[DEBATE] : (Fwd) Toussaint: critique and alternative to Bretton Woods Institutions

[Patrick Bond]

(Once again, Eric Toussaint provides an exceptionally useful set of 
up-to-the-minute data on global financial turbulence. Next week the 
IMF/WB meet in Singapore, probably quite pleased about that 
proto-fascist state's bannings of even moderate NGOs and leaders from 
even entering, and no doubt secure in the knowledge that paramilitary 
Indonesian thugs have threatened to break up the conference of 
progressive civil society forces meeting across the bay - in Batam - at 
the end of this week. So it is good to have an alternative proposal in 
skeletal form, in Section 4 below. However, I must record a small 
caveat: at this stage in history, it isn't apparent to me that a new 
international financial agency is desireable, given both the adverse 
balance of international geopolitical and economic forces that Eric 
mentions, or the dubious merits of establishing a *hard-currency lender* 
for development. But still, this is another seminal contribution from 
one of the global justice movement's leading strategists and campaigners 
and should be widely circulated.)

Bank of the South, international context and alternatives[1]

Eric Toussaint[2]

5/08/2006 version

Translation by Gillian Sloane-Seale, Karin Baasch, Mike Williams and
Jean-Pierre Schermann, Coorditrad volunteers


1. Two important opposing trends are being played out at the
international level 1

2. The international economic context 2003‑2006. 2

3. Potential Alternatives in practice. 7

4. The Bank of the South and the Monetary Fund of the South 9

5. Future perspectives for the economy. 10

6. Conclusion 15


1. Two important opposing trends are being played out at the
international level

Today’s overriding trend, in existence for 25 to 30 years, has been the
pursuit of a neoliberal and imperialistic capitalist offensive. Over the
last few years, this trend has been expressed by the more and more frequent
recourse to imperialistic wars, the increase in arms by the super powers,
the pursuit of reinforcing trade opening of the dominated countries, the
generalization of privatization, a systematic attack against wages and
collective solidarity mechanisms won by workers; all of which are a part of
the Washington Consensus.

A counter trend has been developing since the end of 1990s. Its most
advanced form is expressed (almost) uniquely in Latin America: the election
of presidents advocating for a break with neoliberalism (this round began
with the election of Hugo Chavez at the end of 1998) or at least a 
variation
of same; Argentina suspending payment of its public external debt to 
private
creditors from the end of December 2001 to March 2005; the onset of the
state reclaiming control of large public corporations (PDVSA)[3] and of
natural resources (natural gas in Bolivia); the failure of FTAA (Free Trade
Area of the Americas); the diminished isolation of Cuba.

This counter trend would be inconceivable without the powerful social
resistance that has been opposed to the neoliberal offensive since the 
1980s
(February 1989 in Caracas) in different parts of the world and that have
since flared up periodically.

The resistance that imperialism encounters in Iraq, Palestine and
Afghanistan also play a fundamental role.

2. The international economic context 2003‑2006
The crisis which struck the US economy in 2000‑2001 has been overcome by a
voluntary anti‑cyclical policy of the Federal Reserve Bank (the US Central
Bank) which drastically lowered its official interest rate bringing it to
almost zero. The objective was to avoid the bankruptcy of Enron and 
Worldcom
extending to other large heavily indebted corporations in the private
sector. The radical reduction in interest rates allowed corporations to
refinance their debts in the least cost‑effective manner. It was the same
for North American households whose debt level was unprecedented (130% of
annual income). The total sum of all debts in the US, both in the private
and public sectors, is more than $37 trillion.

The US was able to overcome this crisis and re‑established a level of 
growth
supported by domestic consumption which has been fed and financed
externally.

The economic recovery in the US took place while Europe and Japan
experienced weak growth. The US has since then played the role of being the
world’s economic engine in 2002‑2003. US consumption implies a strong
recourse to imports, especially Chinese products. The US engine has swept
China along in its wake. China has thus maintained a growth rate close to
10%. China’s needs for combustibles and raw materials have boosted the 
world
market prices of these products.

According to the Bank for International Settlements (BIS www.bis.org), in
2005, “China accounted for more than 57% of the incremental demand for
aluminium, 60% of that for copper and over 30% of that for oil” (BIS Annual
Report 2006, p 41).

