Tidal waves and cracks in global finance

The Sumatran earthquake and the resulting tsunami have done more than reveal cracks and instabilities in the earth’s core. They expose equally consequential injustices and hypocrisies in world financial institutions.

The United States portrays itself as a generous nation, yet, according to the Organization for Economic Cooperation and Development, the United States gave $16.2 billion in development aid in 2003, 0.15 percent of gross national income. Norway gave 0.92 percent of its 2003 gross national income. Private charity, commendable as it is, can hardly be expected to fill that gap.

Worse still, far from being a benefactor of the developing world, the United States and other wealthy nations are major beneficiaries of world financial arrangements. Most developing states are deeply in debt, and interest payment on these debts far exceeds the aid these nations receive from all sources. One positive consequence of the tsunami is that its victims have received so much attention that the subject of debt relief for their governments has become inescapable. Most current proposals will, however, only suspend rather than forgive the debt, leaving governments very vulnerable to future catastrophe.

Debt relief for tsunami victims raises an even larger question. Much of sub-Saharan Africa, though not harmed by the tsunami, is both heavily in debt and consumed by such natural catastrophes as AIDS and malaria. World health experts point out that more than 15,000 children die every day in sub-Saharan Africa from poverty-related diseases. Their governments are unable to treat them because they are paying out $30 million a day to the World Bank, the International Monetary Fund and creditor nations. For every dollar that is given to that region in aid one and a half dollars goes out to cover debt repayments.

Desperate as Indonesia and Thailand are, the situation in these African nations is more dire. Their involvement with the international economy is entirely one-sided. Although they are not even viewed as suitable for productive investment or outsourcing, they are still compelled to abide by the developed world’s standards of copyright and patent protection.

Life-saving drugs and many modern technologies are thus priced beyond their reach. Despite the lack of access to vital technologies and medications, they are also expected to pay their debts. More than any other subject, debt exposes the moral hypocrisies of modern international finance. Debt relief for developing states is resisted on two moral grounds. “They rented the money, didn’t they?” as one U.S. Treasury secretary declared in refusing debt relief to a Germany nearly bankrupted by post-World War I reparations.

Nonetheless, the United States and other creditors recently granted debt relief for Iraq, on the grounds that a tyrant unrepresentative of his people negotiated its loans. Such an argument applies far beyond Iraq. It calls into question the legitimacy of debts owed by many developing states, some of which were or are autocracies supported by the United States.

When debt relief is finally considered, the subject becomes another occasion to teach a moral lesson. Recipients of debt relief just need to be like Mike. If they cut government spending, reduce market-distorting restrictions and open their markets to free international trade, they will prosper. Yet as Noreen Hertz of Cambridge Center for International Business points out, “Rules like demands to slash public expenditure mean in practice fewer children being sent to school, less families with access to health care, women having to trudge 10 miles to collect water because no monies are spent on water delivery.”

Nor is this the way the United States prospered. Even in the 19th century, vast public funds were spent on canals, rails were heavily subsidized and the land grant college system was established. In addition, such founding fathers as Alexander Hamilton advocated protection for “infant industries.” The early iron, steel and rail developments in both the United States and Britain were aided by tariff protection. (More recently, Argentina has begun to emerge from its desperate financial plight by rejecting IMF advice regarding imposed austerity and capital controls.)

In this regard, even the European Union, which often touts its own moral superiority regarding its former colonies, continues to pursue a common agricultural policy that benefits its farmers, but at substantial cost to developing states.

The United States itself is in an especially strange position to be lecturing other nations about debt. Expanding trade deficits have left the United States as the world’s largest debtor nation. The size of our markets still induces other major powers to loan us money, thus far preventing a crash in the value of the dollar. Ultimately, however, it is the United States that needs to save more, with China and the so-called Asian tiger states spending more.

The poorest nations need to be invited to join the world economy on fairer terms, through debt relief and generous technology transfer.

John Buell is a political economist who lives in Southwest Harbor. Readers wishing to contact him may e-mail messages to jbuell@acadia.net