How IMF and World Bank Loans Spread Poverty
The poor pay tax in cash and natural resources, and the IMF and World Bank, in the name of “development” recycle these loans back to the rich. In this excerpt from a now classic interview with social and political philosopher Noam Chomsky, he talks about the role interest-based finance plays in hurting the poor and harming the environment.
QUESTION: How do you see the problem of Third World foreign debt? What are the mechanisms through which these countries become increasingly dependent on international financial institutions?
CHOMSKY: The first thing to bear in mind is that debt is not an economic problem. It’s a political problem. The debt is an ideological construction. Say I borrow money from you, and I put the money in a Swiss bank, or I buy a Mercedes, and then my creditors come and I tell them, “I’m sorry — I have no money. You pay it.” That is not the way it works. If I borrowed it, I have to pay it.
Let’s take the Brazilian debt. Who borrowed it? Not the peasants, not the working people. In fact the large majority of the population of Brazil didn’t have anything to do with the debt, but they’re being asked to pay it. That’s like you being asked to pay if I spent my money somewhere else and couldn’t pay it back. To the extent that there is a debt — if you believe in capitalist principles — the debt ought to be paid by the people who borrowed it. In this case they are military dictators, some landowners and the super-rich.
The Brazilian debt, like most of the Latin American debt, is more or less comparable in scale to capital flight. So, there’s an easy way to pay the debt: Bring the capital back.
The other question is: Should debtor countries have to pay at all? The legal concept of “odious debt,” which is reasonably well-established in international law, states that they don’t have to pay. When the United States “liberated Cuba” in 1898 — meaning, prevented Cuba from liberating itself — it cancelled Cuba’s debt to Spain on the grounds that it was an odious debt because it had been forced on Cuba by the relations of subordination and power to which it was subject, and therefore had no legal standing.
Other cases have actually come to international arbitration. About 20 years later, Costa Rica refused to pay a debt to the Royal Bank of Canada, claiming it was an unfair loan. The arbitrator, Chief Justice of the United States Supreme Court and former President William Howard Taft, ruled against England — then the responsible authority for Canada — in favor of Costa Rica on the grounds that the debt had been imposed on the Costa Ricans under unfair conditions of power, and therefore had no legal standing.
By this standard, there is very little Third World debt. An economist who is now U.S. Executive Director of the International Monetary Fund, Karen Lissakers, pointed out several years ago that Washington’s principles, “if applied today, would wipe out a substantial part of the Third World indebtedness,” because it was imposed under unfair conditions of power and subordination.
It seems to me that the right way to the look at the debt is to say that for the overwhelming majority of the population there is no debt. They have nothing to pay. They had nothing to do with borrowing it, they got no gains from it — in fact, they may even have been harmed by it — so why should they pay it? It doesn’t make any sense. If anybody ought to pay it, it’s the borrowers.
Then there’s the question of whether that debt even means anything. The whole idea of a debt is an ideological concept having to do with power relations.
We can’t overlook power relations — they exist. If somebody’s standing over your head with a gun, you can’t say, “That’s illegitimate, I refuse to do what you say.” You’ve got to live with it. Under existing power relations, there’s just no option but paying this illegitimate debt, which is not a debt — it’s robbery, basically. Sometimes you have to accept robbery, and that is what’s happened with Third World debt. The right approach is to question the people with the figurative gun — the rich countries. They’re the ones who have to agree that there’s no debt, and they are the ones who can take the gun away...
QUESTION: But today countries don’t owe money to a particular country. The debt is largely controlled by financial institutions like the IMF.
CHOMSKY: Yes, but that’s another form of robbery. The IMF is a method for paying off investors and transferring the risk to the taxpayers in rich countries. There are two forms of robbery going on: The populations in the debtor countries are being robbed blind by austerity programs, while the taxpayers in rich countries are also being robbed. It’s not as serious for the latter because they’re richer, but they’re still being robbed. The IMF socializes the risk.
This is quite important. People invest in Third World countries because the yields are very high. So gains are high in a market system if the risks are high. They more or less correlate: the greater the risk, the greater the gain. But here it is largely risk-free. Private investors make enormous profits from very risky investments, but then, through the international financial institutions, they essentially have free “risk insurance.” The structure of the system is such that the people who borrowed don’t have to pay — they socialize it by making the population pay, even though the population didn’t borrow the money. The people who invest — they don’t accept the risk, because they transfer it to their own populations. That’s the way market systems work — through the socialization of risk and through the socialization of cost, with the IMF acting as “the credit community’s enforcer,” as Lissakers puts it.
What, then, are the consequences for democracy? Over the last 20 years, power has been transferred to the hands of financial capital, so banks, investors, speculators and financial institutions make policy. The liberalization of financial flows creates what some economists call a “virtual senate”: if private investors don’t like what some country is doing, they can pull their money out. They in effect come to define government policy. That’s the point of liberalization.
There’s nothing novel about this. When the Bretton Woods system — the international financial system — was established in the mid-1940s, a fundamental part of it was regulation of financial flows, to keep major currencies within a fixed band close to each other so that there would be no speculation in currencies. There were also restrictions on capital flight — and there were good reasons for that.
It was understood that the liberalization of capital flows harms the economy. Since liberalization of capital started about 25 years ago, the whole international economy has declined seriously. But there’s a more serious argument, which was clearly articulated at Bretton Woods, that if you allow the free flow of capital, you undermine democracy and the welfare state. If a government is “irrational” — if it decides to do things for the general population instead of for foreign investors, say, as Itamar Franco was trying to do when he refused to pay his state’s debt to Brazil’s central government then it can immediately be punished by pulling out capital. So the point of the liberalization of capital and its effect is to diminish democratic control everywhere and to undermine social programs. It ensures that policy will be geared toward enriching investors, the holders of financial capital, which becomes more and more speculative, therefore harming the general economy.
In the European Union, the power given to central bankers is overwhelming. They set policy. That’s a strong weapon against democratic control of policymaking in every area, and it’s happening more and more. And it’s the predictable — and surely the intended — effect of liberalization of capital flows.
There was an interesting article about this in The Wall Street Journal a couple of days ago comparing Mexico and Brazil. It said that Mexico is an “economic miracle” — the numbers all look fine, the macroeconomic statistics are great, the growth rate is going up, inflation is down — just perfect, they’re following all the rules. It points out that there’s only one problem: The population is suffering badly. The poverty rate is going up — it was always terrible but it’s getting much worse. Starvation is getting worse, people don’t have jobs; the population is suffering bitterly but it’s called an “economic miracle.” Well, there’s nothing surprising about that. When Brazil was the darling of the international investors, Brazil’s generals said, “The economy is doing fine — it’s just the people who aren’t.”
MCMXCIX Noam Chomsky interviewed by Maria Luisa Mendonca