Since 2003, we have witnessed a very sharp rise in the real price of oil,
other raw materials and certain agricultural products. At the same time, 
the
prices of manufactured products rose slightly.

This is why we are living in a world characterised by an improvement in the
terms of trade in favour of developing countries exporting raw materials,
combustibles and several agricultural products. This contrasts sharply with
more than twenty years of degradation of the terms of trade[4] to the
detriment of developing countries.

In the case of Latin America, since 2003, Brazil, Chile, Columbia, Peru and
Venezuela have all benefited from a sharp rise in the prices of their
exports (BIS 2006, p 40).

This upswing in the terms of trade produced an enormous increase in foreign
exchange reserves of developing countries. In fact, more than 130 of them
(out of 165) saw an increase in their reserves.

Between 2000 and April 2006, the foreign exchange reserves of developing
countries (which include the countries of the former Soviet bloc) have
almost tripled (from $973 billion up to $2,679 billion). The foreign
exchange reserves of oil producing developing countries have quadrupled
(from 110 to 443). China’s have increased by more than five times (from 166
to 875). Latin America’s foreign exchange reserves increased at a more
modest rate, i.e. by 40% during the same period.

The world’s total outstanding foreign exchange reserve, according to the
BIS, reached $4.17 trillion in December 2005 (where ⅔ is in US Dollars, the
remaining ⅓ comprising of Euros, Yens, Pound Sterling and Swiss Francs), of
which only $1.292 trillion are in the possession of the most industrialised
countries. Still, it must be noted that the US only possess the equivalent
of $38 billion (in different currencies) and the Eurozone only $167 
billion.
As for Japan, it only holds $829 billion (BIS, 2006, p 83).

Developing counties have never known such a situation: they have a sum
equivalent to more than double the foreign exchange reserves of the most
industrialised countries at their disposal. The composition of the foreign
exchange reserves of developing countries are as follows: 60% in US 
Dollars,
29% in Euros and the rest in Yens, Pound Sterling and Swiss Francs.

The IMF, which, since its inception in 1944, has been officially in charge
of assisting countries who face balance of payment problems, only has the
equivalent of approximately $9 billion that are directly in circulation at
its disposal. Total contributions represent $300 billion but it must be
noted that the 184 members of the IMF do not necessarily make these sums
available to the Fund. Its lending portfolio is no more than $35 
billion. It
is looked on as a dwarf with respect to some twenty developing countries.
Its situation is moreover aggravated by the fact that its lending portfolio
is diminishing (and consequently its revenues) due to advance repayments by
several Asian countries, Brazil and Argentina, soon followed by Mexico and
Uruguay.

Developing countries are, literally as well as figuratively, net lenders to
the most industrialised countries.

It is so true that they lend money to the US Treasury and to Western
European countries by buying their Treasury bonds. Developing countries 
hold
US Treasury bonds exceeding several hundred billion dollars.

NB: The World Bank itself recognizes that developing countries are net
lenders to the most industrialised countries. In its 2003 Annual Report
entitled Global Development Finance, the World Bank states that “Developing
countries, as a whole, are net lenders to developed countries”. In the 2005
publication of Global Development Finance, the World Bank writes:
“Developing countries are now net exporters of capital to the rest of the
world” (World Bank, GDF 2005, p 56). In Global Development Finance 2006, 
the
World Bank states again that “Developing countries export capital to the
rest of the world, particularly to the United States” (World Bank, GDF 
2006,
p 139).

There is nothing that demonstrates the futility of the prevailing theory
more than in the area of development. In fact, according to the prevailing
thought, one of the principal obstacles to development of the South[5], is
the lack of capital. Therefore, for development purposes, developing
countries must look elsewhere for the capital they lack. They must be at 
the
same time indebted and attract foreign capital.

The present policy with respect to foreign exchange reserves is, from all
perspectives, absurd because it conforms to the orthodoxy of international
financial institutions.

Instead of using a large part of their foreign exchange reserves for
investment and current spending (for example, on education and health), the
governments of developing countries use it for repaying their debts or for
lending purposes to the Treasury of the United States or to the treasuries
of Western Europe.

But it does not end there. The governments of developing countries use 
their
foreign exchange reserves as a guarantee on future payment and contract new
debts with private foreign banks or financial markets. It is absurd from 
the
point of view of general interest.

