Massimo Omiccioli
in Peuples/Popoli/Peoples/Pueblos, n. 2 (september 1983)
It is worth starting with a banal observation. Developing countries have seen their external debt accumulate because they have predominantly received debt-creating financial flows over the last 10-15 years. If one takes into account the fact that neither donations nor direct investments have this effect, then the table we present shows that in the early 1960s, the share of debt-creating financial flows was only 35% of the total, at the turn of the 1960s and 1970s it rose to 55%, and reached almost 70% in 1978-80.
Of these flows, moreover, the weight of those with more onerous conditions has risen sharply. Just take another look at the table, bearing these figures in mind: in the period 1972-82, the average interest rate on loans falling under the category ‘Official Development Assistance’ was 2.3% and that on private export credits 7.5%; the interest rate on private portfolio loans (predominantly bank loans), on the other hand, was over 10%. The consequences are not insignificant. If the composition of the external debt of the developing countries had been the same in 1979-82 as it was in 1971, they would have paid a quarter less in interest than they actually did, and debt growth would have been one-sixth less than it actually was in the period in question. If one wants to explain the causes of the external indebtedness of the developing countries, one must therefore first try to explain the reasons for these two phenomena:
CHANGES IN THE STRUCTURE OF NET FLOWS OF FINANCIAL RESOURCES FROM CAD COUNTRIES FROM 1960/62 TO 1978/80. (percentages)
Source: Oecd/Dac, Development Cooperation.
(a) the reduction of the share of financial flows of public origin;
(b) the change in the composition of flows of private origin.
Let us start with the second phenomenon. Between 1969-71 and 1978-80 within private flows the weight of direct investments halved by a quarter, while the share of portfolio loans almost quadrupled. What are the causes of this change? And again: is it a change of form or of substance? Is it possible to assume, that is, that bank loans have replaced direct investments and export credits, while continuing to perform (in some essential respects) the same economic function? Many elements, in my opinion, make an affirmative answer credible.
2. – In the developing countries, first the achievement of political independence and then the aspiration for economic independence profoundly changed the economic and political ‘climate’ for foreign companies. In the period 1956-72 almost one fifth of direct investments in the Third World were nationalised, and in the following four years there were at least another 220 ‘forced disinvestment’ actions. Companies with total foreign ownership were much more exposed to risk, especially compared to joint ventures in which foreign participation was a minority.
A wide range of further legislative and administrative measures have been employed by Third World governments in an attempt to increase control over the activities of foreign companies and to increase the economic benefits for the host country: from tax tightening to restrictions on repatriation of capital and profits, from the imposition of local participation in the management of companies to the obligation to export a certain percentage of production abroad.
The response of multinational companies to this situation of greater risk and less freedom of action has centred on the progressive replacement of traditional direct investments with so-called ‘new forms of investment’. The latter are characterised, according to the OECD’s own definition, by a weakening of the financial commitment on the part of the foreign investor-entrepreneur and by a simultaneous strengthening of the contractual obligations on his counterpart. Traditional direct investment, in fact, consisted of a single ‘package’ that contained within it financial resources, technology, managerial skills, access to or control over sales markets, and so on. The ‘package’ in question was held together by the complete control that the foreign investor exercised over it through (total or majority) ownership of the company’s capital. But we have seen that it was precisely this characteristic that turned out, in the changed international conditions, to be its fundamental element of weakness and vulnerability.
The ‘new forms of investment’ represent the decomposition of the original ‘package’ into its constituent elements. The source of the multinationals’ power and earnings will no longer be their ownership of corporate capital, but the resources they hold in the fields of technology, management and control of sales markets: resources that they will tend to exploit on a contractual basis. The financial resources (which are now only minimally provided by the foreign company) will instead have to be found on the international financial markets by the local partner.
The differences are considerable. Indeed, direct investments constitute financial resources that in practice never mature, whereas bank loans usually have maturities of between 4 and 10 years; the cost of direct investments (in the form of remittances abroad of profits and dividends) is a function of the commercial success of the financed enterprise, whereas not only in the case of interest on loans, but also of fees for technology, management or marketing contracts, these are fixed costs. The change described, therefore, has led to considerable financial rigidities for developing countries.
