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close this bookMaldevelopment - Anatomy of a Global Failure (United Nations University)
close this folder2. The decade of drift: 1975-1985
View the document(introduction...)
View the documentThe excitement of the Bandung plan (1955-73)2
View the documentThe battle for a new international economic order (NIEO): 1974-1980
View the documentStructural costs; the stakes; the struggle for the NIEO
View the documentAfrica: from the Lagos plan (1980) to the world bank plan and the United Nations Conference (1986)
View the documentDebt and the threat of a financial crash
View the documentThe efforts of radical African nationalism: adjustment or delinking?6
View the documentNotes

Debt and the threat of a financial crash

The first Brandt Report attached great importance to immediate issues and in particular to the threat of a global financial crash, in connection with world inflation and the galloping increase in the external debt of some countries. Andre Gunder Frank went so far as to suspect that the real aim of the report and of the proposed summit that eventually was held at Cancun - was to examine ways and means of avoiding a financial crash.

The solution, establishing a link between the issue of international liquidities and development aid, envisaged many years ago then dropped, was taken up by the report. This link would make it possible to avoid financial collapse for certain Third World countries whose foreign debt threatened the global balance. This, according to Gunder Frank, was the 'true ground of mutual interest, for states as a whole'. But is a link of this kind possible?

The report's general considerations on the international monetary system seemed naive. The report sought the establishment of a 'fair world monetary system...'. This has never been the case to date. First, there has never been a monetary system except in periods of economic hegemony of a national centre. It was the case in the 19th century, and up to 1914, when the gold (but really sterling) standard corresponded to British hegemony. It was again the case from 1944 (Bretton Woods) to 1971 (suspension of dollar convertibility) while US hegemony lasted. By contrast, during what Arrighi cells 'tine 30 years war for the British succession', between the US and Germany from 1914 to 1945, there was no world monetary system but a great deal of chaos. The reason for such chaos, including the 1929 crash, was not that there was no world monetary system, but on the contrary, the fact of their being no world hegemonic power made it impossible to have a world monetary system. With the beginning of the decline of US hegemony, we have once more entered a period of this kind.

Disorder inevitably encourages inflationary pressures; this was the case during the 1914-45 period. It was the case again from the second half of the 1960s, in new guises but for the same basic reason. The crisis began in relations between the dollar and the mark, yen and other European currencies, and not by chance. The United States' incapacity to meet economic responsibilities (decreasing world market competitiveness with Japan and Germany) and political role (the Vietnamese war) led to the fall of the dollar. Artificially boosted by the Reaganite policy of high interest rates, the dollar lost ground again.

Undoubtedly inflation has its internal structural causes relating to the strategy of the monopolies to abandon price competition, and to the social order achieved through 'collective bargaining'. This is why inflation has continued to gallop since 1945. This inflation was bound sooner or later to bring a revaluation of gold, and the readjustment of exchange rates in keeping with the unequal distribution of those rates. But as long as the A phase (1945-70) was in effect, the overall structural balance (including, in general, the balance of payments; never mind the chronic invalid, Great Britain, sustained by the US boss for past services, and a few epidemic invalids in the Third World) ensured the operation of the world monetary system based on US hegemony. When the B phase began the system broke down. In a first phase (1965-80) rising inflation was at a trot, then a gallop, and its rate was increasingly unequal (from 7% to 30% a year); exchange rates fluctuated wildly; gold could no longer be pegged (from 1971) and the yellow metal rose from an official rate of US$ 35 to the ounce to a henceforth free market rate, around $600 to $700 to the ounce with some peaks of nearly $1.000; the crisis was then accompanied by a new phenomenon: stagflation. It serves no purpose to complain, as Robert Triffin does, of these factors: instability in exchange rates, inadequacy of reserves, the absence of machinery of adjustment: there is no monetarist cure for a disease that originates elsewhere than in the currency. Would the monetarists understand this? Since 1980 rises in domestic prices have been stifled by policies treating this control as an absolute priority, but at the cost of even more pronounced stagnation and a boost to financial speculation.

It must be supposed that there are mechanisms for adjustment. In the A phase there certainly are. This is why the IMF worked on the hypothesis that a country's deficit was due entirely to its national policy. But in the B phase the imbalance is structural and global, and the deficit of some has its counterpart in the surplus of others. It is no longer possible to blame these deficits on 'inadequate' national policies; they are the inevitable counterparts of surpluses that are no less difficult to reabsorb.

Regional or world monetary order - or monetary disorder - reflects the balance of power, or want of balance, between the developed capitalist countries, and not North-South relations; what has actually changed is relations between developed countries. Hence language such es 'specific needs of developing countries' (end the 'link') is ingenuous.

Is the threat of financial crash genuine? or only a bugbear? The failure of a great financial institution can always be avoided if the central bank prefers to come to its rescue (by nationalization) and accepts the ensuing inflation. In 1929 this option was impossible without suspending convertibility. This is not the case nowadays. Certainly the central bank of a given state may hesitate if it is acting alone, since the resulting acceleration of national inflation would weaken the standing of its currency in relation to others. But has the safeguard not already been put in place by the association in consortia of all the lender countries for any significant international loan? In this case the default of any significant borrower would threaten the entire system and the system therefore behaves with solidarity to avoid the crash.

But who are the borrowers? The countries of the East and the NlCs of the Third World. In fact loans provided for these countries are never called in for repayment; the structural surplus of the lenders would forbid this. These loans, even if not always destined for determinate investments, are the modern form of foreign investment. They are intended to show their return through interest payments. They are also used as a means of constant pressure to subject local policies to the wishes of monopoly capital. By the same token an exaction is made on the real income of the Third World. This is why the threat of a crash is more remote than might be thought. Either these countries will go on mortgaging their independence (and their income) through indefinite pursuit of this kind of development, and all will be well; or, through political change, they will refuse to repay and, as in previous historical situations, will be able to do so to the degree that they are subjected to reprisals driving them into national or collective autarky. In that case the central banks associated with the lending centres will come to the rescue of their own 'victims'.

The threat of a crash comes from elsewhere: the erratic flows of liquidities held by the transnationals (rather than by the oil-producer countries) and observing only the rules of short-term speculation. In this regard the supporters of floating exchange rates have acted to the advantage of the speculators, but to the detriment of the collective interest in avoiding disaster. Hence perhaps after so much infatuation with the Milton Friedman school, for reasons of ideological alienation linked to the neo-liberal revival, the West's monetary and political authorities have begun to revert to less foolish behaviour.