By Daniel Munevar
The purpose of this article is to analyze the relationship between external debt processes and social justice in the international arena. Third, the relationship between external financing cycles and the evolution of inequality at the national and international level is analyzed.
1. The Financing for Development Paradigm: Financing for whom?
Since the first theoretical developments in the area of Development Economics in the early 1950s, the concept of capital accumulation was established as the fundamental basis of long-term economic growth. In the neoclassical theoretical framework, the development process was defined as a linear dynamic equivalent to economic growth. Such a process ultimately depends on rapid rates of growth in labor productivity, which translate into greater availability of material goods to satisfy existing social needs. The analysis shows that high investment rates, by translating into accelerated accumulation of capital and therefore in sustained long-term increases in worker productivity, became the key element in promoting the development of third world countries.
The problem then from the point of view of the developing countries was a dual limitation. On the one hand, their investment capacity at any given time was constrained by their low levels of income and savings. On the other hand, they lacked the necessary technology to initiate a process of productive transformation from low-value-added agricultural activities to higher-value-added industrial activities. To overcome this double obstacle, external financing for development is proposed. Through the transfer of resources from industrialized countries with surplus capital to developing countries, the process of investment and capital accumulation could be accelerated, at the same time that the resources in foreign currency were provided necessary for the import of technology and machinery by the second group of countries.
With minor modifications, this line of argument has remained one of the cornerstones of the discourse of the International Financial Institutions (IFI) for more than 60 years. To the extent that the focus of World Bank policies has been transforming over the last decades, external financing for development was used not only for investment in productive projects, but also for massive investments in infrastructure, agricultural projects , construction of schools and hospitals, etc. The notion that external financing for development could be carried out within the logic of the market, that is, with a profit margin, was slowly consolidating, regardless of the type of activity that was being financed. Thus, the idea that external financing for development plays a positive role for the transfer of resources and therefore for development is positioned as a kind of uncontested conventional wisdom.
However, when we contrast the positive and beneficial conception of financing with its real effects during the last 40 years, we obtain a completely different picture. In the first place, as can be seen in Figure 1, the external indebtedness of both public and private entities of developing countries (developing countries) has not stopped increasing during the last 40 years. During this period, the external debt went from 70 thousand billion dollars in 1970 to about 3.3 billion dollars in 2008, that is, it multiplied by a factor of 48.
Second, the unbridled growth of the foreign debt brought with it an increase in the resources allocated by the developing countries to pay it. As shown in Figure 2, the external debt service went from 9 billion dollars in 1970 to 530 billion dollars in 2008, that is, the service increased by a factor of 58. In total, the developing countries have repaid between 1970 and 2008, the equivalent of 120 times its initial debt. These figures show that before promoting development, the evolution of indebtedness and debt service has become a heavy burden on developing countries.
To get a glimpse of the true magnitude of the problem associated with the transfer of public resources, it is necessary to refer, thirdly, to Figure 3. As shown, the sum of external debt disbursements for the public sector minus the service of the public external debt , remains in negative territory for much of the period between 1970 and 2008. In total, the net transfer of resources from the public sector of developing countries to their external creditors amounts to almost 500 billion dollars. To put this figure in context, the transferred resources represent the equivalent of 5 times the amount donated by the United States for the reconstruction of Europe in the post-war period under the so-called Marshall Plan.
Taken together, these figures show that the paradigm of the debt system as a mechanism for the transfer of resources from the North to the South is just a chimera. What is clear is that the debt system has become, over time, an immoral bloodletting that deeply wounds the developing countries. On the contrary to promoting the accumulation of capital and the development of the countries of the South, the current external financing scheme favors the obtaining of profits by financial entities at the international level.
Thus, the opportunity cost associated with the transfer of resources from the South to the North that configures the public debt system is given by the impact of servicing financial obligations within public budgets. In the case of Latin America, debt service represented on average around 30% of public spending during the last decade. It is estimated that on average in this region of the world, the resources allocated to debt service are equal to twice the resources allocated to education and health. In this way, while the financial sector recorded record profits over the last few years at a global level, millions of people saw their access to basic public services limited, as a consequence of the negative effect of debt on national budgets. In this sense, the cost of debt in human terms reaches unquantifiable heights.
2. The Debt System and Productive Specialization
Following David Ricardo's enunciation of the principle of comparative advantage, international trade studies have separated the analysis of trade flows from capital flows. This is not a minor omission. As Joan Robinson points out, from the statement of the theory of comparative advantage it is possible to reduce this argument to the fact that developing countries specialize in banana production because bananas grow in those countries. What is omitted then is the bananas do not originate from most of the countries that currently export them. To understand the reason for this situation, it is necessary to resort to the analysis of international capital flows (Kregel 2009).
