately, the huge World Bank and IMF bureaucracies have proved to be much
better at carefully rationing debt relief than at making sure that such
impoverished countries did not get up to their eyeballs in debt in the
first place.
Since 1996, the multilaterals' armies of ex-pat peu tyrants have conditioned debt
relief on all the usual "structural adjustment" strictures -- repackaged, without much empirical justification, as "poverty reduction."
(Aside to Jeffrey Sachs: "dollar a day world poverty," as defined by the World Bank, only declined from 1981 to 2001 because of a 500-million+ decline in the number of poor in non-neoliberal China -- most of which occurred in the early 1980s because of a massive redistribution of land to peasants! )
The 18 favored few include Benin, Bolivia, Burkina Faso, Ethiopia, Ghana, Guyana, Honduras, Madagascar, Mali, Mauritania, Mozambique, Nicaragua, Niger, Rwanda, Senegal, Tanzania, Uganda, and Zambia. Each one has taken significant steps to alleviate debt burdens under the so-called "Enhanced" Heavily Indebted Poor Country Initiative (HIPC).
This is a costly process that has forced such countries to jump through elaborate hoops with respect budget deficits, monetary policy, privatization, and other favorite, unproven neoliberal nostrums. Most of these countries started this process in 2000, and have been waiting for debt relief ever since.
The result was that, as of
early 2004, after a decade of HIPC's tender mercies, the "select 18's" external debt had been reduced by a grand total of $2.9 billion, from $83.3 billion to $80.4 billion -- about 3 percent. True, several did garner some interest rate reductions along the way, but these 18 countries -- among the world's poorest -- have continued to pay more than $3 billion of debt service per year to their creditors.
Since 2004, with HIPC's mandate set to expire at the end of 2006,
and debtor countries becoming more and more desperate for relief, the pace has picked up. But before the G-8 Finance Ministers weighed
in this month, the 18's total external debt still stood at $61.6 billion.
This included the $38.2 billion of nominal (face value) debt and capitalized interest from the World Bank, the IMF, and the African Development Bank that has just been forgiven, and another $23.5 billion of debt from "bilateral" government loans (mainly the infamous ECAs) and some private, government-guaranteed debt.
As of this year, after a decade of HIPC, servicing this debt was still costing these 18 countries almost $2.2 billion a year in debt service.
This may look like a modest sum to many First World residents who are used to seeing much larger sums spent on agricultural subsidies, submarines, highway programs, and invasions of distant countries.
But it is a very large share of the $2.9 billion that all 18 of these countries spend each year on education, and the $2.4 billion they spend on public health.
MINI-MOUSENUTS
Second, the actual cash value of the debt relief granted by the G-8 is far less than the widely-touted "$40 billion." And the "100 percent debt reduction" proclaimed by the mass media actually amounts to just 62 percent.
The total face value of
the debt canceled by the World Bank ($31 billion), IMF ($4.2 billion),
and African Development Bank ($3.0) adds up to $38.2 billion. But in cash terms, since the average interest rate on the debt is only 3.5 percent, its cancellation amounts to an annual saving of just $1.34 billion a year.
This saving is certainly nothing to scoff at. But from the standpoint of the developing world as a whole, it compares rather unfavorably with, say, the proposed doubling of First World foreign aid levels to genuinely-poor developing countries. Recently proposed by Tony Blair's Commission for Africa, among others, this would increase current First World aid from roughly $25 billion (counting only the aid to genuinely poor countries) to at least $50 billion a year by 2010.
From this standpoint, this month's G-8 debt cancellation only gets us about 6 percent of the way home toward Blair's incremental $25-$30 billion a year of increased aid.
The annual $1.3 billion saving also compares rather unfavorably with the $1.3 billion per week that the Iraq War now costs, according to the latest figures available from the US Congressional Research Services. Apparently it is much more expensive to kill people than it is to keep them alive.
As for the "100 percent debt reduction," the G-8 decision still leaves the 18 "favored few" with $23.5 billion of bilateral government debt and private debt -- and about $800 million a year of debt service.
Furthermore, there will be no relief of any kind until the G-8's proposals are ratified at the World Bank/ IMF Annual Meetings in September. 
Finally, assuming - optimistically - that these countries would otherwise continue to pay the $1.3 billion per year to the multilateral institutions for the next 20 years without default, and that the multilaterals' lending cost is less than or equal to their cost of funds, the "net present value" of the debt cancellation is not $40 billion, but at most $16 billion.
Indeed, from the standpoint of World Bank and African Development Bank bondholders, if the G-8's taxpayers can be persuaded "take them out" of these "dog countries" and their risky future payments in exchange for, say, $16 billion in cold cash for the multilaterals, that would be a very profitable deal indeed -- since the World Bank's cost of funds, for example, is not the 3.5 % average debt service ratio now paid by these countries, but at least 4.7 %.
At that discount rate, the PV of the 18's expected future debt service is worth no more than $14.8 billion. So if they could $16 billion from First World taxpayers to divide amongst themselves, that would leave the multilaterals with a tidy $1 billion+ gain -- compared with having to continue to play bill collector with dirt-poor debtors, and administer the thankless HIPC program.
And I bet you thought it was all about generosity!!!
200,000 LAWYERS
Third, from the standpoint of "ending poverty in our time," this debt cancellation is like 200,000 lawyers at the bottom of the ocean -- at best, a good start.
The 41 other "severely or heavily indebted" countries, with 900 million residents, have at least $1.02 trillion in debt outstanding. By HIPC standards, their debt burdens are even heavier than for the semi-fortunate 18 -- for example, on average, debt service for the other 41 is 6 percent of national income, compared with just 2 percent for the 18, and 13.3 percent of exports, compared with 11 percent for the 18.
At least 20 of these other heavily-indebted countries that are either waiting to be accepted into the HIPC program (n=11), or are caught in the lengthy "interim period" phase (n=9).
The apparent inconsistencies are glaring. For example, Benin, one of the fortunate 18, only has a $ .8 billion foreign debt, a 1.74% debt service to income ratio, and a $1110 ($PPP) per capita income. Burkina Faso, another one of the 18, has a $.661 billion debt, a 1.25 % debt service to income ratio, and an $1170 ($PPP) per capita income. Malawi, one of the less favored 41, has a $2 billion debt, a 2.1 percent debt service to national income ratio, and a $590 $PPP income per capital. It has been waiting for debt relief from HIPC since 2000. The DR Congo -- formerly the notorious dictator Mobutu's personal fiefdom, Zaire -- with 53 million people, a $660 $PPP per capita income, a $7.6 billion debt, a 2.7% debt/GNI ratio, and a 45 year life expectancy, has also been hanging fire since 2003, waiting for some relief. It fails to qualify for a mixture of technical and political reasons -- including the fact that it remains a war zone.
(Nota bene: Iraq also remains a war zone, but the international community has worked overtime to give its 25 million people tens of billions in debt relief.)
There are at least a few dew drops of social justice in the G-8's discriminations, however. Bolivia, lately in the news because it is on the verge of descending into armed conflict between the indigenous majority and its blancos/ "gente decente" elite, undoubtedly deserves special consideration, after a decade of neoliberal policies that basically succeeded in increasing poverty, inequality, and social tensions to the breaking point -- as the IMF itself has admitted in a recent report.
Nicaragua, another long-suffering satellite of American foreign policy that had the temerity to toss out a US-backed dictator -- sort of a Mobutu with maracas -- and ended up the world's most heavily-indebted country in the 1990s, relative to its size, has also qualified for $265 million in additional debt relief. At the moment, like Bolivia, the country is in a state of emergency -- another good example of neoliberalism's pronounced tendency to overplay its hand.
SUMMARY
Elsewhere, we've expressed grave doubts about the "more sand, same rat-holes" approach to increasing foreign aid, wiping out debt, and "ending poverty."
Fighting poverty, after all, is not just about malaria nets and drinking water. Ultimately it is about deep-rooted, long-term structural change, political mobiliization, the redistribution of power, land, education, and technology, entrepreneurship, and the overthrow of established orders. These are concepts that World Bank bureaucrats, let alone "development economists," may never understand.
At this point, however, it remains true that the poor in many debt-ridden countries are in dire need of short-term relief.
In that spirit, it would be great to see the G-8, the World Bank, the IMF, and other so-called "development banks" work even harder to finally deliver on their long-standing commitments to debt reduction for quite a few more of the poorest of the poor.
(c) SubmergingMarkets.Com, 2005.
June 17, 2005 at 04:38 PM | Permalink
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Wednesday, December 15, 2004
(Some) Justice Finally Comes to Chile - Is More on the Way? James S. Henry
After decades of inaction, Chile's own judicial system is finally beginning to hold leading members of the Pinochet dictatorship directly responsible for the brutal reign of terror that it inflicted on Chile from September 11, 1973 to March 11, 1990.
The latest piece of good news was this week's indictment of 89-year old former Chilean dictator General Augusto Pinochet Ugarte on charges stemming from the disappearance and murder of several individual activists.
In July 2002, another serious human rights case against General Pinochet had been dismissed in Chile on grounds that he was mentally incompetent to stand trial. That case echoed the controversial March 2000 decision by UK authorities to permit him to return home rather than extradite him to Spain, France, Switzerland, or Belgium, after he’d spent more than 17 months under house arrest in London.
As noted below, this week's indictment is just the latest in a series of recent efforts by Chile's judicial system to provide justice for more than 3,200 civilians who were murdered by the regime, more than 28,000 others who recently stepped forward to bare witness about being illegally jailed and tortured, and tens of thousands more who had similar experiences, but have so far kept silent.
Several other cases that have been brought against Pinochet in Chile have recently been allowed to proceed, especially after Pinochet gave a lucid, self-serving interview to Channel 22, a Spanish language TV station in Miami, in November 2003. This incredible act of hubris may have finally brought Pinochet to ground.
While this latest ruling will no doubt be appealed to Chile’s Supreme Court, it is at least another step in the right direction.
In addition to providing justice, such efforts also provide a measure of vindication for those who have long maintained that the Pinochet dictatorship was an unwarranted, illegal, and counterproductive intrusion on Chile's long-standing traditions of democracy and respect for human rights.
However, the real disgrace now is that while Spain, France, Belgium, Switzerland, Argentina, and Chile itself have already brought serious criminal charges against Pinochet or his key associates, the US Government has never done so. 
This is despite the fact that several US citizens were also murdered by the regime, not only in Chile but also in the US itself.
Furthermore, as examined below, many of the Chilean junta's most important confederates and accomplices -- including leading bankers, economists, lawyers, media magnates, convicted professional terrorists, and several senior government officials -- continue to enjoy sanctuary abroad -- especially in the US, the supposed champion of the “post-September 11th” global anti-terrorist campaign.
Many Americans may not recall that there was another September 11th, one that was even more bloody and terror-stricken than their own. Indeed, this “other September 11th” was one that their own government helped to create.
To do so, the US worked closely with an incredible bevy of transnational terrorists, butchers, and tin-horn "generals," like Pinochet (Chile), and later, Videla (Argentina), Banzer (Bolivia), Stroessner (Paraguay), and Rios Montt (Guatemala). These valorous "generals" specialized in the use of terror against defenseless civilians.
It is time for Americans who really care about human rights to demand that their own government follow the courageous lead that Chile has taken, and help bring these uniformed savages and their foreign and domestic collaborators to justice.
THE END OF IMPUNITY?
As noted above, there have been several other important recent steps toward justice in Chile with respect to the Pinochet regime. Among the most important are the following:
è On December 10, 2004, Colonel Mario Manriquez, a retired Chilean colonel, was arrested and charged with ordering the September 1973 execution of Victor Jara, an internationally-reknowned Chilean folksinger and playwright. Jara, 38 at the time, was detained and tortured to death at Santiago’s infamous National Stadium, where thousands were detained after the coup. (For an example of Jara's songs, Download vctor_jara_ni_chicha_ni_limona_.mp3.)
è In addition to the decision by Judge Juan Guzman noted above, on December 4, 2004, Chile’s Court of Appeals also lifted Pinochet's immunity from prosecution with respect to his possible involvement in the 1974 murder of his precedecessor as Commander-in-Chief of the Chilean Army, General Carlos Prats Gonzales.
General Prats, a highly-regarded "constitutionalist" who stalwartly opposed the Army's intervention in political affairs, had fled Chile in September 1973 after the coup against Allende’s duly-elected government.
In one of that decade’s clearest cases of international terrorism, General Prats and his wife Sofia Cuthbert were killed by a car bomb in Buenos Aires in September 1974.
In 2000, Eduardo Arancibia Clavel, a member of Chile's DINA, its secret service, was convicted by an Argentine court of helping to organize the killing, and was sentenced to life in prison. Argentina also requested the extradition of six other DINA agents to stand trial in the case, plus Pinochet, who was indicted for first-degree murder as the "intellectual author" of the crime. Chile's Supreme Court denied the extradition request in 2003, but the case was picked up by a Chilean prosecutor. The recent ruling means that the case can proceed. Pinochet has appealed the decision to Chile's Supreme Court.
è On November 29,
2004, the Chilean Government released the Valech report, a year-long investigation of human rights crimes committed by the Pinochet regime. The report, requested by Ricardo Lagos, Chile's current Socialist President, documented the fact, long-denied by Pinochet and his loyalists, that systematic, widespread torture had indeed been state policy during his reign -- including more than 3400 instances of sexual abuse. Even Pinochet’s eldest daughter was shocked by the report, which was based on nearly 28,000 interviews with victims of the junta’s repression – the first opportunity they had ever had to tell their stories. The victims who had managed to survive to tell their stories were offered modest pensions by the Chilean government in compensation. 
In anticipation of the report, on November 5, General Juan Emilio Cheyre, the head of the Chilean Army, reversed the Army’s previous refusal to accept responsibility for these abuses, declaring:
"The (Chilean) Army has made the difficult but irreversible decision to acknowledge the responsibilities that it has as an institution in all the punishable and morally unacceptable acts of the past… Human rights violations never, and for no one, have an ethical justification."
è In October 2004, Chile’s IRS filed tax evasion charges against the former dictator and his long-time financial advisor, Oscar Aitken. For these charges alone, Pinochet may face fines up to three times any taxes that he evaded, plus a jail term of up to five years. In late November, on the eve of the General’s 89th birthday, a Chilean judge did manage to freeze more than $4 million of Pinochet’s Chilean assets, pending the outcome of investigations for tax fraud and money laundering.
è In May 2004, Pinochet’s immunity was lifted by Chilean judges investigating the Condor case, a 1970s conspiracy among several “Southern cone” dictatorships at the time (Argentina, Brazil, Bolivia, Uruguay, and Chile) with US support and coordination, to disappear political opponents. The decision was upheld in August. Pinochet has denied all responsibility for the disappearances.
THE RIGGS CASE
So far, the main US contribution to these developments took place in July 2004, when the US Senate's Permanent Subcommittee on Investigations released a report on General Pinochet’s offshore banking -- especially his ownership of up to $15 millions of "funny money" in more than a dozen Pinochet-owned bank accounts at
Riggs National Bank (DC, Miami, London), Citibank (Miami), and Bank of America.
The reported, which had been conducted at the behest of Senator Carl Levin, the Subcommittee’s ranking Democrat, revealed that ten key Pinochet-related accounts were handled by Washington DC’s Riggs National Bank. These accounts, plus numerous Riggs-managed offshore trusts and companies, were reportedly established for General Pinochet in the mid-1980s and 1990s with the knowledge and active involvement of Rigg’s owner and CEO, Joseph L. Allbritton (Baylor Law ’49).
Allbritton, a prominent Houston-based banking and media magnate who is now in his seventies, is a close friend of the Bush family, and a trustee of the Lyndon B. Johnson Foundation, the George Bush Presidential Foundation, the Reagan Presidential Foundation, the Kennedy Center, the Houston Symphony, and the Houston Museum of Fine Arts. He has also served on the board of the National Geographic Society and Washington DC’s Federal City Council.
A former owner of the now-defunct Washington Star, Allbritton started acquiring Riggs in the early 1980s, eventually buying at least 40.1 percent of the $6.3 billion asset bank. He served as Rigg’s Chairman and CEO until 2001, when his only son, Robert L. Allbritton, took over.
The Allbrittons also owns several other businesses, including Allbritton Communications Co., which controlled WJLA, Washington D.C.'s main Disney/ABC affiliate, plus TV stations in Little Rock, Tulsa, Lynchburg, Charleston, Harrisburg, and Tuscaloosa.
But Riggs National Bank was the crown jewel in the empire. Founded in 1815, it was Washington D.C.'s oldest and largest bank, touted as "the most important bank in the most important city in the world,” where “at least 21 First Families banked.”
It acquired a commanding share of the city’s “Embassy banking” business, handling prominent diplomatic customers for key foreign embassys, like Saudi Arabia’s Embassy. (The US Senate Committee on Governmental Affairs continues to investigate Rigg’s relationships to the Saudis.
These reportedly included more than 150 private accounts, one of which was apparently used, perhaps unintentionally, by Princess Haifa al-Faisal, the wife of Prince Bandar, Saudi Arabia’s Ambassador to the US, to relay funds to two September 11th 2001 hijackers. In September 2004, several families of September 11th victims filed a class action lawsuit against Riggs with respect to this matter.)
Under the Allbrittons, Riggs was not shy about recruiting political allies. Fellow Texan Jack Valenti (U of Houston, Harvard), the influential motion picture industry representative, is a long-time Riggs board member.
In 1997, Riggs acquired J. Bush & Co., an asset management firm owned by Jonathan J. Bush, George H.W.’s brother, George W.'s uncle and a former Chairman of the New York State Republican Finance Committee. In May 2000, Jonathan Bush briefly became CEO of the Riggs Investment Management Company, but now he concentrates on managing the private assets of wealthy clients at J. Bush & Co. In 2003, “JJ’s” Yale classmate, William H. Donaldson, was nominated by President Bush to head the SEC.
Ironically enough, in 1999, the US Treasury had even selected Riggs to redesign and manage its “CA$HLINK” cash management system, reportedly the world's largest deposit/cash reporting system.
It is not yet clear whether “JJ” was involved in managing any assets for the bank’s wealthy private clients like General Pinochet, the Saudi Princess, or Equatorial Guinea's dictator, Teodoro Obiang Nguema, the bank's largest single private banking customer.
But other senior Riggs managers were involved in handling the relationship with General Pinochet, including the bank’s former President, Timothy C. Coughlin (Brown U., NYU MBA, US Marines, Federal City Council), who resigned in May 2004; Robert C. Roane, (UVA, George Washington MBA), the bank’s chief operating officer, and the former head of Riggs - London, who resigned on November 26, 2004; Carol Thompson, Riggs' former SVP for Latin America, who also resigned in 2004; and Raymond M. Lund, the former EVP of the International Banking Group, who left the bank in March 2004.
Also implicated in the Pinochet affair was Steven B. Pfeiffer (Wesleyan ‘69 – Chairman Emeritus; Oxford - Rhodes Scholar; Yale Law School, US Naval Commander; Council on Foreign Relations), a Riggs board member since 1989, a former chairman of the bank’s International Committee, a former Vice Chairman of Riggs Bank Europe Ltd., and the bank’s Chairman in 2001. Pfeiffer remains a senior partner at Fulbright & Jaworski, the leading DC law firm, where he has served as head of the firm’s International Practice, and, from 1998 to 2002, its Partner-in-Charge. According to the Senate report, Pfeiffer and his law firm provided key legal advice to Riggs with respect to its handling of the Pinochet accounts.
BANKING ON THE GENERAL
Riggs' banking relationship with Pinochet may have dated back to the 1970s, when it was reportedly involved in helping to finance several Chilean arms deals. But it really heated up in the mid-1990s, when Pinochet came under investigation for more than 66 international criminal complaints involving human rights violations, drug trafficking, torture, assassination, illegal arms sales, and corruption, not only by Judge Garzon in Spain, but also by Argentina, Belgium, France, Switzerland, and the UK. The General was trying desperately to conceal his family’s assets around the world.
According to the Senate report, Riggs National Bank participated in a long-term conspiracy to launder Pinochet's offshore holdings and conceal their ownership from US federal bank regulators, including the Comptroller of the Currency. Quite coincidently, the bank also reportedly hired R. Ashley Lee, an OCC bank examiner who happened to be in charge of auditing Riggs from 1998 to 2002.
That helped Riggs conceal the Pinochet matter for a couple years. But in May 2004, Riggs was fined $25 million in civil penalties for "willful, systemic" violations of anti-money-laundering laws" with respect to its dealings with two other dubious clients, Saudi Arabia and Equatorial Guinea.
In light of all these embarrassments, the Allbrittons decided to sell the bank. In July 2004, it agreed in principle on a $779 million sale to PNC Financial Services Group Inc. However, this merger is now reportedly on hold until at least April 2005, and it may never be consummated, given all the many lawsuits and investigations that have arisen out of Rigs involvement in money laundering.
If permitted, the PNC transaction would effectively permit the Allbrittons and their close associates to "launder" their profits from more than twenty years of scandalous, morally-unconscionable behavior, undertaken at the behest of some of the world's worst dictatorships.
Meanwhile, Riggs is fighting a number of other legal actions pertaining to this scandal. In April 2004, three law firms that specialize in shareholder derivative suits teamed up to sue Riggs’ directors for “intentionally or recklessly” ignoring the risks of failing to update the bank’s money laundering controls and dealing with dubious clients like the Saudis and Pinochet.
In September 2004, several former Riggs senior managers and board members were named in a legal action filed by the courageous Spanish judge, Balthazar Garzon, who has been investigating human rights violations committed against Spanish citizens by the Pinochet regime. Judge Garzon has asked that US authorities seize the assets of their personal assets, prosecute them for money laundering, and also freeze more than $10.3 million in alleged Pinochet assets.
So far, the US Department of Justice has basically ignored Judge Garzon’s request.
(c) James S. Henry, SubmergingMarkets™, 2004.
December 15, 2004 at 09:05 PM | Permalink
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Thursday, June 17, 2004
The "Reagan Revolution," Part Two: The View from Developing Countries
Printable PDF Version.
"Man wants to forget the bad stuff and believe in the made-up good stuff. Its easier that way."
--Rashomon, Kurosawa "He (Reagan) may have forgotten us.
But we have not forgotten him."
-- Angolan refugee and landmine victim "Folly is a more dangerous enemy to the good than evil. One can protest against evil; it can be unmasked and, if need be, prevented by force....Against folly we have no defense. Neither protests nor force can touch it; reasoning is no use; acts that contradict personal prejudices can simply be disbelieved. Indeed, the fool can counter by criticizing them, and if they are undeniable, they can just be pushed aside.... So the fool, as distinct from the scoundrel, is completely self-satisfied. In fact, he can easily become dangerous, as it does not take much to make him aggressive...."
--Dietrich Bonhoeffer
(Note: The following is an expanded version of our article that appeared in the July 22, 2008 online edition of The Nation, available here.)
"For what is the crime of burgling a bank, compared with the crime of building one?"
-- Brecht
The Hearing
Last week in Washington we got a rare look inside the global private banking industry, whose high purpose it is to gather up the assets of the world's wealthiest people and many of its worst villains, and shelter them from tax collectors, prosecutors, creditors, disgruntled business associates, family members and each other.
Thursday's standing-room-only hearing on tax haven banks and tax
compliance was held by the US Senate's Permanent Subcommittee on Investigations, chaired by Michigan Senator Carl Levin, a regular critic of tax havens--except when it comes to offshore leasing companies owned by US auto companies. He presented the results of his Committee's six-month investigation of two of Europe's most venerable financial institutions - LGT Group, the largest bank in Liechtenstein and the personal fiefdom of Crown Prince Hans-Adam II and the royal family, with more than $200 billion in client assets; and UBS, Switzerland's largest bank and the world's largest private wealth manager, with $1.9 trillion in client assets and nearly 84,000 employees in fifty countries, including 32,000 in the United States.Kieber
The theatrics included videotaped testimony by Heinrich
Kieber, a Liechtenstein computer expert in a witness protection program with a $7 million bounty on his head, for supplying a list of at least 1,400 LGT clients - some say more than 4,500 - to tax authorities in Europe and the United States; two former American clients of LGT, who took the Fifth Amendment; Martin Liechti, head of UBS international private banking for North and South America, who'd been detained in Miami since April, and who also took the Fifth; Douglas H. Shulman, our sixth IRS commissioner in eight years, who conceded that 
offshore tax evasion must be a "serious, growing" problem even though the IRS has no idea how large it is; and Mark
Branson, CFO of UBS's Global Wealth Management group, who apologized profusely, pledged to cooperate with the IRS (within the limits of Swiss secrecy) and surprised the Committee by announcing that UBS has decided (for the third time since 2002) to "exit" the shady business of providing new secret Swiss accounts to wealthy Americans.
There were also several other potential witnesses whose 
importance was underscored by their absence. Peter S. Lowy, of Beverly Hills, another former LGT client who'd been subpoenaed, is a key member of the Westfield Group, the world's largest shopping mall dynasty, which has interests in and operates 55 US malls and 63 others around the world with a combined value of more than $60 billion, holds the lease for a new shopping mall at the reconstructed World Trade Center, has many other properties in Australia and Israel, and was recently awarded a L3 billion project for the UK's largest shopping mall, in time for the 2012 Olympics.
His lawyer, the renowned Washington fixer Robert S.
Bennett, reported that Lowy was "out of the country" and would appear later, probably also just to take the Fifth. Perhaps he traveled to Australia, where his family is also reportedly facing an LGT-related tax audit. (Bennett's law partner, David Zornow, the head of Skadden, Arps' White Collar Crime practice, represents UBS's Liechti.)
Steven D. Greenfield, a leading New York City toy vendor and private equity investor whose business had been personally recruited by the Crown Prince's brother, went AWOL and did not bother to send a lawyer.
LGT Group declined to follow UBS's contrite example and also failed to appear.
Also missing from the roster were two prominent UBS executives: Robert Wolf, CEO of UBS Americas, who has reportedly raised over $500,000 for Barack Obama, bundled more than $370,850 for him this year from his bank alone, making UBS Obama's fifth-largest corporate donor, and had private dinners with the junior Senator from Illinois; and former Texas Senator Phil Gramm, vice chairman of UBS Securities LLC, a leading lobbyist for UBS until March, and until recently, John McCain's senior economics adviser. (In 1995, while preparing his own ultimately-unsuccessful race for the Republican Presidential nomination, Gramm commented memorably, "I have the most reliable friend you can have in American politics, and that's ready money.") 
