The impact of the debt crisis on all of us

Bringing it back home; The impact of the debt crisis on all of us

The debt crisis is clearly a disaster for the people who live in Third World debtor countries. But what about the rest of us? The fact is that many of the results of international debt boomerang back to hurt the rich world as well as the poor.

Susan George explains in her book, The Debt Boomerang, how six boomerangs affect the Western world and the creditor countries as much as the indebted countries: the environment; drugs; bailing out the banks; lost jobs and markets; immigration; conflict and war. The following paragraphs highlight some of the issues she covers in the book.

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Killing the Earth

Serious environmental destruction began in many Third World countries in the 1970s and 1980s. Easy money was available from industrialised countries for 'development'. Much of it was spent on large dam projects, power plants and charcoal driven industries. These usually didn't help the poor, and did damage the environment.

As debts mounted, what poorer countries needed most was foreign currency to pay back their debts. One easy solution was to milk the earth's resources for the hard cash they brought in, and cut back on environmental conservation programmes.

Third World countries have done this by:

• heavily overusing soil to grow cash crops, often forcing small farmers off their land
• producing more crops on small areas of land, often using chemical fertilisers, and so degrading the soil
• allowing overfishing of their waters, so that fish stocks are damaged
• allowing multinational companies logging rights to their forests, destroying the lifestyle of those who live there
• chopping down forests to make room for beef cattle grazing or crop farming.

FACT: It is the world's largest debtors who are chopping down their forests the fastest. Brazil is the world's largest deforester and one of its largest debtors, owing US$112 billion. It is cutting a staggering 50,000 sq km of forest every year.

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Debt and the Dole Queue

As Third World countries struggle to pay back their debts, they have to export as many goods as possible and cut back on imports. This might seem like a good way to earn money. In fact they don't earn as much as they should, because many Third World countries are exporting similar products, flooding the market. So prices have been plummeting over the last few years.

It is not only debtor countries who lose out by the 'earn more, spend less' principle. The countries demanding repayment also suffer economically. Western countries are losing out on earnings from some factory and farm produced goods because it is so much cheaper to import them from the Third World. At the same time they are not able to export equipment and other manufactured goods to Third World countries which used to be trading partners, because these countries have no money to buy them. So jobs are lost and unemployment rises.

FACT: Before the debt crisis broke, Europe sold about a fifth of its exports to the Third World, particularly Africa. By 1990, it was only a little more than a tenth.

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Dirty Drugs

Millions of Americans and Europeans regularly use illegal drugs. Governments across the Western world have poured money into the struggle against drugs. The narcotics market in Europe is expanding rapidly, contributing to social breakdown and violent crime.

But for all their strategies to fight against drug trafficking, no government has come up with a solution which tackles one of the factors making it possible - international debt. Almost all the major drug-producing countries also have high international debts. To repay debts they need hard currency from the sale of commodities - like cocoa, whose value has been falling. Meanwhile, cocaine prices have been rising. So countries turn to the drugs trade - to raise foreign currency and to survive.

FACT: Bolivia is one of the poorest countries in Latin America with and the highest child mortality rates on the continent. The country has to spend half of all its (legal) export income on paying its debt. 40% of Bolivia's workforce depend on the drugs trade for a living.

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Banking on debt

Commercial banks have suffered very little from the accumulation of unpaid debts. This is largely because Western taxpayers (mostly without knowing it), inflation, and currency speculation have cushioned the blow for them.

In most countries banks have been able to write down their unpaid third world debts in the accounts as losses. This means they pay substantially less tax. Yet the debt still remains and The debtor country has to continue repaying it. While the weight of the bank's loss is in part made good by the taxpayer, the burden for the debtor country is enormous.

Another way that banks can gain tax relief on a loan which is not being repaid is through selling the debt. In a bizarre system of exchange, one bank can sell the debts owed to it at a reduced price to another bank which feels confident it will eventually be repaid at a higher rate than that discount price. This is called the secondary market.

The banker who sells the loan can then claim tax relief on the 'loss' he has made by selling the loan at a reduced price. Yet again, the debtor country gains nothing.

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Unjust War

Britain uses export credits to subsidise arms sales to the South. In 1993/4, 50 per cent of all export credits provided by the DTI to exporters were for arms sales. In time, these credits become debts for poor countries. 96 per cent of the debts owed to Britain by poor countries are owed to the Export Credit Department of the DTI. Many Third World countries have become deeply indebted because of high military spending. And as wars escalate, they are less able to repay the money they owe. One estimate suggests that between 1960 and 1987 Third World governments borrowed around $400 billion dollars to fund arms imports from industrial states.

The Third World arms trade has declined after a peak in the late 1980s. Most of the dictators who invested so heavily in arms are no longer in power and today's governments are not buying as many arms as they once did. But the debts are still left to pay.

Debt can also lead to and contribute to war. As countries become poorer because of their debts, one route that people take is violence and protest. As this escalates, it can end in war - and does in many countries of the Third World. As the debt crisis broke in the early 1980s, violence in many indebted countries around the Third World erupted into war or escalated dramatically.

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