Another absurd policy from the point of view of the Nation, the public
treasury of developing countries, in order to prevent an inflationary 
effect
linked to the high level of foreign exchange reserves, incur debt with 
local
banks in order to withdraw surplus money from circulation.

Let us take another look at the different actions mentioned above.

2(a) Advance payments to the IMF
 >From the end of 2005 until the beginning of 2006, Argentina made advance
repayments to the IMF by using part of its foreign exchange reserves.
Argentina, however, would have been perfectly entitled to challenge the
amounts due to the IMF since the Fund is responsible for a series of 
actions
which have inflicted harm on Argentines as well as on the economy of the
country. The IMF actively supported the Argentine dictatorship during the
years 1976 to 1983, a regime that systematically committed crimes against
humanity as well as putting the country heavily into debt by 
implementing an
economic model prejudicial to the interests of the Nation. The IMF then
demanded that the democratic government, which succeeded the dictatorship,
repay the odious debt contracted by the military junta.

Afterwards, it continued, and still to this day, to dictate an economic
policy prejudicial to the interests of the Nation. Argentina was perfectly
within its right to refuse to continue repaying its debt to the IMF.

The same could be said about Brazil and its advance repayments on its debt.

By using their reserves to repay the IMF, Argentina and Brazil have 
wasted a
part of their resources that could have been utilised for more useful and
worthy ends.

One of the main reasons given by the Argentine and Brazilian governments 
for
advance repayment of their IMF debt was the desire to regain their freedom
of movement.

It must be clearly stated that after repayment, these governments 
maintained
an economic policy supported by the IMF. For example, they did not
re‑establish controls on the movements of capital or on foreign exchange.

2(b) Loans to the US Government by purchasing Treasury Bonds
Most developing countries purchase US Treasury bonds. The exact amounts are
unknown, but this amounts to several hundreds billion dollars being lent to
the US government. The argument most commonly advanced is that US Treasury
bonds are highly convertible assets, ie, they can be resold very quickly 
and
easily. Besides, it is generally assumed that they are risk free since 
it is
inconceivable to imagine the US treasury being in default in the short or
medium term. Simply put, developing countries are thus contributing to the
maintenance of US imperial power. Developing countries are giving the 
master
the baton with which to beat them up and rape them. In actual fact, the US
has a vital need for outside funding to finance its enormous deficits and
maintain its military, trade and financial might. If it were to be deprived
of a significant portion of the loans from developing countries, the US
would find its position weakened.

Additionally, those who advocate purchasing US Treasury bonds generally 
omit
to mention the fact that the dollar is falling. The yield of those bonds is
in devaluated dollars.

Let us immediately agree that the purchase of West European treasury bonds
is in no way a viable alternative, although it may be a lesser evil.

It would be far better to use surplus reserves productively or make them
available to a “bank of the South”.

2(c) The pursuit of public debt
Investing reserves in US Treasury bonds (or any other Treasury bonds)
generally means in return new borrowings. This may seem surprising, but in
reality, this is how things work. On the one hand, a part of foreign
currency reserves is invested in US (or other) Treasury bonds; on the other
hand, all levels of government borrow from domestic or international 
markets
in order to repay the national debt. In any case, the interest earned from
investing in foreign Treasury bonds is less than the interest paid to
borrow. This amounts to a loss for the Treasury of the country concerned.

Leaving a significant amount of reserves in the hands of the Central Bank
frequently leads to it being in debt!

To explain. The massive influx of foreign capital in the form of foreign
exchange ends up in the hands of local agents who will exchange it at their
own banks for local currency. This results in an increased accumulation of
the domestic currency, a potential source of inflation. In order to avoid
this, the central bank performs transactions designed to “freeze” these
reserves so as to prevent the influx of foreign exchange from being
transformed into the local currency. There are two main possibilities:

1. The central bank can decide to increase the rates for
reserve assets of the banking system. This leads to additional costs for
banks, which will certainly be reflected in the interest rates on the loans
they offer. This will make credit more expensive and should thus slow down
the generation of money (since every time credit is given, money is
generated, just as there is monetary “destruction” every time credit is
repaid).

