Origins of crisis ‘Two cheers’ for debt plan

William Keegan

There are lots of strings attached to the debt relief, which is largely coming out of existing

G7 budgets.

Last weekend’s agreement on a programme of debt relief for African countries by the finance ministers of the Group of Seven leading industrial countries has had a wonderfully mixed reception. It has been hailed, not least by the British Treasury’s spin machine — UK finance minister (Chancellor of the Exchequer) Gordon Brown has become the world leader in propagating debt relief — as one of the greatest breakthroughs of all time, on a par with the Marshall Plan that played a major role in putting Western Europe back on its feet after the second world war. But the hard right will never give up its assault on overseas aid, which it regards as wasteful and counterproductive, mostly ending up in the hands of corrupt dictators and Swiss bankers. So there has been a predictable reaction from the anti-aid lobby against the very idea of debt relief.

For the hard-pressed nations benefiting from the G7 agreement it is a case of the opening scene in Hamlet and : “For this relief much thanks.” Meanwhile there has been another reaction among interested laypersons: this debt relief is all very well and good, but what about debt relief closer to home, for the cash-strapped hospitals of the UK’s state-funded National Health Service (NHS) that are up against their financial limits and turning away urgent cases, not to say closing down vital wards? There has been precious little coverage of the origins of the debt crisis. Since your correspondent was there at the time, and saw some of this at first hand, a little history may help to cast some light on what lies behind recent reactions. For a start, the seeds of the debt crisis lay in the financial turmoil that followed the oil crises of the 1970s, when vast increases in the price of oil brought untold wealth to the middle eastern oil producers. Now, although London property was suddenly colonised by oil rich sheiks, even they the most conspicuous of middle eastern consumers could not possibly spend all their new found wealth; and it took time to develop the infrastructure of their economies.

The result was that the financial markets became awash with billions of what became known as ‘petrodollars’ : governments and banks courted the developing countries, almost forcing them to borrow. Among other things, there was a view among western finance ministers and central bankers at the time that unless most of this money was spent, the recession that followed the oil shock could turn into an outright depression. So western capitalism turned into a loan machine for developing economies, with scant regard for their ability to service, let alone repay these loans. The entire process attracted the term ‘recycling of petrodollars.’

Now, with regard to all these charges of ‘corruption’ and misuse of funds: certainly there was a lot of this. But the fact of the matter was that, in the Cold War atmosphere of the times, the United States, the United Kingdom and other governments turned blind eyes to what certain African dictators did with the money: the bigger game was propping up certain leaders to keep them on ‘our side’ vis a vis the Soviets.

Obviously the situation changed after the collapse of the Soviet Union in 1991, but certain habits and practices had become entrenched. Equally obviously, the debt crisis was simmering for quite a long time, and ‘rolling over’ much of the debt became a way of life for international financial officials and bankers. The approach to last weekend’s agreement on debt relief has been long and arduous. And, for all the hype, it is far too early to put it on a par with the Marshall Plan, although it was probably a good tactic for Gordon Brown to make the comparison in order to stress the urgency of the need to relieve famine and disease in Africa.

At most, however, it is a case of ‘two cheers’ for what has been achieved so far. There are lots of strings attached to the debt relief, which is largely coming out of existing G7 budgets. All the hopes expressed by Brown for a doubling of overseas aid have yet to be realised. The Marshall Plan depended crucially on cooperation between the United States and Europe, and within Europe. Cooperation within Africa has a long way to go, to put it mildly. As for debt relief closer to home — those hospitals for instance — successive British governments have reacted against the easy going public sector financial practices of the mid 1970s, and in the world of strict budgetary limits life can be tough.

Indeed, for all the hype, the present British government, because of those other demands on resources closer to home, still has a long way to go the achieve the United Nations target of devoting 0.7pc of gross domestic product to overseas aid. Oh, and by the way: those right wing fellows who object to the very concept of debt relief. Can they be the same people who believe passionately in the capitalist system, which is founded on the freedom for entrepreneurs to opt for bankruptcy proceedings when they can’t service their debts? Or have I missed something? —The Guardian