The ongoing crisis, caused by excessive global debt, saw only financial institutions being protected. For life to come before debt we need to build an alternative to this out-of-control financial system.
Debt is used by international institutions and local elites to force through economic policies which act against the interests of ordinary people. As the current global financial meltdown fuels a growing debt crisis, millions of people across the world are being forced into poverty. The Jubilee Debt Campaign was founded to campaign on the Third World debt crisis which created massive hardship and suffering for millions of people in the global South from the late 1970s. During that crisis we uncovered some of the ways debt is created and used to transfer wealth from one part of society (and the world) to another, to make finance more powerful at the expense of the mass of people and to predetermine economic choices and restrict democratic rights.
We campaigned to end such crises, but whilst $130 billion of debt for the most impoverished countries has now been cancelled, debt was actually growing across the world and the financial system – which fuelled the debt – grew ever more powerful. The most recent financial crisis was the culmination of this unsustainable economic situation, where complex financial instruments were used to hide the true extent of global debt.
Ordinary people were not responsible for, and did not benefit from, the debt
The fallout of the current global financial crisis has been felt across the world with shocking rises in unemployment, poverty and human suffering. But how did we get here? Throughout the 2000s, Western banks went on a lending spree in countries such as Greece, Latvia and Portugal, fuelling economic bubbles, inflating housing costs and creating construction booms.
These loans came to an abrupt end as the financial crisis hit. Now millions of people are suffering increased unemployment, poverty and the devastation of public services, such as healthcare and education as a result of this reckless lending. In the eye of the storm of the financial crisis, with banks facing bankruptcy as a result of massive over-lending, governments stepped in to bail them out. But the bailouts did not stop there. The EU and IMF lent money to ensure the reckless lenders, such as the banks, continued to be paid. Meanwhile austerity was forced on populations under the pretext of making the debt payable. In reality, economies have crashed or stagnated, while debts have kept increasing.
While the levels of poverty in Europe are different, the current crisis mirrors the events that led to the Third World debt crisis in the Global South. A lending boom to Latin American and African countries in the 1970s turned to bust in the 1980s when the US increased interest rates on the debt, and the global economy entered recession. To protect Western banks, the IMF bailed out the reckless lenders, while enforcing austerity, privatisation and liberalisation. For example, Jamaica has endured over 30 years of spending more than 20% of government revenue on debt payments. In that time the government has paid more in principal and interest than it was lent, yet still owes an estimated $7.8 billion. From the Latin American debt crisis in the early 1980s to the East Asian financial crisis of 1997 and today’s global financial crisis, unregulated private lending and borrowing has caused devastation for those who have nothing to do with such reckless behaviour.
While the levels of poverty in Europe are different, the current crisis mirrors the events that led to the Third World debt crisis in the Global South.
Crises have been used to further empower finance and create an ever more volatile system
Despite how they are presented in the media, bailouts are not temporary support to an economy suffering economic shocks. Rather they prevent defaults, enabling debts to continue to be paid to the financiers – effectively bailing out the reckless lenders. Today, in Jamaica and Greece even the IMF admits that the debts can never be repaid in full. In Pakistan and Tunisia IMF bailout loans are being used entirely to repay old debts – in Pakistan’s case, to pay previous IMF loans. In Latvia, even though there wasn’t a government debt crisis, IMF bailout loans were given and used to pay off Scandinavian banks, saddling the government with more debt.
The austerity and privatisation policies forced on Latin American and African countries in the past did not work any better:
- Between 1980 and 2000, economic ‘growth’ per person, per year was -0.5% in Latin America, and -1.5% in Africa (World Bank).
- Between 1980 and 1990 the number of people living in poverty in Latin America increased from 144 million to 211 million.
- In Africa, the number of people living in extreme poverty (on less than $1.25 a day) increased from 205 million in 1981 to 330 million by 1993 (World Bank).
- And most telling of all, the debt was not reduced. Across Latin America and Africa, government foreign owed debt increased from 17% of GDP in 1980 to 33% in 1990 (World Bank).
The problem of high debt payments is exacerbated by massive tax avoidance and evasion, which reduces further the money available to governments. Both debt payments, and the outflow of untaxed profit and capital, are ways countries continue to be looted and people impoverished while further enriching corporations and elites elsewhere.
As well as increasing poverty and inequality, the bailout system sows the seeds for the next crisis by increasing debts and handing ever more ‘power without responsibility’ to the banking sector. A working paper for the Bank for International Settlements claims that in the run-up to the current global financial crisis banks lent large amounts to banks in highly-indebted countries, because of “expectations of a bailout” if any country got into trouble. The system actually encourages reckless lending.