2. The central bank carries out open-market transactions,
ie, it issues securities, designed to take local currency out of
circulation, thereby limiting the risk of inflation.

The problem with this strategy is that the central bank has, on the one
hand, foreign exchange reserves that it invests in international capital
markets (which earn a T1 interest) while on the other hand, the earnings
from the securities that it issues is at T2, which is greater than T1, 
since
the risk premium has more significance within the domestic markets of
developing countries than in international markets.

It is for this reason that, in order to control inflation as well as the
rates of exchange (this also depends on the exchange modes, whether 
flexible
or of the fixed currency board type), both the central bank and the state
are forced to incur debt simply to finance the discrepancy between the
rates.

This is the combined result of a monetary policy whose principal objective
is the fight against inflation (according to familiar liberal perspectives)
and a general economic policy that limits the active intervention of the
state into productive activity and considers social expenditure to be
non-productive (and a source of inflation).

A crushing majority of governments give precedence to this policy, giving
rise to an increase in the national debt as a counterweight to the high
level of foreign exchange reserves[6]. This is true for China as well as 
for
Latin America.

Instead of creating mountains of reserves, in particular to protect them
from speculative assault, the governments of developing countries would do
better to:

1. adopt measures to control capital and currency movement
(a far more effective way of protecting oneself from speculators and
fighting capital flight);

2. use a significant part of their reserves for productive
investment in industry, agriculture (agrarian reform and sovereign control
over food resources), infrastructures, environmental protection, urban
development (urban improvement, construction/renovation of homes...), 
health
care and education services, culture, research, social security…;

3. use part of their reserves for the creation of a pool of
common financial institutions (Bank of the South, Monetary Fund of the
South...);

4. create a front of indebted countries for non-payment;

5. establish and strengthen cartels of countries producing
essential goods;

6. negotiate barter agreements such as those between
Venezuela and Cuba, recently extended to include Bolivia.

These will be developed in the following two sections.

3. Potential Alternatives
Let us return to the favorable economic situation in developing 
countries in
2006. As discussed above, the situation is favorable for developing
countries for several reasons:

- a significant number of them have an unprecedented level of
international reserves at their disposal, while the reserves of the US and
Western Europe are at a historic low level,

- the terms of trade are favorable to them,

- most developing countries have a positive balance of current
accounts,

- the IMF is presently weak.

One could add that in 2005 the average growth rate in developing countries
was twice that of the most industrialized nations, and international
interest rates, even though they are rising, are relatively low. The 
premium
on high-risk countries that the developing countries have to cover has also
reached a historically low level.

On the political level, in several countries the left has achieved 
successes
in 2005‑2006: the election of Evo Morales in 2005 as President of Bolivia;
and important progress made by the left in the elections in India and
Mexico.

On the military level, Washington and its allies have become bogged down in
Iraq and Afghanistan, which will make it difficult for them to intervene
directly in another country.

With respect to the multilateral agreements favorable to the big powers, 
the
Free Trade Area of the Americas was abandoned in 2005 and WTO negotiations
on the Doha Agenda have come to a standstill (for the time being, in any
case).

Within this context, it is potentially possible to implement an alternative
strategy. If the governments of developing countries wanted to challenge
repayment on their public debt, they would be in a good position to do so
because they have what is needed to stand up to the threats of retaliation
by multilateral, bilateral and private creditors. The level of their
reserves gives them enormous room in which to manoeuvre.

If Argentina was able to stand up to the private creditors on its own from
the end of 2001 to the beginning of 2005 (they demanded it resume repayment
of a debt amounting to about $100 billion) and to gain significant
concessions, one can easily imagine the strength that a united front of
several countries would have.

Now is the time to set to work on an audit of the debt.

A united front of countries for non-payment would also be able to further
the matter of restitution of the historical and ecological debt contracted
by the most industrialized nations.

Public opinion and social movements would largely support the 
governments of
the South in taking this legitimate position.

- The governments of the developing countries could take the
initiative in creating a Bank of the South and an international Monetary
Fund of the South (see further on). They could withdraw from the World Bank
and the IMF, bodies that are totally controlled by a few of the biggest and
most industrialized countries.

- They could work on developing a strategy to stabilise the prices of
raw materials and agricultural products by forming cartels between 
producing
nations and by strengthening OPEC’s position.

