Blocking the Black Debt Hole in the 1990s

Author(s): Andre Gunder Frank

Source: Economic and Political Weekly, Vol. 24, No. 42 (Oct. 21, 1989), pp. 2362-2363
Published by: Economic and Political Weekly
Stable URL: http://www.jstor.org/stable/4395487
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Blocking the Black Debt Hole
in the 1990s
Andre Gunder Frank
Recession is threatening to accelerate the neo-mercantilist
regionalisation of the world economy into American dollar,
Japanese yen and German-led European ECU/D 'mark zones and
trading blocs.
THE satisfaction and optimism of the
financial elite assembled in Washington
for the annual World Bank and Fund
meetings further obscure the world-wide
black debt hole. Much of this hole was
dug by them or their predecessors. The
next recession may still suck the whole
world into the depths of this financial
hole. Recent leading economic and finan-
cial indicators of growth rates, business
orders, trade deficits and surpluses,
exchange rate volatility, and junk bond
defaults, etc, suggest that this recession
may finally have begun already in the
United States, Britain and Japan. Now
recession threatens to accelerate regionali-
sation and possible bloc formation in the
Americas, Europe and Asia.
The present world economic crisis
began with the decline in the rate of pro-
fits since the mid-1960s and the recessions
of 1967, 1969-70, and 1973-75. In the
1970s, the world economy was kept
afloat through debt finance lent to the
third world and the socialist countries.
However, this 'solution' itself became a
problem when it led to their debt crisis
beginning in 1981-82. The world economic
crisis continued to deepen in the 1980s,
and much more of its burden was now
borne by the debtor countries. Therefore,
to keep the world economy afloat in the
1980s, debt finance switched to the United
States and then also to Japan instead. The
long cyclical recovery since 1983 has been
debt financed on borrowed money and
borrowed time. Domestic federal, state,
municipal, corporate, consumer, and
foreign debt in the United States all
increased far faster than before and than
GNP in what Business Week in 1985
called the 'Casino Society. Still the
world's largest creditor in 1982, by 1985
the US became the world's largest debtor.
By 1987, its foreign debt exceeded that of
all Latin America combined. Soon the US
foreign debt is likely to match that of all
the third world put together. Domestic
budget deficits and debts have increased
in many other countries as well.
The general consequences of debt nor-
mally are deflation and depression, when
the speculative bubble bursts. Then, the
financial economy reverberates back onto
the real economy to drive real investment,
production, employment, and consump-
tion even further down. Moreover, each
such general world economic downturn
also exacerbates the "dreadful misfor-
tunes" (quotation from Adam Smith) in
at least part of the third world periphery
and now the socialist world semi-
periphery as well. These are then forced
to save on consumption at home and to
export their own capital to promote
recovery in the world economic centre.
The specific consequences of this debt
crisis so far have been depression and
misery in Latin America, Africa, and part
of Asia, which is already worse than that
of the 1930s. Latin America's growth and
development has lost more than a decade,
setting it back to the mid-1970s. Africa has
been set back over two decades to or
below the income levels at the time of
Independence in the 1960s. Eastern
Europe, now the Soviet Union, and soon
China are also in economic and political
crisis. In any recession in the early 1990s,
none of these parts of the world economy
are likely to be able to offer the safety net
they provided during the 1970s or the
United States created during the 1980s.
Any attempt to make Americans ser-
vice, let alone repay, their foreign debts
through Latin American style belt tighten-
ing in, and export surpluses from, the
United States is unlikely to overcome the
political and economic obstacles. It will
be politically much more difficult or im-
pqssible to impose such forced saving on
North Americans than it was on Latin
Americans. Moreover, even servicing only
the interest on the foreign debt would
require running an export surplus of some
$ 50 billion annually, instead of the
$ 100-150 billion export deficit and capital
import of recent years. Thus, interest ser-
vice alone would require a US trade turn-
around of $ 150-200 billion a year. Paying
back any of the debt's principal would
require an even larger and unimaginable
turnaround. It will also be economically
much more difficult or impossible for the
rest of the world to sustain any such
American export surplus or even the loss
of the American import mark-et to the
European, Japanese and east Asian NICs'
own exports. Therefore, much of the
American debt is likely to go unpaid in
reality or even to be unserviced defacto.
