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Everyone’s at it

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The rivalry during the Cold War was not just between America and the Communist ‘other’. Throughout, China and the Soviet Union also battled each other for who would prevail in the Communist World, often also using loans as a means to hold sway.

In 1965, for example, during the Vietnam conflict while Moscow was bankrolling Hanoi’s purchases of arms and ammunition, Deng Xiaoping reportedly offered an enormous loan of 4 billion yuan ($1.6 billion) if Vietnam agreed to abandon economic ties with Moscow.

Or take Soviet lending to decolonized Africa in the late 1950s and early 1960s. Initially this had almost nothing to do with the Cold War rivalry between Moscow and Washington. Nor was this an altruistic act. Instead it was a direct outcome of an intensifying competition with the Chinese for the leadership of the international Communist and national liberation movements: securing influence in Africa was seen as greatly important in that quest, and if it took hundreds of millions of dollars in loans to do it – as it did – so be it.

In that case, however, the West soon also got involved. The patronage of Africa by the Chinese and the Soviets threatened it. As a British Foreign Office document of 1959 warned:

‘If Africa is to remain loyal to the Western cause, its economic interests must coincide with, and reinforce, its political sympathies; and one of the major problems of the relationship between the West and Africa will be to ensure an adequate flow of economic assistance, and particularly capital, through various channels to the newly emerging States. On any reckoning the amounts required will be considerable; and, if the Western Powers are unreasonably insensitive to the economic aspirations of independent Africa, the Governments of the new states may be compelled to turn to the Soviet Union for the assistance that they will certainly need.’

With that threat looming Washington launched a dual strategy to provide ‘friendly’ African regimes with weapons and also to channel funds to them through their own development agency, US-AID, along with the World Bank and other international financial institutions. As one National Security Council memorandum recommended in 1965: ‘US-AID should be used as a political weapon with the major assistance going to African friends of the US.’

Which of course meant that now that the Sino-Soviet love affair with Africa was officially a ménage à trois, the Soviets started to lend even more to key countries in the region to ensure that the parties they were backing didn’t switch camps. This led to the increasingly commonplace and clearly undesirable situation of rival groups within the same country being funded by either the East or the West. In Angola, for example, the Soviet Union provided loans for MPLA to purchase weapons. While FNLA and UNITA, MPLA’s enemies, purchased their weapons with American dollars.

How ironic that loans made during the Cold War in the name of security and peace even at the time were clearly engendering conflict and instability. And how indicative of one of the major ironies of Cold War lending: that, in the pursuit of addressing immediate national security concerns, the world’s superpowers played significant roles in laying the foundations for future insecurity and instability.

They did this in two ways. First, their profligate lending actively helped to jack up the debt mountain so that the Third World owed levels way above what many of its countries could realistically service, sowing the seeds of the crisis the developing world currently faces. And second, by the frequent bankrolling of tyrannical, corrupt, or self-seeking regimes, regimes which never considered the needs of the majority of their people in their investment decisions, whose legacies have been increasing levels of domestic poverty, conflict, unrest and civil strife.

The corrupt regime of Mobutu Sese Seko in Zaire (now the Democratic Republic of Congo), for example, received half of all US aid to black Africa in the late 1970s. Zaire’s favoured borrowing status persisting even after a damning internal memo was made public in 1978 by Karin Lissakers (later to become US executive director of the IMF). The memo did not mince its words: ‘the corruptive system in Zaire with all its wicked manifestations is so serious that there is no (repeat no) prospect for Zaire’s creditors to get their money back.’ Mobutu’s spending sprees became quite legendary: Concorde chartered for private shopping trips to Paris; dozens of estates bought in Continental Europe; the building of the world’s largest supermarket, and of a steelworks that one banker said the country needed ‘like it needs central heating’, to name but a few. Yet, despite the absolute clarity of the 1978 IMF memo and the progressive worsening of Mobutu’s spending, in 1987 the US (through the IMF) pushed through yet another loan in exchange for Mobutu making his territory available for US covert action against neighbouring Angola. Today the people of the Democratic Republic of Congo have to spend 37 per cent of government revenues servicing their debt – not great for a country whose Gross National Income per capita is $90.

Another tyrannical regime, that of Saddam Hussein, was provided with loans amounting to around $100 billion, several times Iraq’s GDP, during the 1980s by governments intent on serving their own geopolitical purposes. Half of this money came from Arab states, led by Saudi Arabia, in order to support Iraq’s invasion of Iran. On top of this came $7 billion worth of credits from the Russians, $6 billion from the French, several billion from the Germans and British and at least $10 billion from the US, much of which was covertly pumped into Iraq throughout the mid-1980s through their export credit agencies – institutions we will be looking at in the next chapter.