- They could create and/or strengthen regional Southern associations
and, why not, endow themselves with a common currency.

- They could reintroduce controls over the movement of capital and
foreign exchange.

- They could take back control of their countries’ natural resources.

- They could pursue audacious public policies in the areas of
education, culture and research (particularly in health care) with
sufficient financial means.

- They could be inspired by the trade agreements among the Bolivarian
Republic of Venezuela, Cuba and Bolivia and advocate new forms of trade
using barter (for example, oil in exchange for health care and education
services).

- Such a strategy would presuppose giving priority to a radical
redistribution of wealth within the developing countries as well as between
the South and the North of this planet. The social content of an 
alternative
strategy is fundamental. It is necessary to provide it with a socialist
content to avoid the possible risk of it becoming an alternative
“caricature”. The socialist content has nothing to do with a simple policy
for reducing poverty, developing social welfare measures and a vague
humanization of capitalism. The socialist content implies major structural
reforms, beginning with the question of ownership of the means of
production, natural resources and all common goods. To paraphrase 
Che[7]: it
is either a socialist alternative or a caricature thereof.

- Any alternative must also essentially include the emancipation of
women by establishing a true equality between the sexes.

4. The Bank of the South and the Monetary Fund of the South
A first choice would be to create one or two institutions.

If two were to be created, there would be a bank to finance development and
a monetary fund whose primary function would be to protect countries from
speculative attacks and assist them in resolving foreign exchange dilemmas
where liquidity is a problem. There is also the possibility of creating 
only
one institution which would be responsible for these important functions.

In particular, the Bank of the South proposes to try breaking the 
dependence
of developing countries on international financial markets, channel their
own capacity for saving, stop the capital flight, channel central resources
to priorities for independent social and economic development, change
investment priorities, etc.

It is about a public bank as an alternative to the Inter American
Development Bank and the World Bank.

The Bank of the South can grant credits with or without interest, as it can
procure non‑reimbursable aid under the form of donations.

The Bank will be principally financed by contributions from member 
countries
in the form of contributions and donations. Tax revenues through
regional/international taxes can also be considered.

Those receiving priority credits and donations must be public entities
(state, province, municipality, public corporations in the areas of
production and services). Additionally, it is essential to clearly define
private agents who can receive credits and donations from the Bank so as to
exclude the strengthening of big business interests from its activity.
History from the last two centuries is replete with examples of public and
popular banks which essentially served to strengthen capitalistic
accumulation without any actual benefit going to the people.

The Bank of the South cannot be disassociated from the debt situation. 
It is
essential that the Bank avoid managing public debt for the benefit of
financial capital.

Another important aspect is that of the necessity of popular and democratic
control in tandem with auditing initiatives of the debt. The active
participation of parliaments in supervising the Bank’s function must 
also be
encouraged.

The foregoing only constitutes a few avenues which require collective and
rigorous planning.

5. Future perspectives for the economy
For economic as well as political reasons, improving the terms of trade for
exporters of basic commodities does not appeal to most industrialised
countries. This is because it stimulates initiatives in countries in the
South. Similarly, the current level of reserves held by countries in the
South are causing concern in the capitals of the most industrialised
countries as well as in the boardrooms of the big multinationals.

The decisions taken by the governments of the most industrialised countries
are aimed at changing the situation in their favour. Meanwhile, the 
economic
cycle follows its own logic (see further down). The lack of will on the 
part
of the governments of the Periphery could well see those governments miss
out on an historic opportunity.

The Central Banks of the three economic powerhouses of the most
industrialised countries are increasing their official market rate with
respect to interest rates. Since 2004 this has been the case with the
Federal Reserve of the United States and the European Central Bank. The 
same
can be said about the Bank of Japan since the beginning of 2006.

An important part of speculative capital which moved towards the countries
of the South between 2002 and 2006 in the pursuit of greater returns to
those offered by the countries of the North is coming back to the North. 
The
fall of the stock markets in emerging countries in May 2006 is probably a
harbinger of what is about to happen.