The only possibilities to deal with the
American debt are a continual roll over,
throwing good money after bad, and/or
bankruptcies and partial outright defaults,
or an inflationary devaluation of the
dollar and thereby of dollar-denominated
assets. However, all of these 'solutions'
reduce the real value of the debt. There-
fore, the US debt can never be fully repaid
nd will be at least partly if not substan-
tially defaulted. The result will be still
another problem of corresponding losses
and deflationary effects for the creditor
countries.
The next recession will be the fifth in
the present world economic crisis. Each
of these previous recessions was more
serious than its predecessor, and each of
the intervening cyclical recoveries was
weaker (as demonstrated by the US Con-
gress Joint Economic Committee graphs).
The question is less one of a soft or hard
landing than whether the world economy
has already bottomed out, or whether the
next recession will be still deeper once
again. This is a serious danger, because
the next recession threatens to exacerbate
all these imbalances and to accelerate their
resolution by sucking the world economy
into the black hole of debt (to use the
expression of MIT economist Lester
Thurow). The accumulation of domestic
and foreign debt in many parts of the
world is likely to inhibit further domestic
reflationary finance (call it Gramm-
Rudman in the United States) to combat
recession just when it is most needed in
the next recession. That would be among
other things to forestall the bankruptcies
of junk bond financed corporations and
banks dependent on interbank loans.
Both US and Japanese monetary policies
would be damned if they do and damned
if they don't. Raising interest rates sup-
ports the currency and attracts or main-
tains capital, but depresses the economy.
Lowering the interest rate appears sti-
mulative but devalues the currency and
threatens capital flight. Foreigners (and
nationals) may wish to withdraw their
capital to safe havens elsewhere, or just
cease to throw more good money after
bad. International co-ordination of
monetary and fiscal, not to mention trade,
policies would become difficult if not im-
possible. Who then will replace the United
States as the borrower of last resort?
The continuing world economic crisis
is exacerbating the accumulated regional
and sectoral imbalances especially among
the world's major trading regions of
America, Europe, Japan, and their third
vorld and socialist trading partners. They
2362 Economic and Political Weekly October 21, 1989
will find it ever more difficult to manage
the growing conflicts between financial
debt.
speculation and real economic pro-
ductive investment, through the already
conflicting monetary, fiscal, exchange
rate, trade, security and other policies.
Therefore, another (again more severe?)
rcession threatens also to spark another
(also more acute?) crisis within the crisis.
More of the same muddling through is
likely to become impossible. Any possi-
bility of reimposition of the old American
dominance (or an alternative Japanese
new dominance) in a multilateral world
economic and financial system or its co-
ordinated management by the G7, G5 or
G3 is improbable in such a recession. (A
US bomb and Japanese yen based Pacific
basin political economic consortium is
possible but rather unlikely, and one in-
cluding Europe even less likely.) The most
likely possible alternative resolution will
therefore be increasingly neo-mercantilist
regionalisation of the world economy into
American dollar, Japanese yen and
German-led European EUC/D mark
zones and/or trading (and political?)
blocs.
Major open questions are the composi-
tions of these regional blocs. How much
of the Americas (and the Pacific?) will fit
into an American bloc? The European
Challenge is to what extent eastern Europe
and the Soviet Union will be (better) in-
cluded in, or (worse) excluded from such
a European arrangement? Who wants to
join a new Japanese-led Greater East
Asian Co-Prosperity Sphere? Where will
various parts of the third world fit in or
be further marginalised and fall between
these regional stools? How can and will
globalised multinational eRterprise and its
interregional investment and trade form
cartels to respond to the regionalisation
of its markets? These-and the related
interregional relations-are the political
economic questions of the 1990s. The
financial gurus assembled in Washington
are not even asking, let alone answering,
them. Or are they answering by default?