While European loans to Iraq were made primarily to serve the interests of their domestic arms dealers, geopolitics played a significant part in the US’s decision to lend there. It emerged in the 1990 Iraqgate-BNL (Banca Nazionale Del Lavaro) scandal, backed by hundreds of US documents, that hundreds of millions of dollars of US Department of Agriculture loans had been channelled to help Iraq build its military capacity: ‘BNL’s loans to Iraq were part of a covert operation coordinated with Italian officials by the Reagan administration and continued by George Bush. The scheme was designed to finance the secret re-arming of Iraq, both to balance the scales in the Iran-Iraq war and to gain bargaining leverage for 50 or so US hostages who were at the time being held by the Iranians at the US embassy in Teheran.’

Clear geopolitical interest dictated lending policy throughout the Cold War. This meant that both tyrannical regimes and regimes which didn’t even pay lip service to the lenders’ ideological beliefs, were bankrolled by the West and the East to secure allegiance or to realize strategic goals. Zaire was lent money by the Americans although it never adopted a free market economy. Angola was lent money by the Soviets despite its insincere playacting at socialism. Saddam was lent monies by the West and Arab states up until the 1991 Gulf War despite the fact that his chemical gas bombing of the Kurdish city of Halabja which killed 5,000 of his own people and wounded 10,000 others was by then common knowledge. The Argentinian military junta of the 1970s was lent money by the US despite the fact that it was known to be ‘disappearing’ tens of thousands of people during its reign. As Lyndon Johnson famously observed in defence of Washington’s support of Ngo Dinh Diem, the corrupt and brutal but Communist-fighting South Vietnamese leader to whom over $4 billion of loans and grants was given: ‘Shit, Diem’s the only boy we got out there.’

The superpowers gained an obvious advantage through these loans. But why did Third World countries borrow such huge amounts of money from other countries when the quid pro quo was so explicit? When in exchange they had to promise allegiance? It’s not too difficult to answer that.

In the worst cases, because their leaders knew that they could easily ill manage, misappropriate or divert funds – no bank manager would be peering over them asking them on what they would be spending the money, or how they might pay it back.

In others, because the borrower country simply wasn’t in Mao or Bolivar or Vajpayee or Shinawatra’s position – desperate for cash these nations needed to borrow money from abroad. Domestic savings weren’t sufficient to finance necessary investments for growth and development or in some cases even current consumption requirements. Exports weren’t providing enough foreign exchange to fund imports and service existing debts. Commodity price shocks (such as the oil hike in the 1970s) meant that they needed to offset their impacts (just as a person might take out a loan to tide them over when they lose their job). Grants weren’t available at levels of magnitude needed. And either loans weren’t available elsewhere or the monies being offered by the bilateral (government to government) lenders were being offered at significantly better terms than other alternatives, often at well below market rates.

But more often than not, and why the amounts borrowed were often far above what was actually needed, was because the battle for power between the East and West seemed like it would never end. As long as the superpowers were fighting it out, most Third World countries believed that they could continue playing one off against the other, and that they would remain in the money. They believed that the ‘banks’ wouldn’t foreclose, and that the tap, which ensured that new loans were always forthcoming and that rescheduling was always an option, would never be turned off.

Although there were times when there was a real, legitimate or proper need to borrow, the lending process had become divorced from sober economics (where a low-cost loan is put to sound economic use.) Sometimes loans were used productively. Brazil, for example, took out many loans during the Cold War to invest in developing its manufacturing industry; some of Africa’s loans were used to invest in its infrastructure. And the lenders, for their part, were sometimes sensible enough to make loans to countries that were rich in oil, minerals, coffee and other exportable resources. In other words, countries that were creditworthy. More often than not, however, the lending process was so distorted by geopolitics that the logic that underpins sound borrowing – that one incurs a debt in the hope of making an investment that will produce enough money both to pay off the debt and to generate economic growth that is self-sustaining – was simply absent. As too was the criteria that underpins sound lending – that the lender be likely to be able to repay the loan. And this isn’t selective reporting. While it may be that good news is sometimes not reported, and there are undoubtedly more ‘positive’ debt stories out there than I have highlighted, there is no question that in the vast majority of cases this is the way it was.

IOU: The Debt Threat and Why We Must Defuse It

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