Originally published May 6, 1985
TO WRITE THIS I had to turn off a television show featuring a rock star, eyes closed in rapture or agony or something, moaning an expression of his solidarity with the people starving to death in Africa. I should-and shall-leave the task of commenting on TV performances to Marvin Kitman. I will even resist the temptation of recalling the Stan Freberg skit of a few years ago in which he asks everyone to stop at a certain hour of a certain day and tap dance for peace.
There is no question that our fellow citizens’ capacity for pity and terror has been stirred by the pictures they have seen of the starvation in sub-Saharan Africa. There is no question that they want to help in some way. It would be pretty to think of them beginning by wondering how the tragedy came about. For anyone ready to take that necessary initial step there is a new book available called Debt Trap: Rethinking the Logic of Development. Yes, I am afraid that to understand starvation in Africa you must start with money and banking, because they are the roots of the problem.
The author of Debt Trap is Richard Lombardi, a former vice president of the First National Bank of Chicago. His office was in Paris, a nice place to have an office, but he was in charge of lending in both French-speaking and English speaking Africa, and he traveled widely and steadily in those countries. What he saw troubled him deeply, for he is an intelligent and compassionate man. To think about the situation in greater depth he took a leave of absence and became a research associate and Thursday Fellow in Georgetown University’s School of Foreign Service. The result is his important and enlightening work.
Lombardi lays out the connection of starvation with banking roughly as follows: People starve because they cannot get food. They cannot get food because they either do not grow it or have no means of securing it from those who do grow it. In Africa they do not grow so much food as they used to, since many farmers have moved to the city and many more have switched to crops for export, like sugar and coffee and cola nuts. Their governments have induced them to switch to export crops to earn foreign exchange. The governments need foreign exchange to try (unsuccessfully) to meet the interest payments on their foreign loans.
Why do they have foreign loans? It comes down to Gertrude Stein‘s answer when she was asked why she had written Tender Buttons: “Why not?” As Lombardi tells it, the world’s big bankers bought the oil sheiks’ OPEC winnings on the Eurodollar market and then jet-setted around the Third World peddling the money. The bankers called this recycling; actually, it was salesmanship.
The bankers happened to launch their maneuver at about the time that the Third World nations, almost without exception, were in trouble with the World Bank and the International Monetary Fund (IMF). The bankers could offer assistance because they had money and also because they had a new vision-not of banking, but of what they came to describe as “world financial enterprise.” Lombardi credits (if that is the right word) this vision to Walter Wriston, who transmogrified the First National City Bank of New York into Citicorp in 1967. At any rate, the “Citicorp Concept” was reverently discussed in the business press and widely emulated by David Rockefeller‘s Chase Manhattan and the rest. The hairy details I’ll leave you to read in Lombardi’s book, only noting Wriston’s fatuous dictum, “But a country does not go bankrupt.”
The stage was now set. The Third World needed (or wanted) money; the bankers had it (or knew where they could get it). And the bankers had convinced themselves that all Third World loans were risk free. What happened? In 1960, Lombardi tells us, Third World debt totaled $7.6 billion. Today, a quarter of a century later, it is nearly $1 ,000 billion that is, $1 trillion, or an increase of roughly 12,000 per cent. The sum is not owed to the banks alone. UN agencies are heavily committed, as are our Export-Import Bank and its counterparts in other First World nations.
All of this occurred because those who count in both the First World and the Third World have been acting out what Lombardi (using an unlovely but fashionable word) terms a “paradigm.” Two components of the paradigm we have discussed here before: Ricardo’s Law of Comparative Advantage (“How Our Sun May Rise Again,” NL, July 12-26, 1982), and the notion that a growing GNP cures all ills (“Sinking By the Numbers,” NL, May 2, 1983). A third principal component, perhaps not now so prominent as the others, is the theory of Walt Rostow (Lombardi erroneously calls him Walter) that developing societies invariably pass through five stages: “the traditional society, the preconditions for takeoff, the takeoff, the drive to maturity, and the age of high mass consumption.” A dream world.
In the grip of this paradigm, everyone began pushing the Third World to modernize and industrialize. The Export – Import Bank and its ilk underwrote sales of steel mills and sugar refineries and atomic energy plants. The national airlines of countries of fewer than a half million souls, most of them tribesmen with neither the need nor the possibility of flying anywhere, bought fleets of Boeing 747 jumbo jets. The World Bank lent money at low rates for roads and airports and dams and other infrastructure. The UN “Development Decades“ favored an urban focus, precipitating a population shift from farm to city. The demand for agricultural exports accelerated the shift, because export crops tend to be more efficiently handled by agribusiness than by customary methods.