In this way, foreign companies not only minimise their own political risks, but also offload commercial risks onto the developing countries: since they have only a marginal financial stake in the new companies, they use them as cyclical shock absorbers. They are the first to suffer from decreases in demand and the last to benefit from its growth. All this happens, as we have already said, without foreign companies seeing their prerogatives significantly diminished, either in terms of effective control over the company’s activities or in terms of financial income.
3. – One might think, at this point, that the change described has simply shifted the risks from the shoulders of the multinational companies to those of the financing banks. Not so, or at least, not so far. Compared to the repeated waves of nationalisations in the post-war period, there have only been two official declarations of default on international bank loans (and both on extremely special occasions): the case of Cuba in 1962 and the Iranian case in 1979 (connected with the American hostage crisis). The same countries that have used the weapon of nationalisations and expropriations extensively, have then always scrupulously honoured their international bank debts (even those bequeathed by previous regimes). This is due to the fact that nationalisations (even when they involve foreign-owned enterprises) are generally regarded as domestic economic policy measures, whereas refusal to honour foreign debts is regarded as a breach of a country’s international commitments, and results in the blocking of any future possibility of receiving credit. It is true, on the other hand, that many situations of de facto insolvency (cases of so-called ‘technical default’) have occurred, but the terms on which debt refinancing operations take place on these occasions have always made it a good deal for international banks. (The transactions that have taken place in recent months are by no means an exception in this respect).
In this post-war period, as far as I know, there has only been one case of repudiation of foreign debt: that of Ghana in 1972, but relating – not surprisingly – to export credits. In particular, a debt of 35 million pounds to four British companies was repudiated on the basis of allegations of corrupt practices. The measure in question was later withdrawn, but it was an effective means of pressure for the government of the former British colony at the negotiating table where its foreign debt was renegotiated.
The case of Ghana suggests some valid reasons that may have caused export credits to be replaced by bank loans, reasons that can generally be traced back to the greater ‘defensibility’ of the latter over the former. Two things must be remembered in this regard:
1) Only export credits that are covered by government guarantees (which are usually accompanied by various forms of interest rate subsidies) are recorded in official statistics, while the others are recorded as portfolio loans;
2) Export credits can be granted either by the exporting company, which in turn finances itself with a bank (supplier credits), or directly by the bank (buyer credits).
In the case of ‘supplier credits’ (the typical form taken by export credits in the 1960s), the creditors are thus made up of a vast conglomeration of exporting companies, whose specialisation, of course, is neither that of assessing the creditworthiness of the various debtors nor that of exercising surveillance and pressure on them collectively in defence of their claims. The simple fact, moreover, that they appear in the exchange with a dual role, and therefore also with a dual interest, makes them more vulnerable: it is easier to repudiate a debt by simply challenging the seller, as the case of Ghana illustrates. It is precisely these reasons that make it practically indispensable for the credits in question to be guaranteed by the government of the exporting country, even if this introduces ‘unpleasant’ political and diplomatic complications should the debtor country default.
In order to obtain a realistic description of the advantages enjoyed by banks in this field, it is sufficient to reverse, point by point, the remarks that have been made about ‘supplier credits’. In a nutshell: “Banks took a larger share of private flows because banks were better equipped to collect credits” (1). This does not mean that to a large extent these are still not export credits, since banks, by their very nature, can more easily do without government guarantees and this causes, as we have seen, a decrease in officially registered export credits.