Thus, “from this point of view, instead of trade flows requiring temporary financing to save the time periods required for changes in relative prices or exchange rates to rebalance trade flows, international flows of capital destined to finance investment projects which determine production and trade flows ”(Kregel 2009). This connection between trade and capital flows allows us to understand in its proper context the process of productive specialization experienced by Latin America, and by extension in much of the rest of the underdeveloped world.
To the extent that international capital flows began to grow systematically during the cycle of independence deeds in Latin America at the beginning of the 19th century, they determined a pattern of productive, commercial and financial insertion that was inherently reinforced throughout weather. In this way, capital investments made by foreign capital to facilitate the exploitation of agricultural plantations or other raw materials, at the same time made it possible to finance the imports of capital goods from industrialized countries (Kregel 2009). Given the productivity differentials between the production of raw materials and manufactured goods, and the deterioration in the terms of trade that this differential entails, external financing becomes a requirement for the maintenance of this production structure. In turn, the greater dependence on foreign sources of financing reinforces the need to generate foreign exchange from exports in the short term to meet the financial obligations derived from the payment of the debt, which closes the vicious circle of productive specialization and dependence observed throughout the last two centuries.
The pressure on the part of creditors to receive payment of the debt forces the debtor countries to favor the promotion of activities that immediately generate foreign exchange earnings from exports. Such exports are concentrated in sectors with low added value and little capacity to absorb labor. This productive scheme, associated with the debt system, becomes a significant obstacle to the development of the countries of the South in 3 ways. First, the concentration of production on raw materials limits the economy's ability to generate jobs and thus solve the problems of underemployment and informality. Second, it increases the vulnerability of southern countries to volatility in international commodity prices. And third, by increasing dependence on commodity export earnings, the debt system increases the so-called "resource curse." Given the lack of other activities that generate income and jobs, the social and political tensions associated with the control of raw materials also increase and with it the chances of internal armed conflicts.
3. External financing, financial crisis and inequality
The third mechanism through which the debt system has become an obstacle to international peace and justice has to do with the direct relationship that exists between global capital cycles and the evolution of equity both within and between countries during the last decades.
The literature on the topic of inequality focuses largely on its study starting from a microeconomic analysis. That is, the differentials in the income of a social group are explained through the study of individual characteristics (years of study, type of work, etc.). Although this type of analysis is useful to understand the dynamics of specific groups, it has been unable to provide a convincing explanation of the general trends in the evolution of inequality in both developed and underdeveloped countries registered over the last decades. .
On the other hand, the University of Texas Inequality Project, a research group based in Austin, Texas, under the direction of James K. Galbraith takes a different approach to the question. Thus, it starts from the fact that the evolution of inequality is an element determined largely by the economic structure present in a country and therefore its trends at the global level should be understood as an eminently macroeconomic issue. In this sense, the key to understanding the phenomenon of inequality lies in understanding the dynamics of structural transformations of an economy that produce it (Galbraith 2009).
As Kusnetz (1955) shows in his classic statistical study on economic development, the increase in per capita income is associated with a structural transformation of the economy. In a first stage, as the importance of agricultural activities decreases and insipid processes of industrialization and urbanization begin to take place, the levels of inequality tend to grow as a consequence of the higher levels of income associated with industrial activities. In the second stage, once industry becomes the main source of employment and the urbanization process concentrates the bulk of the population in urban areas, inequality tends to decline. Finally, in a third stage, to the extent that the service sector becomes the main source of employment, with activities related to the financial sector standing out in it, inequality increases again. In this way the evolution of inequality can be described as an inverted S. The position of a country on this curve depends on the state of its structural transformation process.
In this scheme, the patterns of global capital flows, and therefore debt, have become key elements when it comes to understanding the evolution of inequality. The relationship between both patterns is given by the Boom & Bust cycle. Contrary to neoclassical theory, the financial system is inherently volatile. Volatility implies that capital flows to an economy do not follow a stable pattern or trend over time, which induces a state of financial fragility. Thus, strong increases in capital inflows to peripheral countries, associated with the initial phase of a global capital cycle, are followed by massive flight and financial crises that cause extended periods of economic stagnation. At first these capital flows accelerate economic growth, but given the large amounts of capital that tend to be concentrated in a small number of countries, they end up causing serious distortions that eventually cause the collapse of entire countries and regions. While inequality tends to decrease during the period of economic growth that takes place in the capital inflow phase, income distribution deteriorates significantly and suddenly once the consequent financial crisis takes place. In the same way, changes in the terms of trade that favor the products of a country tend to reduce the levels of inequality in it.
