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By Éric Toussaint
The internal public debt of developing countries (developing countries) has grown a lot since the second half of the 90s. The cost is enormous.
According to the World Bank, the internal public debt of all developing countries rose from 1.3 trillion dollars in 1997 to 3.5 trillion dollars in September 2005 | 1 | , that is, 2.5 times the external public debt, which amounted to 1,415 trillion dollars in 2005. Furthermore, the repayment of the internal public debt in 2007 represented around three times that of the external public debt, that is, 600,000 million dollars. Therefore, the payment of the total public debt (external and internal) exceeds the astronomical sum of 800,000 million dollars reimbursed each year by the public powers of the developing countries.
However, 80,000 million dollars a year for 10 years, that is, 800,000 million dollars in total, would be enough to ensure essential social services for the entire population, such as access to basic health care, drinking water and primary education | 2 | . It would be a fundamental progress for a great majority of the inhabitants of the earth.
Colombia's public debt: a delayed bomb
Let's take a concrete example. Colombia, which suffered like other Latin American countries from the debt crisis of the 1980s, then "benefited" from a massive and short-lived inflow of capital in the early 1990s. The neoliberal model seemed to triumph from 1991 to 1994 while that, in reality, led Colombia to a dead end: "financialization" and public "over-indebtedness." The internal public debt has grown strongly.
The weight of the internal public debt in Colombia's GDP has multiplied by 15 between 1990 and 2006, while that of the external public debt also grew, but in a clearly lower proportion (multiplied by 1.5).
The same type of policy was applied in Brazil, Argentina and Mexico. Everywhere in developing countries we are witnessing a very large increase in public debt, mainly in the form of domestic debt. The figures published in April 2005 by the World Bank speak for themselves | 3 | . If we take all developing countries together, public debt, internal and external, which represented 46% of GDP in 1990, has risen to 60% of global GDP in 2003. In fact, external public debt in the percentage of GDP decreased slightly between 1990 and 2003, from 31% to 26%. On the other hand, the weight of the internal public debt multiplied by 2, going from 15% to 34% of GDP.
The financial crises that affected developing countries between 1994 and 2002 as a consequence of the deregulation of capital markets and the private financial sector recommended by the World Bank and the IMF, have led to a sharp increase in domestic debt. In short, the application of the Washington Consensus has led the governments of the developing countries to renounce control of the exchange and movement of capital. What is added to the deregulation of the banking sector in different countries. Private banks were pushed to take more and more risks, leading to numerous crises, starting with the 1994 one in Mexico. Capital left Mexico en masse, which led, especially, to chain bank failures. The Mexican government, supported by the World Bank and the IMF, transformed the private debt of the banks into domestic public debt. This happened in exactly the same way in countries as different as Indonesia, in 1998, or Ecuador, in 1999-2000.
On the other hand, even in the countries that were saved from the collapse of the banking sector, the World Bank recommended that the governments of the developing countries resort more and more to the internal public indebtedness. Without shame, the World Bank proclaimed that this development was positive and recommended foreign investors to invest in the expanding domestic debt market (also called domestic). The Bank recommended that the governments of indebted countries favor the rescue of local banks by large foreign banks, a process that is already quite advanced in Latin America. The large Spanish banks, solidly embedded in the South American banking sector, and the US banks that dominated the banking sector in Mexico | 4 | . The World Bank also supported the process of privatization of retirement systems and favored the use of workers' savings (their future pensions) to buy bonds of the internal public debt. The governments of Brazil, Chile and Argentina have applied this policy of partial privatization of retirement systems, and pension funds have become important buyers of domestic debt bonds.
This evolution does not only affect Latin America. Asia is the continent where domestic public debt has increased the most in recent years, especially as a consequence of the 1997-98 Southeast Asian crisis and the policies imposed by the World Bank and the IMF. Instead of being used (either by public authorities or private agents) for productive investment, the savings that are deposited in the banking sector are systematically diverted towards parasitic income behavior. The banks lend money to the public powers that they must repay with enormous interest, which is around usury. Indeed, for banks it is less risky to lend to the State than to grant loans to small or medium producers. A state will almost never stop paying when it comes to domestic debt. In addition, central banks in developing countries, supported by the World Bank, often charge the highest interest rates. This leads to the following behavior: local banks borrow in the foreign financial markets (United States, Japan, Europe) in the short term and at fairly low interest rates and they lend that money in their countries in the long term with high interest rates. That way they make huge profits until interest rates rise sharply again in northern countries, which can then lead to bankruptcy. With the risk that the State will have to assume, once again, its private debts, thereby increasing the internal public debt. This is how the vicious circle of internal public debt originates, which completes that of external public debt.
Brazil: The domestic public debt grew 40% in two years.
Brazil is an emblematic case. Its internal public debt is 8 times greater than the external one. In 2008, the domestic public debt reached an astronomical figure of 869,000 million dollars, that is, 1.4 trillion reais | 5 | , with an increase of 40% in just two years. The repayment of the Brazilian internal debt is 12 times greater than that of the external debt. The part of the Brazilian state budget destined to the repayment of the internal and external public debt is four times higher than the sum of expenditures on education and health | 6 | . In Guatemala, the internal public debt is four times more than the external debt.
Strong rise in Argentine domestic public debt.
In Argentina, while the government achieved a reduction in external public debt in 2005 thanks to a three-year suspension of repayments to private creditors, the internal public debt grew. In the end, the Argentine public debt resumed its rise | 7 |.
In China, the accumulation of foreign exchange reserves leads to a rise in the domestic public debt.