For the Federal Reserve of United States it is vital to attract as much
capital as possible so as to pay off the enormous trade deficit. A 
permanent
flow of capital towards the USA is a first rank necessity. Because of this,
it is necessary to increase the interest rates in order to offer foreign
investors a sufficient return. This is even more important since the value
of the dollar dropped particularly with respect to the Euro and the Yen, 
and
that the interest rates increase equally in the Euro Zone, in the United
Kingdom and in Japan.

It is possible that the current increase in interest rates will level off.
The US monetary authorities know that if they raise interest rates too 
much,
they risk provoking an explosion in the speculative real-estate bubble 
and a
dramatic reduction in household consumption because US householders are 
in a
lot of debt (US household debt is 11,500 billion dollars). Too much of an
increase in interest rates also risks causing problems for big 
businesses in
the US, starting with the automotive and aviation sectors. Nevertheless,
even if Northern interest rates no longer rise sharply in the last quarter
of 2006, they have already reached a sufficiently high level to attract a
good part of the capital which had previously been diverted tot the 
South in
recent years.

The price trend for basic commodities has been very obviously influenced by
the level of economic activity. It is necessary to be cautious with the
forecasts of growth for 2007‑2008. Having said this, a reduction of growth
in the United States cannot be excluded. If it happens then it will be
interesting to see the impact on growth in Western European and Japan. 
If it
also slows down in these two regions, then there is likely to be a decrease
in the sale of raw materials as well as in prices, unless the China’s
activity is maintained during over an extended period of time, which would
be surprising.

Evidently, China is going through a stage of over‑investment. The rate of
return is generally quite low. Its activity is largely dependent upon its
exports. The consumption of Chinese households is growing but only a small
minority is benefiting from this domestic consumption. In short, the
domestic market is unlikely to replace the external market as the outlet 
for
Chinese production unless the Chinese authorities make a radical turnaround
in their model of development (increase in salaries, a radical 
strengthening
of the domestic market, looking for real constructive cooperation with 
other
countries from the South), which, unfortunately, appears to be very
unlikely. The struggles in which the Chinese workers are engaged, an
improvement in salaries, better working conditions and a right to 
collective
organisation, point objectively in the direction of a radical change in the
model of development but it is difficult to see how they could obtain
satisfaction in the short term.

There is a risk that the evolution of the Chinese economy will lead in the
opposite direction. Let me explain. If a reduction in economic activity in
the United States is not counterbalanced with sufficiently strong growth in
Europe and Japan, the economic activity in China will certainly slow down.
Given that the rate of return is low and the corporate debt level is quite
high, it is probable that a reduction in activity will provoke significant
reductions in personnel and business failure. Such a situation would not
create conditions favourable to the cause of Chinese workers.

What I have just described is largely hypothetical and the time factor has
not been specified: this evolution might play out over several years.
Numerous variables are in play.

For example, what is going to happen to the price of oil and gas? What will
OPEC do? My impression is that the price is going to remain high, which 
is a
good thing. But nothing is guaranteed.

What is going to happen to other essential products? The price of certain
products is such that we are witnessing a classic phenomenon in the
evolution of capitalist economies, mines which were no longer profitable 
are
being exploited again. Some have quite elevated investment costs. There is
over‑investment. This will produce a rise in supply, which will exceed
demand, which will in turn result in price depreciation and corporate
bankruptcy.

What can stop this? Either an acceleration in the world economic growth,
which is very unlikely; or the creation of cartel made up of producing
countries to plan production and limit growth in order to stabilize 
elevated
price levels. This brings us to the need for an alternative. If governments
of the South do not rise to the challenge, the situation will evolve
unfavourably. One can only fear what might happen.

What has just been described may also happen with the price of oil and gas.
If there is a sharp decrease in the price of gas and oil, that would be
disastrous for many countries of the South.

Let us return to the variable “debt repayment”.

Since 2003‑2004 most indebted countries with middle incomes no longer find
it difficult to service their debt. This is the consequence of several
economic factors: growing estimated returns thanks to the elevated price of
raw materials which they export, the arrival of speculative capital in
search of short-term profits notably in the stock exchanges of emerging
countries, relatively low interest rates and extremely low risk premiums in
2004-2005-2006.

All this can change within a year or a few years.

The cash revenue and reserve levels can diminish, the interest rates at
their height in the North can increase the servicing of the debt on the
loans contracted at a variable rate, the cost of the new loans to refinance
old debts is going to grow because it will be applied to a more elevated
interested rate, the risk premiums can rise again.

