Chapter 15 Review Questions Answer Key

1. Launched in 1996, the HIPC initiative accepted for the first time that some poor countries would not be able to repay their loans made by the World Bank and the IMF, and that some loans would have to be cancelled. This debt cancellation was to be done in parallel proportion with debt cancellation of bilateral loans with governments and by private creditors. Debt cancellation was negotiated with strict neoliberal structural adjustment policy conditions, and involved three creditor groups: the Paris Club, the London Club and the IMF, World Bank and other development banks. The initiative ultimately failed, and was replaced by the Multilateral Debt Relief Initiative, which did substantially reduce debt service payments. [p. 270]

2. The 1970s were a time of “mania,” which resulted in excess surplus capital. As a result, there was a sharp increase in “loan pushing” at very low interest rates. In the 1970s, the amount of developing country debt increased sevenfold, which included a real transfer of money from South to North. In 1984, when real interest rates peaked at 12 per cent, Mexico became the first country to default on its debt obligations, setting off the debt crisis. In order to save the international banking system, debts were renegotiated, and some new loans were made just to pay interest rates. By 1990, developing country debt had reached over one trillion dollars, but now with no new benefits to recipient countries. Private lenders wanted to sell debt and debt was traded, which included debt-for-nature and debt-for-development swaps, but debt still rose inexorably and have persisted into the twenty-first century. [p. 268]

3. According to Kindleberger, a cycle begins with a period of real growth and rising profits through the development of new technologies, transportation, or communications systems. When growth eventually outstrips productive investments, speculation begins, which is often linked to fraud and swindles. Kindleberger calls these bubble periods “mania.” These periods involve heavy international lending as banks exhaust domestic borrowing potential and desperation to lend leads to high-risk foreign loans. Eventually the bubble bursts, prices fall, and a period of “panic” ensures when investors try to sell or collect loans, which ultimately leads to a “crash.” [p. 265]

4. In 1997, Jubilee 2000, an international campaign for debt cancellation of “unpayable debt,” was launched. The campaign had as its goal the cancellation of the unpayable debt of the world’s poorest countries through a “fair and transparent process” by the year 2000. The campaign was successful in three main ways: (1) it made a technical issue into something the layperson could easily understand; (2) it linked local debt campaigns in both North and South; and (3) it attracted an unexpectedly large number of supporters (24 million from 166 countries) and put pressure on Northern governments to increase debt cancellation under the HIPC initiative. [p. 270]

5. He means that the mania includes loan pushing that turns to economic bust and panic. This was the case in the 1930s and in the 1980s, which led to two “lost decades of development” across much of the Global South. For two decades, the developing world gave $48 million to the rich world each day—yet every day the debt burden increased by $204 million. Similarly, the global financial crisis in 2008 was rooted in excessive lending, followed by a sudden bust. And the pattern was repeated. The North printed money through quantitative easing, and some of this surplus money was lent to the South, promoting what will become a new debt crisis. Meanwhile, within the rich countries, wealth has been transferred from rich to poor while poorer people have been encouraged to borrow to maintain minimal levels of consumption. And the US has built up a huge foreign debt by forcing developing countries to keep US dollars as reserves, making developing countries net lenders to the US and other industrialized countries. [p. 280]

6. The major difference between the 1930s and the 1980s was the existence of the Bretton Woods institutions (BWIs). Poor countries became increasingly dependent on “aid,” and the “donors” made their aid conditional on recipient countries having World Bank and IMF programs, which in turn imposed two sets of conditions. One was continued debt repayment. Little concession was made for economic problems such as bad crops, and debt bondage lasted indefinitely. Indeed, with respect to the Bretton Woods institutions, developing countries have fewer rights than the citizens of Hammurabi’s Babylon did nearly 4,000 years ago. The second highly controversial condition was that poor countries adopt neoliberal economic policies and what were known as “structural adjustment programs” (also discussed in Chapters 3 and 9). Import-substituting industrialization was the model followed earlier by the now-industrialized countries and was the model being followed by the developing world (Chang, 2002), but the BWIs forced poor countries to open their borders to manufactured goods from the industrialized countries, and instead to adopt a model of export-led growth. This resulted in many countries rapidly expanding the production of agricultural and mineral exports, which in turn meant increased competition and a drop in the prices paid by the rich countries to the poor countries. Cocoa sold for $2,604 a tonne in 1980, less than half that ($1,267) in 1990, and even less in 2000 ($906). Commodity prices began rising again from 2004. But for two decades, the industrialized countries forced the developing world to sell industrial inputs for ever-lower prices while also forcing them to buy imported manufactured goods instead of producing them locally. Debt had become a major weapon of economic power used by the industrialized countries. [p. 273]