While neither of these UBS executives have been directly implicated in the tax scandal, both might reasonably be questioned about precisely what the rest of UBS in the States knew about the Swiss program, what it implies for US tax policy, and whether those who complain about UBS's knowing facilitation of tax fraud are just whining.
While they were on the subject of offshore abuses, the Senate might
also have wanted to depose former top McCain fundraiser James Courter,
who also resigned last week, after it was disclosed that his telecom
firm, IDT, had been fined $1.3 million by the FCC for using a haven
company in the Turks and Caicos to pay bribes to former Haitian
President Jean-Bertrand Aristide.
The Cases
This crowded docket, combined with the UBS mea culpa, almost distracted us from the sordid details of the Levin Committee's actual findings.
UBS: UBS opened its first American branch in 1939, and for all we know, has likely been facilitating tax fraud ever since, but the Senate investigation focused only on 2000 to 2007. During this period, even as UBS was sharply expanding its onshore US operations by acquiring Paine Webber, expanding in investment and retail banking, it also mounted a top-secret effort to recruit wealthy Americans, spirit their money to Switzerland and other havens and conceal their assets from the IRS.
This program, aimed at people with a net worth of $40 million to $50 million each, was staffed by fifty to eighty senior calling officers and 1,000 client advisors. Based in Zurich, Geneva, and Lugano, each officer made two to ten surreptitious trips per year to the United States, calling on thirty to forty existing clients per visit and trying to recruit new ones by attending HNW (high net worth) watering holes like Miami's Art Basel and the UBS Regatta in Newport. By 2007, this program had garnered 20,000 American clients, with offshore assets at UBS alone worth $20 billion.
To achieve these results, UBS established an elaborate formal training program, which coached bankers on how to avoid surveillance by US customs and law enforcement, falsify visas, encrypt communications, secretly move money in and out of the country and market security products even without broker/dealer licenses.
Meanwhile, back in 2001, UBS had signed a formal "qualified intermediary" agreement with the US Treasury. Under this program, it agreed either to withhold taxes against American clients who had Swiss accounts and owned US stocks, or disclose their identities. However, when UBS's American clients refused to go along with these arrangements, the bank just caved in and lied to the US government. Eventually, it concealed 19,000 such clients, partly by helping to form hundreds of offshore companies. This cost the US Treasury an estimated $200 million per year in lost taxes.
In early July 2008, a US court approved a "John Doe" subpoena for UBS, demanding the identities of these 19,000 undisclosed clients. However, as of last week's Senate hearing, UBS has refused to disclose them. While it maintains that it is no longer accepting new Swiss accounts from Americans, it is also insisting on the distinction between "tax fraud" and "tax evasion," reserving full disclosure only for cases involving criminal tax fraud, which is much harder to prove under Swiss law. This means it may be difficult to ever know whether it has kept its commitments.
Ultimately UBS got caught, not by virtue of diligent law enforcement, much less the Senate's investigation, but by sheer accident. In late June, Bradley Birkenfeld, a senior private banker who'd worked with UBS from 2001 until late 2005 out of Switzerland, and then continued to service the same clients from Miami, pleaded guilty to helping dozens of wealthy American clients launder money. His name surfaced when his largest client, Igor Olenicoff, a Russian emigré property developer from Southern California, was accidentally discovered by the IRS to be reporting much less income tax than he needed to justify his $1.6 billion measurement on the Forbes 400 list of billionaires.
With Birkenfeld's help, Olenicoff succeeded in parking several hundred million of unreported assets offshore--including millions in accounts controlled by a Bahamian company that he said had been set by former Russian Premier Boris Yeltsin. Ultimately, Olenicoff settled with the IRS for $52 million in back taxes, one of the largest tax evasion cases in Southern California history, and also agreed to repatriate $346 million from Switzerland and Liechtenstein. In theory he faced up to three years of jail time, but--following standard US practice of going easy on big-ticket tax evaders who have no "priors"--he received only two years probation and three weeks of community service.
As noted, Olenicoff also gave up his UBS private bankers, including Birkenfeld, who plead guilty in June to facilitating tax fraud and is now awaiting sentencing--the first US prosecution of a foreign private banker in history. It was Birkenfeld's revelations, in turn, that led to the disclosure of UBS' program for wealthy Americans, and at least one-half of the Senate investigation.
The most important point is that this entire program would clearly have been impossible without the knowledge and approval of the bank's most senior officials in Switzerland, and probably some senior US executives as well -- although the Committee did not press this point. As former UBS CEO Peter Wuffli once said, "A company is only as ethical as its people." From this standpoint, we have reason to be concerned that UBS's behavior may repeat itself, so long as so many of these same senior executives remain in place.
LGT: For all its pretensions to nobility, Liechtenstein is well-known in the trade as the "place for money with the stains that won't come out," a flexible jurisdiction whose "trusts" and "foundations" are basic necessities for everyone from Colombian drug lords and the Saudi royals to the Suhartos, Marcoses, Russian oligarchs, and Sicilian mafia.
As detailed by the Senate investigation, LGT Group has certainly lived up to this reputation in the US market. It maintained a program that was, if anything, even more sophisticated and discreet than that of UBS for large fortunes. Among its specialties: setting up conduit companies in bland places like Canada, allowing clients to transfer money without attracting attention; leaving the designation of "beneficiaries" up to corporations controlled by potential beneficiaries themselves, a neat way of avoiding "know your customer" rules; rarely visiting clients at home, let alone mailing, e-mailing, or phoning them, certainly never from a Liechtenstein post office, Internet address, or area code; shifting the names of trust beneficiaries to very old folks just before death to make it look like a repatriation of capital was an inheritance.
In terms of precise trade craft, indeed, LGT had it all over UBS. It only really got caught red-handed when it tried to modernize and trusted Heinrich Kieber, a fellow citizen and IT expert ,who turned out to be either a valiant whistleblower, a well-paid extortionist (he was paid $7.5 million by the German IRS alone for his DVDs), or both.
The Implications
So what do we learn from all this? Many will consider these revelations shocking. After all, just as the US government is facing a $500 billion deficit, millions of Americans are fighting to save their homes, cars, and college educations from the consequences of predatory lending, and inequalities of wealth and income are greater than at any time since the late 1920s, we learn that for decades, the world's largest banks have been helping wealthy Americans steal billions in tax revenues from the rest of us. At the very least, this suggests that it may be time to put the issue of big-ticket tax evasion, offshore and on, back on the front burner. But we also need historical perspective. Those who have studied this subject for decades also realize that achieving reform in this arena is not a matter of a few criminal prosecutions. It is a continuous game, requiring persistence and constant adaptations to the opponents, because we are playing against some of the world's most powerful vested interests, with huge fortunes at stake.
After all, offshore tax evasion by wealthy Americans is hardly new. For example, in May 1937, Treasury Secretary Henry Morgenthau, Jr. wrote a lengthy letter to Franklin Delano Roosevelt, explaining why tax revenues had failed to meet his expectations despite a sharp rise in tax rates. Some rich folks didn't mind paying up, given the hard times so many Americans were facing during the Depression. As Edward Filene, the Boston department store magnate, famously remarked, "Why shouldn't the American people take half their money from me? I took all of it from them." However, according to Morgenthau, many other rich people busied themselves inventing new ways to dodge taxes, notably by secreting funds offshore in brand new havens like the Bahamas, Panama, and.... Newfoundland!
Scroll forward to the Castle Bank and Trust case of the early 1970s, when another IRS investigation of offshore banking disclosed a list of several hundred wealthy Americans who'd set up trusts in the Bahamas and Cayman Islands. Just as the investigation was picking up steam and the names were about to be publicized, a new IRS Commissioner came in and shut it down--officially because the otherwise-lawless Nixon Administration suddenly got concerned about due process. Few names on the list--a copy of which appears in my forthcoming book, Pirate Bankers, were ever investigated.
Scroll forward now to the late 1990s, when the Organization for Economic Cooperation and Development (OECD), the European Union and the US Treasury once again became excited about offshore tax havens. As the EU launched its "savings tax directive" on cross-border interest, a Cayman banker surfaced to report that more than 95 percent of his nearly 2,000 clients were Americans, and the IRS discovered 1 million to 2 million Americans using credit cards from offshore banks. Meanwhile, the OECD's favorite tool became the "blacklist." A list of thirty-five to forty "havens" was evaluated on the basis of abstract criteria like the quality of anti-money laundering programs and the willingness to negotiate information sharing agreements.
Unfortunately this "name and shame" approach didn't have much success. First, the OECD had no success against jurisdictions like Monaco, Andorra, and Liechtenstein that are basically shameless. Second, the OECD's definition of "haven" was highly selective. It omitted many emerging havens like Dubai, the Malaysian island of Labuan, Estonia, Singapore, and for certain purposes even Denmark, whose importance has recently increased. As we'll see, it also ignored the role of major onshore havens like London and New York, which have been very attractive to the world's non-resident rich, especially from the developing world.
Third, blacklisting havens focused on the wrong dimension. As Senator Levin's hearing has underscored, the real problem is a global pirate banking industry that cuts across individual havens, and includes many of our largest, most influential commercial and investment banks, hedge funds, law firms, and accounting firms. From their standpoint, it doesn't much matter whether a particular haven survives, so long as others turn up to take their place in providing anonymity, security, and low-tax returns. Up to now, despite blacklisting, the supply of new tax haven vehicles has been very elastic.
On the other hand, as the UBS and LGT cases show, the dominant players in global private banking are relatively stable institutions--which makes sense, given their clients' need for stable sanctuaries. This suggests that it makes more sense to focus on regulating institutions than regulating or blacklisting physical places.
Until the UBS case, this seemed to be much more difficult than, say, beating up on some tiny and distant sultry island for shady people. Even now, after the Birkenfeld case supplied the first private banker prosecution, we have yet to see the first criminal prosecution of a top-tier private bank--apart from BCCI in the early 1990s, which had already failed and was hardly top-tier.
This is not because of a shortage of despicable behavior. For example, UBS, like most of its competitors in global private banking, has a long history of engaging in perfidious behavior, apologizing for it, and then turning back to the future. This includes UBS's involvement in South Africa's apartheid debt and the accounts scandals of the 1980s involving the Marcos family; Benazir Bhutto, Mobutu Sese Seko, Holocaust victims, and Nigerian dictator Sani Abacha in the 1990s; the 2001 Enron bankruptcy, and the Menem arms-purchasing scandal in Argentina; the 2003 Parmalat scandal; the 2004-2006 Iran/ Cuba/Saddam funds transfers scandal, for which it was fined $100 million by the Federal Reserve; the 2008 Massachusetts and New York securities fraud cases, and now the Birkenfeld matter. Furthermore, as the Committee report noted, UBS has a history of violating even its own policies. From this angle, unapologetic LGT is at least not hypocritical.
It is also well to remember that UBS and LGT are hardly the only global private banks involved in recruiting wealthy clients to move money offshore. The Committee report indicates a long list of other banks that also provided offshore services to American clients involved in the UBS and LGT cases--including Citibank (Swiss), HSBC, Barclays (Birkenfeld's original employer), Credit Suisse, Lloyds TSB, Standard Chartered, Banque du Gotthard, Centrum, Bank Jacob Safra, and Bank of Montreal. In addition, there are dozens of other non-US and US banks that are also active in the offshore US private banking market. This suggests the shortcomings of a case-by-case prosecutorial approach, and the value of designing regulations to improve behavior and provide ongoing feedback about taxpayer compliance.
In principle, one can imagine many such improvements in regulation, assuming a compliant Congress. For example, as proposed in the "Stop Haven Abuses Act" (S-681) introduced in 2006 and revised in February 2007 by Senators Levin, Coleman, and Obama, there would be a rebuttable presumption that offshore shell corporations and trusts are owned by those who establish them. This would eliminate the "Q.I. rule" exception, which allowed hundreds of UBS clients to avoid reporting to the IRS simply by moving their assets to into shell companies.
We could also institute many other changes, including an increase in the painfully short, three-year statute of limitations for investigating and proposing changes in offshore tax liabilities; tightening up on anti-money laundering legislation; levying withholding taxes against hedge funds; raising the penalties for abusive tax shelters, and requiring banks that open offshore entities for US clients to report them to the US Treasury.
Key Tasks
However, most of these proposed rule changes have the flavor of stopgaps, technical gimmicks that are still far too focused on individual taxpayers rather than the private banking industry--the advisers, enablers, and systems operators. If we're right that this industry had become an unregulated, untaxed black hole--a multi-billion-dollar global "bad"--we need to focus on two key tasks.
The first is to create appropriate incentives for the global private banking industry to do the right thing. We need to find ways to tax the behavior of tax-evading institutions, their CEOs, senior managers, and even shareholders, to punish them for more misbehavior, and perhaps also reward them for bringing the money home with a brief one-time tax amnesty. In the short run, there have to be more Bradley Birkenfelds, more exposés, and more penalties for banks and bankers alike. Mere apologies, however heartfelt, should not be enough.
The second challenge is to organize a global alliance around this issue. This is more difficult, although steps are already being taken. Global organizations like Tax Justice International, Oxfam GB, Friends of the Earth, Global Witness, and Christian Aid are converging on a new global campaign around the issue of havens and offshore tax evasion. They've been enlisting support for this effort from countries like Norway, Chile, Brazil, Spain, and France, organizations like the UNDP, the World Bank, and even the International Monetary Fund.
This is very exciting, but the organizers face one critical problem--the fact there are serious conflicts of interest among developed and developing countries. The fact is that the United States, the UK and other developed countries not only lose tax revenue to haven banking; they also profit from it, because their own banks are so deeply engaged in it, especially when it involves developing countries.
Back in April 1986, this author broke the story that Citibank was actually taking far more capital out of Latin America and other developing countries than it was lending to them, despite its reputation as the largest Third-World lender. Indeed, the business of helping Third-World elites decapitalize their own countries had become so large and lucrative that Citi's private banking group was the bank's single most profitable division.
To achieve that feat, Citigroup resorted to skullduggery and the flouting of local laws all over the planet. This included repeatedly sending teams of private bankers undercover to countries like Brazil, Argentina, and Venezuela; helping to set up thousands of shell companies and bank accounts in offshore havens and secretly transferring funds to them; teaching its clients money-laundering tricks like mis-invoicing and back-to-back loans; designing ways to communicate with clients that kept their financial secrets safe; and overall, concealing vast sums of flight capital from Third World tax authorities (and their competitors), while lobbying Congress to insure that any foreign capital that arrived in the United States enjoyed near-zero taxes and near-Swiss secrecy. For a time the resulting tax breaks and lax banking rules that applied to "nonresident aliens" from other countries made the United States, in effect, one of the world's largest tax havens.
In short, from the 1970s to the 1990s, banks like Citigroup, BankAmerica, and JP Morgan Chase (and UBS, Credit Suisse, RBS, Paribas and Barclays, etc.) were behaving throughout the Third World just as badly as UBS has recently been behaving here. And their very success laid the foundations for the global, private-haven banking industry with which the IRS is now struggling.
At the time, it seemed that their behavior was hurtful mainly to the developing world, which wasn't strong enough to hold Senate hearings and put Citibankers in jail. But lately it has become clear that the system has grown large enough to consume its creators.
In the last thirty years, fueled by the globalization of financial services, lousy lending, capital flight, and mind-boggling corruption, a relatively small number of major banks, law firms, accounting firms, asset managers, insurance companies, and hedge funds have come to launder and conceal at least $10 trillion to $15 trillion of private untaxed anonymous cross-border wealth.
Rich people the world over, including tens of thousands of wealthy Americans, are now free to opt in to this sophisticated, secretive, utterly unprincipled global private banking industry. They can become, in effect, residents of nowhere for tax purposes, citizens of a brave new virtual country, which offers its inhabitants unprecedented freedom from the taxes, regulations, and moral restraints that the rest of us take for granted. They wield enormous political influence even without paying taxes, merely by making contributions, threatening to withhold them--or better yet, threatening to abscond with their capital unless certain conditions are met. In a sense, this is the ultimate libertarian pipe dream: representation without taxation. But it is a nightmare for the rest of us, and we must design and organize our way around it.
Afterword
Let me just add one paragraph for those in the audience who don’t automatically stand up and cheer every time someone figures out a new way to boost tax revenues, even through better law enforcement.
Why should we care whether Davy Jones is clever enough to fiddle with his IRS bill, even by way of offshore banks? Wouldn’t the funds just be wasted if they went to the government rather than to finance Davy’s yacht tender in Marbella? Or won’t the government just borrow and spend anyway, regardless of revenues?
Well, in these straightened times, with a gargantuan federal deficit, most state and local governments running out of debt capacity, stagflation, a weak dollar, private debt at record levels, and rising unemployment, just imagine that every extra dollar for that yacht tender is coming right out of the funds available for schools, teachers, hospitals, roads, police, and fire protection – local services. The free lunches have all been mortaged, or given away in capital gains tax cuts for the same social class that is also are evading what little taxes they still have to pay. Meanwhile, $1 spent on a yacht tender goes right to the bottom, while $1 spent on food, salaries, or even roads has a much greater multipler, and benefits a more deserving class.
Perhaps best of all, think of the difference between giving an exra $1 to the hard-working child care worker down the street, compared with $1 to some wealthy scion of a giant shopping mall dynasty who spends his life just trying to spend his inheritance.
***
About James S. Henry
James S. Henry is a New York-based investigative journalist who has written widely on the problems of tax havens, debt, and development. His most recent book, The Blood Bankers (Basic Books, 2005), examined where the money went that was loaned to eight developing nations. His forthcoming book, Pirate Bankers (2009), examines the history and structure of the global private banking industry.
July 24, 2008 at 01:06 AM | Permalink | Comments (0) | TrackBack
Saturday, August 19, 2006
BEYOND DEBT RELIEF The Next Stage In the Fight for Global Social Justice James S. Henry
“Third World debt relief” has become a little like Boston’s “Big Dig,” the Middle East “peace process,” and the “ultimate cure for cancer” -- long anticipated, endlessly discussed, and perpetually, it seems, just around the corner.
At the end of the day, after decades of effort, the fact is that very little Third World debt relief has actually been achieved.
There is also mounting evidence that even the paltry amount of debt relief that has been achieved has not done very much good.
This is partly because debt relief tends t
o reinforce questionable policies and bad habits that get developing countries into hock in the first place. It is also because debt relief has reinforced the prerogatives of IMF/World Bank econo-crats, whose policies have often been incredibly detrimental.
Finally, debt relief is also often a very poor substitute for other forms of aid and development finance.
Furthermore, most of the costs of debt relief have been born by ordinary First and Third World taxpayers, while the global banks and Third World elites that have profited enormously from all the lousy projects, capital flight, and corruption that were financed by the debt have escaped scot-free.
This is not to suggest that the debt relief campaign has been utterly pointless.
It has provided a bully pulpit for scores of entertainers, politicians, economists, religious leaders, and NGOs. It has occasionally reminded us of the persistent problems of global poverty and inequality.
I
t has also provided an excuse for some pretty good free concerts.
From the standpoint of actually providing enough increased aid to improve living conditions in debt-ridden countries, however, debt relief has been a disappointment. In the immortal words of Bono himself, "We still haven't found what we're looking for."
Fortunately, there is an alternative strategy that would have much greater impact. But this strategy would require a more combative stance on the part of anti-debt activists, and it would almost certainly not generate nearly as many convivial press conferences or photo opportunities.
“Fact Check, Please”
Surprisingly, there have been few efforts to take stock of debt relief efforts, to see whether this game has really been worth the candle.
It is high time that we took a closer look. After all, it is now more than 30 years since Zaire’s bilateral debts were rescheduled by the Paris Club in 1976, 27 years since UNCTAD’s $6 billion write-off for 45 developing countries in 1977-79, 23 years since the climax of the so-called “Third World debt crisis” in 1983, and more than a decade since the inauguration of the IMF/World Bank’s debt relief program for “Heavily-Indebted Poor Countries” (“HIPCs”) in 1996.
On the debt relief campaign side, it is two decades since the formation of the UK Debt Crisis Network, eight years since the 70,000-strong “Drop the Debt” demos at G-8’s May 1998 meetings in Birmingham, and over a year since the “Live-8/End Poverty Now” fiesta at Gleneagles.
Along the way, there have been Bradley Plans, Mitterand Plans, Lawson Plans, Mizakawa Plans, Sachs Plans, Evian Plans, and more than 200 debt rescheduling by the Paris Club on increasingly generous terms -- Toronto terms (’88-‘91), London (‘91-‘94) terms, Naples terms (’95-96), Lyon terms (’96-99), and Cologne terms (’99-).
Most recently, in the wake of “Live 8,” the G-8, the World Bank, and the IMF launched their “Multilateral Debt Relief Initiative” (“MDRI”) with a great deal of fanfare, declaring that it will be worth at least “$40 to $50 billion” to the two score countries that are eligible.
Realities
Despite all this activity, the fact is that developing country debt is now greater than ever before, and is still increasing in real terms. For most countries, the debt burden – as measured by the ratio of debt service to national income – is even higher than in the early 1980s, at the peak of the so-called “Third World debt crisis.”
By our estimates, as of 2006, the nominal stock of all developing country foreign debt outstanding was $3.24 trillion. This debt generated about $550 billion of debt service payment each year for First World banks, bondholders, and multilateral institutions.
That includes $41 billion a year that was paid by the world’s 60 poorest countries, whose per capita incomes are all below $825 a year. Even after twenty-five years of “debt relief,” this annual bill for debt service still almost entirely offsets the $40-$45 billion of foreign aid that these countries receive each year. Their debt burden also remains higher, relative to national income, than it was the early 1980s.
As discussed below, most heavy debtors also have very little to show for all this debt. So these payments are, in effect, a “shark fee” paid to First World creditors for funds that have long since vanished into the ether – and a not a few offshore private bank accounts.
Present Value
Since most existing Third World debt was contracted at higher interest rates than now prevail, the “present value” of the debt -- a better measure of its true economic cost -- is actually even higher: nearly $3.7 trillion.
China and India alone now account for about $.5 trillion of this developing country “PV debt.” Both countries were relatively careful about foreign borrowing, and they also largely ignored IMF/World Bank policy advice, so their debt burdens are small, relative to national income. But in absolute terms, their debts are large, simply because they are so huge. They can easily afford it -- thanks in part to their non-neoliberal economic strategies, both countries now have high-growth economies and large stockpiles of reserves.
Of the other $3.2 trillion of “PV debt,” however, $2.6 trillion is owed by 26 low-income and 49 middle-income countries that pursued “high debt” growth strategies.
These heavily-indebted countries have about 1.6 billion residents – over a quarter of the world’s population, a share that has been steadily increasing.
After decades of debt relief, their “PV debt/ national income ratios” are all in the relatively-high 60-90 percent range. Debt service consumes 4 to 9 percent of national income each year, more than they spend on education or health, and far more than they receive in foreign aid.
III. Where’s the “Relief”?
These numbers beg a question -- what have all the professional debt relievers at the World Bank, the IMF, and the Paris Club, not to mention debt relief activists, been up to all these years? How much debt relief have they actually secured, who received it, and how helpful has it been?
To begin with, it is not easy to measure “debt relief.” The definitions of debt relief employed by debtor countries, commercial creditors, bilateral creditors, and multilateral organizations like the IMF/World Bank, the OECD, the Paris Club, and the Bank for International Settlements vary significantly, and the reported data is subject to huge discrepancies. This helps to account for the fact that only a handful of systematic attempts to measure debt relief have ever been attempted.
As usual, however, some things can be said. This article provides the most comprehensive estimate of debt relief to date, based on a careful review of these data sources and our own independent analysis.
Overall Relief
Our first key finding is that the actual amount of debt relief provided to all developing countries to date has been pretty modest.
From 1982 through 2005, in comparable $2006 NPV terms, the total value of all low- and middle-income developing country debt that was “relieved” -- rescheduled, written down, or cancelled –- was only $310 billion -- just 7.8 percent of all the pre-relief debt outstanding.
Low-Income Relief
The relief ratio for the world’s 60 poorest countries has been higher – about 28 percent of their pre-relief debt levels. All told, in PV terms, these countries have received about $161 billion of debt relief – more than half of all the debt relief to date. This is now saving the recipient countries about $15.3 billion per year of debt service.
This is certainly nothing to sneeze at. But it is a far cry from the extra $50 billion to $100 billion per year of cash aid that most leading development experts believe will be needed if developing countries are to attain the (rather modest) “Millennium Development Goals” that were set back in 2000 by the UN, with a target date of 2015.
It is also important to remember that most low-income countries have been waiting a very long time for even this modicum of debt relief, most of did not start arriving until the late 1990s. By then, several countries that had not been “highly-indebted” to begin with had become so, just by dint of the delay.
Debt Relief Sources – Low-Income Countries
Our analysis shows that 30 percent of this low-income debt relief has come from the World Bank/ IMF’s HIPC and MDRI programs. Another 30 percent has come from Russia alone, which forgave a substantial load of bilateral debt that were owed to it by Nicaragua, Vietnam, and Yemen, when Russia joined the Paris Club in 1997. In February 2006, Russia also wrote off another $5+ billion debt that was owed by Afghanistan.
Finally, another $65 billion of debt relief for low-income countries was provided by the Paris Club, an association of First World export credit agencies (EGCs) like the US EXIM Bank and the UK’s EGCD. These agencies have a strong “client base” among the ranks of First World exporters, contractors, and engineering firms. All these private entities received significant business from the first round of Third World lending, in the form of orders for large projects. They are now eager to have the EGCs forgive still more loans, at taxpayer expense, in order to clear the way for another round of project finance.
On the other hand, leading global banks like Citigroup, UBS, JPMorganChase, Goldman Sachs, Deutsche Bank, BNP, and ABN-Amro, and Barclays, have provided a grand total of just $1.5 billion of low-income debt relief, mostly by way of the HIPC program.
In the 1970s and early 1980s, of course, these giant international banks led the way in syndicating loans for developing countries. At the same time, many of them also became pioneers in “private banking,” the dubious business of helping Third (and First) World elites park their capital offshore and onshore, as free of taxes and regulations as humanly possible.
Since the early 1990s, apart from China and India, these private banks have largely handed over the task of providing new loans to low-income countries to multilateral institutions like the IMF, the World Bank, and the IDB, as well as to the EGCs. Ironically, this has permitted them to focus on more lucrative Third World markets, including low-debt/ high-growth markets like China and India.