A significant number of indebted countries risk finding themselves in the
situation of the cicada in the fable of La Fontaine. At the end of the
summer, when the economic environment deteriorates, they risk finding
themselves in payment difficulties and their exchange reserves risk melting
like snow in the sun.

It is a further argument for putting an alternative policy with respect to
establishing a common front of indebted countries for the non-payment of 
the
debt (see points 3 and 4) into practice.

Before arriving at conclusions, I would like to leave you some impressions
and additional information.

§ For the last twenty years, the United States has
succeeded in overcoming their crisis by applying a very interventionist
policy and in making other countries pay a part of the cost for extricating
itself out of the crisis. Let us not forget that the working classes of the
USA have gone to great expense in extricating themselves out of the crisis
(for example, through massive layoffs in 2001-2002, a very strong growth in
the casualisation of labour, and a growth in the number of the working 
poor,
a reduction in real salaries and their share in the national revenue).
Nevertheless, the US economy has not been cleaned up from the capitalist
point of view (it has a relatively weak growth rate, a relatively low 
profit
rate). It will certainly have to go through a deeper purge, which implies a
devaluation/destruction of capital (a significant number of bankruptcies).
When will this purge happen? No‑one can reasonably predict a date but the
purge is unlikely to be avoidable from the point of view of the capitalist
logic itself. I want to make it clear that a purge is not synonymous with a
collapse. On the contrary, it is arguably the best mechanism that 
capitalism
has at its disposal to regain a durable elevated rate of profit and strong
growth.

§ The domestic debt of developing countries has grown
sharply during the last three years in absolute figures. The soar of the
national debt is particularly high and disquieting in a large number of
middle incomes countries. According to the World Bank, the national debt of
indebted countries went from $1.3 trillion in 1997 to $3.5 trillion in
September 2005[8].

§ The private banks of the North, after ceasing to give
bank loans to the indebted countries in 2001-2002, have resumed issuing
loans as of 2003. In 2005, the number of issued loans increased from 74% in
relation to 2004. 1261 loan contracts have been signed, principally in the
areas of oil and gas.

§ In 2005, approximately 40 developing countries issued
new bonds on the international financial markets. The bonds issued by 
ten of
those countries (Brazil, China, Hungary, India, Indonesia, Mexico, Poland,
Russia, Turkey and Venezuela) represent 69% of the total issued by the 40
countries. Let us look at bonds issued in Euros and how sharply they have
grown at the global level during recent years. In 2000 the securities 
issued
in Euros represented 29.8% of all bonds issued. In 2005 they represented
45.4%. bonds issued in dollars, which represented 51.9% in 2000, 
represented
nothing more than 38.3% in 2005[9].

§ In 2005, a large part of foreign direct investment was
linked to privatisations/acquisitions/mergers which created no additional
employment. In certain cases value and employment were destroyed.

§ A new type of derivative has been launched in the
market in recent years. It is known as Credit Default Swaps. The buyer of
the bonds issued by companies or states pays an insurance against the risk
of non‑payment. This market which has literally exploded over recent years
on the global scale represents a notional (virtual) value of $7.3 trillion,
of which less than 5% involves developing countries. According to the World
Bank and the financial press, it is difficult to measure the strength of
this type of derivative. Where there is a general difficulty with the
repayment of debt, it will be difficult for the insurers to keep their
commitment without risking bankruptcy[10].

§ The institutional investors, namely, the pension funds
of the most industrialised countries, have invested a total of $46 trillion
(ie an amount largely greater than the sum total of the entire world’s 
GDP),
of which $20.7 trillion is controlled by US companies[11]. It would be
enough that they dedicate a tiny fraction of these investments to buying
shares in the stock markets of the emerging countries or to buying 
currency,
to increase their value (which is what happened in 2005). It would be 
enough
for this same tiny fraction to be withdrawn to provoke a drop in the stock
market in Sao Paulo or in Mumbai (which is what happened in May 2006), or
even a reduction in the value of the currency of Thailand or Argentina. If
governments do not take measures to control the movement of capital as well
as foreign exchange, they are at the mercy of speculative attacks of the
amplitude of those in the second half of the 1990s.

