As Third World leaders began to take responsibility for their nations, they emphasized tackling the problem of economic underdevelopment. Their efforts were based on state-led development models, influenced by current thinking in the U.S. and Western Europe. Typically, colonial governments had been heavily involved in economic planning and regulation, and new leaders like Kwame Nkrumah of Ghana, Jawaharlal Nehru of India, and Léopold Senghor of Senegal had been educated in Europe and influenced by socialist and social democratic programs. Moreover, the new states started economic life without their own entrepreneurial class capable of leading economic development.
Not surprisingly, then, many countries concentrated on Big Projects—showpiece government development projects that could be the motor for economic transformation, such as Ghana’s Volta River Project, which involved construction of the Akosombo Dam in the early 1960s to form the world’s largest artificial lake and building aluminum smelters to take advantage of the country’s bauxite resources. And most countries followed policies of import substitution—developing local production capacity to replace expensive imports from Europe and North America. However, these and other industrialization projects all required massive loans, from banks, export credit agencies, or international development institutions such as the World Bank.
Again Western elites faced a problem: how could they preserve their access to Third World resources and markets? Independence offered the West an opportunity to shed the costs of direct rule—responsibility for administration, policing, and development—while maintaining all the benefits of Empire. But independence also carried dangers: Asian, African, and Latin American nations might indeed become masters of their own economies, directing them to maximize their own development. And there were alternative models: Cuba and Vietnam, to name the most prominent. After all, the point was not simply to import oil or coffee from Latin America, or copper or cocoa from Africa, but to import these goods at prices advantageous to the West—in effect, a built-in subsidy from the former colonies to their former rulers. Empire, whether based on direct rule or indirect influence, is not about control for its own sake: it is about exploitation of foreign lands and peoples for the benefit of the metropolis, or at least its ruling circles.
At some point, the alternative that Claudine Martin laid out to John Perkins in 1971, as recounted in Confessions of an Economic Hit Man,[iii] must have become an obvious element of the West’s strategy. The U.S. and its allies were competing with the Soviet bloc to provide loans for development projects of a myriad kinds. Why not embrace this burden—and use the debts to bring these countries into the West’s web of control economically and politically? They could be lured by economic hit men like John Perkins to take on debt to build grandiose projects that promised modernization and prosperity—the debt-led theory of economic development. Moreover, the large sums flooding in could be useful in winning the allegiance of new Third World elites, who were under pressure to deliver prosperity to their political followers, allies, and extended families. The possibilities for corruption were seemingly endless, and would provide further opportunities for enmeshing the leaders in relationships with the West while discouraging them from striking out on their own on what could only be a more austere, and much more dangerous, path.
Debt Boom — and Bust: SAPing the Third World
The Yom Kippur War in 1973 and the subsequent Arab oil embargo led to the stagflation crisis of 1974–76 and marked the end of the postwar boom. As one result, leading First World banks were awash in petrodollar deposits stockpiled by OPEC countries. If these billions continued to pile up in bank accounts—some $450 billion from 1973 to 1981—the effect would be to drain the world of liquidity, enhancing the recessionary effects of skyrocketing oil prices. What to do? The international monetary system was facing its worst crisis since the collapse of the 1930s. The solution was to “recycle” the petrodollars as loans to the developing world. Brazil, for example, borrowed $100 billion for a whole catalog of projects—steel mills, giant dams, highways, railroad lines, nuclear power plants. [iv] The boom in lending to the Third World, chronicled by Sam Gwynne in “Selling Money—and Dependency,” turned into a bust in August 1982, as first Mexico and then other Third World states were unable to meet their debt payments. What followed was a series of disguised defaults, reschedulings, rolled-over loans, new loans, debt plans, and programs, all with the announced goal of helping the debtor countries get back on their feet. The results of these programs were, however, the reverse of their advertised targets: Third World debt increased from $130 billion in 1973 to $612 billion in 1982 to $2.5 trillion in 2006, as James S. Henry explains in “The Mirage of Debt Relief.”
Another result of the crisis of the 1970s was to discredit the reigning economic orthodoxy—Keynesian government-led or -guided economic development—in favor of a corporate-inspired movement restoring a measure of laissez-faire (a program usually called neoliberalism outside North America). Its standard-bearers were Ronald Reagan in the U.S. and Margaret Thatcher in Britain, and international enforcement of the neoliberal model was put into the hands of the International Monetary Fund (IMF) and World Bank. Dozens of countries operate under IMF “structural adjustment” programs (SAPs), and despite—or because of—such tutelage few ever complete the IMF/World Bank treatment to regain financial health and independence.