For middle-income countries, while the foreign loan business was booming in the 1970s and early 1980s, these banks became deeply involved in stashing abroad the proceeds of the banks’ own country loan syndicates. For low-income countries, private bankers were more often called upon to recycle the proceeds of loans from the development banks, the IMF, and the EGCs, as well as the proceeds of various government-owned asset rip-offs.
Overall, therefore, from the standpoint of debt relief, these First World financial giants have provided very little debt relief. This is despite the fact that they have not only reaped enormous profits from Third World lending, but also continue to reap enormous profits from Third World private banking. In the wake of the debt crisis, they have also been able to scoop up undervalued financial assets – banks, pension funds, and insurance companies – in countries like Mexico, the Philippines, and Brazil. In good times and in bad, in other words, these private institutions have always found ways to prosper, help their clients launder money, evade taxes, and conceal ill-gotten gains, and they have never been reluctant to profit from social catastrophe.
We will return to these financial giants below, because the history of their involvement in this story suggests one possible antidote for our “debt relief” blues.
B. Middle-Income Relief
So-called “middle-income” countries like Brazil and Mexico have received $149 billion of debt relief –- just 4.3 percent of their $3.4 trillion of pre-relief debt outstanding. As discussed below, most of this was obtained by the early 1990s, by way of Paris Club restructuring and the Brady Plan.
This reflected the high priority given to these large, lucrative, highly-indebted markets in the 1980s by First World banks and governments, mainly because such a large share of their loan portfolios was tied up in them.
That, indeed, was the true meaning of the “Third World debt crisis,” so far as First World bankers, central bankers, officials and, indeed, most First World journalists was concerned. It was viewed primarily as a ‘crisis’ for the banks and their shareholders. Over time, as they managed to reduce their exposure, the “crisis” disappeared from the headlines – except for the countries involved.
Debt Relief Sources – Middle-Income Countries
Overall, private banks provided $75 billion of debt relief to middle-income countries, about half the total. Most of this was achieved through debt swaps and buy-backs. The Paris Club added another $28 billion, mainly by way of traditional bilateral debt rescheduling.
The US Treasury added $47 billion, by way of the Baker Plan (1985-89) and the Brady Plan (1989-95.) On its own, the Baker Plan actually increased middle-income country debt by $77 billion, consuming $45 billion of US taxpayer subsidies in the process.
From 1995 to 2002, the US Treasury, the World Bank, and the IMF also provided short-term financial relief to several large middle-income countries like Argentina, Brazil, Mexico, and Indonesia. In theory, these were pure reschedulings, with all loans paid back with interest, and no net impact on “PV debt” levels.
In practice, several of these bailouts were completely mismanaged. Indonesia, Mexico, and Argentina were all permitted to use their emergency dollar loans to bail out dozens of domestic banks and companies -- which just happened to be connected to influential members of the local elite, who were also “not unknown” to leading private bankers and US Treasury Secretaries.
So a large share of these bailout loans was wasted on outright graft. On the other hand, countries were still expected to service the bailout loans, often at very high interest rates. Given their reluctance to raise taxes, especially on capital, most countries repaid the bailout loans by boosting domestic debt – in effect, by printing money. For example, Mexico’s bailout in the mid-1990s ended up costing the country’s taxpayers more than $70 billion, while Indonesia’s bailouts ended up costing the country at least $50 billion. In effect, the bailouts actually ended up increasing overall country debt levels, just as the Baker Plan had done. Our estimates of debt relief have generously omitted the impact of these bailouts, which would make the total amount of debt relief even smaller.
Overall, during the 1970s and 1980s, middle-income countries like Argentina, Brazil, Indonesia, Iraq, Mexico, the Philippines, Russia, Turkey, and Venezuela became the world’s largest debtors. Combined with the fact that they have also received so little debt relief since the early 1990s, this helps us to understand why their debt service costs soared to all-time highs since 2000, in real terms, and relative to national income. Recent debt relief programs have focused almost entirely on low-income countries, ignoring the situation of heavily-indebted middle-income countries. This is another strategic choice that debt relievers may want to reconsider.
The Political Economy of “Debt Relief”
So what’s gone wrong with debt relief? Why has so little been achieved after all these years? Whose interests have been served, and whose have been ignored or gored? Is there a different strategy that could have been more effective?
A. The Roots of the “Debt” Crisis
To understand this disappointing debt relief track record, it will be helpful to review the origins of the so-called “Third World debt crisis.” This continuing crisis had its roots in the fact that from the early 1970s to 2003, developing countries absorbed more than $6.8 trillion of foreign loans, aid, and investment, much more foreign capital than they had ever before received.
A handful of developing countries managed this enormous capital influx more or less successfully -- for example, Asian countries like Korea, China, India, Korea, Malaysia, and Vietnam. For a variety of historical reasons, they were able to resist the influence of First World development banks and private banks. Today they are the real winners in the globalization sweepstakes, ranking among the world’s fastest growing economies and the First World’s most important suppliers, customers, and potential competitors.
Our concern here is not with this handful of winners, but with the great majority of the world’s 150 developing countries. In general, compared with the winners, they have been much more open to unrestricted foreign capital and trade since the 1970s, as well as policy advice from the “BWIs” (the Bretton Woods institutions – the World Bank and the IMF). For many countries this close encounter with global capitalism has proved to be troublesome – indeed, for many, disastrous.
In effect, these countries have conducted a very risky policy experiment for several decades. By now the results are clear. Across country income levels, these countries have paid a very heavy price for unfettered access and dependence on foreign banks. Indeed, we are hard-pressed to find a single exception to the miserable track record of this “wide open, debt-heavy, bank-promoted” growth strategy.
Lousy Regimes and Unproductive Debts
Overall, we estimate that more than a trillion dollars – at least 25 to 35 percent -- of the $3.7 trillion foreign debt that compiled by low- and middle-income countries from 1970 to 2004 either disappeared into poorly-planned, corruption-ridden "development" projects, or was simply stolen outright.
For several of the largest debtors, like the Philippines, Indonesia, Mexico, Brazil, Venezuela, Argentina, and Nigeria, the share of the debt that was wasted was even higher. Indeed, one of the most important patterns underlying the “debt crisis” was that borrowing, wasteful projects, capital flight, and corruption were all concentrated in a comparative handful of countries. As we’ll argue, this is crucial fact for those who seek to revitalize the debt relief movement to understand, because it implies that the interests at stake are far greater than those that have come to the surface in the struggle for “low income” debt relief.
Low-Income Heavy Borrowers
In the case of the 48 low-income countries that eventually qualified for debt relief from the BWIs under the HIPC and MDRI programs, a similar pattern of concentration applies. In the early 1980s, the real value of these countries’ debts increased by 70 percent in just six years. By the time the World Bank got around to launching HIPC in 1996, their debts had increased another 7-10 percent. Just 11 of these low-income countries –- including Bolivia, Congo Republic, Cote d’Ivoire, DR Congo, Ethiopia, Ghana, Mozambique, Myanmar, Nicaragua, Sudan, and Zambia -- accounted for 68 percent of this group’s debt increase from 1980 to 1986.
All these top low-income borrowers were not only desperately poor to begin with, but they were also either “weak open states” run by kleptocratic dictators, or were caught up in bloody civil wars – in most cases, both at once. Sometimes the causality flowed in both directions -- excess debt could exacerbate political instability. But the primary relationship was the unsavory combination of weak states, corrupt leaders, wide open capital markets, and symbiotic relationships with “easy money” and seductive bankers.
Extending this analysis to the key middle-income debtors noted above, we find similar long-run patterns of mis-government, weak states, and wide-open banking.
All this suggests that the heaviest debtors got into troubles for reasons that only were only superficially related to the usual villains in the orthodox neoliberal account of debt crises -- “exogenous shocks,” “policy errors,“ “liquidity crises,” and – when pushed to acknowledge the existence of corruption and capital flight – a “lack of transparency in the management of natural resources.” Those countries that are deepest in debt and most in need of relief today include countries that have long been among the most consistently mis-governed, wide-open, and “mis-banked.” While natural resource wealth like minerals and oil have indeed often turned out to contribute to economic mismanagement, their presence is not a sufficient condition for such mismanagement – the decisive question is the relationship between foreign and domestic elites.
From the standpoint of debt relief, this pattern presents a dilemma –Without insisting on deep political reforms, simply providing countries with more relief alone might accomplish little – they are likely to dig themselves right back into a hole. After all, corrupt dictatorships like the Central African Republic have been more or less continuously in arrears on their foreign debts since at least 1971!
The Debt/Flight Cycle
Servicing these huge unproductive debts took a large bite out of these countries’ export earnings and government revenues, draining funds that were badly needed for health, education, and other forms of public investment, and helping to produce crisis after financial crisis. Growth, investment, and employment were throttled by the continuing need – enforced by First World creditors -- to generate enough foreign exchange to service the loans.
Meanwhile, even as all this foreign capital was rushing in, an unprecedented quantity of flight capital – including a substantial portion of the loan proceeds – headed for the exits.
Of course Third World capital flight is an old story, associated with long-standing factors like individual country political risk, unstable currencies, bank secrecy, the rise of “offshore havens,” and the absence of global income tax enforcement.
But the dramatic increase in poorly-managed financial inflows to the developing world in the 1970s and early 1980s – especially foreign loans and aid – boosted these capital outflows by an order of magnitude. They basically overwhelmed existing political institutions in many countries, producing the largest tidal wave of flight capital in history, and fundamentally revolutionizing offshore private banking markets.
We simply cannot account for this sharp increase in flight capital unless we take into accounts its close relationship to all this “lousy lending and loose aid.”
Poorly-controlled lending and foreign aid contributed to the rise of global flight capital in the first place. From one standpoint it did so in a purely mathematical sense, by providing the foreign exchange that was needed to finance capital flight. But that doesn’t explain why these new “loanable funds” didn’t become a net addition to investment in the borrowers’ economies. The loans also stimulated additional capital flight, for several reasons: (1) they destabilized the economies of many newly-indebted countries, providing more capital than they could productively absorb in a short period of time; (2) the inflows provided sources of government revenue that were not directly responsible to taxpayers. This generated enormous opportunities for corruption and waste, partly by way of poorly-planned projects with weak financial controls, and partly by providing Finance Ministers, central bankers, and other insiders with dollars they could use to speculate against their own currencies; (3) the debt flows laid the foundations for a new, highly-efficient global haven network, which made it possible to spirit funds offshore and stash them in anonymous, tax-evading investments. It is no coincidence that this network was dominated by the very same global banks that led the way in Third World syndicated lending.
All this combined to encourage Third World officials and wealthy elites to move a significant share of their private wealth offshore, even as their own governments were borrowing more heavily abroad than ever before.
Part of the resulting flight wave took the form of large stocks of strong-currency “mattress money” that was hoarded by residents of Third World countries -- especially $100 bills, Swiss francs, Deutschmarks, British pounds, and after 2002, €100, €200, and €500 notes. By 2006, for example, the total stock of US currency outstanding was $912 billion. At least two-thirds of it was held offshore, especially in developing countries with a history of devaluations.
An even larger amount of capital flight was accounted by private “elite” funds that were spirited to offshore banking havens – often, it turns out, with the clandestine assistance of the very same First World banks, law firms, and accounting firms.
The outflows that resulted from this “debt-flight” cycle were massive -- by my estimates, an average of $160 billion per year (in real $2000), each year, on average, from 1977 to 2003.
Furthermore, a great deal of this flight capital was permitted to accumulate offshore in tax-free investments, especially bank deposits and government bonds by nonresidents, which were specifically exempted from taxation by First World countries. By the early 1990s, he total stock of untaxed Third World private flight wealth soon came to exceed the stock of all Third World foreign debt.
Indeed, for the largest “debtors,” like Venezuela, Nigeria, Argentina, and Mexico – the same countries that dominated borrowing -- the value of all the foreign flight wealth owned by their elites is almost certainly now worth several times the value of their outstanding foreign debts.
For so-called “debtor” countries, therefore, the real problem was never simply a “debt” problem; it was an “asset” problem – a problem of collecting taxes, controlling corruption, managing state-owned resources, and recovering foreign loot. All this, in turn, was based on the fact that a huge share of private wealth had simply flown the coop, under the “watchful eyes” of the BWIs, other multilateral institutions, Wall Street, and the City of London.
Meanwhile, these countries’ public sectors – and ultimately ordinary taxpayers – were stuck with having to service all these unproductive debts, while their legal systems, banking systems, and capital markets also ended up riddled with corruption.
Conventional economists have not ignored these phenomena completely. But they have tended to compartmentalize them into “institutional” problems like “corruption” and “transparency,” and have treated them as “endogenous” to particular countries. In this approach, the individual country is the appropriate unit of analysis. In fact, however, such local problems were greatly exacerbated by a global problem – the structure of the transnational system for financing development, on the one hand, and for stashing vast quantities of untaxed private capital -- from whatever source derived -- on the other.
Human Capital Flight
This underground river of financial flight was also accompanied by an increased outflow of “human capital” as well, as large parts of the developing world became jobless and unlivable, and a significant share of its precious skilled labor decamped for growth poles like Silicon Valley and other booming First World labor markets. My own estimate for the net economic value of this displaced Third World “human flight” wealth, as of 2006, is $2.5 to $3.0 trillion.
This offshore human capital does send home a stream of remittance income that is now estimated at $100 billion- $200 billion a year. But much of this is wasted on high transfer costs and other misspending. Clearly, a country that chooses to depend heavily on labor exports – as the Philippines, Mexico, Haiti, and Ecuador have done, is a poor substitute for generating jobs and incomes at home.
Summary – Roots of the Crisis
Overall, the impact of the patterns just described on Third World incomes and welfare has been devastating. Except for the handful of globalization winners that managed to avoid the “debt trap” and neoliberal nostrums, real incomes in the Third World basically stagnated or declined from 1980 to 2005. While growth has revived since then, especially among commodity exporters, large parts of the developing world are still struggling to regain their pre-1980 levels of consumption, social spending, and domestic tranquility.
In addition to prolonged stagnation, many countries have also experienced sharp increases in unemployment, poverty, inequality, environmental degradation, insecurity, crime, violence, and political instability, all of which were exacerbated by the debt-flight crisis.
Of course, instability was sometimes beneficial – in Argentina, Bolivia, Brazil, Chile, Guatemala, Indonesia, Kenya, Mexico, the Philippines, and South Africa, financial crises helped to undermine autocratic regimes. But we should be able to democratize without so much hardship.
All these Third World troubles provided a striking contrast to the First World’s relative prosperity during this period. To be sure, there were brief hiccups at the hands of oil price spikes in 1973 and 1979, plus recessions of 1982-83, 1990-91, and 2001-03. Japan stagnated in the 1990s, and France and Germany also experienced prolonged doldrums. But these were the exceptions. Overall, a large share of the world’s poor basically treaded water, while most First World residents paddled by. (continued on page 27)
B. “Can’t Get No Relief!”
Whatever one thinks of neoliberal policies, therefore, it is very hard to make this track record look like an achievement. This perspective should help us to view “debt relief” in a different light.
Given this history, we might well have expected that at least by now, First World governments, the BWIs, and even the global private banking industry would have acknowledged their partial responsibility, pitched in, and offered to share a large portion of the bill.
Obviously this hasn’t happened. As the sidebar discusses, this is not because of any principled opposition to “debt relief” per se. Indeed, debt relief turns out to be a venerable capitalist institution, at least where the debtors in question have clout.
Nor was it possible for the countries themselves to agree on a unilateral moratorium on debt service. More generally, while a handful of individual countries -- Argentina in 2001-2, Russia after World War I, and Cuba in the early 1960s and 1980s –- have declared debt moratoria on their own, Third World debtors as a whole have never been able to marshal the collective will needed to take this step.
Given this, the only alternative has been to rely on voluntary actions by First World creditors, as accelerated by appeals to conscience. We’ve seen the rather modest results that this approach has achieved.
Several key factors are at work here:
• Sticks. Most developing countries believe they are too dependent on the trade finance and aid to risk outright defiance of international creditors.
• Carrots. Many members of the Third World elite have been “bought in.” One common reward is the opportunity to participate in international ventures and receive foreign loans and investments. Beyond that, there is a whole range of other incentives, including offshore accounts, insider profits, and outright bribes and kickbacks. There are also more subtle forms of influence -- Dow Jones board seats (Mexico’s Salinas), positions at prestigious universities, banks and BWIs (Mexico’s Zedillo at Yale, Argentina’s Cavallo at NYU, (Bolivia’s ex-Finance Minister Juan Cariaga) and any number of other former officials at the World Bank/ IFC) participation in other exclusive organizations (for example, the Council of the Americas, the Council on Foreign Relations, or the Inter-American Dialogue), and even more subtle forms of ideological influence. These intra-developing world networks have been relatively weak.
• The Banking Cartel. Compared with the debtor countries, the global financial services industry is very well organized. Country specialists at leading banks and BWIs have dealt with the same debt problems over and over again, while on the country side, dozens of debt negotiators have come and gone. Specialists like Citigroup’s William Rhodes and Chase’s Francis Mason were adept at isolating more militant countries and exploiting inter-country rivalries. Boilerplate language in standard country loan and bond contracts – for example, jurisdiction and cross-default clauses – also helped to perpetuate the “creditor cartel.”
• Declining Political Competition. After 1990, the Soviet Empire ceased to be a serious competitor for Third World affections. Interestingly, from that point on, the real value of total First World aid and aid per capita to developing countries fell until late 1990s. Meanwhile, First World banks completed write-downs of Third World loans, and the BWIs and other official institutions displaced them as the principle source of new low-income loans. With credit risk effectively transferred to the public sector, and the largest debtors focused on the neoliberal reforms that the BWIs were demanding in exchange for debt relief, debtor country support for joint relief atrophied.
With country debtors so fragmented, “small-scale” debt relief became just another instrument of neoliberal reform, while the cause of “large-scale” debt relief was relegated to the NGO community, without much developing country involvement. The resulting “movement” was a loosely-run coalition of First World NGOs and well-meaning celebrities. Lacking a strong political base, the movement mounted a series of intermittent media campaigns. It also assumed the supplicant position of appealing to the “better selves” of politicians like Tony Blair and George Bush, central bankers, and BWI bureaucrats – a hard-nosed, flea-bitten bunch if ever there was one.
The Best-Laid Plans…
One factor that certainly has not played a role in the failure to achieve substantial debt relief is a shortage of clever proposals from the First World policy establishment.
Indeed, ever since Third World borrowing took off in the 1970s, there has been a plethora of schemes for “international credit commissions,” “debt facilities,” debt buybacks, debt-equity swaps, and “exit bonds.” In the last decade, as frustrations with HIPC grew, there have also been proposals for a new “sovereign debt restructuring agency,” global bankruptcy courts, and modifications in the boilerplate contracts noted above.
These proposals provided grist for a steady stream of journal articles and conferences, but very few made much practical difference. The overall pattern was one of cautious incrementalism -- a series of modest proposals, each one just slightly more ambitious than its predecessor, and all doomed to be ineffectual – but with the saving grace that at least no powerful financial interests would be offended.
A. The Baker Plan
The majority of today’s Third World population was not even born in October 1985 when Reagan’s second Treasury Secretary, James A. Baker III, announced his “Baker Plan” for debt relief. This acknowledged the fact that the market-based debt rescheduling approach to the debt crisis pursued by commercial banks since 1982 wasn’t working. Indeed, traditional rescheduling was aggravating the problem, because banks had ceased to provide new loans, while continuing to role over back-due interest at higher and higher interest rates.
The Baker Plan hoped to change this by offering a combination of new loans funded by US taxpayers and the MFIs, plus some private bank loans, in exchange for “market reforms” in the recipient countries. It was motivated by the conventional notion that the 1980s debt crisis was basically a short-term “liquidity” problem, not a reflection of deeper structural interests. Supposedly a fresh round of (government-subsidized) new loans, conditioned on reforms, would allow debtor countries to “grow their way” out of the “temporary” crisis.
By 1989, the Baker had produced a grand total of $32 billion of new loans, mainly to 15 middle-income countries like Mexico and Brazil. This was achieved at a cost of $45 billion to First World taxpayers, by way of the US Treasury. By comparison, the gross external debt of all developing countries at the time was about $1 trillion, so the amount of relief provided was relatively small. Indeed, to the extent that the Plan added $77 billion to Third World debt, it actually constituted negative debt relief.
Finally, of course, both Plans omitted almost all low-income countries completely, partly because First World exposure to them was limited, and partly because at that point, the notion of writing down “development loans” was still anathema to the World Bank and the IMF.
B. “Market-Based” Debt Relief
While observers were waiting for the Baker Plan to work in the late 1980s, private banks were also busy retiring to manage some $26 billion of debt on their own, by way of so-called “market-based” methods, including buy-backs and debt swaps. Some of these techniques had harmful consequences for the countries involved. They also tended to reinforce the de facto “takeover” of the Third World debt problem by the BWIs and other official lenders. With our support, however, they succeeded in offsetting part of the Baker Plans’ harmful effect on debt levels, however.
C. The Brady Plan
When these two approaches failed to make much of a dent in the problem, James Baker’s successor, former Wall Street investment banker Nick Brady came up with a more aggressive debt swap plan in March 1989. The key motivator was not just generosity. Brazil’s February 1987 attempted moratorium on interest payments had set a dangerous precedent, and Mexico’s rigged July 1988 Presidential transition, combined with its huge debt overhang and declining oil prices, suggested that a more widespread default might occur unless more debt relief were forthcoming.
Under Brady’s plan, first implemented by Mexico in July 1989, private banks agreed to swap their country loans at 30-35 percent discounts for a menu of new country bonds, whose interest and principle were securitized by bonds issued by US Treasury, the World Bank, the IMF, and Japan’s Export-Import Bank – backed up, in turn, by reserves from the debtor countries.
By the end of the Brady Plan in 1993, this “semi-voluntary” incentives scheme had provided another relatively small dose of relief, mainly to about 16 Latin American, middle-income countries like Argentina, Brazil, and Mexico, plus US favorites like Poland, the Philippines, and Jordan. With the help of taxpayer subsidies, it also succeeded in virtually wiping out the debts owed by several small developing countries – Guyana, Mozambique, Niger, and Uganda – to private banks. By 1994, just prior to Mexico’s “Tequila Crisis,” the Brady Plan had yielded about $124 billion (in $2006 NPV terms) of debt reduction – at a cost of $66 billion in taxpayer subsidies. To date, it remains the largest – and most costly -- initiative in the entire debt relief arena.
Some have argued that Brady Plan also had a beneficial indirect effect on the total amount of new loans and investments received by debtor countries in 1989-93, by way of its impact on equity markets and direct investment. However, these gains were more than offset by increased capital flight, leaving a net benefit to developing countries that was almost certainly lower than the initial First World tax subsidies.
Furthermore, any such gains were largely wiped out by the subsequent financial crises in Mexico, Argentina, Brazil, Nigeria, Peru, and the Philippines in 1995-99. These were partly due to the brief surge of undisciplined borrowing, facilitated by the Brady Plan Indeed, while the early 1990s produced a reduction in debt service relative to exports and national income for the 16 countries, by the end of 1990s, most of the “Brady Bunch” had seen their debt burdens return to pre-Plan levels.
Overall, therefore, this provides a graphic illustration of the point noted earlier: without basic institutional reform – not just “market” reforms within one country, but more general reforms of the global financial system – debt relief in one period may just lead to increased borrowing and another crisis in the next.
D. “Traditional” Bilateral Relief – Low Income Countries
As noted, these early debt relief initiatives were focused mainly on the world’s largest debtors, although a handful of low-income countries took advantage of them. By the late 1980s, there was a growing recognition of the trend described earlier – that the debts of low-income countries were exploding.
These countries were also paying astronomical debt service bills, despite the fact that they had all qualified for “concessional” finance. By 1986, 19 out of the (future) 38 HIPC low-income countries were devoting at least 5 percent of national income to servicing their foreign debts, and many countries were paying much more. On average, debt service consumed over a third of their export revenues, compared with less than 10 percent a decade earlier. And the “present value” of their low-income country debt had continued to rise throughout the Baker/Brady Plan period. By 1992, the debt was three times the l980 level, and well above the 1986 level. Finally, from 1985 on, private bank lending to low-countries had only been exceeded by lending by development banks and export credit agencies.
One of the first to recognize the need for a closer focus on low-income debt was another UK Chancellor, Nigel Lawson. In 1987 he proposed that the Paris Club refocus its negotiations with debtor countries on trying to reduce their “debt overhang” – the present value of their expected future debt service payments. This was a striking contrast to conventional debt relief, where the goal of rescheduling had always been to avoid write-downs and preserve the loans’ present value by stretching out repayment. Once again, that had assumed that the key debt problem was one of “illiquidity” and that the nasty random shocks would soon reverse themselves. As Lawson and other observers had come to recognize, in the absence of serious intervention, the resulting “debt overhang” might just become permanent.
Lawson’s proposal launched the Paris Club on a prolonged series of debt restructurings. In the next decade, it conducted 90 bilateral restructurings with 73 individual countries, on increasingly-generous term sheets. By 1998, this effort – supplemented by assistance for debt swaps from the World Bank/IDA’s Debt Facility -- had produced another $95 billion of debt relief.
E. HIPC
In September 1996, the BWIs established the “HIPC Initiative,” their first comprehensive debt relief program ever, targeted at “heavily-indebted developing countries.” They didn’t take this initiative unilaterally – they were responding to numerous complaints from NGOs and the debtor countries, who said that existing relief programs were not doing enough for the world’s poorest, most insolvent countries, and that it was also high time for multilateral lenders like the IMF and the World Bank to finally share the costs.
Initially the program was supposed to include the 41 low-income countries that had been included on the World Bank’s first list of “HIPCs” in 1994. That list was supposed to have been determined by objective criteria, including real income levels and the “sustainability” of projected debt service levels, relative to projected exports. But such criteria are of course anything but objective, especially where acute foreign policy interests are concerned. The original list of countries would have included all those with per capita incomes less than $695 in 1993, plus (a) PV debt to income ratios of at least 80 percent, or (b) debt service to export ratios of at least 220 percent. Those criteria would have admitted such major debtors as Angola, Nigeria, Kenya, Vietnam and Yemen. On the other hand, it would have also omitted future HIPCs like Malawi, Guyana, and Gambia. As of 1996, the countries on this original HIPC list accounted for $244 billion of debt and 672 million people – about 63 percent of all low-income country debt and more than a third of all low-income country residents.
