Debt, Glorious Debt

The greatest crisis facing American Congress currently is the debt ceiling. The primary prerogative of the newly elected Australian Prime Minister is to pay back the country’s debt. The main reason Britain’s Chancellor is stubbornly sticking to his policies of austerity is to balance the books and repay government debt. Most potently of all, the reason the majority of African nations remain in Third World poverty and deprivation is debt. Why? Why are we all so obsessed with debt? Has it passed the world leaders’ sights that every regular citizen is in debt, be it through student tuition, mortgage repayments or general loans. Have the leaders of the world forgotten that most banking institutions are indebted to each other. Is it beyond world leaders’ recollection that the way every country rebuilt after the 2 world wars was through loans and absorbing debt? Loans are required to make the world go round, and debt is what holds back universal progress.

In Britain, living costs are going through the roof due to George Osborne’s unyielding programme of austerity. In Australia, crucial public spending is being neglected for the sake of repaying the large debt ‘crises’. In America, the entire congressional system has come to a standstill due to the issue of the fiscal cliff based upon the debt ceiling. These are a small number of countless examples of how everyday citizens are suffering as a result of debt repayments driving themselves to the forefront of the western political agenda. What we are all forgetting is that debt is precisely what is required to maintain the stability of every major modern economy, and what we need to shift our focus on is distinguishing between loans and debt. Loans are what got the German economy back on track under Stresemann’s stewardship after the economic stagnation caused by the Treaty of Versailles. It is loans that transformed Uganda from a LDC into an emerging economy in the mid twentieth century. It is loans which allowed millions of Brits and Americans to climb onto the first rung of the property ladder after the policies of Reagan and Thatcher. On the other hand it is debt and debt repayment which plunged Germany back into economic crises and hyper-inflation after their fragile recovery under Stresemann. It is debt repayment which stifled Uganda’s growth and has lurched them back into the category of some of the least developed nations on the planet. It is also debt repayment which created the housing bubble in America and Britain which led to the catastrophic and well-documented economic crisis of 2008.

The institutions like the IMF and the World Bank are contemporarily hailed as poverty reducers and development encouragers, but this wasn’t always the case. In the late 20th century they were universally criticised for their policies in the Third World, dubbed ‘neo-colonialism’. Both were set-up in the aftermath of the Second World War, and what is often forgotten is that they are inherently American. Many would argue they were in fact established in order to build and accelerate the growth and prosperity of the USA. America was the strongest economic power after WW2 but the rest of the world was rebuilding so it had no one to trade with. It consequently set up the IMF and the World Bank to offer loans to other nations, allowing them to trade with America and advance their development further. The issue of neo-colonialism was that these institutions would then go into Third World nations in Africa and Asia, promising development through mega-projects and direct foreign investment, and offering substantial loans. Not grants, loans. The result? By wielding the Grim Reaper of Debt over the heads of these emerging nations, the IMF and World Bank held great power and influence over them, demanding high interest returns on their loans and enforcing Structural Adjustment Programmes in order to allow these countries to repay their debts. These programmes usually involved enforced trading, meaning the developing countries had to trade all of their natural resources with the west – primarily America. In this sense, it could be said that they were still serving American interests, and in continuing to promote globalisation, deregulation and free trade, perhaps they even are today.

Either way this is another example of how loans helped developing countries to develop, and debt put them in a vulnerable, dominated position. So how do we get around this great dilemma? Loans are necessary, but debt inevitably leads to crises, so what to do? What is required is a comprehensive re-evaluation of the loan system, and a completely new perspective on debt. A more liberal approach is needed on the part of lenders, while a less fiscally prudent approach is required on the part of borrowers. It is all very well for borrowers to take out a loan with the intention of improving their economies, but if they don’t invest that money into public services or business innovation, and get caught up in worrying about interest and repaying those loans, there is no point in borrowing the money in the first place. At present, loans are immediately seen as debt by borrowers. This is not what they are; they should be seen as an opportunity for growth, even an opportunity to transform a borrower into a potential lender. Borrowers must use their loans wisely, and productively.

Equally, it is down to lenders to be more liberal in their demands for a return. Low interest loans and grants should be encouraged if the motives of the lender really are to aid the development of the borrowers. Much has been made of the mistakes Tony Blair made during his premiership, but his finest hour came in the G8 summit of 2005 when he provided the masterstroke of persuading every major world leader to cancel the debt owed by Africa. This meant that years of threatening and stifling debt were transformed into development aid overnight. That is precisely what is needed, development aid in the form of grants, not self-serving loans. To sum up, debt is holding back development and keeping countries trapped in poverty, but this shouldn’t stop the practising of inter-country loaning. Loans must continue, but for them to have any positive effect on the world, the attitudes surrounding loans and debts must change dramatically.

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