Another phenomenon causing the increase in domestic public debt is the accumulation of large foreign exchange reserves by developing countries exporting oil, gas, minerals and certain agricultural products whose prices have been rising since 2004. The phenomenon also affects China, It accumulates a large amount of exchange reserves thanks to the flooding of the world market for manufactured products, which provides it with a permanent trade surplus. The central banks of these countries place a large part of their reserves in the form of United States Treasury bonds (or bonds of other Treasuries, especially European), that is, they lend money to the United States government to alleviate their huge deficits. Paradoxically, while certain DCs are overflowing with liquidity, this policy generally requires new borrowings as a counterpart. As surprising and absurd as it may seem, while foreign exchange reserves are placed, in part, in Treasury bonds of industrialized countries, which is recommended, on the other hand, by the World Bank and the IMF, the public powers ask for loans to repay the debt public. In all cases, the remuneration of the reserves placed in foreign Treasury bonds is lower than the interest paid on the loans. Thus, a part goes to the Treasury of the corresponding country.
In addition, the existence of an excessive amount of foreign currency in the country often induces the central bank to borrow. Indeed, massive inflows of foreign capital in the form of foreign currency are in the hands of resident agents who exchange them in their banks for the national currency, the increase of which is potentially a source of inflation. To avoid this, the monetary authorities are forced to implement operations to "clean up" these reserves, either by increasing the rates of the banking system's reserve assets (then the rise in interest rates on bank loans makes it more expensive credit, which slows down the monetary creation represented by a loan), or by issuing public debt securities (the prior sale of these securities allows the central bank to recover the national currency that therefore leaves the monetary circulation) | 8 | .
An overwhelming majority of governments give priority to this neoliberal policy and thus we are witnessing a rise in domestic public debts as a counterweight to a high level of exchange reserves | 9 | . This occurs both in China and in the countries of Latin America, Asia and Africa.
Instead of accumulating mountains of exchange reserves and increasing, at the same time, their internal public debt, the governments of the developing countries would do better by taking the following measures: 1) Auditing the internal and external public debt in order to cancel illegal debts. 2) Adopt control measures for capital movements and exchange rates (effective to protect against speculative attacks and to fight capital flight). 3) Use an important part of the reserves for productive investment in industry and agriculture (agrarian reform and development of food sovereignty), in infrastructure, environmental protection, urban renewal (urban reforms and construction or renovation of houses ... ), health services, education, culture, research, social security ... 4) Pool a part of the exchange reserves to set up one or more common financial organizations (Bank of the South, Monetary Fund of the South). 5) To constitute a front of the indebted countries to reject the payment of the debt. 6) Strengthen and establish groups of countries that produce basic products to stabilize their rising prices. 7) Develop barter agreements such as those carried out between Venezuela and Cuba | 10 | later expanded to Bolivia and Nicaragua.
| 1 | World Bank, Global Development Finance 2006, p. 44.
| 2 | Calculation carried out jointly by the specialized agencies of the United Nations, namely: World Bank, WHO, UNDP, UNESCO, UNFPA and UNICEF and published in Implementing the 20/20 Initiative. Achieving universal access to basic social services, 1998, www.unicef.org/ceecis/pub_implement2020_en.pdf . The aforementioned agencies estimate the additional amount to be devoted annually to expenditures related to basic social services at $ 80 billion a year, which now amounts to around $ 136 billion. The total annual amount that must be guaranteed ranges from $ 206 billion to $ 216 billion.
| 3 | Wolrd Bank, Global Development Finance 2005, Washington DC, April 2005, p.70.
| 4 | World Bank, Global Development Finance, 2008. Chapter 3.
| 5 | 1 US dollar = 1.61 Brazilian reais as of August 10, 2008.
| 6 | Rodrigo Vieira de Ávila, "Brésil: La dette publique est toujours bien là", www.cadtm.org/spip.php?article3155 , www.cadtm.org/imprimer.php3?id_article=3605
| 7 | If we add that the government in 2005, erroneously, promised, in exchange for the reduction of the external debt, to increase the interest paid based on inflation and GDP growth, the situation in Argentina is turning again untenable. Eduardo Lucita, «Again the Argentine debt», www.cadtm.org/spip.php?article3517 .
| 8 | For an explanation of this type of operation, see Eric Toussaint, Banque du Sud et nouvelle crise internationale, CADTM-Syllepse, 2008, chapter 1.
| 9 | World Bank, Global Development Finance 2006, p. 154.
| 10 | ALBA, an agreement signed jointly by Venezuela, Cuba, Bolivia and Nicaragua that works, in part, in the form of barter: for example, 20,000 Cuban doctors provide free health services to the Venezuelan population and have performed 50,000 ophthalmological operations at no cost to Venezuelan patients , in exchange for oil.
Translated by Caty R.
Caty R. belongs to the Rebelión, Cubadebate and Tlaxcala collectives.
* Éric Toussaint, is a Doctor in Political Science, president of CADTM Belgium, member of the Presidential Commission for the comprehensive audit of Ecuador's debt in 2007-2008, author of: Banco del Sur and new international crisis (Abya-Yala, Quito , 2008; El Viejo Topo, Barcelona, 2008), World Bank: The permanent coup (Abya-Yala, Quito, 2007; El Viejo Topo, Barcelona, 2007; CIM, Caracas, 2007), Finance against the people ( CLACSO, Buenos Aires, 2004) and co-author of numerous works. His latest book, which will appear in 2009 is: 60 Questions 60 Answers on the debt, the IMF and the World Bank (Icaria, Barcelona, 2009) written in collaboration with Damien Millet.