Qualifications
For a variety of reasons – including shifting admissions criteria, the desire of the BWIs to contain costs, and sheer geopolitics – this initial list was soon altered. Seven countries, including several large low-income debtors like Kenya, Nigeria, and Angola, were eliminated, while nine much smaller countries suddenly qualified for relief. When the dust settled, there were still precisely 41 countries on the HIPC debt relief list. However, compared with the original list, as of 1996, they now only accounted for 39 percent of all low-income country debt –- indeed, only 6 percent of all developing country debt -- and just 23 percent of all low-income country residents.
This downsizing was partly just due to BWI self-interest. The World Bank is a self-perpetuating bureaucracy, funded by its own long-term bond sales, as well as by First World contributions. It is always very concerned about securing its own cash flow and debt rating.
In principle, contributions from the BWI’s First World members could always make up any shortfalls. In practice, however, the World Bank liked to avoid having to solicit contributions from the US Congress – it always meant difficult hearings where the Bank had to explain where Togo or the Comoros was, and why it deserved assistance.
Initially the BWIs had proposed to fund HIPC debt relief by liquidating part of the IMF’s huge 3.22 metric tons of gold reserves, whose market value had increased to several times book value. Indeed, in 1999-2000, the IMF had conducted a round-trip sale and buyback of 12.9 million ounces with Brazil and Mexico, booking the profit to fund HIPC’s initial costs. Here, however, another powerful set of interests intruded. The BWIs’ proposal for a much larger gold sale were successfully scuttled by the World Gold Council’s lobby, whose membership includes 23 leading global gold mining companies, including the US’ Newmont Mining, South Africa’s AngloGold, and Canada’s Barrick Gold Corp.
So debt relief turned out to be something that the BWIs had to fund on a “pay as you go” basis, through bond sales and periodic contributions from its First World members. The larger the amount of debt relief, the smaller the World Bank’s own loan portfolio, and the more it feared that its own bond rating and financial independence might be jeopardized. So it had an innate bias in favor of providing less debt relief.
As for the precise list of qualifying countries, there were many anomalies. For example, as of the mid-1990s, Angola, Kenya, Nigeria, and Yemen all had higher debt burdens and lower per capita incomes than many of the countries on the final HIPC list, but they were excluded.
On the other hand, at the behest of France, HIPC analysts also designed specific rules so that the Ivory Coast would be included, despite the fact that it had a higher per capita income and lower debt burdens than many other countries on the list. Guyana, a bauxite-rich former British colony in northeast South America with a population of just 750,000 and a real per capita income of $3600 – clearly a “middle income” country, if anyone cared to object – was also admitted.
Meanwhile, HIPC excluded 29 other mainly middle-income countries that had been classified by the World Bank itself as “severely indebted,” including “dirty debt” leaders like Argentina, Ecuador, Indonesia, Pakistan, and the Philippines. In many cases their debt burdens were much heavier than those that were admitted to the HIPC club. (continued below)
All these exclusions were important, because it turned out that while the “HIPC 38” did reduce their debt service payments by about $2 billion a year from 1996 to 2003, debt service payments by non-HIPC low income countries actually increased by several times this figure.
Overall, the BWI’s filters with respect to “sustainable debt” and income were inconsistently applied. They were intended to contain the size of debt relief and focus it on tiny, more malleable countries.
The Long March
Debt critics were naturally a little disappointed at HIPC’s modest scope, relative to the size of all outstanding Third World debt. But at least they thought they could count on the BWIs to provide speedy debt relief to those countries on the HIPC list.
Unfortunately, even for those countries, the journey usually proved to be a very long march. The World Bank and the IMF decided to impose a long, drawn-out, tortuous process before countries actually got any relief, conditioning it on a menu of all the BWIs favorite neoliberal reforms, including privatization, tariff cuts, and balanced budgets.
This was especially hard to account, in light of the fact that the HIPCs on the final list were hardly prime prospects for First World banks, contractors, or equipment suppliers. Fully half had populations smaller than New Jersey’s, with per capita incomes averaging less than $1100, and average life expectancies of just 49 years. So offering this crowd debt relief was unlikely to set a dangerous “moral hazard” precedent.
Nevertheless, under the original 1996 “HIPC I” scheme, countries were supposed to spend three years implementing such reforms under the WB/IMF’s watchful eye before they reached a “decision point.” Then a debt relief package would be assembled and a modest amount of debt service relief would be approved.
Countries were then supposed to continue their good behavior for another 3 years before reaching the “completion point,” at which point they’d finally see a serious reduction in debt service.
Even then, they wouldn’t receive a total debt write-off, but only a partial subsidy, reducing debt service to a level that the WB/IMF considered “sustainable,” relative to projected exports.
Along the way, countries were also expected to draw up an IMF/World Bank-approved “Poverty Reduction Strategy Paper,” negotiate a “Poverty Reduction and Growth Facility,” and engage the IMF and the World Bank in regular, rather intrusive “Staff Monitoring Programs.”
To some extent, all this policy paternalism was justified by the fact that, as we’ve seen, many of these countries were unstable, poorly-governed, war-torn places. This is the old “more sand, same rat-holes” aid dilemma noted earlier – those countries most in need of assistance are also often precisely the ones with the most limited ability to use it wisely. Furthermore, under the influence of neoliberal policies, state institutions in many of these countries have become even weaker.
However, from the standpoint of delivering debt relief in a timely fashion, the BWI’s strictures clearly went beyond the pal. Many BWI technocrats adopted a kind of righteous, almost creditor-like stance toward the countries – perhaps because, after all, the BWIs are substantial creditors. They may also prefer gradual debt relief because this preserves their control. In any case, all of this is a poor substitute for the more constructive neutral role that, say, a “trustee in bankruptcy” would typically play in bankruptcy proceedings.
Combined with country backwardness, this creditor-cum-neoliberal-reformer mentality had predictable results. Indeed, if HIPC’s true goal was to avoid giving meaningful debt relief, it almost succeeded! By 2000, just six countries – Bolivia, Burkina Faso, Guyana, Mali, Mozambique, and Uganda - had managed to reach “completion,” and zero debt relief had been dispensed. Eventually, HIPC I afforded a grand total of $3.7 billion of debt relief to these six countries. Even this amount was not distributed immediately in most cases, but was spread out over decades. For example, Uganda’s debt service relief from the World Bank was stretched out over 23 years, Mozambique’s over 31 years, and Guyana will still be collecting $1 million per year of debt relief in 2050!
Would that First World creditors and the BWIs had been anywhere near as circumspect about making loans to developing countries as they have been about administering debt relief!
HIPC II
In June 1999, following the massive “Drop the Debt” rallies at the May 1998 G-8 meeting in Birmingham, the WB/IMF launched “HIPC II,” supposedly a faster, more generous version of HIPC I. But even this version soon proved to be embarrassingly slow. By 2006, of the 38 countries on the initial HIPC list way back in 1996, just 18 had reached the “completion point.” Eleven others had reached their “decision points,” after a median wait of 49 months, but five of these were reporting “slow progress.” Of the other original nine, just one was both ready to qualify and interested in participating.
To fill out the ranks, in 2006 the WB/IMF identified six more low-income countries that might still be able to qualify for HIPC relief before the curtains finally descend in December 2006. However, only two of these were both ready and willing to try for this deadline.
All told, compared with the original target group, at the end, HIPC was down to providing debt relief to countries that accounted for just 18 percent of outstanding low-income debt and 13 percent of the world’s low income population.
The HIPC Sweepstakes
Those countries that managed to navigate all the HIPC hurdles did finally receive some debt relief – all told, for HIPC I and HIPC II, a grand total reduction in debt service of $832 million per year for 2001-2006, compared with debt payments in 1998-99. This sum was divided among for all 27 countries that had reached their completion or decision points.
Some countries did much better than others. For example, middle-income Guyana progressed quickly through the program, qualifying for debt relief to the tune of $937 per capita from both HIPCs – compared with the “HIPC 38’s” average of just $75 per capita. Indeed, Guyana became something of a pro at debt relief – by 2006, it had achieved a record total of $2971 for each of its citizens, from all debt relief programs to date.
Sao Tome, Nicaragua, Congo Republic, Guinea-Bissau, Zambia, Bolivia, DR Congo, Mozambique, Mauritania, Sierra Leone, Ghana, and Burundi also did relatively well on a per capita basis, all realizing more than $100 of HIPC relief per citizen.
In terms of the share of all HIPC relief received, the clear winner was DR Congo, Mobutu’s old stomping ground, which commanded an astounding 18.2 percent of al HIPC relief, and, indeed, nearly 8 percent of all First World debt relief received by low-income countries.
In these terms, other winners included Nicaragua (9.5% of HIPC, 10.8% of all relief), Zambia (7.2%/4.9%), Ethiopia (5.7%/5.5%), Ghana (6.2%/2.6%), Tanzania (5.8%/4.8%), Bolivia (3.7%/4.2%) and Mozambique (5.8%/6.7%), which single-handedly captured 55 percent of HIPC I’s $3.7 billion benefit.
Compared with our original list of “war-torn debt-heavy dictatorships,” there is a huge overlap: The top ten low-income borrowers in 1980-86 accounted for more than half of both HIPC relief and all First World debt relief distributed from 1988 through 2006. On the other hand, many other indebted low-income countries received much less debt relief, both in per capita and absolute terms.
This per country/ per capita debt relief analysis, presented here for the first time, underscores several of the most serious problems with using debt relief as a substitute for development aid.
Of course it is difficult to insure that reductions in debt service (or the increased borrowing that occur in the aftermath of debt reductions) will be applied to worthy causes. (“The Control Problem.”)
Even apart from that, as noted in the accompanying tables, the amount of relief available varies wildly across countries, according to factors that may have very little to do with development needs. (“The Correlation Problem.”)
The BWIs in charge of the HIPC program tried to tackle the “Control Problem” by insisting on country “poverty reduction” programs and policy reforms, and by monitoring government spending, and so forth. Whether or not that has worked is a matter of dispute – there is a strong case to be made that most of this conditionality was counterproductive. Clearly it succeeded in slowing down the distribution of relief.
But there is nothing that HIPC could do about the “Correlation” problem – the lack of proportionality between debt relief and development needs. Relying on debt relief, in other words, inevitably means that some of the worst-governed, most profligate countries in the world may reap the greatest rewards.
Overall HIPC Results
As noted, HIPC does appear to have reduced foreign debt service burdens somewhat, especially for the 18 countries that managed to complete the program – although domestic debt service may be another story.
However, 11 of the original 38 HIPC countries still had higher debt service/income ratios in 2004 than in 1996. Indeed, to this day, poor Burundi is still laboring under a PV debt/income ratio of 91 percent!
Furthermore, debt service ratios had already declined for 25 out of the 38 countries from 1986 to 1996, prior to HIPC’s existence. Debt service burdens also declined for many other low-income countries that didn’t enroll in HIPC, as well as for the 9 “pre-decision point” countries that have so far received no relief from it. So it is not easy to call the HIPC program a “success,” even for those countries that have been able to reach the finish line.
What is also indisputable is that the total amount of debt relief achieved by HIPC to date has been very modest. While conventional press accounts often refer to HIPC as providing at least “$50 to $60 billion” of debt relief to developing countries, the more accurate estimate is at most $41.3 billion by 2006. This is less than 10 percent of all low-income country debt outstanding.
Of this, $7.6 billion was awarded to the original six countries in the HIPC I program, and another $33.7 billion is expected to be received by the other 23 countries that have at least reached the “decision point.” The potential cost of providing relief to the remaining 9 to 15 countries that might still qualify for HIPC is estimated at $21 billion, but very little of this will ever be forthcoming. Indeed, the timing and levels of relief are still highly uncertain for half of the 11 “decision point” countries.
Once again, all these figures refer to the present values of expected future debt service relief, not to current cash transfers. As of 2006, only a third of HIPC I’s relief and less than 20 percent of HIPC II’s had actually been “banked” – an average of less than $1 billion of cash savings per year, to be divided up among all these very poor countries.
The High Costs of HIPC Relief
Even these modest savings were not cost-free to the countries involved. To comply with the BWI’s demands for HIPC relief, developing countries were required to the usual panoply of neoliberal reforms, many of which had perverse political and economic side effects. There are many examples that illustrate this point.
F. MDRI
Our final stop on the debt relief train is the “Multilateral Debt Relief Initiative” (“MDRI”), announced with so much fanfare at the July 2005 G-8 meetings. On closer inspection, this debt relief plan was even less impressive and generous than HIPC.
By 2004, many debtor countries and First World NGOs had finally had it with HIPC. However, MDRI only really came together because the UK Chancellor, Gordon Brown, saw a chance to earn some political capital, make up for the UK’s lagging foreign aid contributions, and heal some of the bad feelings that had been generated by the UK’s support for the Iraq War, all at very little cost.
With HIPC already set to expire, and with so much low-income debt still outstanding, Brown decided to work closely – and indeed help to fund -- the Live 8/”End Poverty Now” alliance’s “free” concerts. The collaboration with the NGOs was facilitated by the fact that one of Brown’s senior advisors, a former UBS banker, was an Oxfam board member, while Tony Blair’s senior advisor on debt policy was Oxfam’s former Policy Director.
These connections no doubt smoothed the reception for Brown’s proposals in the NGO world, but they ultimately failed to achieve very much incremental debt relief for poor countries.
To begin with, the actual cash value of the debt relief provided by MDRI is far less than the "$40 to $50 billion" that was widely touted in the press.
The face value of the IMF, World Bank, and African Development bank debts of the low-income countries that may be eligible for cancellation adds up to about $38.2 billion.
But MDRI’s debt relief, like HIPC’s will not distributed in one fell swoop. Given the concessional interest rates that already applied to most of the loans in question, and that fact that many of them were already in arrears, the actual debt service savings that these countries may realize from the program is just $.95 billion per year, on average, distributed over the next 37 years, to be divided among 42 countries.
This may appear to be a modest sum to First World residents who are used to seeing much larger sums spent on farm subsidies, submarines, highway programs, and invasions of distant countries. But it is undeniably a large share of the $2.9 billion that the top 19 likely qualifiers for the program spend each year on education, or the $2.4 billion they spend on public health.
Still, the G-8 debt cancellation gets us just 6 percent of the way home toward, say, the Blair/Brown Commission for Africa’s proposed $25-$30 billion per year of increased aid for low-income countries in Africa.
It also compares rather unfavorably with the $1.3 billion per week that the Iraq War was costing in 2005, and the $2 billion a week that it is costing now.
Furthermore, to qualify for this MDRI relief, countries will still have to go through many of the same hoops that HIPC put them through. At least 8 countries among the 42 – including large debtors like Somalia and the Sudan -- may never meet these qualifications.
Even for the top 19 countries that are likely to qualify, MDRI will still leaves them with $23.5 billion of higher-priced bilateral government debt and private debt that are outside the program, with an annual debt service bill of $800 million a year. And here again, of course, the point bears repeating – the countries have virtually nothing to show for all these debts.
Finally, even assuming - optimistically - that MDRI’s 42 potential beneficiaries would otherwise continue to pay the $.7 billion to $1.3 billion of debt service owed to the BWIs and the AfDB over the next 37 years without arrearages or defaults, the "net present value" of this debt cancellation is not $40 billion, but at most $15 billion. In fact, given the likelihood that some debtors may not qualify for the program, the PV of expected MDRI debt relief is really closer to $10 billion.
In fact, from the standpoint of World Bank and African Development Bank bondholders, they may well prefer to have their member countries to take them out of these "dog countries."
Indeed, that might even be a very profitable deal for the World Bank, since its cost of funds is not the 3-3.5 percent paid – if and when they pay -- by these low-income debtors, but at least 4.7 to 5 percent. Assuming that the members of the World Bank’s Executive Board will honor their pledges, exchanging a stream of highly-uncertain debt service payments from these benighted countries for $10 billion to $15 billion of cold hard cash may look like a pretty good deal for the Bank. Certainly it is better than having to play bill collector to all those nasty hell-holes.
And I bet you thought “debt relief” was all about generosity!
VI. Summary – A Modest Proposal
So what are the key lessons from this saga for would-be debt relievers? And where should debt campaigners focus their energies now?
1. Beyond the BWIs.
As we’ve argued, it is no accident that twenty-five years after the debt crisis, some of the poorest countries on the planet, as well as many middle-income countries, continue to be struggling with their foreign debts.
If we accept the basic premise of debt relief – that debtors who have become hopelessly in debt deserve a chance to wipe the slate clean, once and for all, then our conventional approach to debt relief, as administered by the IMF, World Bank, the US Treasury, and the Paris Club, is a failure. Not only has it failed to deliver the goods, but it has also had very high operating costs, in term of delays, administration, and excessive conditionality.
Evidently it was not enough that so much of loans that these countries borrowed was wasted, stolen and laundered right under the noses of our leading banks. Debtor countries were then expected to jump through elaborate BWI policy hoops, testing out all their favorite policy prescriptions in order to avoid having to continue paying for it for the rest of their lives.
In particular, the huge World Bank and IMF bureaucracies have proved to be far better at rationing debt relief than at making sure that impoverished countries don’t get up to their eyeballs in debt in the first place.
Indeed, Russia alone – which is itself still heavily-indebted -- has been far more generous and expeditious with developing countries than the BWIs.
If we are really serious about providing substantial amounts of debt relief, we will to find or design new institutions to administer debt relief.
2. Beyond Narrow Debt Relief.
It not really surprising that First World governments and the BWIs tend to side with international creditors -- as, indeed, governments have often sided with landlords, enclosers, gamekeepers, slave-owners, and other propertied interests.
What is surprising is that, despite the very high stakes for developing countries, and the availability of so much potential mass support for a fairer solution, the debt relief campaign has been so ineffective.
This is no doubt partly just because it is difficult to sustain a global not-for-profit campaign across multiple activists and NGOs. It is also because the campaign faces powerful entrenched interests.
But another difficulty may be of our own making. Compared with the dire needs of many countries and the sheer volume of “dubious debt” and capital flight, we believe that the debt relief movements’ demands have simply been far too meek.
To make a real difference, the debt relief movement needs to get much tougher on two closely-related but necessarily more contentious aspects of the “debt” problem:
(1) Dubious debt, contracted by non-democratic or dishonest governments and wasted on overpriced projects, shady bank bailouts, cut-rate privatizations, capital flight, and corruption. As noted earlier, my own rough estimate is that such debt may account for at least a third of the $3.7 trillion of developing country debt outstanding.
(2) The huge stock of anonymous, untaxed Third World flight wealth that now sits offshore – much of it originally financed by dubious loans, as well as by resource diversions, privatization rip-offs, and other financial chicanery.
Most of this wealth – estimated at $4 trillion to $5 trillion for the Third World alone – has been invested in First World assets, where it generates tax-free returns for its owners and handsome fees for the global private banking industry.
Obviously the sums at stake here are much larger the debt relief campaign has tacked so far. The issue also affects middle-income debtor countries as well as low-income ones. Finally, it also begs the question of the on-going responsibility of leading private global financial institutions, law firms, and accounting firms that built the pipelines for Third World flight capital, and continue to service it. Since the 1980s, several of these institutions have become many times larger and more influential than the World Bank or the IMF.
If the debt relief movement had the will to tackle such problems, there is much that could be done.
For example, we could imagine:
(1) Systematic debt audits, and a global asset recovery institution that helped developing countries recovery stolen assets;
(2) Revitalization of the “odious debt” doctrine, which specifies that debts contracted by dictatorships and/ or spent on non-public purposes or personal enrichment are unenforceable.
(3) Promotion of international tax cooperation and information exchange between First and Third World tax authorities – including as one early step the creation of a “Tax Department” at the World Bank, which doesn’t even have one!
(4) Codes of conduct for transnational banks, law firms, accounting firms, and corporations, prohibiting their active facilitation of dubious lending, money laundering, and tax evasion.
(5) The enactment of a uniform, minimum, multilateral withholding tax on offshore “anonymous” capital – the proceeds of could be used to fund development relief.
Many other ideas along these lines are conceivable. Obviously a great deal of organization and education across multiple NGOs would be needed to tackle even one of them. But the most important requirement is nerve – the willingness to move beyond the debt movement’s all-too-narrow focus, to tackle the real issues in this arena.
3. The Limits of Debt Relief
Earlier in this essay, we expressed serious doubts about the "more sand, same rat-holes" approach to wiping out debts, increasing aid and "ending poverty."
As we argued, most of the prime candidates for debt relief would also have great difficulty in managing it. This skeptical viewpoint has recently received even more support -- there are disturbing reports that the corrupt leaders of poorly-governed, resource-rich countries like DR Congo and Malawi are squandering the debt relief that they’ve recently received on fresh rounds of dubious borrowing and arms purchases.
The fundamental problem, glossed over by many debt movement campaigners, is that combating poverty is not just a question of malaria nets, vaccines, and drinking water. Ultimately it requires deep-rooted structural change, including popular mobilization, and the redistribution of social assets like political power, land, education, and technology. These are concepts that BWI technocrats, let alone film stars and rock stars, may never understand.
On the other hand, it remains the case that poor people in debt-ridden countries are in dire need of almost any short-term relief whatsoever. In that spirit, it would be wonderful to see the debt movement, the G-8, and the BWIs join hands just one more time and finally deliver on their long-standing rhetorical commitment to deliver substantial debt relief.
As we’ve just seen, the 1.6 billion people who reside in heavily-indebted developing countries are still waiting.
***
(c) SubmergingMarkets, 2006
August 19, 2006 at 01:23 AM | Permalink | Comments (0) | TrackBack
Friday, June 17, 2005
DEBT RELIEF MYTHOLOGY One Week in Iraq's Worth, No Less! James S. Henry and Andrew D. Hellman
You know that it is high time to read the fine print and sharpen the pencil when Treasury Secretary John Snow, Angelina Jolie, Al Franken, Bono, Bob Geldof, the World Bank's Paul Wolfowitz, and the UK's Gordon Brown all line up on the same side of the field to cheer some change or other in First World policies with respect to the developing world.
This was indeed a "feel good" week for First World development buffs, as a group of G-8 Finance Ministers, warming up for next month's giant confab in Gleneagles, Scotland, announced that they had finally agreed on "$40 billion of debt relief" for 18 poor, heavily-indebted countries in Latin America and Africa.
In his typically understated fashion, the UK's Gordon Brown, Chancellor of the Exchequer and heir-apparent to Tony Blair, called the measure an "historic breakthrough," the "most comprehensive statement that finance ministers have ever made on issues of debt, development, health, and poverty" -- even if he did say so himself!
Perhaps so. Of course any amount of debt relief, no matter how picayune, is to be welcomed, especially by the 282 million impoverished inhabitants of these 18 benighted countries, whose median per capita income is $1153 per year ($PPP). Indeed, at least 75 percent of these poor folk somehow manage to survive on less than $2 per day, with an average daily income of just US$.98. Fully half of these countries boast life-expectancies at birth of less than 50 years.
At the risk of appearing to be
slightly cynical, however, we may wish to pause for a few seconds before popping the champagne bottles, tapping the kegs, and inviting our starving Third World brethren over for a few brewskis, a jol, and a brai to celebrate the "end of poverty" in our time.
As discussed below, in the words of one famous aging rocker, when it comes to debt relief, "We still haven't found what we're looking for."
LONG TIME A COMIN'
In the first place, the 18
particular countries selected for this dose of debt relief were not
chosen at random, or on the basis of need alone. They are a subset of 69 countries that are regarded by the World Bank and the UN as "heavily" or
"severely" indebted.
The select 18 are the ones that, for a variety of serendipitous reasons, just happen to have enrolled in and survived the arduous "HIPC" process that was established by the World Bank/IMF in 1996, supposedly to help poor countries sharply reduce their debt burdens.
Unfortunately, the huge World Bank and IMF bureaucracies have proved to be much better at carefully rationing debt relief than at making sure that such impoverished countries did not get up to their eyeballs in debt in the first place.
Since 1996, the multilaterals' armies of ex-pat peu tyrants have conditioned debt
relief on all the usual "structural adjustment" strictures -- repackaged, without much empirical justification, as "poverty reduction."
(Aside to Jeffrey Sachs: "dollar a day world poverty," as defined by the World Bank, only declined from 1981 to 2001 because of a 500-million+ decline in the number of poor in non-neoliberal China -- most of which occurred in the early 1980s because of a massive redistribution of land to peasants! )
The 18 favored few include Benin, Bolivia, Burkina Faso, Ethiopia, Ghana, Guyana, Honduras, Madagascar, Mali, Mauritania, Mozambique, Nicaragua, Niger, Rwanda, Senegal, Tanzania, Uganda, and Zambia. Each one has taken significant steps to alleviate debt burdens under the so-called "Enhanced" Heavily Indebted Poor Country Initiative (HIPC).
This is a costly process that has forced such countries to jump through elaborate hoops with respect budget deficits, monetary policy, privatization, and other favorite, unproven neoliberal nostrums. Most of these countries started this process in 2000, and have been waiting for debt relief ever since.
The result was that, as of
early 2004, after a decade of HIPC's tender mercies, the "select 18's" external debt had been reduced by a grand total of $2.9 billion, from $83.3 billion to $80.4 billion -- about 3 percent. True, several did garner some interest rate reductions along the way, but these 18 countries -- among the world's poorest -- have continued to pay more than $3 billion of debt service per year to their creditors.
Since 2004, with HIPC's mandate set to expire at the end of 2006,
and debtor countries becoming more and more desperate for relief, the pace has picked up. But before the G-8 Finance Ministers weighed
in this month, the 18's total external debt still stood at $61.6 billion.
This included the $38.2 billion of nominal (face value) debt and capitalized interest from the World Bank, the IMF, and the African Development Bank that has just been forgiven, and another $23.5 billion of debt from "bilateral" government loans (mainly the infamous ECAs) and some private, government-guaranteed debt.
As of this year, after a decade of HIPC, servicing this debt was still costing these 18 countries almost $2.2 billion a year in debt service.
This may look like a modest sum to many First World residents who are used to seeing much larger sums spent on agricultural subsidies, submarines, highway programs, and invasions of distant countries.
But it is a very large share of the $2.9 billion that all 18 of these countries spend each year on education, and the $2.4 billion they spend on public health.
MINI-MOUSENUTS
Second, the actual cash value of the debt relief granted by the G-8 is far less than the widely-touted "$40 billion." And the "100 percent debt reduction" proclaimed by the mass media actually amounts to just 62 percent.