Under such prodding the Third World’s GNP rose even faster than the Development Decades had hoped. But Third World debt rose faster yet. This outcome, which should be a puzzle to true believers in the GNP, threatened to swamp the UN agencies. The IMF (then as now) counseled austerity, meaning cut imports (or, more frankly, reduce your standard of living) and expand exports (done by lowering wages and, again, your standard of living).
At that point in time (as Watergate taught us to say) the Citicorp Concept flashed across the horizon. Gone was the old-fashioned bankerly attempt to evaluate the business prospects of each enterprise applying for a loan. In its place was the actuarial notion that lots of risks are safer than a few. Risk itself disappeared because countries did not go bankrupt. Recycling could go on merrily as long as Third World countries could be induced to borrow money at a point or two over what the bankers had to pay for it on the Eurodollar market.
It turned out not to be difficult to induce Third World countries to borrow, what with everyone advising them to do so and especially with fewer and fewer questions asked. Lombardi has some horror stories to relate. A billion dollar steel mill in Nigeria is too sophisticated to use the low-grade ore it was originally intended for. Zaire has the longest transmission line in the world, and no particular need for it at either end. A loan to Costa Rica was underwritten by a banking syndicate on the basis of a news article in Time.
At least some of the borrowers were foolish like fox terriers. They didn’t bother to buy so much as a new presidential palace with the money, instead sending it straight to numbered bank accounts in friendly Switzerland. Periodically, statesmen who had that kind of foresight were overthrown, and their successors opened up their own numbered accounts. No one knows how many billions thus disappeared. The critical fact, however, is that the bankers lending the money didn’t care; they lent the money to countries, not to individuals, and countries don’t go bankrupt, even when they are stolen blind.
Of course, countries whose debts have increased 12,000 per cent in 25 years do usually have trouble meeting even the interest payments. So the IMP urges austerity; food is in short supply; starvation looms-chronic starvation, not the sort that results from a natural disaster.
LOMBARDI paints the unhappy picture with great fervor. He emphasizes that the Third World’s troubles are not merely those of an exploding population. The population problem certainly plays a role, but in the improbable event of zero population growth troubles would remain. The key is breaking that paradigm.
Lombardi suggests ways this can be done. He also shows the trouble the paradigm has caused and will cause in the First World-that is, to you and me. For when bankers lend money to Brazil to buy a steel mill or to Tunisia to manufacture blue jeans or to Taiwan to keypunch data into American computers via satellite, Americans lose their jobs.
The apostles of the Law of Comparative Advantage (a.k.a. “free trade”) counter that building the Brazilian steel mill and the Tunisian garment factory and the Taiwanese data-processing equipment makes jobs for Americans, and to a degree they are right. An hour or two at, say, John F. Kennedy Airport in New York will convince you that Boeing has sold (with Export-Import Bank help) an awful lot of747s to foreign airlines you never dreamed existed. Still, unless we are prepared to give our airplanes and steel mills and wheat and corn away, someone has to pay for them-that is, the loans the bankers have made for us have to be paid off. If they can’t be paid off, our friendly bankers will surely find ways to transfer the bad debts to us taxpayers. And if they are paid off, Third World austerity programs will throw Americans out of work. “When bank credit to Mexico stopped in 1982,” Lombardi observes tellingly, “more jobs were lost in the following six months in the United States than in the three previous years of a depressed U.S. auto industry.”
Banking, in short, is not an innocent enterprise. It can cause starvation in the Sudan and unemployment in Cincinnati. Faulty practice flows from faulty theory. Faulty banking theory flows from faulty reading of history. Lombardi devotes several chapters to this question, and though I don’t always agree with him (in particular, I think he misunderstands evolution), I certainly applaud his effort. I therefore earnestly commend his book to your attention.
A useful supplement to the foregoing is The Dangers of “Free Trade,“ a new booklet by Professor John M. Culbertson of the University of Wisconsin-Madison. Culbertson details the mischief caused in both the Third and First Worlds by the Law of Comparative Advantage, then suggests new trade policies suited to the actual situation of the actual world we live in. He makes a strong argument for conducting international trade between nations (rather than between private citizens or firms), and he makes a persuasive case for bilateralism (showing that he’s not afraid of unconventional thoughts).
The New Leader