Last Updated: Friday - 09/24/2010

Developing world doomed to debt

Unless we are prepared to overhaul our current economic system, the developing world is doomed to debt. One billion fellow humans live in absolute deprivation without adequate food or shelter. Eighty countries are now in worse financial shape than they were 30 years ago.

Still, the transfer of money from the South to the North in debt service charges between 1982 and 1990 has been in excess of $418 billion.

You would think that this man-made disaster would make more headlines than all the quakes, floods and droughts put together. But the mainstream media have been careful not to bore their audience with the complexities of global finance.

The public wants to be entertained, there is little taste for gloomy discussions about matters that don't seem to touch us.

We prefer to be reassured by our politicians and money gurus that everything is under control and that the good times are around the corner.

The first publicized indication that something was seriously wrong was in the early 1980s when Mexico and Peru tried to create a coalition of Latin American countries which would refuse to make their people pay for debts incurred by dead dictators and foolish financiers.

Media headlines were not so much about a large sector of humanity struggling to keep body and soul together under increasingly dire circumstances, but about the scary thought that the Western banking system might collapse. Two-thirds of Mexico's debt was owed to private banks.

In August 1983 Mexico ran out of foreign exchange to service its huge external debt and pay its imports bill. The dare to default was nullified by a hastily-designed rescue package put together by western central banks and governments in return for Mexico's promise to implement an austerity plan imposed by the International Monetary Fund.

This structural adjustment program put the squeeze on an already impoverished bottom layer of society.

The wealthy had seen the crisis coming as far back as 1981 and had transferred their money out of the country. As much as $14 billion was deposited in Eurobanks, $12 billion was held in foreign currency accounts in Mexico and another $25 billion was invested in U.S. real estate.

It was said that in a couple of years more money was taken out of the country by rich Mexicans and foreigners acting on the advice of private banks than by all the empires which had previously exploited the country.

In an effort to control the flight of capital the Mexican government nationalized the banks. There were cries from the Business Coordinating Council that this was a clear sign the country was moving towards socialism.

Not to worry. Private investors could not be convinced to bail out Mexico, so taxpayers' money had to be used. Critics protested that this was not a bail-out of Mexico but a bail-out of western private banks.

Some creative financing took place such as payments for exports not yet produced. The currency was devalued resulting in a 100 per cent inflation rate. Unemployment and underemployment was already estimated at 45 per cent but more bloodletting was required.

Taxing the rich, limiting imports of luxury items and placing a ceiling on foreign exchange accounts made more sense.

In practice the debt was passed on to the poor by way of wage cuts, cuts in vital imports and slashed spending on health, education and social services.

Something is wrong. In the last 20 years, the salaries in Mexico have lost more than two-thirds of their real value. Mothers require three incomes to buy for their families what they bought with one wage in the past.

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