The total face value of
the debt canceled by the World Bank ($31 billion), IMF ($4.2 billion),
and African Development Bank ($3.0) adds up to $38.2 billion. But in cash terms, since the average interest rate on the debt is only 3.5 percent, its cancellation amounts to an annual saving of just $1.34 billion a year.
This saving is certainly nothing to scoff at. But from the standpoint of the developing world as a whole, it compares rather unfavorably with, say, the proposed doubling of First World foreign aid levels to genuinely-poor developing countries. Recently proposed by Tony Blair's Commission for Africa, among others, this would increase current First World aid from roughly $25 billion (counting only the aid to genuinely poor countries) to at least $50 billion a year by 2010.
From this standpoint, this month's G-8 debt cancellation only gets us about 6 percent of the way home toward Blair's incremental $25-$30 billion a year of increased aid.
The annual $1.3 billion saving also compares rather unfavorably with the $1.3 billion per week that the Iraq War now costs, according to the latest figures available from the US Congressional Research Services. Apparently it is much more expensive to kill people than it is to keep them alive.
As for the "100 percent debt reduction," the G-8 decision still leaves the 18 "favored few" with $23.5 billion of bilateral government debt and private debt -- and about $800 million a year of debt service.
Furthermore, there will be no relief of any kind until the G-8's proposals are ratified at the World Bank/ IMF Annual Meetings in September. 
Finally, assuming - optimistically - that these countries would otherwise continue to pay the $1.3 billion per year to the multilateral institutions for the next 20 years without default, and that the multilaterals' lending cost is less than or equal to their cost of funds, the "net present value" of the debt cancellation is not $40 billion, but at most $16 billion.
Indeed, from the standpoint of World Bank and African Development Bank bondholders, if the G-8's taxpayers can be persuaded "take them out" of these "dog countries" and their risky future payments in exchange for, say, $16 billion in cold cash for the multilaterals, that would be a very profitable deal indeed -- since the World Bank's cost of funds, for example, is not the 3.5 % average debt service ratio now paid by these countries, but at least 4.7 %.
At that discount rate, the PV of the 18's expected future debt service is worth no more than $14.8 billion. So if they could $16 billion from First World taxpayers to divide amongst themselves, that would leave the multilaterals with a tidy $1 billion+ gain -- compared with having to continue to play bill collector with dirt-poor debtors, and administer the thankless HIPC program.
And I bet you thought it was all about generosity!!!
200,000 LAWYERS
Third, from the standpoint of "ending poverty in our time," this debt cancellation is like 200,000 lawyers at the bottom of the ocean -- at best, a good start.
The 41 other "severely or heavily indebted" countries, with 900 million residents, have at least $1.02 trillion in debt outstanding. By HIPC standards, their debt burdens are even heavier than for the semi-fortunate 18 -- for example, on average, debt service for the other 41 is 6 percent of national income, compared with just 2 percent for the 18, and 13.3 percent of exports, compared with 11 percent for the 18.
At least 20 of these other heavily-indebted countries that are either waiting to be accepted into the HIPC program (n=11), or are caught in the lengthy "interim period" phase (n=9).
The apparent inconsistencies are glaring. For example, Benin, one of the fortunate 18, only has a $ .8 billion foreign debt, a 1.74% debt service to income ratio, and a $1110 ($PPP) per capita income. Burkina Faso, another one of the 18, has a $.661 billion debt, a 1.25 % debt service to income ratio, and an $1170 ($PPP) per capita income. Malawi, one of the less favored 41, has a $2 billion debt, a 2.1 percent debt service to national income ratio, and a $590 $PPP income per capital. It has been waiting for debt relief from HIPC since 2000. The DR Congo -- formerly the notorious dictator Mobutu's personal fiefdom, Zaire -- with 53 million people, a $660 $PPP per capita income, a $7.6 billion debt, a 2.7% debt/GNI ratio, and a 45 year life expectancy, has also been hanging fire since 2003, waiting for some relief. It fails to qualify for a mixture of technical and political reasons -- including the fact that it remains a war zone.
(Nota bene: Iraq also remains a war zone, but the international community has worked overtime to give its 25 million people tens of billions in debt relief.)
There are at least a few dew drops of social justice in the G-8's discriminations, however. Bolivia, lately in the news because it is on the verge of descending into armed conflict between the indigenous majority and its blancos/ "gente decente" elite, undoubtedly deserves special consideration, after a decade of neoliberal policies that basically succeeded in increasing poverty, inequality, and social tensions to the breaking point -- as the IMF itself has admitted in a recent report.
Nicaragua, another long-suffering satellite of American foreign policy that had the temerity to toss out a US-backed dictator -- sort of a Mobutu with maracas -- and ended up the world's most heavily-indebted country in the 1990s, relative to its size, has also qualified for $265 million in additional debt relief. At the moment, like Bolivia, the country is in a state of emergency -- another good example of neoliberalism's pronounced tendency to overplay its hand.
SUMMARY
Elsewhere, we've expressed grave doubts about the "more sand, same rat-holes" approach to increasing foreign aid, wiping out debt, and "ending poverty."
Fighting poverty, after all, is not just about malaria nets and drinking water. Ultimately it is about deep-rooted, long-term structural change, political mobiliization, the redistribution of power, land, education, and technology, entrepreneurship, and the overthrow of established orders. These are concepts that World Bank bureaucrats, let alone "development economists," may never understand.
At this point, however, it remains true that the poor in many debt-ridden countries are in dire need of short-term relief.
In that spirit, it would be great to see the G-8, the World Bank, the IMF, and other so-called "development banks" work even harder to finally deliver on their long-standing commitments to debt reduction for quite a few more of the poorest of the poor.
(c) SubmergingMarkets.Com, 2005.
June 17, 2005 at 04:38 PM | Permalink | Comments (0) | TrackBack
Wednesday, December 15, 2004
(Some) Justice Finally Comes to Chile - Is More on the Way? James S. Henry
After decades of inaction, Chile's own judicial system is finally beginning to hold leading members of the Pinochet dictatorship directly responsible for the brutal reign of terror that it inflicted on Chile from September 11, 1973 to March 11, 1990.
The latest piece of good news was this week's indictment of 89-year old former Chilean dictator General Augusto Pinochet Ugarte on charges stemming from the disappearance and murder of several individual activists.
In July 2002, another serious human rights case against General Pinochet had been dismissed in Chile on grounds that he was mentally incompetent to stand trial. That case echoed the controversial March 2000 decision by UK authorities to permit him to return home rather than extradite him to Spain, France, Switzerland, or Belgium, after he’d spent more than 17 months under house arrest in London.
As noted below, this week's indictment is just the latest in a series of recent efforts by Chile's judicial system to provide justice for more than 3,200 civilians who were murdered by the regime, more than 28,000 others who recently stepped forward to bare witness about being illegally jailed and tortured, and tens of thousands more who had similar experiences, but have so far kept silent.
Several other cases that have been brought against Pinochet in Chile have recently been allowed to proceed, especially after Pinochet gave a lucid, self-serving interview to Channel 22, a Spanish language TV station in Miami, in November 2003. This incredible act of hubris may have finally brought Pinochet to ground.
While this latest ruling will no doubt be appealed to Chile’s Supreme Court, it is at least another step in the right direction.
In addition to providing justice, such efforts also provide a measure of vindication for those who have long maintained that the Pinochet dictatorship was an unwarranted, illegal, and counterproductive intrusion on Chile's long-standing traditions of democracy and respect for human rights.
However, the real disgrace now is that while Spain, France, Belgium, Switzerland, Argentina, and Chile itself have already brought serious criminal charges against Pinochet or his key associates, the US Government has never done so. 
This is despite the fact that several US citizens were also murdered by the regime, not only in Chile but also in the US itself.
Furthermore, as examined below, many of the Chilean junta's most important confederates and accomplices -- including leading bankers, economists, lawyers, media magnates, convicted professional terrorists, and several senior government officials -- continue to enjoy sanctuary abroad -- especially in the US, the supposed champion of the “post-September 11th” global anti-terrorist campaign.
Many Americans may not recall that there was another September 11th, one that was even more bloody and terror-stricken than their own. Indeed, this “other September 11th” was one that their own government helped to create.
To do so, the US worked closely with an incredible bevy of transnational terrorists, butchers, and tin-horn "generals," like Pinochet (Chile), and later, Videla (Argentina), Banzer (Bolivia), Stroessner (Paraguay), and Rios Montt (Guatemala). These valorous "generals" specialized in the use of terror against defenseless civilians.
It is time for Americans who really care about human rights to demand that their own government follow the courageous lead that Chile has taken, and help bring these uniformed savages and their foreign and domestic collaborators to justice.
THE END OF IMPUNITY?
As noted above, there have been several other important recent steps toward justice in Chile with respect to the Pinochet regime. Among the most important are the following:
è On December 10, 2004, Colonel Mario Manriquez, a retired Chilean colonel, was arrested and charged with ordering the September 1973 execution of Victor Jara, an internationally-reknowned Chilean folksinger and playwright. Jara, 38 at the time, was detained and tortured to death at Santiago’s infamous National Stadium, where thousands were detained after the coup. (For an example of Jara's songs, Download vctor_jara_ni_chicha_ni_limona_.mp3.)
è In addition to the decision by Judge Juan Guzman noted above, on December 4, 2004, Chile’s Court of Appeals also lifted Pinochet's immunity from prosecution with respect to his possible involvement in the 1974 murder of his precedecessor as Commander-in-Chief of the Chilean Army, General Carlos Prats Gonzales.
General Prats, a highly-regarded "constitutionalist" who stalwartly opposed the Army's intervention in political affairs, had fled Chile in September 1973 after the coup against Allende’s duly-elected government.
In one of that decade’s clearest cases of international terrorism, General Prats and his wife Sofia Cuthbert were killed by a car bomb in Buenos Aires in September 1974.
In 2000, Eduardo Arancibia Clavel, a member of Chile's DINA, its secret service, was convicted by an Argentine court of helping to organize the killing, and was sentenced to life in prison. Argentina also requested the extradition of six other DINA agents to stand trial in the case, plus Pinochet, who was indicted for first-degree murder as the "intellectual author" of the crime. Chile's Supreme Court denied the extradition request in 2003, but the case was picked up by a Chilean prosecutor. The recent ruling means that the case can proceed. Pinochet has appealed the decision to Chile's Supreme Court.
è On November 29,
2004, the Chilean Government released the Valech report, a year-long investigation of human rights crimes committed by the Pinochet regime. The report, requested by Ricardo Lagos, Chile's current Socialist President, documented the fact, long-denied by Pinochet and his loyalists, that systematic, widespread torture had indeed been state policy during his reign -- including more than 3400 instances of sexual abuse. Even Pinochet’s eldest daughter was shocked by the report, which was based on nearly 28,000 interviews with victims of the junta’s repression – the first opportunity they had ever had to tell their stories. The victims who had managed to survive to tell their stories were offered modest pensions by the Chilean government in compensation. 
In anticipation of the report, on November 5, General Juan Emilio Cheyre, the head of the Chilean Army, reversed the Army’s previous refusal to accept responsibility for these abuses, declaring:
"The (Chilean) Army has made the difficult but irreversible decision to acknowledge the responsibilities that it has as an institution in all the punishable and morally unacceptable acts of the past… Human rights violations never, and for no one, have an ethical justification."
è In October 2004, Chile’s IRS filed tax evasion charges against the former dictator and his long-time financial advisor, Oscar Aitken. For these charges alone, Pinochet may face fines up to three times any taxes that he evaded, plus a jail term of up to five years. In late November, on the eve of the General’s 89th birthday, a Chilean judge did manage to freeze more than $4 million of Pinochet’s Chilean assets, pending the outcome of investigations for tax fraud and money laundering.
THE RIGGS CASE
So far, the main US contribution to these developments took place in July 2004, when the US Senate's Permanent Subcommittee on Investigations released a report on General Pinochet’s offshore banking -- especially his ownership of up to $15 millions of "funny money" in more than a dozen Pinochet-owned bank accounts at
The reported, which had been conducted at the behest of Senator Carl Levin, the Subcommittee’s ranking Democrat, revealed that ten key Pinochet-related accounts were handled by Washington DC’s Riggs National Bank. These accounts, plus numerous Riggs-managed offshore trusts and companies, were reportedly established for General Pinochet in the mid-1980s and 1990s with the knowledge and active involvement of Rigg’s owner and CEO, Joseph L. Allbritton (Baylor Law ’49).
Allbritton, a prominent Houston-based banking and media magnate who is now in his seventies, is a close friend of the Bush family, and a trustee of the Lyndon B. Johnson Foundation, the George Bush Presidential Foundation, the Reagan Presidential Foundation, the Kennedy Center, the Houston Symphony, and the Houston Museum of Fine Arts. He has also served on the board of the National Geographic Society and Washington DC’s Federal City Council.
A former owner of the now-defunct Washington Star, Allbritton started acquiring Riggs in the early 1980s, eventually buying at least 40.1 percent of the $6.3 billion asset bank. He served as Rigg’s Chairman and CEO until 2001, when his only son, Robert L. Allbritton, took over.
The Allbrittons also owns several other businesses, including Allbritton Communications Co., which controlled WJLA, Washington D.C.'s main Disney/ABC affiliate, plus TV stations in Little Rock, Tulsa, Lynchburg, Charleston, Harrisburg, and Tuscaloosa.
But Riggs National Bank was the crown jewel in the empire. Founded in 1815, it was Washington D.C.'s oldest and largest bank, touted as "the most important bank in the most important city in the world,” where “at least 21 First Families banked.”
It acquired a commanding share of the city’s “Embassy banking” business, handling prominent diplomatic customers for key foreign embassys, like Saudi Arabia’s Embassy. (The US Senate Committee on Governmental Affairs continues to investigate Rigg’s relationships to the Saudis.
These reportedly included more than 150 private accounts, one of which was apparently used, perhaps unintentionally, by Princess Haifa al-Faisal, the wife of Prince Bandar, Saudi Arabia’s Ambassador to the US, to relay funds to two September 11th 2001 hijackers. In September 2004, several families of September 11th victims filed a class action lawsuit against Riggs with respect to this matter.)
Under the Allbrittons, Riggs was not shy about recruiting political allies. Fellow Texan Jack Valenti (U of Houston, Harvard), the influential motion picture industry representative, is a long-time Riggs board member.
In 1997, Riggs acquired J. Bush & Co., an asset management firm owned by Jonathan J. Bush, George H.W.’s brother, George W.'s uncle and a former Chairman of the New York State Republican Finance Committee. In May 2000, Jonathan Bush briefly became CEO of the Riggs Investment Management Company, but now he concentrates on managing the private assets of wealthy clients at J. Bush & Co. In 2003, “JJ’s” Yale classmate, William H. Donaldson, was nominated by President Bush to head the SEC.
Ironically enough, in 1999, the US Treasury had even selected Riggs to redesign and manage its “CA$HLINK” cash management system, reportedly the world's largest deposit/cash reporting system.
It is not yet clear whether “JJ” was involved in managing any assets for the bank’s wealthy private clients like General Pinochet, the Saudi Princess, or Equatorial Guinea's dictator, Teodoro Obiang Nguema, the bank's largest single private banking customer.
But other senior Riggs managers were involved in handling the relationship with General Pinochet, including the bank’s former President, Timothy C. Coughlin (Brown U., NYU MBA, US Marines, Federal City Council), who resigned in May 2004; Robert C. Roane, (UVA, George Washington MBA), the bank’s chief operating officer, and the former head of Riggs - London, who resigned on November 26, 2004; Carol Thompson, Riggs' former SVP for Latin America, who also resigned in 2004; and Raymond M. Lund, the former EVP of the International Banking Group, who left the bank in March 2004.
Also implicated in the Pinochet affair was Steven B. Pfeiffer (Wesleyan ‘69 – Chairman Emeritus; Oxford - Rhodes Scholar; Yale Law School, US Naval Commander; Council on Foreign Relations), a Riggs board member since 1989, a former chairman of the bank’s International Committee, a former Vice Chairman of Riggs Bank Europe Ltd., and the bank’s Chairman in 2001. Pfeiffer remains a senior partner at Fulbright & Jaworski, the leading DC law firm, where he has served as head of the firm’s International Practice, and, from 1998 to 2002, its Partner-in-Charge. According to the Senate report, Pfeiffer and his law firm provided key legal advice to Riggs with respect to its handling of the Pinochet accounts.
BANKING ON THE GENERAL
Riggs' banking relationship with Pinochet may have dated back to the 1970s, when it was reportedly involved in helping to finance several Chilean arms deals. But it really heated up in the mid-1990s, when Pinochet came under investigation for more than 66 international criminal complaints involving human rights violations, drug trafficking, torture, assassination, illegal arms sales, and corruption, not only by Judge Garzon in Spain, but also by Argentina, Belgium, France, Switzerland, and the UK. The General was trying desperately to conceal his family’s assets around the world.
According to the Senate report, Riggs National Bank participated in a long-term conspiracy to launder Pinochet's offshore holdings and conceal their ownership from US federal bank regulators, including the Comptroller of the Currency. Quite coincidently, the bank also reportedly hired R. Ashley Lee, an OCC bank examiner who happened to be in charge of auditing Riggs from 1998 to 2002.
That helped Riggs conceal the Pinochet matter for a couple years. But in May 2004, Riggs was fined $25 million in civil penalties for "willful, systemic" violations of anti-money-laundering laws" with respect to its dealings with two other dubious clients, Saudi Arabia and Equatorial Guinea.
In light of all these embarrassments, the Allbrittons decided to sell the bank. In July 2004, it agreed in principle on a $779 million sale to PNC Financial Services Group Inc. However, this merger is now reportedly on hold until at least April 2005, and it may never be consummated, given all the many lawsuits and investigations that have arisen out of Rigs involvement in money laundering. If permitted, the PNC transaction would effectively permit the Allbrittons and their close associates to "launder" their profits from more than twenty years of scandalous, morally-unconscionable behavior, undertaken at the behest of some of the world's worst dictatorships.
Meanwhile, Riggs is fighting a number of other legal actions pertaining to this scandal. In April 2004, three law firms that specialize in shareholder derivative suits teamed up to sue Riggs’ directors for “intentionally or recklessly” ignoring the risks of failing to update the bank’s money laundering controls and dealing with dubious clients like the Saudis and Pinochet.
In September 2004, several former Riggs senior managers and board members were named in a legal action filed by the courageous Spanish judge, Balthazar Garzon, who has been investigating human rights violations committed against Spanish citizens by the Pinochet regime. Judge Garzon has asked that US authorities seize the assets of their personal assets, prosecute them for money laundering, and also freeze more than $10.3 million in alleged Pinochet assets.
So far, the US Department of Justice has basically ignored Judge Garzon’s request.
December 15, 2004 at 09:05 PM | Permalink | Comments (0) | TrackBack
Thursday, June 17, 2004
The "Reagan Revolution," Part Two: The View from Developing Countries
"Folly is a more dangerous enemy to the good than evil. One can protest against evil; it can be unmasked and, if need be, prevented by force....Against folly we have no defense. Neither protests nor force can touch it; reasoning is no use; acts that contradict personal prejudices can simply be disbelieved. Indeed, the fool can counter by criticizing them, and if they are undeniable, they can just be pushed aside.... So the fool, as distinct from the scoundrel, is completely self-satisfied. In fact, he can easily become dangerous, as it does not take much to make him aggressive...."
Following last week's prolonged national memorial to President Reagan, the most elaborate in US history, most Americans have turned their attention back to the troubled present. But we cannot resist continuing down the revisionist path that we started on in Part One of this series.
Contrary to Henry Ford, history is not "bunk," nor is it "just one damn thing after another." In fact, it is one of our most valuable possessions. But unless we take the time to learn from it, it can easily come back to haunt us -- as it is doing right now. At the very least this exercise will prepare us to evaluate President Clinton's new autobiography, which is due out next week.
As noted in Part One, most recent discussions of Ronald Reagan's foreign policy legacy have focused almost entirely on the Cold War. Even there, as we argued, his legacy is decidedly mixed. While he may have helped to pressure the Soviets to reform, he also took incredible risks with the balance of nuclear forces, including some risks that we are still living with to this day.
When we turn from superpower relations to Reagan's impact on developing countries, the legacy is even starker. In The Blood Bankers, we've detailed how the Reagan Administration's lax policies toward country lending and bank regulation exacerbated the 1982-83 Third World debt crisis. And then the administration did very little to help developing countries fundamentally restructure their debt burdens and recover. By the end of the 1980s, most country debt burdens were higher than ever.
Here we will focus on another long-term legacy of Reagan's relations with the developing world -- the consequences of his support for a plethora of reactionary dictatorships and contra armies all over the globe.
Most Americans are probably not aware of it, but this bloody-minded policy fostered several nasty wars in developing countries that have cost literally millions of lives -- and are still producing fatalities every day, by way of wounds, continuing conflicts, unexploded ordnance, and landmines.
Furthermore, as described below, the Reagan Administration was also responsible for several of the clearest examples in history of state-sponsored terrorism.
Unfortunately, it turns out that very little of this was really necessary, either from the standpoint of defeating the Soviets, pushing the world toward democracy and free markets, or enhancing US security.
Indeed, in the long run, Reagan's policies basically destabilized a long list of developing countries and increased their antagonism towards the US. Combined with the policies of "benign neglect," stop-go intervention, and ineffective neoliberal reforms that characterized the Clinton Administration's policies toward developing countries, and the neoconservative policies pursued by both Bushes, it is no accident that America's reputation in the developing world is now at a record low.
Unfortunately, like some of the risks that Reagan's policies introduced into the nuclear balance, these effects may have a very long half-life. Surely they will be with us long after Ronald Reagan has met his Maker. We just hope for the Gipper's sake that his Maker does not read this article before pronouncing judgment upon him.
THE INDICTMENT
There is an abundance of examples of the Reagan Administration's strong negative impacts on developing countries. To cite just a few:
In the case of the Philippines, the Reagan Administration was a staunch ally of Ferdinand and Imelda Marcos right up to their last helicopter ride to Hawaii in February 1986. Vice President George H.W. Bush visited Manila in March 1981, soon after Reagan was elected, to thank him for his generous support. He toasted Marcos in glowing terms: "We love your adherence to democratic principles and democratic process....." The thousands of political opponents who were tortured, imprisoned, or died fighting this corrupt conjugal dictatorship and the millions of Filipinos who have spent the last twenty-five years servicing the couples' unproductive foreign and domestic debts would probably disagree.
In the case of Iran and Iraq, Reagan helped arm and finance Saddam Hussein throughout the 1980s, encouraged the Saudis and Kuwaitis to finance his invasion of Iran when it bogged down, helped to equip him with chemical and biological weapons, sent Donald Rumsfeld to Baghdad to assure close relations and propose a new pipeline to Saddam to help him export his oil, and even provided a team of 60 Pentagon analysts who sat in Baghdad, using US satellite imagery to target Saddam's chemical weapons against the Iranians.
At the same time, as the Iran-Contra arms scandal later disclosed, Reagan also helped Iran buy spare parts and advanced weapons for use against Iraq. He also looked the other way when Saddam decided to turn his US-supplied Bell Helicopters and French-supplied Mirage jets and chemical weapons on the defenseless Kurds at Halabja. Of course, the fact that the UN, under strong US pressure, did nothing at the time to condemn Saddam for this behavior did not exactly discourage further aggression.
This bipolar policy contributed to prolonging the 1980-88 Iran-Iraq War, one of the largest and bloodiest land wars since World War II. It cost 500,000 to 1 million lives and 1-2 million wounded, and created more than 2.5 million refugees. It also caused a huge amount of damage to both countries' economies, and left Iraq, in particular, broke and heavily indebted. As we've argued in The Blood Bankers, that destabilization, in turn, contributed significantly to Saddam's 1991 decision to invade Kuwait in 1991 -- and ultimately, our current Iraq fiasco.
In the case of South Africa, the Reagan Administration steadfastly opposed any US or UN sanctions on international trade and investment. Indeed, it continued to work closely with the apartheid regime on many different fronts, including the civil wars in Angola (see below), Namibia, and Mozambique.
It also now appears that both Carter and Reagan turned a blind eye to South Africa's development of nuclear weapons and ballistic missiles, in collaboration with Israel, which purchased its uranium from the Pretoria regime. Fortunately, no thanks to Reagan, Bush I, or for that matter, Bill Clinton, apartheid came to an end in the early 1990s, and South Africa became the first nuclear power ever to dismantle its nuclear weapons.
In the case of Guatemala, Reagan gave a warm embrace to the brutal dictatorship of General Efrain Rios Montt in the early 1980s. Rios Montt, a graduate of Fort Benning's School for the Americas, was also an ordained "born-again" minister in California-based Gospel Outreach's Guatemala Verbo evangelical church. Evidently that combination endeared him to the Reagan Administration -- US Assistant Secretary of State Thomas Enders praised him for his "effective counter-insurgency," and President Reagan called him "a man of great personal integrity," "totally dedicated to democracy," someone who Amnesty International had given "a bum rap."
This cleared the way for hundreds of $millions in World Bank loans and US aid that helped to make Rios Montt and his generals rich. Meanwhile, the junta implemented a genocide that a UN-backed Truth Commission later found was responsible for the deaths of 200,000 Guatemalan peasants, mainly Mayan Indians.
In the case of Argentina, Reagan turned a blind eye to the "dirty war" waged by the military junta against its opponents, at a cost of 30,000 lives and many more destroyed families.
When this junta launched the April 1982 invasion of the Falkland Islands to deflect public attention from its political and economic woes, Reagan and Secretary of State Al Haig ultimately decided to side with the UK's Margaret Thatcher, a fellow neoconservative. However, key Reagan aids Jeane Kirkpatrick and Michael Deaver worked behind the scenes to support the fascist junta, encouraging it to believe that the US might stay neutral. The very evening that the invasion was launched, Kirkpatrick was the guest of honor at an elaborate Washington D.C. banquet that was sponsored by the junta.
In the case of Panama, Reagan's CIA subsidized and promoted the rise of General Manual Noriega, another graduate of the notorious US School of the Americas. The US made extensive use of Noriega's intelligence gathering capabilities during the contra war with Nicaragua (see below).
