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Trade and debt relations between rich and poor countries

abracad, · Categories: externally authored, in the news, spiritual politics

by Patricia Pitchon, December 2012

The economic crash of 2008 revealed more clearly the reasons why the international economic system must be changed, and the fact of substantial resistance from those who still try to benefit from that broken system.

After the economic crash of 2008, people thought at first the effect would be confined to banks, but then it became a huge burden for governments as sovereign debt, and now we understand that both rich and poor countries are being affected all over the world. It is not merely a case of contagion via international financial institutions and governments struggling to take on ever more debt to uphold the present financial system. It is also that that present system needs urgent reforms, a few of which are beginning to take shape - though with considerable difficulty and opposition from those who believe they can still benefit from the status quo.

It is widely acknowledged that a high level of permitted speculation adds volatility and greater risk of crashes. The excitement for the few can and does result in misery for the many. Prior to the 1980s, about 20 per cent of money circulating around the world was speculative, and about 80 per cent was ultimately invested in real projects. After deregulation in the 1980s, this relationship between speculation and investment became inverted, with about 20 per cent of that money being invested and 80 per cent dedicated to speculation. This is one factor which ultimately impoverishes people and nations.

Trade and debt relations between rich and poor countries
Trade agreements between rich and poor countries are often disadvantageous to the poor countries

Curbing Speculation

One example is the current speculation in commodities: what is 'fun' for one set of people may for others result in the inability to feed themselves properly, especially those who depend on these commodities (such as various crops, oils and so on). Furthermore, people cannot accumulate sufficient savings to cope with large price swings due to such speculation. Governments are not helpless. They can get together and draft and implement laws to curb speculation, they can reduce volatility in the markets in a number of ways. They can limit the power of major players in the private sector, in particular where activities involve high risk: these include the creation and use of poorly understood and risky financial instruments, where both returns and losses can be high.

The thinking behind the idea that everything should be left to the 'free market' has proved to be opportunistic and shallow. It often benefits the few at the expense of the many and has little to do with responsible governance. Governments everywhere, even if they discharge no other responsibilities, have a duty to ensure access for all to food and shelter, healthcare and education. These four basic needs are essentially human rights, and responding to them is compatible with various political and economic systems. What underpins this approach is a respect for human life, and the belief that we cannot wish for ourselves what we want to deny others.

How and why free trade isn't free

Free trade is an important expression of free market thinking, but in practice trade agreements between rich and poor countries are often disadvantageous to the poor countries. For example, looking back at trade relations between the United States, Canada and Mexico via the 1994 North American Free Trade Agreement (NAFTA), Joseph Stiglitz and Andrew Charlton, in their book Fair Trade For All, concluded that the US retained its agricultural subsidies and "pitted the heavily subsidized US agribusiness sector against peasant producers and family farms in Mexico". The US also kept out some of Mexico's products using non-tariff barriers. US farmers exported many products at "costs far below those of the local market, driving down prices for local farmers"; this in a country where a fifth of all workers worked in agriculture, and in rural areas, around 75 per cent of the people were poor. At the end of the first decade of free trade, Mexico's exports were increasing by 10 per cent a year, but mean real wages were lower, and some of the poorest were worse off due to US subsidies of its own farmers.

How to deal with debt: a Debt Court

Although there is a role for productive financing and investment, when poorer countries rely excessively on foreign finance instead of mobilising their own resources they can be saddled with high (and ultimately unpayable) debt. Mobilising resources means, for example, collecting taxes and dealing with tax avoidance and evasion and capital flight, as The Jubilee Debt Campaign points out in a recent report, The State of Debt by Tim Jones. It also means developing more transparency generally and monitoring flows in and out of countries. There are some countries, however, whose leaders borrowed recklessly what they could never repay and the present generation is suffering the consequences. Reckless lenders also must bear some responsibility. In this report an interesting proposal, whose time has surely come after years of campaigning, is the creation of a debt court, independent of creditors and debtors, where sovereign states can seek debt cancellation when debts are too high, via a fair and open arbitration mechanism. The court can hear evidence from the state in question as well as other participants including civil society. During the appeal to the court, a moratorium on debt repayments is declared. Loans would be written off if incurred odiously or illegitimately (by self-enriching leaders or without the consent of the governed, for example, or by reckless lenders or those offering deliberately deceptive and obscure loan terms). The remaining debt is reduced to enable the country to protect basic human rights and needs, and the report indicates this is preferable to current IMF bailout loans, which involve borrowing yet more money to pay bad debts.

Trading in debt itself: vulture funds

Since debt threats are now returning to the Developing World (Ethiopia is a case in point), partially due to aspects of lending policies of the World Bank and the IMF which often keep the indebted developing country barely able to meet debt repayments and thus preventing meaningful development, it is particularly important to curb the activities of often secretive vulture funds. One such fund, FG Hemisphere, bought a Democratic Republic of Congo debt (incurred by its state mining company in the 1980s under General Mobutu) for $3 million and sued DRC in a case brought in Jersey for $100 million. Similar examples have caused public revulsion. In 2010 the UK passed a law limiting the amount claimable from some impoverished countries. In Jersey as a 'Crown Dependency' the ruling in 2012 was by the UK's Privy Council, and it went against the vulture fund FG Hemisphere.

It is clear that much remains to be done, but fairer trading and lending policies, curbing excessive speculation and debt cancellation through a fair and open process can contribute to greater stability and development for the poorer countries.

Article source: © Share International


Filed in: externally authored, in the news, spiritual politics

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