The International Monetary Fund (IMF) announced a new issue of $ 650 billion in Special Drawing Rights (SDRs) in August, which would be distributed among member countries in proportion to their IMF quotas. This amount is less than what many had requested, which was a trillion dollars, but it represents a little temporary comfort for the heavily indebted Third World countries.
Almost all of this will go into the pockets of the private financial institutions which are the creditors of the heavily indebted Third World countries, but in the system as it exists, this is a relief for those countries.
The misery of the relief, however, is that the distribution of SDRs is quota-compliant, which means that most of it goes to advanced countries, and only a tiny amount to the Third World.
Of the 190 IMF member countries, 55 rich countries will receive $ 375 billion while 135 relatively poorer countries will receive only $ 275 billion. And of these, 29 “low-income” countries will only receive $ 27 billion, even though, according to the IMF’s own calculations, these countries need $ 450 billion in external resources over the next five years.
It has been suggested that rich countries should give their share of SDRs to poorer countries. They don’t need these resources and can borrow easily if needed. In addition, the strength of their currency prevents them from falling into the trap of external debt. Rich countries, however, insist that they receive interest for doing so, even though the SDR itself, not being a loan but simply an addition to foreign exchange reserves, bears no interest rate.
The first absurdity of the issue of SDRs therefore stems from the very structure of the IMF: SDRs are distributed not according to need but according to the dominant distribution of economic power (which underlies quotas). Those who need it most receive the least, while those who need it least receive the most.
The second absurdity comes from the fact that the fundamental reason why third world countries go into debt is not at all addressed by the new issue of SDRs. The problem with SDR is simply to keep the system running; and therefore, within the system as it exists, it provides respite for indebted countries, but does nothing to overcome their fundamental problem.
There are two essential requirements of indebted countries. One, the most obvious, is debt cancellation. Unless this is done, SDR problems will simply serve to service existing debt, without providing any resources for poor countries’ spending on health care or education or other essential social services. And the problem with the new SDR issuance is that while providing some temporary relief, it completely removes the need to discuss debt cancellation.
Even debt cancellation, while an essential step, will not be enough to overcome the Third World debt problem. As with the Indian peasants, in the case of which one debt forgiveness has been followed by another, there will be accumulations of recurring debt unless the basic neoliberal arrangement in which the indebted countries are trapped is removed.
The fundamental problem of poor countries is that they have a recurring current account deficit on the balance of payments, quite independent of the interest payments on the debt already contracted, which must be financed by external borrowing. Unless this current account deficit is closed, any particular episode of debt cancellation will simply lead to a new build-up of debt which will have to be offset by another episode of debt cancellation, and so on.
The reason a current account deficit persists is that these countries are not allowed to hedge against low priority imports under a neoliberal regime. In the absence of such protection, their attempt to improve their current account can only take the form of a depreciation of the exchange rate, which is a general measure with inflationary consequences.
An example will clearly show the difference between a protectionist regime and a neoliberal regime that is forced to rely solely on exchange rate movements to improve the current account.
If tariffs are increased on luxury imports which are not easily achievable in the country, it increases the domestic price of these products, which means lower demand in the domestic market and therefore lower imports. If, of course, these imports are simply limited in quantity, the reduction follows directly.
There is thus a saving of currencies on these imports, while the increase in prices being limited to luxury products does not affect the standard of living of workers, nor does it increase the prices of exports at the given exchange rate (this which has not been altered). There is therefore a reduction in the current account deficit without falling either in the level of employment or in the real wage rate.
On the other hand, if there is a depreciation of the exchange rate to fill the current account deficit, then this increases the domestic prices of all imports, including essential imports, such as petroleum, which enter as inputs into the economy. production of almost all goods. The depreciation of the exchange rate therefore raises the general level of prices, which, for a given monetary wage, lowers the real wage.
Indeed, if the real wage is not lowered, then the exchange rate depreciation to reduce a current account deficit will continue to push up prices and continue to lower the exchange rate ad infinitum. For example, a nominal exchange rate depreciation of 10% will increase domestic prices by 10% if real wages and the profit margin remain unchanged (the latter administered by capitalists will necessarily remain unchanged). This means that there would have been no real depreciation of the effective exchange rate (the nominal depreciation having been offset by an equivalent rise in prices); and this in turn will mean a further depreciation of the nominal exchange rate to reduce the current account deficit, and an equivalent further rise in prices, and so on.
Thus, the depreciation of the exchange rate works only by, and necessarily by, the compression of real wages. And the fall in real wages may need to be prohibitively large to bring about a noticeable reduction in the current account deficit.
Having a common base exchange rate and quantitative restrictions or additional tariff rates that differ from product to product (a system called “multiple exchange rates”) is therefore superior to a simple common exchange rate with hardly a big variation in tariffs. rate on all products.
But it is precisely on this last point that the Bretton Woods institutions insist; “Unifying” the exchange rate is one of the “conditionalities” they impose on Third World countries, which is also one of the characteristics of a neoliberal regime.
Another way in which a country can manage a current account deficit without going into unsustainable debt is to enter into a trade deal like the one India had with the former Soviet Union and the socialist countries of Eastern Europe in the 1960s and 1970s. This arrangement meant that a country sold and bought goods from its trading partner, and the balance was not settled immediately in hard currency but remained on the books and was settled through subsequent purchases of the products. the other. Even such bilateral trade deals, however, are excluded under the neoliberal regime, which, therefore, seems tailor-made to catch third world countries in the debt trap.
Since trade between the metropolis and much of the Third World (with the exception of some Asian countries to which there has been some relocation of activities from the metropolis in recent years) still takes the form of the first sells manufactured products and the second sells primary products, the relative prices of which are always unfavorable to the latter, the rapprochement of the two regions within a neoliberal regime is an infallible prescription so that the latter are trapped in the debt.
This is why the issuance of new SDRs by the IMF, while in a sense bringing relief to indebted Third World countries, is in reality a means of maintaining a fundamentally iniquitous system. It was once said of Indian peasants that “the debt sustains the peasant as the rope of an executioner sustains the hanged man.” The same can be said of Third World countries under neoliberalism.