This encouraged Noriega to believe that he could get away with anything. For a while he did: in the early 1980s, he became one of the most important cocaine wholesalers in the region, shipping a ton of coke per month to Miami on INAIR, a Panama airline that he co-owned, literally under the US Customs' nose. By 1989, even George H.W. Bush was embarrassed, and he had the dictator forcibly removed -- at a cost of the lives of 23 US troops, 314 Panamanian Defense Forces, and several hundred Panamanian civilians.
In the case of tiny Honduras, the poorest country in Central America, the Reagan administration turned another of its many blind eyes to the rise of death squads in the early 1980s. John Negroponte, the former US Ambassador to the UN and our new "proconsul" in Iraq, served as Ambassador to Honduras from 1981 to 1985. As this author knows from first-hand experience, reports of human rights abuses in Honduras were rampant during this period. It is hard to believe that Negroponte, who cultivated close relations with the Honduran military, was simply unaware of all these reports.
One of the key offenders was Battalion 3-16, the CIA-trained and funded Honduran military unit that was responsible for hundreds of disappearances and torture cases, including several that involved Americans.
One US embassy official later reported that in 1982, Negroponte had ordered any mention of such abuses removed from his annual Human Rights reports to Congress. Negroponte has denied any knowledge of this, and has skated through several confirmation hearings to arrive at the very top of the US diplomatic corps, where he will soon be running the world's largest US embassy. 
In the case of El Salvador, the Reagan Administration also sharply increased economic and military support to a brutal oligarchical regime that was also deeply involved in death squads. President Carter had also provided military aid to the regime -- indeed, Archbishop Oscar Romero's condemnation of that aid was one key factor in his assassination in March 1980. After Reagan's November 1980 election, the Salvadoran military felt it had a "green light" to become even more aggressive with its opponents in the Church and unions, as well as the FMLN rebels.
One immediate byproduct of the "green light" was the murder of four US Maryknoll nuns in December 1980. Reagan's first Secretary of State, Al Haig, later suggested that the nuns might have been killed in a "crossfire" when they "ran a roadblock. " But their murders were later attributed to five Salvador National Guard members, who, in turn, appear to have acted on orders from senior members of the Salvador military.
A law suit was eventually brought on behalf of the nuns against the commanders to whom these guardsmen ultimately reported -- Jose Guillermo Garcia, El Salvador's Minister of Defense from 1979-1983, and Carlos Eugenio Vides Casanova, the former head of the National Guard. These were the Reagan Administration's key Salvadoran allies in the early 1980s, and they'd been rewarded with retirement in Florida.
In 2000 a jury ruled that even though they had given the orders, they did not have "effective control" over their subordinates, given the instability in the country. However, in July 2002, another jury in West Palm Beach found the duo liable for torture and other human rights abuses against three other victims, and ordered them to pay $54.6 million in damages.
Meanwhile, their paymasters and other collaborators in the Reagan Administration have gotten off scot free. Reagan's insistence on a military solution to the conflict in El Salvador helped to perpetuate the civil war throughout the 1980s, at a cost of more than 75,000 lives. Ultimately, under Bush I and Clinton, the long-delayed negotiated solution was achieved.
As for Archbishop Romero's assassin, he has never been found. There are credible reports, however, that the actual triggerman now lives -- naturally enough -- in Honduras.
In the case of Lebanon, Reagan was responsible for a broken promise to the Palestinians that ultimately contributed to the 1982 massacres at the Sabra/ Shatila refugee camps. To get the PLO to withdraw from Beirut, Reagan promised to protect Palestinian non-combatant refugees in those camps. Indeed, the PLO fighters left on August 24, 1982, and US Marines landed on August 25. But they were withdrawn just three weeks later, on September 10, after the PLO fighters left. Ariel Sharon,Israel's Defense Minister at the time, promptly ordered the Israeli Defense Forces to surround the camps. They refused to let anyone leave, and then permitted his Lebanese allies, the rightist Christian Phalangists, to move in.
The result was the slaughter of at least 900 to 3000 unarmed Palestinians, including many women and children, on September 16-18, 1982. As former Secretary of State George Schultze later commented, "The brutal fact is, we are partially responsible." Israeli's own Kahan Commission later found Sharon "indirectly responsible" for the massacre, but imposed no penalties, other than forcing him to resign as Defense Minister.
In the case of Angola, Reagan, in cooperation with South Africa's apartheid regime and Zaire's dictator Mobutu, helped to sponsor UNITA, Joseph Savimbi's rebel band, against the left-leaning MPLA, which also happened to have far stronger support from the Angolan people. Reagan hailed the power-hungry Savimbi as a "freedom fighter," and enlisted wealthy arch-conservatives like beer merchant Joseph Coors and Rite-Aid owner Lewis E.Lehrman to organize assistance and lobby Congress for millions in aid.
In fact Savimbi turned out to be one of the world's most lethal terrorists. Even after UNITA lost UN-supervised elections in September 1992, he continued the war, financing his operations by trafficking in "blood diamonds."
The resulting guerilla war cost the Angolan people up to 1 million dead, turned a quarter of Angola's 12 million people into refugees, and devastated health and education programs and the domestic economy. It also left an estimated 6 to 20,000,000 land mines scattered all across the country, one of the world's most heavily mined countries, with more than 80,000 amputees as a byproduct. Only with Savimbi was finally killed in May 2002 was the country finally restored to peace.
In the case of Afghanistan, Reagan considerably expanded aid to the Afghan rebels in the early 1980s, providing them more than $1 billion in arms and sophisticated weapons like Stinger missiles to fight the Soviets. The resulting battle ultimately cost the Soviets 15,000 lives. But the price to Afghanistan was much higher -- the Afghan people lost more than 1 million dead and wounded, plus millions of refugees. Furthermore, after the Soviets finally left in the 1989, the country became a stomping ground for opium-dealing warlords, religious fanatics like the Taliban, and al-Qaeda's global terrorists.
Furthermore, we now know that Gorbachev had offered to pull Soviet troops out of Afghanistan in 1987, in exchange for reduced US arm shipments to the rebels. However, he was rebuffed by the Reagan Administration, which wanted to prolong the Soviets' agony. This not only cost a great many more Afghan (and Soviet) lives, but also helped turn Osama Bin Laden from a nobody into a folk hero. All this helped to pave the way to 9/11, the continuing war in Afghanistan, and the even more dangerous global terrorist war.
All told, then, the Reagan Administration clearly has a lot to answer for with respect to the developing world. And this is even apart from one of the most perfidious examples of Reagan's brutilitarian policies, that of Nicaragua -- as the following excerpt from The Blood Bankers makes clear.
NICARAGUA'S COUNTERREVOLUTION
By the end of 1980, with Nicaragua's civil war concluded, General Anastasio Somoza deBayle dead in Paraguay, and the country''s debt settlement with its foreign banks concluded, many Nicaraguans were looking forward to rebuilding their economy and finally achieving a more peaceful society. Alas, it was not to be.
Undoubtedly the Sandinistas deserve some of the blame for the way things turned out, though, as we will see, the odds were clearly stacked against them. As the strongest faction in the winning coalition, and “the boys with the guns,” at first they commanded overwhelming popular support for having rid the country of the world’s oldest family dictatorship outside of Saudi Arabia and Paraguay. However, like Venezuela’s Hugo Chavez in the 1990s, they were torn between leading a social revolution and building a multi-party democracy.
Their hero, Augusto “Cesar” Sandino, “the general of free men,” had fought the US military and the Nicaraguan army for six years to a standstill, before he was betrayed and murdered by General Anastasio Somoza Garcia in 1934. After a decade of insurgency in the 1970s, the Sandinistas’ most important experiences to prepare them for the job of running the country were limited to armed struggle, clandestine organizing, and some very rough times in Somoza’s jails. Unhappily, one of their most accomplished political leaders, Carlos Fonseca, had been murdered by the National Guard in 1976.
On the other hand, as South Africa demonstrates, it is not impossible for committed revolutionaries to lead a fairly peaceful transition to a multi-party democracy. After all, the ANC had waged just as long a struggle against a state that was no less repressive as Somoza’s. Many of the ANC’s supporters were also just as radical as the Sandinistas, and it also sourced most of its weapons and advisors from radical watering holes like the Soviet Union, East Germany and Libya.
However, ironically, South Africa was not as easy for the US to push around as Nicaragua. South Africa accounted for two-thirds of sub-Saharan Africa’s economy and most of the world’s gold, diamonds, platinum, and vanadium. By 1982, with some help from the UK and Israel, it had acquired nuclear weapons. Compared with Nicaragua, South Africa’s economy was actually in pretty good shape when the ANC came to power. While there had been a protracted low-intensity war against apartheid, South Africa managed to avoid the full-blown civil war that Nicaragua was forced to undertake in the 1970s to rid itself of the Somoza dictatorship.
Nicaragua was also objectively a far less strategically important target. To Washington’s national security planners, however, that made it an ideal opportunity for a relatively low-cost “demonstration." Its population was the same as Iowa’s. Its entire economy was smaller than Des Moines’s. It had few distinctive natural resources. Its only “weapons of mass destruction” were volcanoes, earthquakes, and hurricanes. It was surrounded by other countries that were also of modest strategic value – except for whatever symbolic value was associated with repeatedly crushing the aspirations of impoverished peasants into the dirt.
During the late 19th century, Nicaragua had been selected several times over by US Canal Commissions for a canal across Central America, until Teddy Roosevelt finally opted to create Panama and build a canal across it in 1902, for reasons that had more to do with Wall Street than engineering. After that, Nicaragua’s canal plans went nowhere, especially after the US Marines landed in 1910 to collect debts owed to British and US banks and to depose a nationalist leader who, among other things, made the fatal mistake of seeking European funding for an alternative to the Panama canal.
The ANC also had one other weapon that the Sandinistas clearly lacked. This was the extraordinary wisdom and good fortune of 72-year old Nelson Mandela, who had earned everyone’s respect during his 27 years in prison. He had also learned survival skills like patience, diplomacy, and the capacity for making adroit compromises with bitter enemies. Under his influence, the ANC set out to build a mass party. It agreed to hold new elections within two years of his release. It went out of its way to commit itself publicly to multi-party democracy, a market economy, civil liberties, and peaceful reconciliation.
Most of the Sandinistas’ top leaders – the so-called cupola -- were not really interested in building a mass party, much less a multi-party democracy, at least not initially. They saw themselves as a vanguard party, leading the masses toward a social revolution. As Sergio Ramirez, a leading FSLN member who served as Nicaragua’s Vice President under Daniel Ortega from 1984 to 1990, wrote in his 1999 book, Adios Muchachos,
The FSLN was not prepared...to assume its role of party of opposition inside a democratic system, because it had never been designed for this. Its vertical structure was the inspiration of Leninist manuals, of the impositions of the war and of caudillismo, our oldest cultural heritage.
To be fair, the FSLN leadership also believed that the first priority was to attack the country’s dire health, literacy, land ownership, and education problems, and to build “direct democracy” through civic organizations, not through party politics and national elections. Given the country’s emergency and the need to recover from the civil war, this was entirely understandable. But it did provide cheap shots for the FSLN’s opponents and the mainstream US media, which basically wrote Nicaragua off very early as a reprise of Castro’s Cuba.
The Sandinistas were also widely criticized for lacking the soft touch when it came to domestic politics. Among their many ham-handed moves was their May 1980 decision to expand the Council of State to include “mass organizations,” the August 1980 decision to postpone elections until 1984, the rough way they dealt with the Miskito Indians, the 1986 decision to shut down the (by then, CIA-subsidized) La Prensa, and Daniel Ortega’s various high-visibility trips to Havana, Moscow, Libya and Gucci’s eyeglass counter in New York They were also criticized for implementing a compulsory draft, detaining alleged contra sympathizers without trial after the contra war heated up, permitting the FSLN’s National Directorate (Daniel Ortega, Tomas Borge, Victor Tirado, Henry Ruiz, and Bayardo Arce) to remain an unelected (all-male) body until 1991, and seizing a huge amount of property from ex-Somocistas, even middle-class ones, for their own use during the “pinata” period after Ortega lost the 1990 election -- including more than a few beach houses.
At the same time, they were not given much credit for preserving a mixed economy, reforming the health and education systems, pursuing aid from numerous non-Communist countries in Latin America and Europe, implementing a badly-needed land reform, tolerating the virulent La Prensa, which supported the contras and called for their overthrow, until they finally reached the limit and shut it down in 1986, ultimately holding free elections in November 1984 and February 1990, and respecting the outcome of those elections even when, as in 1990 (...and 1996, and 2001..) they lost.
The basic reality is that from at least 1981 on, Nicaragua’s new government was operating in an increasingly hostile international environment, where the Western media and the USG, as well as the Miami-based Somocistas, were predisposed to seize upon the slightest departures from Roberts’ Rules of Orders to consign them to hell – and if no such departures were readily at hand, to invent them out of whole cloth. These hostile attitudes had much less to do with the FSLN’s behavior than with the USG’s new aggressive stance with respect to the Soviet Union – actually dating back at least to President Carter’s initiation of a contra-like war against the Soviet-backed government in Afghanistan in July 1979.
STATE-FUNDED TERRORISM - REAGAN STYLE
So, despite all the FSLN’s undeniable missteps, it would probably have taken divine intervention to save Nicaragua from the wrath of Ronald Reagan, who decided almost immediately upon taking office to single tiny Nicaragua out for a replay of the Carter/ Brzezinski strategy in Afghanistan.
As former CIA analyst David MacMichael testified at the International Court of the Hague’s hearings on a lawsuit brought by Nicaragua against the US in 1986, from early 1981 on, the US Government set out to create a “proxy army” that would “provoke cross-border attacks by Nicaraguan forces and demonstrate Nicaragua’s aggressive nature,” forcing the Sandinistas to “clamp down on civil liberties.....arresting its opposition, (and) demonstrate its allegedly inherent totalitarian nature.”
In other words, if they were not totalitarian enough to begin with, we would see to it that they became totalitarian – and then blame them for making the switch.
President Reagan offered several different justifications for this ultimately rather bloody-minded policy. In March 1983, in a speech to Congress, he presented his subversion theory, Congress, warning that the Sandinistas had already “imposed a new dictatorship…supported by weapons and military resources provided by the Communist bloc, (that) represses its own people, refuses to make peace, and sponsors a guerrilla war against El Salvador. (emphasis added).”
At other times, he emphasized the beachhead theory, according to which the Sandinistas provided a “Soviet beachhead… only two hours flying time away from our borders…with thousands of Cuban advisors…camped on our own doorstep…close to vital sea-lanes.” He offered similar characterizations of the threat posed by left-wing guerillas in El Salvador, Honduras, and Guatemala. In 1982, Jeane Kirkpatrick, Reagan's hawkish UN Ambassador, also promoted this beachhead theory with her own profound geographical analysis:
I believe this area is colossally important to the US national interest. I think we are dealing here not...with some sort of remote problem in some far-flung part of the world. We are dealing with our own border when we talk about the Caribbean and Central America and we are dealing with our own vital national interest.
Other elements were also sometimes thrown into the mix. On November 6, 1984, just two days after the Sandinistas won a decisive 67-percent victory in the country’s freest elections in history, there was a huge media flap in the US press over their alleged attempt – later proved false – to buy Soviet MiGs for air defense. This story later turned out to be a wholesale concoction of the State Department’s “Office of Public Diplomacy,” and of Oliver North, Otto Reich, and Robert McFarlane in particular, just one of many US propaganda efforts that were designed to distract attention from the FSLN’s victory in those elections.
Together, the subversion theory and the beachhead theory added up to a revival of the time-worn domino theory, transposed from Southeast Asia to Central America. Apparently, the notion was that since Nicaragua bordered on Honduras and El Salvador, which bordered on Guatemala and Belize, which bordered on Mexico, the Red Army might soon be drinking margaritas on the banks of the Rio Grande. Or the Reds might just jet in to El Paso in their MiGs from Managua, “only two hours away.” The fact that “they” were already 90 miles away in Havana, armed with brand new MiG 23 Flogger bombers and MiG 29s, did not get much mention from the Gipper. After all, Cuba had already demonstrated that it could stand up to a US invasion, and the Bay of Pigs was not a happy memory.
This rather strained analysis of Nicaragua’s purported threat to US national security was later endorsed, with only slight variations, by the January 1984 Bipartisan National Commission on Central America chaired by Dr. Henry Kissinger. One might have expected Kissinger to reach a different conclusion, given his long personal experience with Vietnam, Laos, Cambodia, and China, whose leftist regimes spent most of the 1970s fighting with each other, demonstrating conclusively the power of nationalism over solidarity. But he was performing the assignment to ingratiate himself with the Republican Party’s conservative wing. And unlike the National Commission on Terrorist Attacks, which he resigned from in December 2002, it did not require him to identify his consulting firms’ private clients.
In any case, well into the 1990s, long after there were peace settlements in Nicaragua, El Salvador, and Guatemala, and long after the Sandinistas had handed over political power to their opponents, hawkish Republicans like Senators John McCain and Jesse Helms were still seeing ghosts in Nicaragua, trying to make hay out of the Sandinistas’ potential subversive threat. Indeed, as we’ll see, these charges even played a role in Daniel Ortega’s defeat in Nicaragua’s Presidential elections in 2001, even when his running mate was Violeta Chamorro’s son-in-law!
Eventually, in fact, all the stockpiles of AK47s, landmines, rocket launchers, and surface-to-air missiles acquired by the Sandinistas to defend Nicaragua against the contras did end up posing a security threat to the US. But it was not precisely the one that that the Sandinistas' right-wing critics had predicted. In November 2001, Colombia’s 11,000-strong nasty, right-wing, drug-dealing paramilitary group, the AUC, procured 3,500 AK47’s from Nicaragua’s military stockpiles, by way of Israeli arms merchants based in Panama and Guatemala. The arms were part of a five-shipment package that included 13,000 assault rifles, millions of bullets, grenade and rocket launchers, machine guns, and explosives. The AUC, which was on the G.W. Bush’s administration’s official list of terrorist groups, was supported by landlords who wanted to combat Colombia’s leftist guerillas, the ELN and the FARC. The AUC was also supposedly fighting Colombia’s Army. From 2000 to 2003, Colombia received $2.5 billion of US military aid, plus more than 400 Special Forces troops, making it the world’s third largest recipient of US aid. The AUC also reportedly purchased arms from army stockpiles in El Salvador and Guatemala. In 2002, a OAS study also revealed that a Lebanese arms broker with al Qaeda links had tried to purchase 20 SA-7 missiles from Nicaragua’s stockpiles. The US starting pressuring Nicaragua’s President Bolanõs, a neoliberal businessman, to reduce these stockpiles – but hopefully not by selling more of them to the AUC.
In the long run, therefore, by forcing the comparatively-harmless Sandinistas to stockpile all these weapons to defend themselves, and by also arming the right-wing militaries of El Salvador and Guatemala to the teeth, the US had set a trap for itself.
In reality, of course, Nicaragua’s leftists, even if they had been so inclined, were neither necessary nor sufficient to “subvert” their neighbors. Those neighbors with the most serious liberation movements, like El Salvador, Guatemala, and Colombia, had long since done a perfectly good job of subverting themselves. Their rebel movements developed over many decades from within, on the basis of incredibly-unbalanced social structures. For example, El Salvador’s catorce, its top 14 families, controlled 90-95 percent of that country’s land and finance capital, while in Guatemala, just 2 percent of the population controlled more than 70 percent of arable land. These situations were only a slightly more anonymous version of Nicaragua, where the Somoza family alone had laid claim to a quarter of the country’s arable land. And the resulting social conflicts were similar -- in the 1980s, El Salvador’s class war claimed more than 80,000 lives, while Guatemala’s claimed 200,000, with the vast majority due to their own brutal armed forces and paramilitaries.
On the other hand, Costa Rica, Nicaragua’s good neighbor to the south, had long since inoculated itself against revolution by developing an old-fashioned middle-class democracy, with lots of small farms and more teachers than police, having completely abolished its military in 1948.
Furthermore, while the Reagan Administration asserted over and over again in the early 1980s that the Sandinistas had shipped arms to leftist guerillas in El Salvador, two decades later, these allegations have been shown to be as spurious as the MiG purchases. In fact, the Sandinistas’ aid to El Salvador’s rebels, the FLMN, was miniscule, and it was terminated in 1981, as the World Court concluded in 1986. The claim that El Salvador’s FLMN had acquired several hundred tons of weapons from the East Bloc, Arafat and Libya (!), had also been pulled out of thin air. In fact, the rebel armies in El Salvador and Guatemala were poorly armed, except for Galil rifles and rocket launchers they managed to steal or purchase from corrupt army officers. Leading Sandinistas like Tomas Borge also explicitly rejected the notion of “exporting revolution,” except by way of the FSLN’s own example. After all, the FSLN had not needed Soviet or Cuban backing for their own revolution. They also had their hands full rebuilding Nicaragua. The last thing they needed was another war with El Salvador or Guatemala, in addition to the contra war.
Finally, while the Sandinistas were not liberal democrats, and, as noted, committed many political blunders, they were scarcely in a position to run a “dictatorship,” even within Managua’s city limits. To their credit, they had greatly increased the amount of popular involvement in the country’s governance. In November 1984, they held national elections that most international observers, including Latin American scholars and Western European parliaments, agreed were reasonably clean, despite the Reagan Administration’s provision of $17 million to opposition candidates, its systematic efforts to discredit the elections, and the fact that by then Nicaragua was already under steady assault from US-backed contras. Certainly by comparison with the Somozas’ rigged elections, other countries in post-war situations, and El Salvador and Guatemala in particular, Nicaragua’s degree of political freedom was tolerable, if not beyond reproach.
Yet when 75 percent of registered voters turned out for the November 1984 elections, and the FSLN received a commanding 67 percent of the vote, capturing the Presidency and 61 of 96 seats in the new National Assembly, Nicaragua was again accused by the Reaganites of being a “dictatorship.” As former New York Times Editor John Oakes remarked at the time, “The most fraudulent thing about the Nicaraguan election was the part the Reagan Administration played in it.”
The other troubling fact for Reagan’s Nicaraguan policy was that, objectively, the Soviet Union really did not have much interest in acquiring yet another dependent, state-socialist backwater like Vietnam, Afghanistan, or Cuba -- which by the early 1980s was already costing the USSR about $3 billion a year in aid. In hindsight, we now know that, far from being an expansionist Evil Empire, at this point, the USSR was really just hanging on for dear life -- a wounded giant, obsessed with its own serious economic problems, which were even forcing it to import grain from Argentina’s fascist junta! Internationally, it had its hands full just trying to stave off an embarrassing defeat in Afghanistan on its own southern border. It was also pressing existing client states in Eastern Europe and Southeast Asia hard to practice self-reliance.
Finally, in 1980-81, before the US made it absolutely clear that it was seeking “regime change” in Nicaragua, the Sandinistas tried to restore good economic relations, plus access to World Bank and IDB loans. But for the US intervention, this access would have been maintained. And that, in turn, would have significantly reduced Nicaragua’s dependence on East-Bloc aid. After all, as a senior World Bank official noted in 1982, “Project implementation has been extraordinarily successful in Nicaragua, perhaps better than anywhere else in the world.”
About that time, Nicaragua also sought aid from many non-Soviet countries, including Venezuela, Mexico, and France. It was most successful with Mexico, which resisted US pressure and became Nicaragua’s largest aid provider until 1985. Nor did Nicaragua turn immediately to the Soviet Bloc for aid. When it tried to buy $16 million of arms from France in early 1982, however, President Reagan got the French President, Francois Mitterand, to delay the sale “indefinitely.” Only then – under increasing attack from the contras -- did Nicaragua turn to the Soviet Union and Cuba for significant quantities of arms and advisors.
Of course, as noted, many Sandinistas were undoubtedly committed radicals, dedicated to policies like land reform, free health and education, and the seizure of Somocista-owned properties. But these policies were entirely defensible, given Nicaragua’s economic conditions and its need to play catch-up with basic social justice. These are, after all, policies that the US has itself supported, or at least tolerated, in other times and places, when they happened to serve its interests.
The Sandinistas may have been mulish and full of radical bravado, but they were far from anyone’s pawns. These characterizations were 1950-vintage hobgoblins, left over from the days when Ronnie ran the Commies out of the Actors Guild in LA. At best, they reflected a desire to show the Evil Empire who was boss, by making an example of some weak little pinko regime.
On this view, then, in the early 1980s, the USG basically succeeded in pushing tiny Nicaragua into relying heavily on Soviet and Cuban arms and economic aid for its own survival– as, indeed, the USG may have also done with Fidel’s Cuba back in 1959-60. The USG then used that reliance as an excuse to expand its own provocations into a full-scale war that ultimately claimed 30,000 lives. In the historical record books, this is surely one of the clearest examples of state-funded terrorism ever.
SAYING "UNCLE"?
All these inconvenient little details were brushed aside by the Reaganites when they took office in January 1981, raring, in President Reagan’s words, to make the Sandinistas “say uncle.” Say uncle they never did -- in fact, by 1988, they’d “whupped” Olly North’s contras pretty good. But that was not for want of US efforts.
In March 1981, President Reagan signed an Executive Order that mandated the CIA to undertake covert operations in Central America, to interdict arms shipments “by Marxist guerillas.” By November 1981, the US focus had shifted from arms interdiction to regime change. That month, the Administration provided an initial $19 million to mount a pretty transparent “covert” effort to destabilize Nicaragua. The strategy, implemented by the now-famous gang of Presidential pardonees, was the classic scissors tactic that had been employed by the US and its allies in many other 20th century counterrevolutionary interventions, notably Russia (1918), Guatemala (1954), Cuba (1959-60), and Chile(1973).
On the one hand, the USG tried to cut off Nicaragua’s cash flow, reducing access to new loans from the IMF, the World Bank, and the IDB, as well as all EXIM Bank funding and OPIC risk insurance. In September 1983, the US slashed Nicaragua’s sugar quota. In November 1985, it added a total embargo on all trade with the US, Nicaragua’s main trading partner and foreign investor up to then. Given the country’s dire economic straits, this had the practical effect of cutting off all US private investment and bank lending.
At the same time, the Reagan Administration was stubbornly opposing all efforts to embargo trade or investment with respect to South Africa’s racist apartheid regime. In September 1983, for example, the State Department approved a Westinghouse application to bid on a $50 million ten-year contract to maintain and supply South Africa's two nuclear power stations. The US also continued to support World Bank and IDB loans to the right-wing regimes in Guatemala and El Salvador throughout the 1980s.