SRI LANKA
A Political Life
Amrit Wilson
The reality of death is always hard to accept but more so in the
case of a courageous woman with her laughter and optimism and
her hope for the future. Rajani Thiranagama, who was shot dead
in Jaffna on September 27, will be remembered as a doctor, a
researcher, as a writer and a political analyst but more than
anything as a revolutionary activist who gave her life for the
struggle in this bleak phase of Sri Lanka's history.
ON Thursday September 21, Rajani
Thiranagama was shot dead while on her
way home from the University of Jaffna.
Her murder sent a deep shock of sorrow
and anger through a city where killings
and disappearances are every day oc-
currences. People knew that she had been
killed for what she stood for and for the
work she had been doing in the last few
years.
Rajani was a socialist with a rare com-
mitment to the people. She wanted their
voices and opinions to be heard, their lives
and their
struggles and their often brutal
deaths not to be forgotten, buried in the
debris of a ravaged society. Since October
1987 she had been exposing and systemati-
cally documenting the atrocities commit-
ted by the IPKF; by the Tamil paramilitary
groups which the Indian army armed, in-
filtrated and now controls and by the
Liberation Tigers of Tamil Eelam (LTTE).
In the confusion of northern Sri Lanka,
its atmosphere of lies and terror, of
infiltration and hired assassins, one can-
not trace her murder to any one agency.
It is possible, however, that her killer was
acting under instructions from the IPKF
or RAW or on behalf of the LTTE who,
since the recent truce with the IPKF, are
trying to eliminate all those who have
dared to criticise them. Rajani was 35 and
had two young daughters. In the last few
months her home had been raided by
armed men. Her written manuscripts had
been taken away and she had received a
series of threats. In her letters she
described harassment from the IPKF: "the
local army officer in charge is trying to
trap me" and in a last letter which arrived
in London after her death she had written
One day some gun will silence me. And it
will not be held by an outsider, but by a
son-born in the womb of this very
society-from a woman with whom my
history is shared
Rajani was driven by a revolutionary's
burning honesty. So at a time in Sri Lanka
when most 'revolutionary' affiliations are
based on fear or else in hope of personal
gain, she remained independent. But she
was not an aloof external observer; she
was an activist in the heart of a tortured
community, close to ordinary people and
so deeply loved that 2000 people defied
intimidation by the IPKF and militant
groups to commemorate her and protest
against her murder.
As a student and later as a doctor in
Jaffna, she had lived through the Sri
Lankan government's campaign of terror
and repression against the Tamil com-
munity. But later, particularly in the wake
of the 1983 holocaust against Tamils
(when India stepped in to arm and in-
filtrate Tamil militant groups), she had
witnessed and spoken out against the
degeneration of the LTTE into a purely
militaristic organisation with a callous
disregard for the people. In interviews and
discussions with South Asia Solidarity
Group in June 1987 she had described the
nature of the LTTE and the relationship
between them and the population as a
whole: the fact that the LTTE had in fact
the same petit-bourgeois base as the now
discredited parliamentary party-the
TULF; and how although it was the only
liberation movement which offered a plan
of militant action and put it into practice,
this alone is not enough, to liberate a
country.
There were no mass organisations which
could effectively mobilise the people or voice
needs and opinions... there were all the
externals of change: murals, Tiger courts,
ribbon cutting by the Tigers! But the people
had no role. They were spectators, by-
standers... unable to determine the course
of their struggle.
Rajani was in Jaffna in July 1987 when
the Indian Armed Forces were welcomed
in as 'peacemakers', and during the
October War a few months later when she
lived through the onslaught by the same
peacemakers on civilian targets including
Jaffna Hospital, refugee camps and
villages. In a letter which was also a poem
she wrote:
You want events, numbers, case histories?
Not now please, because my mind is
strangled.
I know its strange, but that is what I feel
That is what we live.
Pairn agony and fear always fear.
I ask you, could you write straight when
people die in lots?
When you find them
dead like flies...
But it was in these days of anguish that
she started analysing and documenting
this chapter of Sri Lankan history, calmly
aware both of the need and the possible
consequences of such a step. Because,
although
To be objective or analytical seems to be a
major effort like trying to do something
physical in the midst of a debilitating
illness. .. it is important for us to arrive at
Economic and Political Weekly October 21, 1989 2363