4. – It would remain to be explained, finally, what were the causes of the relative decline of public flows with respect to private ones. But this is nothing more, in my opinion, than the translation, in the field of financial relations with the Third World, of that general decline of public intervention in the economy that in the Thatcher and Reagan governments today celebrates its ideological glories. The underlying causes of both phenomena must be sought in the same set of economic, political and cultural reasons. Only two aspects are worth emphasising here: the mutual competition between the different industrial countries and the effects of the American defeat in Vietnam. The US share of total financial flows to the developing countries declined from an average of 50% in 1957-59 to 39% in 1968-70. The US maintained its positions in economic aid and direct investment, but by the end of 1970 its share of the industrial countries’ export credit stock was less than one sixth of the total. The US was losing out in an area that was decisive in sustaining the large capital goods export industry. The war in Vietnam, on the other hand, was not only a heavy burden on the US government budget and the entire economy, but the defeat it suffered was a decisive blow to the government’s domestic and international prestige. Its claims to decide the country’s domestic and world affairs could no longer be sustained. Private interests had the floor: ‘Big Business’ had its revenge. “Only by accepting the ‘laws’ of the market and subordinating its economic policy to them was it possible for the USA to reassert its hegemony over Europe and extend it further over the rest of the world. In fact, with the official devaluation of the dollar against gold in 1971, the inauguration of the flexible exchange rate system and the withdrawal of troops from Vietnam, the US freed itself from the fetters of formal imperialism, which had eventually worn down its military and financial supremacy, to exercise its hegemony through market forces.”(2)- The rise in oil prices (implicitly supported by the USA through a spectacular increase in its own crude oil imports) and the subsequent recycling of oil surpluses constituted two key stages in this process: American banks controlled almost 40% of international bank loans (and more than half of the loans to the developing countries). Support for the governments of ‘friendly’ countries will also no longer be a burden on the federal budget. Among the most indebted countries are in fact all the major pro-American military dictatorships: Brazil, South Korea, Argentina, Chile, Indonesia, Turkey, Philippines, Taiwan, Thailand.
5. – Let us try to pull the strings of our argument. Many developing countries have learned to their cost that nationalisations alone do not end foreign control. The international financial system, technology and trade are the new terrain on which the game for the economic independence of developing countries is being played. In particular, the way the international financial system operates is now a central issue for the economic future of both developing and industrialised countries. Over the last decade, the blackmail power of private financial institutions has grown enormously, and has been one of the main obstacles to any policy of economic revival in industrialised countries (as the recent experience of Mitterrand’s France has been made clear). The economic stagnation of the industrial countries caused growing deficits in the balances of payments of Third World countries, which the private banks chose to finance only because of the high interest rates they could impose and the enormous bargaining power they could exercise.
The markets of the developing countries thus compensated for the low growth (and in some years the outright fall) of the domestic markets of the industrial countries, at the cost, however, of an extraordinary growth in their indebtedness. By its very nature, such a process could not last indefinitely. The skyrocketing of US interest rates gave it the decisive blow. The result is that Third World countries are today strangled by borrowing costs. In Brazil, the world’s largest debtor,the per capita income (this strange concept) has fallen by 12% in the last three years. In the city of São Paulo alone, 400,000 industrial workers have lost their jobs in the last two years, bringing the total number of employed back to the level of 10 years ago. And the economic ‘adjustment’ programmes that the IMF now wants to impose on Brazil, as on all other debtors in crisis, are aimed at a further turnaround: cuts in imports, public spending and wage indexation (when inflation rates in the main South American countries reach 100 or 200% per year). The IMF’s recipes, in addition to the terrible domestic consequences they cause in debtor countries, impart a heavy deflationary impulse to the world economy, making an exit from the current crisis even more unlikely. A drastic downsizing of the power of private financial institutions together with the strengthening of official ones on the basis of a repudiation of their current philosophy is absolutely essential to enable the implementation and success of policies of economic recovery and development. In 1944, in his appeal to the closing session of the Bretton Woods conference, the then US Treasury Secretary Morgenthau stated the goal of ‘driving … the usurers out of the temple of international finance’. Forty years later, it is high time for all forces of progress to reappropriate that old slogan and place it clearly at the centre of their programmes for a new development of the world economy.
Notes:
1 D. Gisselquist, The political economics of international bank lending, Praeger, New York 1981, p. 173.
2 G. Arrighi, The Geometry of Imperialism, Feltrinelli, Milan 1978, p. 85 (the English version was published by New Left Books, London).
in: Peuples/Popoli/Peoples/Pueblos, n. 2 (september 1983)