The other half of the scissors strategy was the USG’s effort to create, finance, arm, and determine strategy and tactics for an 18,000-person contra army, financed with $300 million of taxpayer money, in-kind military assistance, another $100-$200 million raised from private donors like the Sultan of Brunei, and an untold amount of cocaine proceeds. The main faction, the Frente Democrático Nacional (FDN), consisted of 3,000 ex-Somocista National Guard members and another 12-13,000 assorted mercenaries, anti-Castro Cubans, Israeli trainers, Argentine interrogators, and cocaine traffickers of several different nationalities. The Reaganites knew they were not dealing with angels here. As the CIA’s Inspector General later admitted in 1998, the agency made sure to get a statement from the US Department of Justice in 1982, waiving the CIA’s duty to report drug trafficking by any contra contractors.
From 1982 to 1989, this murderous scalawag army stoked a war that ultimately took about 30,000 lives, including those of 3,346 children and more than 250 public school teachers. Another 30,000 people were wounded, and 11,000 were kidnapped, according to the National Commission for the Protection and Promotion of Human Rights. Another half million fled the country to avoid the chaos. With the help of Harvard Law School Professor Abram Chayes, Nicaragua later successfully sued the US for launching these and other terrorist attacks and causing all this damage. In November 1986, the International Court at the Hague found the US liable for several clear violations of international law – notably, for launching an unprovoked war that was not justified by any “right of self defense.” The Court suggested that appropriate damages for the resulting property damage were on the order of $17 billion. But the Reagan Administration declined to appear in court, and refused to recognize the judgment.
THE WORLD'S HEAVIEST DEBT BURDEN
The detailed history of Nicaragua’s contra war has been told elsewhere, at least those parts of it that are not still classified, like much of the record of US knowledge about the contras’ extensive cocaine trafficking activities, and President Reagan’s confidential discussions with his aides, kept off limits for an indefinite period by a Executive Order signed in 2001 by President G.W. Bush.
Our main interest here is in the war’s devastating impact on Nicaragua’s economy and its crushing foreign debt burden. Ultimately, the FSLN soundly defeated the contras with a combination of adroit military tactics – for example, heavily-mined “free-fire” zones along its northern border with Honduras – and a large standing army, raised by draft. To pay for all this, however, the FSLN had to boost military spending, from 5 percent of national income in 1980 to 18 percent in 1988, when the first in a series of armistices was finally signed. By then, more than half of Nicaragua’s government budget was devoted to paying for an army that numbered 119,000 regular soldiers and militia – 7 percent of all Nicaraguans between the ages of 18 and 65.
Early on, the Sandinistas had made a strong commitment to building new health clinics and schools in the county. These social programs, plus land reform, were among their most important accomplishments. Even in the midst of the war, with the help of 2500 Cuban doctors, they managed to increase spending on health and education, open hundreds of new medical clinics, and sharply reduce infant mortality, malnutrition, disease, and illiteracy. They also implemented a land reform that redistributed more than 49 percent of Nicaragua’s arable land to small farmers.
But the war made it very hard to sustain these undeniable social accomplishments Despite the FSLN’s military “victory,” Nicaragua’s regular economy took a direct hit. Trade and investment plummeted, unemployment soared to 25 percent, and inflation reached more than 36,000 percent by 1988-89. From 1980 to 1990, Nicaragua’s average real per capita income fell 35 percent, and the incidence of poverty rose to 44 percent. To deal with shortages in the face of soaring inflation, the FSLN had to implement a rationing system for food and other basic commodities. As the Nixon Administration had done to the Allende regime in Chile a decade earlier, so the Reaganites did to Nicaragua – they made the economy “scream.”
All told, by 1990, Nicaragua had displaced Honduras as the poorest country in Central America. It had also become the world’s most heavily indebted country. To fund the defense budget and their other commitments in the face of declining tax revenues, trade, investment, and multilateral funding, the FSLN partly relied on inflationary finance, by having the Central Bank just print more cordobas. But for vital foreign purchases, including oil and weapons, it required dollar loans from sympathetic countries, mainly the Soviet Union ($3.3 billion), Mexico ($1.1 billion), Costa Rica, Germany, Spain, Venezuela, Brazil, and Guatemala (!), plus more than $500 million from the Central American Bank for Economic Integration, one multilateral institution that the US did not control.
When the newly-elected government of Violeta Barrios de Chamorro took office in April 1990, the debt stood at $10.74 billion – more than 10 times its level in 1980, and nearly 11 times Nicaragua’s national income.
This was by far the highest foreign debt burden in the world, thirty times the average debt-income ratio for all developing countries. And it was not derived from “technical policy errors,” “economic accidents,” or “geographic misfortune. ” Part of it was the $1.5 billion of dirty debt left over from the Somoza years. The rest derived from the ruthless persecution by world’s most powerful country of a tiny, stubborn Central American nation that was determined to finally make its own history.
CONCLUSION - REAGAN'S IMPACT ON NICARAGUA
In the 1980s, against all odds, and woefully ignorant of economics, politics, business, and diplomacy, a handful of rather foolhardy Nicaraguans dared to challenge the Reagan Administration's attempt to prevent them from controlling their own destiny.
They made many mistakes, and they required much on-the-job training. But at least they tried to stand up.
When they did so, they were attacked, and when they defended themselves, they were portrayed as the aggressors. Ultimately they won a victory of sorts, but it left their country a shambles.
Then their successors, worshipers of the latest fashions in neoliberal economic theology, came to power promising reform and freedom, and ended up turning the country into a bantustan.
Perhaps Nicaragua will need another revolution.
(c) James S. Henry, SubmergingMarkets.com(tm) 2004. Not for reproduction or other use without express consent from the author. All rights reserved.
June 17, 2004 at 08:05 PM | Permalink | Comments (2) | TrackBack
Thursday, April 01, 2004
"The Worst April Fool's Joke Ever:" Brazil's 1964 Coup The Foundations of Regressive Development
April 1, 2004 is not only April Fools Day in the US and Europe. It is also the fortieth anniversary of “the worst April Fools’ joke ever,” as many Brazilians called it, the 1964 US-backed military coup in Brazil that overthrew the constitutional, democratically-mandated government of its populist President, João Goulart.
This coup led directly to 21 years of disastrous rule by Brazil’s military. During that period, the military cracked down sharply on all political opposition, independent trade unions, and critical media. It also piled up one of the world’s largest foreign debts, tried to develop nuclear weapons and intercontinental missiles, and pursued a national development strategy that favored the construction of huge, poorly-planned but highly lucrative hydro dams, Amazonian highways, and nuclear plants over investment in education and other basic human needs.
As described in more detail in the following excerpt from The Blood Bankers, all this proved to be very profitable for the officials, generals, and foreign and domestic bankers that catered to the regime’s needs.
But it also created a legacy of distorted development, poverty, concentrated land and media ownership, deforestation, environmental pollution, high-level corruption, and inequality, as well as a culture of violence and disregard for human rights.
Fortunately, Brazil, a country with 182 million people that accounts for more than two-thirds of South America's entire economy, returned to civilian rule in 1985. But it still struggles with most of these problems to this day.
As the following account makes clear, the US Government was deeply involved in encouraging the coup at the highest levels -- n.b. recently-declassified White House tapes and documents. Once in power, Brazil’s military also played a crucial role in the empowerment of right-wing regimes in several other Latin American countries, including Bolivia and Uruguay. Indeed, top US policymakers viewed Brazil’s military as a very useful agent, which could be used to impart a hard right spin to political development all over the Southern Hemisphere.
The standard apology for all this is that it was the price that had to be paid to contain the global Communist menace. When examined carefully in the bright light of day, this excuse turns out to be a canard. The fact is that Brazil never faced a serious revolutionary threat from the Left; that Goulart and his supporters were at worst populist, nationalistic land-reformers and union supporters; that the generals and their friends in Brazil's elite systematically exaggerated the leftist threat in order to justify their appetite for power, which gave many of them offshore bank accounts; that Presidents Kennedy, Johnson, and, later on, Nixon, were completely spooked by the Castro fiasco into overreacting to such populists all over the Third World; that the Brazilian coup completely undermined the rule of law, labor unions, human rights, and political freedoms for many years; and that it also led to decades of short-sighted economic policies that damaged millions of lives.
In short, if we really want to understand the roots of Latin America's comparative poverty, inequality, violent culture, and distorted development, as well as why many Latin Americans do not necessarily share the gringos' high esteem for their own role in history, the story of Brazil's 1964 military coup is a good place to start.
FOUNDATIONS
One long-time Brazilian banker recalled that at that time (the early 1960s) JPMorgan's position in Latin America was “essentially nowhere.” Years earlier, of course, it had been one of the first U.S. banks to do international banking. In the l880s, J.P. Morgan Sr. acquired Morgan et Cie in France and a third of London’s Morgan Grenfell, and in l908 the bank added Guaranty Trust Company, which had French, Belgian, and UK branches. From l890 to l930 Morgan floated more Latin American bonds than any other bank. But from the Depression until the l950s it had largely neglected Latin America. By l964, its entire Mexican exposure was only $15 million, and its Brazilian exposure just $50 million, and Morgan’s Latin American group was run by people who were ”not very aggressive....bright but not out-going.....(the head) would show up in Rio and wait at his hotel for clients to call on him.” Of the group’s five bankers, only Fred Vinton, the son of a long-time Citibank rep in Buenos Aires, had ever lived in Latin America. Citibank, Chase, and Bank of Boston all had local branches in Rio and São Paulo, but not Morgan.
Of course, at the time, Brazil was viewed as quite a risky place to do banking. Juscelino Kubitschek, the country's President from l955 to l961, had embarked on an ambitious ”Fifty Years in Five” program, promoting industrialization and huge projects like Brasilia, the new federal capital in the remote state of Goiás, that was aptly described as “the revenge of a Communist architect against bourgeois society.” Kubitschek’s program produced five years of 7 percent growth, unprecedented corruption, and the Third World's largest debt, $2.54 billion by l960. That may not sound like much now, but it consumed forty percent of Brazil’s export earnings. In l961, Janio da Silva Quadros, Kubitschek's successor condemned this debt in terms that later generations would fully understand:
All this money, spent with so much publicity, we must now raise bitterly, patiently, dollar by dollar and cruzeiro by cruzeiro. We have spent, drawing on our future to a greater extent than the imagination dares to contemplate.
But Janio Quadros soon proved to be one of Brazil’s weirdest leaders. He also tried to ban horse racing, boxing matches, and bikinis on the beach, and when the U.S. pressured him to embargo Castro, he defiantly journeyed to Havana and awarded Che Guevara the Ordem do Cruzeiro do Sul, Brazil's equivalent of the Legion d'Honeur. At one point early in his term he had been visited by Adolfe Berle, Jr., President Kennedy’s special assistant on Latin America. Kennedy was quietly seeking Quadros’ support for the upcoming Bay of Pigs invasion. According to John M. Cabot, the US Ambassador to Brazil at the time, Berle effectively offered “Brazil” a $300 million bribe in return for cooperation. But Quadros became “visibly irritated” after Berle ignored his third rejection, and sent Berle off to the airport unaccompanied. A few months later, in August 1961, Quadros resigned, complaining of being surrounded by ”terrible forces,” and blamed his downfall on a cabal that included “reactionaries” Berle, Cabot, and US Treasury Secretary C. Douglas Dillon.
Goulart and Kennedy
This allowed the succession of João Goulart, Janio’s Vice President, a wealthy populist cattle farmer from Rio Grande do Sul. Goulart visited the US in April 1962, addressed a joint session of Congress, and received a ticker tape parade in New York City. But he immediately proceeded to alienate every key interest group at once, launching an aggressive land reform, boosting taxes on foreign investors, nationalizing utilities and oil refineries, and even encouraging enlisted men in the Army to organize a union. Inflation soared to the unheard-of level of 100 percent, exhausting four Finance Ministers in two years. All this was a splendid recipe for counterrevolution -- Brazil’s usually fractitious military leaders banded together and organized a coup, was supported by business, most of the “middle class,” and the U.S., which spent tens of millions of dollars on a covert ant-Goulart media campaign. In l963, Goulart's second Finance Minister visited Washington and asserted that the left-leaning regime’s social reforms had been inspired by President Kennedy’s so-called "Alliance for Progress" But he received a cold shoulder -- the US aid window closed down until April 1964, after the coup. As early as l962 U.S. intelligence had warned of coup preparations, and was more than sympathetic. As David Rockefeller, who was at that point the President of his family’s bank, Chase Manhattan, told a closed-door conference at West Point in the fall of l964, ”It was decided very early that Goulart was unacceptable....and would have to go.”
Ball and Johnson
A newly-declassified audio tape, recorded by the White House taping system on March 31, 1964, just as the coup was just beginning to unfold, shows President Lyndon Johnson personally involved in reviewing US support for the coup, and monitoring the latest developments. In a phone conversation with Undersecretary of State George Ball, who was coordinating US activities, Johnson expressed support for aggressive action: "I think we ought to take every step that we can, be prepared to do everything that we need to do, just as we were in Panama if that is at all feasible. I’d put everybody who had any imagination or ingenuity in (Ambassador) Gordon’s outfit or (CIA Director) McCone’s or yours or (Secretary of Defense) McNamara’s. We just can’t take this one, and I’d get right on top of it and stick my neck out a little.” US Undersecretary of State George Ball: That’s our own feeling about it, and we’ve gotten it well organized.”
The April 1, 1964, coup that followed -- ”the worst April Fool's joke ever” -- was led by General Humberto de Alencar Castello Branco, commander of the Fourth Army in Recife. During World War II, he had served with Brazil’s Expeditionary Force, which fought with the Allies in Italy. His “trench buddy” there was Colonel Vernon A. Walters, the U.S. “military attaché” from September 20, l962 to l967, who would later be promoted to Lt. General for his accomplishments in Brazil, and then move on to serve as senior CIA officer, the CIA’s Deputy Director from March 1972 to 1976, and Ronald Reagan’s UN Ambassador in the 1980s. Colonel Walters spoke fluent Portuguese and also very close to General Emílio Garrastazu Médici, head of Brazil’s Black Eagles military school during the 1964 coup, then military attaché to Washington (64-65), head of Brazil’s CIA, the “Serviço Nacional de Informaçoes (SNI)” from 1967 to 1969, and then Brazil’s President, courtesy of the junta.
Castello Branco
During the coup, Castello kept both General Walters and U.S. Ambassador Lincoln Gordon “very well-informed of pre-coup deliberations,” a US Navy “fast” Carrier Task Group was standing by offshore, and six US Air Force C-135 transport plants with 110 tons of arms and ammunition were standing by, in case there was any resistance. Fortunately, the coup was almost bloodless, although there would be many disappearances, deaths, and cases of political torture during the 21 years that followed.
Castello Branco was supposed to step down after a short period of housecleaning, but Brazil’s military proved to be a better master than a maid -- it stayed in power from l964 to l985. At first, Castello turned the economy over to Octavio Bulhões, an academic-cum-Finance Minister, and Roberto Campos, a U.S.-educated ex-Jesuit and former head of Brazil’s powerful National Development Bank (BNDES), who became Planning Minister. Their reign from April l964 to March l967 was the first in a series of rather disappointing Latin American experiments with monetarism, the notion that controlling the money supply was the sine qua non of economic policy. To fight inflation, they reigned in credit, slashed spending (which they viewed as driving money growth, because the government was financing by selling bonds to the banking system) , and opened the door to imports. They also eased restrictions on foreign investment, eliminated taxes on foreign profits, and outlawed strikes. Dozens of labor leaders were jailed, and wages were frozen, although inflation was still raging at forty percent a year. But the regime was careful to protect investors against inflation by indexing bonds and bank deposits. A new capital markets law also created Brazil’s first investment banks and provided “the most sophisticated company law in Latin America.” In l965, in an attempt to control the money supply, Campos also created Brazil’s first Central Bank and a National Monetary Authority.
All these conservative measures went down rather well with bankers and the U.S. government. Regardless of who staged the coup, it soon became quite clear who would pay for it. From l964 to l970, Brazil got more than $2 billion of U.S. aid, which made it the third largest aid recipient in the world. About $900 million of this arrived in the first six months after the coup -- in l964, after the coup, the U.S. Treasury paid seventy percent of the interest due on Brazil's debt. In July 1964, Brazil also signed another IMF agreement, and in the next three years it got $214 million of IMF loans, which had been zero from l959 to l964. Brazil also suddenly became the World Bank’s largest customer, after getting no loans at all from 1950 to l965, as well as the largest borrower the IDB and from our old friends, the US EX-IM Bank. From l964 to 1970, direct investment by American companies increased fifty percent. In January l967, the IMF held its 22nd convention in Rio, presided over by General Artur Costa e Silva, a former War Minister and Castello Branco's successor.
Unfortunately for the majority of Brazilians living in poverty, most of this aid went to pay for budget deficits, planning exercises, and capital-intensive projects -- original Alliance for Progress objectives like “eliminating illiteracy from Latin America by l970” and “income redistribution” got short shrift. The real value of the minimum wage dropped by one-fourth from l964 to l967, and malnutrition and infant mortality rose dramatically. Domestic industry was hit by foreign competition and a recession at once, even as multinationals were getting cheap finance and lower taxes. Many foreign investors also got ”sweetheart” deals -- Campos was especially generous to Amforp, an American-owned utility, and in l965 the American billionaire Donald Ludwig was allowed to buy an Amazon forest tract twenty percent larger than Connecticut for $3 million. General Artur Golbery Couto e Silva, the military’s “gray eminence,” later became President of Dow Chemical do Brasil and a representative of Dow’s Banco Cidade. A top professor at the Escola Superior de Guerra, Brazil’s version of the National War College, and the author of the seminal Geopolitica do Brasil, in the early 1960s Golbery had used CIA funding to launch the Institute for Research and Social Studies (Instituto de Pesquisas e Estudos Sociais--IPES), the SNI’s precursor. Over the next two decades, the SNI would employ more than 50,000 people to spy on and otherwise deal with “subversives” at home and abroad. Golbery later served as head of the Casa Civil, a key aid to President Ernesto Geisel. Not surprisingly, along the way, Dow Chemical got special permission for a new plant in Bahia.
Soon, even nationalist critics started attacking Roberto Campos' program as a ”pastoral plan” designed by Americans to eliminate domestic industry -- he became widely known as ”Bob Fields,” “a full-time entreguista.” In l964, a popular Rio bumper sticker said, “Enough of intermediaries! -- (U.S. Ambassador) Lincoln Gordon for President!” In l966, the U.S. Ambassador complained that American advisors were implicated in ”almost every unpopular decision concerning taxes, salaries and prices.”
In October 1965, in the last free elections until l982, the military’s candidates for state governorships in Rio de Janeiro and Minas Gerais were defeated. Workers, students, and church organizers turned radical, and several civilian leaders who had supported the coup, including Magalhães Pinto and Carlos Lacerda, also pressed for new elections. There was a sharp increase in capital flight -- in 1966 Brazilians sent more money abroad than all the new foreign investment and foreign aid brought in. The nationalists in the military also began to treat the “internationalist” segments of the upper classes harshly -- they unleashed a spy operation to catch wealthy Brazilians who had foreign accounts. In November 1966 the police, assisted by Brazil’s intelligence service, the SNI, under the command of General Fiuza de Castro, raided the offices of Bernie Cornfeld's Swiss-based I.O.S. flight capital operation in seven cities, arrested 13 salesmen, and seized files on 10,000 clients.
All this set the stage for a hard-line backlash, led by members of the military who believed that the castellistas were selling out to foreigners and were not tough enough on subversivos. In late l966, Castello Branco gave way to the IMF’s favorite, General Costa e Silva. Political parties were consolidated into a ”majority” party, ARENA, and an official ”opposition” party, the PMB -- as they soon came to be known in the underground, the parties of ”yes” and ”yes sir.” Many opposition politicians, union leaders, and students were stripped of their civil rights. In December 1968, when a federal deputy asked Brazilian women to stop having sex with military officers until political repression ceased, the Army demanded that Congress lift the fellow’s immunity so he could be prosecuted for “insulting the Armed Forces.” When the Congress refused, Costa e Silva closed it, disbanded state assemblies and city councils, suspended habeas corpus, and imposed press censorship. Dictatorial niceties like arrests without warrant and torture now became common, while elections were reduced to ratifications of the military’s “bionic” candidates.
As for Roberto Campos, in March l967 he moved over to the private sector, giving way to a more dirigiste economic team. He never again exercised much power, although he served as Ambassador to England in the mid-1970s. His l982 diary reads like a “Who’s Who” of prominent Brazilians and Americans. Tony Gebauer was one of the friends listed there. But unlike some of his successors, apparently Roberto Campos didn’t do his private banking at Morgan -- the diary lists accounts at Geneva’s Pictet et Cie and Trade Development Bank, whose founder, Edmond Safra, also founded Republic Bank of New York and Safra Bank, and was an old Campos acquaintance.
So by 1967, Brazil was thus well on its way to becoming a marshal law state. With the support and guidance of the US government, a left-leaning, if democratically-elected, government had been vanquished, and a right-wing dictatorship put in its place. Especially after 1968, until the mid 1970s, the level of repression increased, and the number of political opponents who were murdered or “disappeared” reached into the low thousands. This was modest, compared with what went on in Argentina, Chile, and Paraguay, , but Brazil made up for the body count by sharing its early experiences with these countries. (See below.)
DICTATORSHIP OF THE IMAGINATION
While Brazil’s military deserved much of the credit for this new system, the US national security apparatus also played a key role. One of its crucial long-term influences was a variation on the “Mighty Wurlitzer” concept that it had pioneered with great success in France, Italy, Germany, and Japan in the 1940s and 1950s, and continues to use right up to the present in places like post-Soviet Eastern Europe, Southeast Asia, Lebanon, Pakistan, Iraq, and the Philippines.
This was to develop a nation-wide media network that could be used to shape public opinion. In 1964, an energetic, personable young Time-Life executive named Joe Wallach went to work with Roberto Marinho, a Brazilian businessman who at that point was running a newspaper and a local TV station in Rio. Wallach, didn’t speak any Portuguese at the time, but he had a background in TV production and accounting in California. Suddenly he became O Globo’s Executive Director. “Time-Life” also invested $4 million -$6 million in a joint venture with Globo, a great deal of money for that time, which helped Globo buy up concessions and steal a march on its competitors. “Time-Life” and its friends also encouraged multinationals to direct advertising to Globo, which soon came to run a kind of advertising cartel. Meanwhile, Globo also was careful to take a pro-government line in its reporting – cynics came to refer to it as “The Ministry of Information.”
All this, plus the special licenses for satellite broadcasting, radio, and local stations that it received again and again from the government, made Globo prosper. Over the next twenty-five years, under Wallach’s leadership, TV Globo became the world’s fourth largest TV network. The deal was rather simple – Globo provided favorable coverage to its political allies, and they helped it get the TV, satellite broadcasting, radio, and cable concessions that it needed to keep growing. In special cases, the politicians and their families also shared in the ownership of these “goodies,” as we’ll see below.
Over the next three decades, Globo became one of the most politically-influential media empires in the developing world – by 1990 it owned 78 stations in Brazil, with more than 50 million viewers in Brazil alone, ad revenue of $600 million a year, 8,000 employees, more than 30 subsidiaries in Italy, Portugal, Cuba, Japan, and other countries, and it was producing and exporting TV programming to 112 countries. Furthermore, even after Brazil returned to democracy in 1985, Globo continued to exert strong influence over political selection of many key political leaders, including several Presidents. All along, it was a consistent opponent of candidates that it perceived as threats to the system, often using blatant propaganda to influence elections, as in the hard-fought 1989 Presidential race between Lula and Fernando Collor.
Only in 2001-2002, long after Wallach had retired and Roberto Marinho had passed the empire on to his evidently less-able sons, would Globo’s disappointments in Internet and cable investments and crushing foreign debts finally bring it down to earth – not unlike the similar fate that befell its original partners at “Time-Life,” now part of the hapless AOL Time Warner conglomerate. The Marinho family’s estimated wealth on the Forbes’ annual billionaire survey peaked at $6.4 billion in 2000, with the Internet’s peak. By 2002 they were down to their last $1 billion, barely eligible for a mention on the Forbes list.
Even then, however, Globo still would try to use its political influence as currency. In the 2002 Presidential race, in a move that must have made its original partners turn circles in their graves, Globo for the first time threw its support to Lula, the left-wing candidate, who ended up finally winning on this fourth try for office. Evidently, having backed the “system” that, as we’ll soon see, ultimately made Brazil the world’s largest debtor, Globo was hoping for some government relief from its own crushing foreign debts.
BANKING ON THE STATE
In any case, in addition to military action and media support, the top-down development strategy adopted by Brazil’s military and its foreign allies in the 1960s also had a crucial economic component. At first glance – and indeed, at second – this strategy was a little hard to reconcile with free-market principles and democratic rule. But it cleared the way for bankers like Tony to earn huge fortunes. As Auden says, “When there was peace, he was for peace. When there was war, he went.” These bankers joined forces with a corrupt coalition of officials, industrialists, and agro-exporters to support a new debt-intensive strategy that was designed and implemented by a powerful new Minister also named Antonio, who became one of JPMorgan's Tony Gebauer’s closest friends of all.
Antonio Delfim Neto was an extremely fat academic-cum-bureaucrat from a middle-class Italian family in São Paulo. In the l950s, he wrote a brilliant Ph.D. dissertation on the coffee industry and taught macroeconomics at the University of São Paulo (U.S.P.). In the l960s he was a consultant to Ralph Rosenberg, whose Ultra Group was the largest private investor in Petrobras, as well as Antonio Carlos de Almeida Braga, the owner of Bradesco, Brazil's largest bank, and Pedro Conde, another bank owner. From 1963 to l967, Delfim, in his late thirties, advised São Paulo governors Carvalho Pinto and Lauro Natel, who was on leave from Bradesco. Then, from l967 to 1985, Delfim came to wield more influence over the economy than anyone before or since.
He was as quick-witted as Campos, but most of his success was due to a lack of ideology. As Delfim said in l969, “I am not going to sacrifice development only to pass into history as someone who defeated inflation at any cost.” He was the grand master of bureaucratic infighting, inserting his “Delfim boys,” mostly U.S.P.-trained economists, into key positions all over the government, where they operated a kind of Florentine patronage system, keeping a running tally of favors owed to important people. “I was in the office of (an important banker) when Delfim called. He needed $5 million right away,” one banker recalled. “The only argument was how to get it to him. We knew he'd make it up to us.” In a country where most ministers rotated quickly, this network of favors and influence earned Delfim unusual longetivity. He was Finance Minister in l969-74, Ambassador to France in l974-78, Minister of Agriculture in l979, Planning Minister in l979-85, and even after civilian rule returned in l985, an important behind-the-scenes leader in Congress, where he also enjoyed immunity from prosecution. Among those responsible for Brazil's massive debt burden in the 1980s, only Tony Gebauer enjoyed similar continuity.