The highest price is paid by the poorest in society through the austerity
Bailouts come with conditions to introduce austerity measures such as cuts in government spending, increases in taxes and privatisation. Former IMF mission chief to Ireland, Ashoka Mody, says there is “not one single historical instance” where austerity policies have led to an exit from a heavy debt burden. But this failure of austerity is only part of the story. It is the impact of unjust debts and austerity on ordinary people which shows the true extent of its failure.
In 2000, as part of Millennium Development Goal 8, 189 countries – including those of the EU, US and Japan – agreed to “deal comprehensively with the debt problems of developing countries”. They have failed to do so. This is one of the reasons debt-burdened countries are off track to meet other development goals. Jamaica is off track on at least one of the indicators for all the MDGs. In two it has even gone backwards. In 1990, 97% of children completed primary school. By 2010, the figure was just 73%. Maternal mortality has almost doubled, rising from 59 per 100,000 live births in 1990 to 110 by 2010 (World Bank).
High debt payments, and cuts in government spending, make it more difficult to provide decent quality public services such as healthcare and education. Jamaica spends more than twice as much on debt payments as it spends on education and health combined. This year and next, in Pakistan, spending on foreign debt payments will be the same as the combined spending on health and education.
As well as increasing poverty and inequality, the bailout system sows the seeds for the next crisis by increasing debts and handing ever more ‘power without responsibility’ to the banking sector.
Countries in Europe have also taken a huge step backwards. In Greece, new hospital fees have left many people untreated and children go unvaccinated because it is no longer free. Health expenditure has fallen by 40% between 2010 and 2013. Latvia has lost 8% of its healthcare workers and 14% of school staff.
What kind of world are we building?
The importance of debt as a perspective for building a movement for social change is that it helps get to the root of the myths that underlie the debt-austerity economy. The imposed narrative ‘we are in debt?’, ‘then it must be our fault’, ‘how can we make up for it?’, seeks to force us to believe there is no alternative. Questioning the legitimacy of debt frees our minds to begin thinking about how society could be if it was not controlled by finance – if it was based on different principles from those dictated by the market.
The struggle against debt is a struggle over principles and values. There can be no one policy solution to free people from the scourge of unjust debt and austerity. Some specifics do emerge, however. One of the key routes to justice is for the unjust debts to stop being paid. This could happen through debt audits that lead countries to repudiate debts, or through the creation of a fair and independent arbitration process for reducing government debts. In 2008, the Ecuadorian government set up a public debt audit commission to investigate where the countries debt came from. After finding that various debt contracts were illegitimate and potentially illegal, President Correa announced they would not be repaid. Whilst this pledge was not fully followed through, it caused the value of Ecuador’s debt to fall dramatically on financial markets, so the government was able to buy it back on the cheap, leading to a dramatic debt reduction.
An alternative approach is that being attempted by the government of Grenada. After defaulting on its debt earlier in 2013, the government of the Caribbean island has now publicly stated it wants to negotiate with all its creditors jointly – something which the likes of the IMF and World Bank do not normally allow to happen – and for all lenders to share in writing down the debt.
Questioning the legitimacy of debt frees our minds to begin thinking about how society could be if it was not controlled by finance – if it was based on different principles from those dictated by the market.
But the cancelling of unjust and unsustainable debts is not enough if we want to build greater economic democracy and prevent future debt crises. Economies need to become fairer, with governments getting the resources needed to provide decent services through fair tax systems. The root cause of debt crises across the world is the unregulated financial system, where large quantities of loans move between countries, fuelling trade imbalances and global instability. A wide range of regulations on the financial system are needed to get finance under control and reduce these huge flows of money across the world.
These recurring debt crises are not inevitable, but the result of ideologically driven economic policies and mistakes. In the 1950s and 1960s, the number of governments which defaulted on their debts to foreign private creditors averaged four every twenty years. Since the 1970s this has risen to four every year. The ‘Bretton Woods System’ from the late 1940s to early 1970s was a time of much greater government involvement in the economy, and specifically there were regulations on the movement of money – lending, speculation and investment – between countries. These so called ‘capital controls’ between countries were matched with ‘credit controls’ limiting the amount of lending banks could undertake, and in what sectors. For example, in the UK there were limits both on how much banks could lend, and of this, how much they could lend for mortgages for housing.
For life to come before debt we need to build an alternative to our out of control financial system – including tax justice, controls on lending and the cancellation of unjust debts.