IOU: The Debt Threat and Why We Must Defuse It. Noreena Hertz
all Mao Zedong said he did while in Moscow in December 1949, his first ever trip abroad. He should have added ‘and wait’. Because in between crapping, snacking and napping, that was primarily what he did. Ensconced in virtual seclusion in one of Stalin’s dachas, in a birch forest a few miles to the west of Moscow with nothing but biographical films of Stalin to watch, Mao Zedong waited for weeks to be received by the ‘steel man’ whom he had travelled 8,600 km by train to see.
The purpose of his trip was twofold. First to ask Stalin for a $300 million loan on behalf of the newly established People’s Republic of China – Mao had no other source of ‘hard currency’ – the US wouldn’t lend to China, and China’s economy was in difficulty; and second to establish a new Sino-Soviet Treaty of Alliance.
Given that the Soviet Union was itself strapped for cash and in the process of trying to rebuild its own war-torn economy, $300 million was a huge amount for it to lend out. Moreover, Stalin needed time to work out whether an alliance with Communist China was really in the Soviet interest, and more specifically whether Mao, a man he considered a ‘cave Marxist’, someone with no real understanding of socialism, was a necessary ally. Would he be an asset or a liability?
Eventually, Stalin buried his doubts. China was too important to risk losing. A number of countries, including India, had officially recognized the People’s Republic, and Stalin was worried that continued procrastination would risk alienating the Chinese Communists. Stalin also realized that by lending to China, the Soviet Union would be able to bank a favour it could later call in. He agreed to establish the treaty and authorized the loan.
The wisdom of the decision was soon vindicated. Only a few months later the Korean War erupted, and within weeks of the American landing at Inchon, the Russian-backed North Korean army was on the verge of annihilation. An anxious Stalin requested Chinese intervention and Mao, partly prompted by his desire to prove that Soviet support of China had been justified, obliged. Ironically, and much to Mao’s irritation, almost all of the $300 million Soviet loan ended up being used to buy Soviet weapons to fight a prolonged war in Korea on Stalin’s behalf.
Four years later the question of debt reared its head once more in Sino-Soviet relations. In 1954, Stalin’s successor Nikita Khrushchev, in a show of ‘fraternal’ support, offered another $500 million to Mao Zedong – at a very low interest rate of only 2 per cent. The loan was meant to be paid back between 1966 and 1967, but this time China returned the debt ahead of schedule, much to Khrushchev’s surprise. As he told the Central Committee Plenum in February 1964, the Chinese could have reaped great financial rewards on such a low-interest loan. In fact, the Soviets had made this clear to Beijing. But Mao insisted on repayments. ‘Can any of the economists understand this?’ Khrushchev asked. ‘It is difficult to understand. Only Mao Zedong can understand this.’
Mao had insisted on repaying the Soviets so quickly because he understood all too clearly that the cost of debt cannot only be measured in financial terms. He saw that loans from other governments often also come at a huge political cost: binding countries to each other, and creating a dependency that first establishes and then serves to reinforce pre-existing power asymmetries and he didn’t want to risk being so dependent on the Soviet Union that he lost political manoeuvrability and endangered his own sovereignty. This was a similar conclusion to that reached by Simon Bolivar, the liberator of the Andean Spanish Colonies (a rough amalgam of Venezuela, Colombia and Ecuador as they are today) over a hundred years before. ‘I despise debt more than I do the Spanish!’ Bolivar had said to his comrades-in-arms, explaining that, ‘it threatens the independence that had cost so much in blood.’ And one echoed much more recently by the Indian government in 2002, when it paid off its most expensive multilateral loans (loans to the IMF, World Bank and regional development banks) early, and again in 2003 when Prime Minister Atal Behari Vajpayee announced to 22 donor countries that he did not want to receive their aid on a government-to-government basis any more as India was no longer willing to accept the conditions that came with it. Echoed again by Thaksin Shinawatra, Prime Minister of Thailand in 2003 when he repaid the $12 billion loan his country had secured from the IMF in the wake of the Asian financial crisis, a year before it was due. Against a backdrop of a massive national flag and with patriotic theme songs blaring, he swore to his audience that this was ‘the last time the country would be indebted to the IMF’, while reminding them of what a ‘pain to the nation’ the debt had been.
But the responses of Mao, Bolivar, and Vajpayee and Shinawatra are not typical. Most developing countries have not and do not take a stance against borrowing. Instead developing world leaders have on the whole accepted indeed in many cases embraced loans from whichever government has proffered them. The reasons we will come back to later on.
It’s a Cold War
At no time in recent history have loans been proffered as ‘generously’ as during those not so distant days of the Cold War. A money-for-influence circus with China, the Soviet Union and the United States all pursuing Communism around the ring. A time of two political and economic ideologies and three camps – the capitalist bloc under the auspices of the United States, and the Chinese and Soviet socialist blocs – with each camp seeking to win the allegiance of the greatest number. A time when loans to countries and regions shot up in direct proportion to their perceived geopolitical influence or ideological loyalties and when loans were used as a means of securing powerful allegiances and ensuring political stability.
In 1960, for example, when South Asia and the Far East were perceived as the main ‘red threats’, 50 per cent of all US aid (loans and grants) was sent to key ‘domino’ countries like South Korea, Vietnam, Thailand, India, Pakistan and Iran. Between 1945 and 1952, when the Soviet penetration of Europe was perceived by the Americans as their greatest threat it was Europe that received $13.3 billion in US aid, (in that case mainly grants) while other regions had to make do with significantly less.
The Bay of Pigs fiasco, in which the US attempted and failed to overthrow the Communist regime of Fidel Castro, moved Latin America onto America’s list of preferred borrowers. In a. speech soon after the invasion, John F. Kennedy spoke of ‘the struggle in many ways more difficult than war…a struggle…taking place every day, without fanfare, in thousands of villages and markets…and in classrooms all over the globe.’ A struggle which needed, Kennedy believed, foreign financial assistance to win. Why? Not for the sugar-coated reasons laid out in his inauguration speech only a few months before.
‘To those people in the huts and villages of half the globe struggling to break the bonds of mass misery, we pledge our best efforts to help them help themselves, for whatever period is required, not because the Communists may be doing it, not because we seek their votes, but because it is right.’
But, rather, because if the Americans didn’t provide loans, ‘the reds’ would. As Kennedy proclaimed later, in an address at the Waldorf Astoria on a blustery winter night just weeks after the resolution of the Cuban Missile Crisis:
‘Less than a month ago this Nation reminded the world that it possessed both the will and the weapons to meet any threat to the security of free men. The gains we have made will not be given up, and the course that we have pursued will not be abandoned. But in the long run, that security will not be determined by military and diplomatic moves alone…Aid is a method by which the United States maintains a position of influence and control around the world and sustains a good many countries which would definitely collapse or pass into the Communist bloc…Really I put it right at the top of the essential programs in protecting the security of the free world.’
And, indeed Latin America’s external debt increased from $12.6 billion (thousand million) to $28.9 billion between 1960 and 1970, a 230 per cent increase, the majority of which was provided by the