Background

Shortly after the Yom Kippur war of 1973, the Arab oil exporting countries announced an embargo on the shipping of oil to countries that had supported Israel. The result of this policy was to raise the price of oil in the world market as much as 400%. While they were not the targets of this policy, non-oil exporting developing countries in Latin America, Africa and Asia were the hardest hit.

Because so much of the world’s economy depends on oil for manufacturing and especially for transportation, the price of all commodities shot up. Countries that had no choice but to import grain, clothes and other essential goods for internal consumption were hit hard by the price rises and went into debt.

Originally, these debts were largely owed to other countries (sometimes to former colonial masters), but in the late 1970s and early 1980s, two International Financial Institutions (IFIs) began lending new money to countries that would then use that money to repay the older loans. These institutions were the International Monetary Fund (IMF) and the World Bank.

In exchange for the new loans, the IMF and the World Bank imposed a regime of “structural adjustment” – in other words they redesigned the economies to which they were lending. One impact of the readjusting was to move countries away from the import substitution models of the 1960s-1970s and towards an export-oriented model (see above section on trade for more details).

The primary components of structural adjustment included the following: a) budget austerity measures, meaning drastic cuts in government spending; b) privatization, meaning that the government should sell whatever it can to the private sector; c) trade liberalization, or the phase-out of subsidies and tariffs; and d) fiscal liberalization or the elimination of all controls and restrictions on the buying and selling of the national currency on the domestic market.

The debt burden that countries continue to face is no small matter – some countries may pay more than 50% of their national budgets on debt repayments. But the real bind is not the debt per se, but the set of policies into which the debt treadmill forces countries. A country must borrow money to repay older debts, and must fulfill the IMF structural adjustment conditions in order to get money, even if that money is coming from other donors. The IMF’s “signaling mechanism” gives it a role like that of the Godfather of a mafia – if the IMF doesn’t give it’s blessing, no private bank or government agency will lend money.

The IMF and the World Bank have produced many reports over the years on the benefits of structural adjustment, but their own research suggests that many of these reports are ideologically driven, and other evaluations have even gone so far as to suggest that the adjustment policies of the 1980s have been a failure (though those policies are still in use).

To understand why these institutions do what they do, we must first understand that their mission is in many ways the opposite of what they claim. While they claim to work in the interests of the poorest countries, they are explicitly controlled by the richest countries. (Formally this is done by control over voice and vote within the institutions; informally most acknowledge that it is the United States who has control over their policies.) Since no country is likely to make policies that are not in their own best interest, it would be useful to see studies on the effects of structural adjustment on the richest countries. While no such study exists, it seems clear that open access to developing country markets and fierce competition among developing countries for the sale of raw materials to rich countries has helped economies in North America, Europe and Japan.

So debt is the glue that holds this mechanism of control in place. Debt is a kind of fiscal bondage, ensuring that the majority of some countries’ budgets go to paying off older loans. Debt is also a kind of political bondage, tying countries to a set of policies that were neither democratically chosen by the countries’ citizens, nor beneficial for the growth and development of the economy.

In recent years, campaigners have scored a major victory on this issue. After agreements reached in 2005, some countries have had debts owed to the IMF, the World Bank and other development institutions cancelled without the imposition of new conditions. Unfortunately, the number of countries affected by this agreement is still too small (currently about 25) and the agreement itself is tied to a terrible regime of IMF conditions known as HIPC (Heavily Indebted Poor Country initiative). Still, this is a major step forward.