Given that global capital cycles are determined by the liquidity conditions present in advanced economies, southern countries have few tools to control such cycles of crisis and increasing inequality, with the exception of controls and restrictions on cash flows. capital. This fact is evident with an analysis of the global evolution of inequality during the last 50 years. Thus, the period of capital flow control that preceded the collapse of the original Bretton Woods agreement was characterized by the relative absence of financial crises and a stable trend in the evolution of inequality throughout the 1960s. However, these trends they were radically altered in the first half of the 1970s.
The progressive deregulation of international capital markets had as a direct consequence a substantial increase in debt flows to developing countries, especially to Latin America. This event, together with the rise in the prices of raw materials throughout the decade, had an important effect on the evolution of inequality. On the one hand, inequality decreased significantly in the countries that export raw materials and the main recipients of credit from the international financial system. On the other hand, inequality grew in industrialized countries as a result of the decade of low economic growth and high levels of inflation. As a whole, global inequality began to decline slightly during the 1970s.
This trend was reversed again with the debt crisis that shook much of the developing countries and plunged them into a prolonged period of economic stagnation. The end of the debt cycle coincided with the deterioration of the terms of trade with the fall in the prices of the main exports of the debtor countries. As expected, this double blow had serious repercussions on the distribution of global income, as structural adjustment plans became the order of the day in terms of economic policy. In the first instance, the greatest increase in inequality was recorded in countries in Africa and Latin America, followed later by the countries of the communist bloc, once it began its process of disintegration in the second half of the decade. The exception to these cases occurred precisely in those countries that did not participate in the credit cycle thanks to their capital control policies: China and India. Thus, the 1980s were characterized by a sustained rise in inequality at the global level.
The 1990s did not record significant changes in the trends described above. The implementation of policies ascribed to the so-called Washington Consensus, with its consequent effects in terms of austerity policies, privatizations and labor flexibility, in a large part of developing countries sustained the upward trend in inequality levels. In this sense, there are 2 elements that are worth highlighting. The first is the key role that the financial sector has played in the process. In most of the cases observed, the policies of deregulation and privatization of the financial sector have brought with them salary structures characterized by the preeminence of the salaries of this sector over the rest of the economy. Thus, the financialization of economies has played a central role in increasing inequalities during the last two decades. The second is the evolution of inequality in Southeast Asia. During the period prior to the outbreak of the 1997 crisis, characterized by strong capital flows to this group of countries, levels of inequality tended to decline. However, once the crisis occurred, as it happened in the case of Latin America during the 1980s, the levels of inequality registered a strong increase that eliminated in a short period of time the advances achieved during the previous decade.
By way of conclusion of this essay, it is possible to point out that the previous historical account makes clear the profound influence that the debt system has on key economic and social dynamics such as accumulation, productive specialization and the evolution of inequality. As a whole, the picture is not encouraging. As shown in the first section, the debt system favors the transfer of resources from the South to its creditors, thus becoming an obstacle to the provision of social services and basic human rights of the populations of these countries. In addition to the above, it is added that by forcing the payment of debt service, the current external financing scheme promotes the implementation of a productive scheme specialized in the production of raw materials, which translates into a labor structure incapable of generating employment and that deepens social tensions for the control of these resources. Finally, given the global nature of international capital flows, these have become the main determinant of the evolution of inequality worldwide, this influence being a negative one. This series of evidences makes it clear that it is urgent to reconsider the current scheme of external financing for development, so that instead of becoming an obstacle to the satisfaction of human rights and therefore to international peace and justice , become a facilitator to achieve these goals.
Daniel Munevar - Paper presented during the XXV Summer Course "Making peace possible", of the International University of Peace in Barcelona, Spain in July 2010. http://www.cadtm.org
Galbraith, J.K. (2007), "Inequality, Unemployment and Growth: New Measures for Old Controversies", draft version paper prepared for the Journal of Economic Inequality.
Kregel, J. (2009), “Financial Markets and Specialization in International Trade: The Case of Commodities”, draft of remarks prepared for the Consultation on Financial Crisis and Trde: Towards an Integrated Response in the Latin America-Caribbean Region organized by UNCTAD
Kuznets, S. (1955), "Economic Growth and Income Inequality", American Economic Review 45, 1-28.
World Bank (2009), Global Development Finance 2009, Washington D.C.