§ The capitalists of the South increased capital flight
in 2005. Even though the flight represented $172 billion in 2004, they rose
to $318 billion in 2005.[12].

§ Over the last few years, the South-South flow was
developed principally under the management of capitalist firms of the 
South.
For example, the flow in foreign direct investments between countries of 
the
South went from $14 billion in 1995 to $47 billion in 2003. In 2003, these
flows in South-South investment represented 36.6% of the total foreign
investment flows going to the South. Bank loans from the private banks of
the South to other countries and businesses of the South went from $0.7
billion in 1985 to $6.2 billion in 2005. For the first time in its history,
the World Bank dedicated an entire chapter in its annual report Global
Development Finance to the flow of South-South capital[13]. That deserves a
specific contribution on the subject. The South-South flow (with some
exceptions linked to Venezuelan initiatives) completely follows the 
logic of
capitalist globalisation. Chinese firms invest largely in Africa and in
Latin America to ensure control of the source of raw materials. 
Petrobras is
doing exactly the same thing in Bolivia, Nigeria and Angola. It is the same
for the Russian firms. Elsewhere, the World Bank is proposing to the
governments of the South to recycle a part of its enormous foreign exchange
reserves in lending them to private local investors. In short, the World
Bank is itself on the offensive on the theme of the Bank of the South by
providing it with content in accordance with strengthening capitalism at 
the
global level. Rather than proposing to the governments of the South that
they equip themselves with South-South public instruments for financing
their needs (and those, as a priority, of their people), the World Bank
proposes to entrust the reserves to private capital of the South. That goes
without saying but that brings us to the contents of the proposed the Bank
of the South as discussed in Section 4 of this text.

6. Conclusion
A new historical opportunity is being presented to people and 
governments in
so‑called developing countries to adopt a liberating initiative with
international scope. The economic situation favouring strong initiatives
will not be extended. Inaction or strategic errors will lead to an
unfavourable reversal.

If the opportunity is not seized (and it is very probable that it will not
be seized), history will follow its course and people will be struggling
under even more severe conditions than now. The battle will continue and
faced with the cynical policies of their governments, citizens will become
radical and claw their way to the top of freedom without God or Supreme
Saviour. This is called revolution.





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[1] Preliminary document prepared for the International Debt Observatory
conference being held in Caracas 22‑24 September, 2006. www.oid-ido.org and
www.cadtm.org

[2] Eric Toussaint who holds a PhD in Political Science from the
Universities of Liège and Paris 8, is president of CADTM (Committee for the
Abolition of Third World Debt) Belgium. Author of Your Money or Your Life.
The Tyranny of Global Finance, Haymarket Books, Chicago, 2005, 487 pp;
co-author with Damien Millet of The Debt Scam, VAK Publication, Mumbai,
2003 and Who Owes Who? 50 Questions about World Debt, Zedbooks, London,
2004; co-author with Damien Millet of Tsunami Aid or Debt Cancellation! The
Political Economy of Post Tsunami Reconstruction,VAK Publication, Mumbai,
2005. For more information: www.cadtm.org

[3] Petróleos de Venezuela, S.A., Venezuela’s state‑owned petroleum company.

[4] There has been a downswing in the terms of trade for developing
countries during the 1950s and the 1960s. This was followed by an upswing
during the 1970s. Since the 1981 energy oil crisis until 2003, we have
witnessed another downswing in the terms of trade.

[5] For a critique, see Éric Toussaint, « Les idées de la Banque 
mondiale en
matière de développement » [“The Concepts of the World Bank on 
Development”]
Chapter 10, Banque mondiale, le Coup d’État permanent [The World Bank, the
Permanent Coup d’État], CADTM-Syllepse-Cetim, Liège-Paris-Genève, 2006.

[6] World Bank, Global Development Finance 2006, p. 154

[7] Socialist revolution or caricature of revolution.

[8] World Bank, Global Development Finance 2006, p. 44

[9] World Bank, Global Development Finance 2006, p. 59

[10] World Bank, Global Development Finance 2006, p. 62

[11] World Bank, Global Development Finance 2006, p. 53

[12] World Bank, Global Development Finance 2006, p. 151

[13] World Bank, Global Development Finance 2006, chapter 4, p. 107-136