The Web of ControlPayments on Third World debt require more than $375 billion a year, twenty times the amount of foreign aid that Third World countries receive. This system has been called a “Marshall Plan in reverse,” with the countries of the Global South subsidizing the wealthy North, even as half the world’s population lives on less than $2 a day. [v]
How does such a failed system maintain itself?
Simply put, Third World countries are caught in a web of control—financial, political, and military—that is extremely hard for them to escape, a system that has become ever more extensive, complex, and pervasive since John Perkins devised his first forecasts for MAIN. Chart 1 illustrates the flows of money and power that form this web of control. Capital flows to underdeveloped countries via loans and other financing, but—as John Perkins points out—at a price: a stranglehold of debt that gives First World governments, institutions, and corporations control of Third World economies. The rest of this chapter outlines the program of free-trade, debt-led economic development as preached by the IMF and the World Bank, shows how corruption and exploitation are in fact at the heart of these power relationships, and explores the range of enforcement options used when the dominated decide that they have had enough.
The Market: Subsidies for the Rich, Free Trade for the Poor
If the global empire had a slogan, it would surely be “Free Trade.” As their price for assistance, the IMF and World Bank insist in their structural adjustment programs that indebted developing countries abandon state-led development policies, including tariffs, export subsidies, currency controls, and import-substitution programs. The approved model of development instead focuses on export-led economic growth, using loans to develop new export industries—for example, to attract light industry to export-processing zones (Nike, for example, has been a major beneficiary of these policies). Membership in the World Trade Organization also requires adherence to free trade orthodoxy.
Ironically, as Cambridge economist Ha-Joon Chang points out, the First World countries transformed their own economies from a base of traditional agriculture to urban industry by using an arsenal of protectionist tariffs, subsidies, and controls. Britain became a paragon of free trade only in the 1850s; before then it had pursued highly directive industrial policies (in addition to its forcible extraction of tribute from India and the West Indies). The U.S. economy developed behind some of the highest tariff walls in the world, President Grant reportedly remarking in the 1870s that “within 200 years, when America has gotten out of protection all that it can offer, it too will adopt free trade.” U.S. tariff rates were not significantly reduced until after World War II. In the postwar era, the most successful developing countries have been the East Asian “tiger” economies of Japan, China, Korea, and Taiwan, which have indeed concentrated on export-led development, but have historically prohibited import of any goods that would compete with industries whose products they wanted to nourish. For example, anyone viewing a 1958 Toyota on sale would have advised the company not to bother, since its cars were clearly not competitive on the world market, and West European automakers produced better vehicles at a lower price. Toyota did not give up and today is the world’s most successful automaker. In sum, the First World has “kicked away the ladder,” prohibiting Third World countries from using the only economic development strategy proven to work. [vi]
The phrase free trade suggests images of Adam Smith’s marketplace, where equals meet to haggle over the goods on sale and finally arrive at a bargain that meets the needs of both, thus enhancing the general welfare. But these are only images, not reality, and they are images that convey exactly the wrong impression. It is not First and Third World equals who are meeting in the marketplace, and the result of their interaction is not a bargain that benefits both. Ghana, for example, was forced by the IMF to abolish tariffs on food imports in 2002. The result was a flood of food imports from European Union countries that destroyed the livelihoods of local farmers. It seems that the IMF’s economic hit men “forgot” to ensure that the EU abolish its own massive agricultural subsidies. As a result, chickens imported from the EU cost a third of those locally produced. [vii] Zambia was forced by the IMF to abolish tariffs on imported clothing, which had protected a small local industry of some 140 firms. The country was then flooded with imports of cheap secondhand clothing that drove all but 8 firms out of business. [viii] Even if Zambia’s clothing producers had been large enough to engage in international trade, they would have faced tariffs preventing them from exporting to EU and other developed countries. And while countries like Zambia are supposed to devote themselves to free trade, First World countries subsidize their exporters through export credit agencies—often, as Bruce Rich explains in “Exporting Destruction,” with disastrous results for the environment and economies of the Third World.
There are perverse effects as well—the famous “unintended consequences” that conservatives love to cite. The IMF’s structural adjustment program in Peru slashed tariffs on corn in the early 1990s, and corn from the U.S.—whose farmers are subsidized at the rate of $40 billion a year—flooded the country. Many of Peru’s farmers were unable to compete, and so turned to growing coca for cocaine production instead. [ix]
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