7. General Joseph Mobutu took power in the Congo in 1965, changing the country’s name to Zaire. Mobutu may have been on the West’s side in the Cold War, but he was also one of the world’s most corrupt dictators, and his government was widely described as a “kleptocracy.” In 1978, the IMF appointed its own man, Irwin Blumenthal, to a key post in the central bank of Zaire. He resigned in less than a year, writing a memo saying that “the corruptive system in Zaire with all its wicked manifestations is so serious that there is no (repeat no) prospect for Zaire’s creditors to get their money back.” When Blumenthal wrote his report, Zaire’s debt was $4.6 billion. When Mobutu was overthrown and died in 1997, the debt was $12.9 billion, and Mobutu had luxury estates in France and billions of dollars stashed abroad. Shortly after the Blumenthal memo, the IMF granted Zaire the largest loan it had ever given an African country. During the Cold War, Mobutu provided a home for US covert action against neighbouring Angola, and the US pushed through yet another IMF loan to Zaire, this time over the objections of some IMF officials. After the overthrow of Mobutu in 1997, Zaire was renamed the Democratic Republic of the Congo (DRC), and it eventually qualified for debt cancellation under the Heavily Indebted Poor Countries Initiative in 2010. Its government foreign-owed debt fell from $11 billion to $4 billion, but the remainder of Mobutu’s debt has continued to be paid. [p. 267]

8. For many of the countries, debt payments have fallen considerably, though new rounds of lending are threatening to recreate debt crises and in a few cases already have. This debt cancellation only applied to countries judged to be both heavily indebted and extremely impoverished. Most developing countries were excluded. Despite a brief drop in 2000 due to debt cancellation, total debt has continued to increase. But the huge increase in debt brought little benefit to developing countries. For two decades, despite a massive increase in debt, there was a transfer of money from South to North. For the two decades 1984–2003, total debt tripled from $739 billion to $2307 billion, yet in the same period poor countries gained nothing and actually gave $274 billion to the rich countries because they had to pay more in interest payments and principal repayments than they received in new loans. For 20 years, the developing world gave $38 million to the rich world every day—yet the debt burden increased by $215 million every day. [p. 270]

9. The previous big crisis was the Great Depression of the 1930s. It largely affected the United States and Europe, while developing countries, notably in Latin America, continued to grow. Within the then-industrialized countries, the Depression hit both rich and poor. The rich countries, and mainly the United States, responded to the 1979 crisis by trying to ensure that the Depression of the 1930s was not repeated. They tried to export the crisis to the South and to poorer people within their own countries. Money was to be extracted from the developing countries in order to prevent depression in the industrialized countries, and they used new manias and borrowing to transfer wealth from poor countries and poor people to a small wealthy elite. The development model that originated in the 1930s Depression and continued through the 1960s and 1970s was state-led growth—not just in the then-socialist countries but also in European and Asian capitalist countries and in developing countries following capitalist, social democratic, or socialist policies. This also led to improving the conditions of poorer people in both North and South and reduced inequality. [p. 271]

10. Through the 1980s, 1990s, and 2000s, inequality rose in many Western countries as the power of trade unions to bargain for higher wages was reduced, taxes on richer people were cut, and financial deregulation made it easier for companies and rich individuals to evade and avoid tax. Relatively more economic output went to the rich through earnings on capital rather than to ordi­nary people through wages. The rich spend less of their income than middle- and low-income earners and in­stead use it to speculate in financial markets. This led to the boom in financial speculation and increased the supply of loans and thus debt. [p. 271]