In August 1969, General Costa e Silva died of a stroke, after learning that his wife had helped deliver Brasilia’s telephone exchange contract to Ericsson, a Swedish company that bribed its way all over Latin America. Vernon Walter’s friend, the even-more hawkish General Emilio Medici (1969-74), then took over, and some of Delfim’s critics seized the opportunity to accuse Delfim of corruption. But he was so popular with all his other “clients” that Delfim was soon reappointed. He promised Medici, echoing the grandiose Kubitschek in the 1950s, “Give me a year and I will give you a decade.”
General Medici
Meanwhile, from a national security standpoint, Medici was exactly what Brazil’s US allies were looking for – he visited Nixon, Henry Kissinger, and General Walters in December 1971. In the meeting just two weeks later with Secretary of State William Rogers, recorded in a transcript only just released by the National Archives in 2002, Nixon described Medici in glowing terms:
- Rogers: “Yeah, I think this Médici thing is a good idea. I had a very good time with him at lunch and he…”
- Nixon: “He’s quite a fellow, isn’t he?”
- Rogers: “He is. God, I’m glad he’s on our side.”
- Nixon: “Strong and, uh, you know…(laughs)…you know, I wish he were running the whole continent.”
- Rogers: “I do, too. We got to help Bolivia. He’s concerned about that. We got to be sure to…”
- Nixon: “Incidentally, the Uruguayan thing, apparently he helped a bit there…”
The “Uruguayan thing” was clarified in another transcript, recently released, of a Nixon conversation with Britain’s Prime Minister Edward Heath that same month. According to Nixon, “The Brazilians helped rig the Uruguayan election…Our position is supported by Brazil, which is after all the key to the future. ”(emphasis added.) He was referring to the November 28, 1971, elections, in which Uruguay’s Frente Amplio, a coalition of left-leaning political parties not unlike Allende’s Unidad Popular in Chile, had been defeated by the right-wing Colorado Party. The result was indeed unexpected, and evidently Medici had had a key role in it.
In March, 1972, the Colorado’s new right-wing President Bordaberry, gave Uruguay’s security forces a green light to go not only after the Tupamaros, Uruguay’s urban guerillas, but also against its labor unions, student associations, and political opponents. In June 1973 the military made Bordaberry a puppet, and in 1976 took complete power, following in Brazil’s footsteps. The result was a bloodbath that anticipated the thousands of political murders that later occurred in Chile, after Allende’s demise in September 1973, and in Argentina after its military seized power in 1976. By then, Uruguay, a country with just 3 million people that had once been known as “the Switzerland of Latin America,” had become its torture chamber, with more political prisoners per capita than any other country in the world. Like Brazil, once gone, civilian government did not return to Uruguay until 1985.
According to other newly-released documents, General Medici had also assisted with the right-wing in Bolivia in August 1971. More generally, it has recently become clear that Brazil’s military, with US support and coordination from the US, played a key role in training and guiding the repression that went on in Chile, Argentina, Paraguay, and Bolivia in the late 1960s and 1970s. As one scholar noted, “Brazil had a head-start on terror.” Even prominent journalists, like Waldimoro Herzog, who was murdered by the Brazilian regime in 1975, were not safe.
Indeed, one of the victims may even have been former President João “Jango” Goulart himself, who died in 1976 of a curious “heart attack” at the age of 58, at his ranch in Parana. Goulart’s family had long suspected that he’d been murdered by the military. In 2000, Brazil’s Congress finally got around to starting an official investigation of the death. Of course Brazilian Presidents have a history of unfortunate endings – Juscelino Kubitschek, Quadros’ predecessor, also died in 1976, in a car accident, and Tancredo Neves, the first civilian President after military rule ended in 1985, died after three months in office.
In any case, whether or not the “domino theory” really ever applied to Communist revolutions, clearly it worked quite well with respect to these Latin American right-wing regimes. And their US patrons discovered that with only a little nudge, one big domino – “the key to the future” – could wield extraordinary influence.
1 The above is an excerpt from James S. Henry, The Blood Bankers. Tales from the Global Underground Economy. (New York: Four Walls, Eight Windows, December 2003, 417 pp.)
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Friday, December 05, 2003
Restructuring Iraq's Foreign Debt - Let's Hope This "Baker Plan" Is More Successful!
On December 5, 2003, President George W. Bush announced that he is appointing James A. Baker III to
to be his “debt envoy,” in charge of renegotiating Iraq’s huge foreign debt. To many, this is a welcome move -- Baker appears to be a savvy, affable fellow with strong diplomatic skills and multilateralist inclinations, which this administration sorely needs. And Iraq’s debt now stands at $128-$200 billion or more, depending on whose claims are recognized. (See below.) Since this is at least several times Iraq's entire national income, a debt restructuring is certainly long over due.
Indeed, as I’ve argued elsewhere, if Iraq’s foreign debt had been restructured in the late 1980s, when Baker was Secretary of State, many of our difficulties with Iraq -- including Saddam’s 1990 invasion of Kuwait, the prolonged embargo, and our most recent invasion of Iraq -- might well have been avoided entirely.
Those who are old enough to remember James Baker's terms as Secretary of the Treasury from January 1985 to August 1988 and Secretary of State from January 1989 to August 1992 may be struck by several other ironies.
As we’ll remind ourselves below, not only did his "Baker Plan" utterly fail to reduce the Third World debt when he was Treasury Secretary, but when he was Secretary of State, he actually encouraged the US Department of Agriculture and leading US and foreign banks to lend billions of dollars to Iraq -- despite its credit unworthiness. His motive back then was evidently to help Saddam continue to be able to import weapons from abroad and manufacture even nastier weapons back home. It seemed like a good idea at the time.
So, in a sense, this recent appointment shows that our policies have come full circle. It must be profoundly satisfying for 73-year old Jim Baker. His last hurrah in government may be to finally successfully restructure a Third World country's debts -- indeed, in this case, the same very country whose debts he helped to increase substantially fifteen years ago. We may not be able to find Bin Laden, but we certainly have located another enemy, Pogo……
THE BAKER PLAN’S TRACK RECORD
To begin with, Jim Baker’s credibility in debt restructuring is not exactly unsullied. In 1985, as President Reagan’s second Treasury Secretary, he launched his so-called "Baker Plan," the first of several attempts by the US Government to tackle the exploding Third World debt problem. It was managed day-to-day by Baker’s close associate, former Undersecretary of the Treasury Dr. David C. Mulford, who later became Chairman of Credit Suisse First Boston's International Group, and just last month was designated by President Bush II as the new Ambassador to India.
The “Baker Plan,” which relied heavily on a combination of tougher IMF/World Bank conditions in exchange for a modest amount of new loans, basically assumed that with the right policies, developing countries could grow themselves out of their excessive debts. Unfortunately this assumption proved to be wrong – with disastrous consequences for the countries. The Baker Plan, together with its successor, Treasury Secretary Nicholas Brady’s so-called "market-oriented," voluntaristic approach to debt reduction, were utter flops. The conditions that were imposed on debtor countries threw them into even deep recessions, provoking bloody riots (Venezuela, 1989) and debt moratoria (Brazil, 1987; Argentina, 1988). By the year 2000, the real level of Third World debt was 150 percent higher than it had been in 1985. (See Chart 1.1)
However, the Baker Plan, the Brady Plan, and other such “market-based” approaches to debt reduction that succeeded them did at least have one beneficial effect. They provided lots of opportunities for leading First World investment banks -- like Mulford’s former employer Credit Suisse First Boston, and Nick Brady’s investment bank Darby Overseas Investments Ltd., but unlike Baker’s own Carlyle Group, which has generally avoided developing countries -- to make a ton of money by structuring and syndicating privatizations and debt swaps, and by advising developing countries on the intricacies of how these plans really worked. (See my book for more juicy details -- including Dr. Mulford's involvement in Argentina's 2001-02 debt debacle.)
Mulford
THE ORIGINS OF IRAQ’S DEBT AND THE KUWAIT INVASION
In announcing Jim Baker's new appointment, President Bush explained that "the future of the Iraqi people should not be mortgaged to the enormous burden of debt incurred to enrich Saddam Hussein's regime.(emphasis added.)" It is hard to quarrel with that statement – up until the last five words. If Mr. Bush had actually bothered to examine the origins of Iraq's foreign debt, he would have quickly realized that "enriching Saddam" was a very minor part of the story.
Indeed, the vast bulk of Iraq's foreign debt today is supposedly “owed” to Kuwait, Saudi Arabia, and the other Gulf States. Most of this was incurred to help fight the Iran-Iraq War and defend the autocratic dynasties that rule these oil emirates against the Ayatollah Khomeini's brand of populist fundamentalism in the 1980s.
One of the main reasons why Saddam invaded Kuwait in August 1990, in fact, was that Kuwait and Saudi Arabia refused to restructure these "Iraqi debts" – at the same time they were accelerating oil production, driving oil prices down and decimating Iraq's oil revenues (and their own -- but they had much less need for the revenue back then.) By 1989, as it emerged from an eight-year war, Iraq's economy was a complete mess, with hundreds of thousands of war casualties, more than a million soldiers under arms, declining oil revenues, and this huge war debt.
Iran-Iraq War
Yet for reasons that are still very unclear to this day, the Kuwaitis and the Saudis insisted on being repaid in full, and actually accelerated their oil production.
If James A. Baker III, who was Secretary of State at that point, had really wanted to avoid Iraq’s subsequent invasion of Kuwait, he (and Mulford/ Brady) might easily have exerted pressure on these two US allies, who were completely dependent on the US military for their protection. Given that pressure, they might well have restructured Iraq's excessive debts back then, at a fraction of the cost that will be required in 2003 -- even ignoring all the other side effects of this delay.
Instead, Baker choose to adopt what might be termed a “Weimar” response with respect to Saddam’s debts. It was nothing less than a throwback to the hard-hearted policy that the US, France, and the UK adopted with respect to Germany’s war reparation debts after World War I – with somewhat similar long-term consequences.
Please don’t take my word for this, however. Instead, examine the detailed history of the “lessons learned” from the Iran-Iraq war that was published in December 1990 by the US Army War College’s own Strategic Studies Institute, just a few months after Saddam invaded Kuwait. On the subject of why Saddam had chosen to do so, the study had this to say:
Nor does it seem reasonable to argue that Iraq invaded Kuwait because it thought it could get away with it. Throughout the war, the Iraqis had ample evidence of the importance of Kuwait to the superpowers….M/font> Taking all this into account, it seems obvious that Iraq invaded its neighbors because it was desperate. (Emphasis added.) It had a million man army that it could not demobilize, because it had not jobs to send the men home to. It had no jobs because its economy had been ruined by the war. It could not get its economy going again until it demobilized. Thus the Iraqi leadership saw itself in a vicious dilemma. At the same time, Kuwait was fabulously wealthy, and Iraq – by seizing it – could hope to exploit its wealth to resolve its economic problems….The lesson would appear to be, never make war until you have assessed the potential of your opponent. Iraq’s initial mistake in attacking Iran was in failing to appreciate the vast human potential that Tehran could exploit…And in the end, although it emerged “victorious,” it practically bankrupted itself. In this view, then, Saddam was not so much a crazed madman, an expansionist bent on regional domination, or even an undeterrable, diehard anti-Zionist, as much as he was a desperate bungler, driven into the corner by his country’s own economic situation. THE COSTS OF NOT RESTRUCTURING IN 1990 Was this view correct? We may never know. What is clear is that the cost of not bothering to find out has been enormous – especially compared with the cost of the mere $27 billion settlement that Iraq proposed and Kuwait rejected in July 1990, on the eve of the war. Among the subsequent costs of failing to restructure Saddam’s debts” back then, we can include: >The direct costs of the 1991 Gulf War. These include at least $100 billion of damage to non-oil infrastructure in Kuwait and $50 billion in Iraq, plus $61 billion of direct military expenses for the US-led coalition forces, an estimated $600 billion in longer-term reductions of the region’s gross domestic product; 2500 to 3500 civilians, 50,000 to 100,000 Iraqi soldiers, and 350 coalition forces killed; about 111,000 indirect civilian deaths during the wartime period, including 70,000 children, due to a breakdown in sanitation, the spread of infectious diseases, the disruption of hospital care caused by power outages, and the side-effects of more than 300 tons of depleted uranium ordinance used by the coalition in southern Iraq; up to 25,000 coalition troops who complained after the war of “Gulf War” syndrome, a mysterious “illness” that many believed might have been caused by exposure to chemical weapons; nearly 700 oil wells that were set afire, burned for a year, and caused an environmental disaster and another $20 billion of damage; and 11,000,000 barrels of oil that were released into the Persian Gulf, about twenty times the size of the 1989 Exxon Valdez spill. (See the PDF Version for footnotes to sources.) >Compensation Claims for Gulf War Damage. As a result of the 1991 war, Iraq was also saddled with about $320 billion in claims for damage compensation, which it was supposed to pay out of oil revenues, channeled through the UN under the terms imposed by the Coalition. These claims included $117 billion claimed by Kuwait’s Public Authority for Assessment of Compensation. By 2003, $148 billion of these Gulf War claims had been settled for about $.30 on the dollar, or $43 billion. Assuming conservatively that the remaining claims will be settled for an average present value of $.20 cents on the dollar, the remaining claims would be worth $36 billion. At that rate, Iraq will ultimately have paid out about $79 billion, in present value, for Gulf War damage -- on top of its foreign debt. This means that these compensation claims will have cost it almost as much as its entire Iran-Iraq war debt. These sanctions created havoc in Iraq’s public health, sanitation, and hospital systems, by interrupting the supply of imported medicines, hospital equipment, chlorine and pipes for water treatment plants, pollution control gear for the country’s oil refineries, and many other imported necessities. UNICEF has estimated that these 1990s sanctions alone were responsible for boosting Iraq’s infant mortality from 25 per 1000 births in 1990 to 92 per 1000 in 1995, and causing a one-third reduction in average per capita caloric intake by 1996. In 1996 the UN Oil-for-Food program was introduced to moderate these effects. Still, aid experts estimated that for the decade as a whole, the sanctions on Iraq probably claimed at least 60,000 to 100,000 victims per year – half of them children. In addition, the sanctions also imposed heavy costs on neighboring states like Turkey, which estimated that it lost $80 to $100 billion in trade revenues with Iraq because of their border’s closure. Meanwhile, the one group of Iraqis that was least affected by the sanctions was of course Saddam’s own Ba’athist Party. A 2002 study by the GAO found that, while the UN Oil for Food program accounted for $51 billion of Iraq oil revenues from 1997 to 2001, another $6 billion of illicit income was probably generated through illegal oil exports and surcharges levied by key officials in exchange for contracts. It speculated that much of this income ended up in the usual places – bank accounts in offshore havens like Switzerland, Lebanon, and Cyprus. These sanctions also provided the occasion for the well-known remark by US Secretary of State Madeleine Albright in 1996. When asked by reporter Leslie Stahl whether the policy was worth the deaths of 500,000 Iraqi children, she replied, “I think this is a very hard choice, but we think the price is worth it.” Many others did not agree. Two successive senior UN humanitarian program coordinators and the head of the World Food Program resigned from the program in 1998 and 2000, describing what was being done to the Iraqi people as “intolerable.” As one commented, “How long should the civilian population of Iraq be exposed to such punishment for something they have never done?” The Clinton Administration’s answer -- like that of President George H.W. Bush I and James A. Baker III way back in 1991-92 -- was that, from the standpoint of the First World's own selfish interests, this brutilitarian policy was preferable to the full-scale invasion that would have been needed to take out Saddam and his crew. But for the events of September 11th 2001, and the opportunity that it presented to conflate Saddam’s regime with other “Islamic terrorists,” President Bush II would probably have reached the same conclusion. All these costs are even before accounting for the enormous costs of the 2003 US-led invasion – at least $100 billion for military costs for the period March 2003 through yearend 2004, and an estimated $20-$30 billion a year for reconstruction. All told, the failure to head off Saddam’s adventurous attempt to solve his “debt problem” by invading Kuwait has easily had an economic price tag – even apart from all the suffering it caused – of at least $800 billion to $1 trillion. This makes Iraq’s foreign debt – whatever it is – pale by comparison. And it should also make us all a wee bit curious to know whether negotiating a debt-and-oil-price settlement with Saddam was ever seriously considered by James Baker way back in the late 1980s, before all these bloody chickens came home to roost? IRAQ’S FOREIGN DEBT – WHO’S OWED WHAT NOW? A s for Iraq’s foreign debt now, who is owed what, and with whom will ‘debt envoy” Baker have to negotiate? Estimates of the debt’s size vary widely, because different measuring rods and time periods are used by different analysts. But by all measures, the accumulated debt burden was already very heavy by the end of the 1980s. And most of it was clearly due to the Iran-Iraq War, which lasted from October 1980 until July 1988, when Iran finally accepted a ceasefire. Since the US and its allies, including Kuwait and Saudi Arabia, actively encouraged that war, and provided assistance to both sides in the interests of perpetuating it, there is a strong moral argument that the portion of the Iraqi debt that pertains to it should indeed be these allies' responsibility. Iraq’s own official estimate of its foreign debt as of December 31, 1990 was just $42.1 billion. But this left out a huge amount of “quasi-loans” that it had obtained from neighbors like Kuwait, Saudi Arabia, and the Gulf States -- all of which informed Saddam after the war that they had never considered these funds as "grants," but loans, which they expected to be repaid. As noted, this became a crucial bone of contention in the events leading up to the Kuwait invasion. Since Iraq was embargoed throughout the 1990s, except for UN-approved “Oil-for-Food” transactions, it did not contract any new loans after August 1990. The World Bank/ Bank of International Settlements estimated in 2001 that as of 1998, Iraq’s foreign debt totaled $127.7 billion. Netting out this interest, the World Bank's estimate implies that Iraq’s foreign debt was $80.7 billion in August 1990, just before the Gulf War – including all the disputed finance from the Gulf States. That already made Iraq’s debt-to-national income ratio about 1.1, or $4600 of foreign debt per capita – not quite as high as the debt burdens of some other Third World countries (like Nicaragua), but as high as for the typical “heavily-indebted country.” Of this $81 billion total, fully $47 billion was "owed" to Arab kingdoms, including $17 billion to Kuwait, $20 billion to Saudi Arabia, and $300 million from Jordan and Morocco. (If interest is included, this adds another $30 billion the $47 billion. ) Most of the $47 billion was provided during the first three years of the Iran-Iraq war, when these countries were most afraid that Iraq might lose the war to Iran. A US intelligence estimate says that Kuwait and the Gulf emirates provided Iraq at least $1 billion a month from October 1980 through the end of 1984, in order to sponsor this war effort. Another $13.5 billion was provided by the Soviet Bloc, including $12 billion from the USSR (including about $7 billion for arms), $1 billion from Bulgaria, and $500 million from Poland, in the form of export credits. Another $800 million was loaned by Iraq’s good neighbor to the north, Turkey. (Iraq also received the whopping sum of $50 million in foreign aid from the Soviets and Western Europe during this period.) Finally, about $19 billion of Iraq’s foreign debt came from First World Western sources, including $13.5 billion of bilateral and government-guaranteed export credits from the 16 members of the “Paris Club.” These were also mainly used to finance Iraq’s arms imports. The leading providers were France’s COFACE, which loaned $ 3.75 billion of export credits outstanding for arms and $4.3 billion for other goods; Japan’s JEXIM and leading trading houses, which loaned Iraq 700 billion yen ($5.8 billion); the UK’s ECGD, which provided more than $1 billion in credits, and became Iraq’s “paramount favored creditor;” and Germany’s HERMES, Austria’s OeKB, Canada’s EDC, and Australia’s EFIC. While these government agencies provided the loan guarantees, a whole army of private banks actually got involved in delivering the guaranteed credits, and some also provided their own credits to Iraq. Among the most important private banks involved in Iraq lending during the 1980s were Germany’s Commerzbank, JP Morgan, Chase, Gironzentrale (Austria), First City Bank of Houston, and Gulf International Bank (Bahrain.) In the early 1980s, JPMorgan also made several rather unusual, life-saving loans to a Brazilian arms company, Engesa, which became one of Iraqi’s principal arms suppliers. Let’s just hope that James Baker has more success negotiating a debt reduction for Iraq with Kuwait and Saudi Arabia than Saddam did. IRAQ’S FOREIGN DEBT – BAKER’S OWN INVOLVEMENT The other interesting fact to know about James Baker’s experience with Iraq’s foreign debt is that he was deeply involved in making it larger. While he was Secretary of State from 1988-92, our very own US Department of Agriculture's Commodity Credit (CCC) Program loaned Saddam nearly $5 billion, with James A. Baker III's knowledge and active encouragement. Under the US Department of Agriculture's "GSM-102" export credit program, the CCC underwrote private loans that were extended by US banks to foreign banks or US exporters, supposedly for purchasing US commodities like wheat and rice. The DOA had approved Iraq’s participation in the “GSM-102” program early in the Reagan Administration, in December 1982. In 1983 the CCC guarantee $385 million in Iraqi credits to import American grain, the first in a long series of such guarantees. By 1990, these CCC credit guarantees were being issued to Iraq at the rate of $1 billion per year, and accounted for more than 20 percent of the entire GSM-102 program. These loans were made, not just to feed Iraq’s people and support US farmers, or certainly not because Iraq had good credit, but as part of an effort to cultivate a close relationship with Saddam’s regime -- and especially in the late 1980s, at a point when his oil revenues were collapsing and no one else would lend him any more money, in order to help him continue buying arms. In June 1989, for example, US Secretary of State James A. Baker III wrote to the US Secretary of Agriculture, Clayton Yeuter, asking him to boost the CCC’s loan guarantee program to Iraq to $1 billion a year. Yeuter promptly did so. Even September 1989, when a major scandal surfaced that involved lending to Saddam by Italy's largest state-owned bank (privatized in 1998) Banco Nazionale del Lavoro (BNL), the record shows that Baker lobbied hard to continue this lending, with the State Department commenting in February 1990 that “the CCC program is a key component of the (Iraq) relationship….we need to move quickly to repair the damage to the US-Iraqi relationship by getting this critical program on track.” Many prominent US and foreign banks helped to arrange these Iraqi credits under the CCC program, including BNL, JPMorgan, Midland Bank, Chase, First City Bank of Houston, Bank of New York, DG Bank (Germany), Bank of America, Arab Banking Corp. (Bahrain), Gulf International Bank (Bahrain), Girozentrale (Austria), and UBAF. All told, from 1983 to 1990, the USDA’s CCC program extended more than $5.5 billion of credits to Iraq – of which $2 billion was still outstanding when it invaded Kuwait in August 1990. For a country with just 18 million people at that time, this was an enormous trade credit. But we now know from sources in Iraq and Jordan that much of the grain that these loans were supposed to have purchased never even reached Iraq. Much of it was traded by Saddam’s intermediaries in Jordan, Turkey, and the then-Soviet Union for munitions, spare parts, chemical and other military supplies. Most of this story has never been fully investigated. The morally-obtuse Clinton Administration decided that it had better things to do than chase down “Iraq-Gate” after it won the 1992 election, and the current installment of the Bush Dynasty certainly has no interest in doing so. Fortunately for Mr. James A. Baker III, the appointment to his new "debt envoy" position doesn't require Senate confirmation.….. The historian can always dream, however, of being able to ask him a few questions about what really happened way back then, and what he thinks might have been possible with a little more aggressive, more timely, if perhaps less "voluntaristic" approach to debt restructuring. Conventional wisdom maintains that Iraq always was covetous of Kuwait, and that, indeed, the nature of the Ba’athists is to be expansionists; in invading, the Iraqis were merely following their instincts. This explanation does not hold water. Why, for example, if they desired territory, didn’t they seize Khuzestan at the end of the war when Iran was prostrate? Why did they not at least insure themselves control of the Shatt Al Arab? By withdrawing completely from Iran, and turning the issue over to the UN for settlement, the Iraqis behaved as a responsible member of the world community.
In the wake of the 2003 US invasion, Kuwait has indicated that it may be willing to exchange a portion of these claims for a stake in Iraq’s new oil concessions. Throughout the last decade, Iraq protested to no avail that many of Kuwait’s compensation claims were spurious, amounting to yet another forced transfer of its oil revenues to the wealthy Kuwaitis, even while Iraq's own citizens were starving. (Just to cite one example -- the case of a wealthy Kuwaiti who complained to the UN in 2003 about losing his thoroughbreds, jewelry, and art collection, and received $4 million in compensation, all of it paid for from Iraq's oil revenues.)
>Sanctions. There was also the enormous cost of the UN sanctions that banned all imports of Iraqi goods. The UN imposed these on Iraq four days after the invasion, and maintained them for 13 years, until May 2003. This was one of the most comprehensive economic blockades in history – way beyond the effort maintained, for example, against South Africa in the 1980s. But even these sanctions failed to get Saddam out of Kuwait, topple him from power, or force him to cough up his purported “weapons of mass destruction.”
What they did do was to create what can only be described as an economic catastrophe for Iraq’s people – despite the fact that they had much less responsibility for their dictator’s behavior than, say, the international community that had helped bring him to power in the 1960s, armed him to the teeth, and encouraged his aggressions throughout the 1980s, so long as it was directed against Khomeini.
However, this included about $47 billion of interest that accrued during the 1990s. Since this was a period when Iraq was subject to sanctions that prevented it from doing any debt restructuring, however, it is questionable whether it is really fair to charge Iraq for all this imputed interest (calculated by the World Bank at a 7 percent a year.)
All told, therefore, when James Baker looks around to see who will have to “eat the losses” on Iraq’s foreign debt, he will quickly learn that it not just our Old European rivals, the French and the Germans, or even the fair-weather Russians, but the original “hard ball” players from 1991, Kuwait and Saudi Arabia. 
Yeutter
(c) James S. Henry, SubmergingMarkets.com, 2003. Not for reproduction or other use without express consent from the author. All rights reserved.
December 5, 2003 at 03:30 PM | Permalink | Comments (6) | TrackBack
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