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«THIRD WORLD DEBT: LEGACY OF DEVELOPMENT EXPERTS Paul Craig Roberts In the future, we should try to move toward a common recognition ofaid to ...»

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Paul Craig Roberts

In the future, we should try

to move toward a common recognition

ofaid to underdeveloped countries as a collective responsibility for

the developed countries, the burden of which should be shared in

an agreed fair way, amounting to an approach to a system of international taxation.

—Gunnar MyrdaP

Debt and Development: The Crowding-Out Effect Four decades ago, in the wave of the internationalism ushered in by two world wars and coincident with the beginning of large-scale decolonization, the West found itself confronted with a new entity that was to become known as the Third World. The terms “underdeveloped countries” and “less developed countries” were coined to take account ofthese nations and our perspective of them, and the field, development economics, was crystallized to address the problems that these new nations faced.

Today, many ofthese nations are still underdeveloped by Western standards. In addition, some nations that once seemed on the way up now find themselves statistically grouped with nations that are many generations their juniors. It would be almost farcical to refer to many ofthese nations as “developing” in the optimistic lexicon of the past. Instead, they are now more commonly known as the “debtor countries.” This revision in taxonomy is not mere whimsy or rhetoric. Latin American debt is now approaching $400 billion. Sub-Saharan Africa Cato Journal, Vol. 7, No. 1 (Spring/Summer 1987). Copyright © Cato Institute. All rights reserved.

The author holds the William E. Simon Chair in Political Economy at the Center for Strategic and International Studies at Georgetown University. He is also Chairman of the Institute for Political Economy.

‘Myrdal (1970, p. 365).


has foreign debts exceeding $50 billion. The focus of attention has shifted to the inability of Third World countries to make good on their debts—debts that are said to be crippling their respective economies.

The debt problem elbowed its way to attention in 1982, when Mexico announced that it could not pay its debts. The problem was seen as a political one. The multilateral lending agencies and Western governments stepped between the original principals in the loans, private banks on one side and Third World governments on the other. This culminated in a process of lending money to pay interest while pushing for economic policies to facilitate debt servicing in debtor nations that generate large trade surpluses. Somewhere along the way economic development was crowded out by debt.

The Rule of Experts The crowding-out process began when Third World development was placed in the hands ofWesternacademics, Third World governments, and international bureaucrats. From the beginning, “development planning,” as it was called, substituted foreign loans for foreign and domestic equity in order that the investment process could be controlled by the government’s development plan. Consequently, economic life in developing countries was politicized from the start, with markets taking a back seat to governments. Peter T.

Bauer, whose skepticism of the wisdom and benevolence of government rivaled development economists’ skepticism of markets and

private investment, doubted that development planning would succeed. He was wont to remind his colleagues (Bauer 1972, p. 73):

The state cannot create new additional productive resources. The politicians and civil servants who direct its policy dispose only of resources diverted from the rest of the economy. It is certainly not clear why overriding the decisions ofprivate persons should increase the flow of income, since the resources used by the planners must have been diverted from other productive public or private uses.

Others, however, were confident that only planning would bring development. Gunnar Myrdal (1965, p. v), an eventual Nobel laureate, described the extent of the faith in planning in the 1960s: “In the under-developed countries outside the Soviet Union, national economic planning is almost everywhere a commonly acclaimed ideal.” Earlier Myrdal (1956b, p. 201) wrote, “All special advisers to underdeveloped countries who have taken the time and trouble to acquaint themselves with the problems, no matter who they are all recommend central planning as a first condition of progress.”


Myrdal (1956a, p. 65) did not decry this mistake. He wrote,


But the alternative to making the heroic attempt is continued acquiescence in economic and cultural stagnation or regression which is politically impossible in the world of today; and this is, ofcourse, the explanation why grand scale national planning is at present the goal in underdeveloped countries all over the globe and why this policy line is unanimously endorsed by governments and experts in the advanced countries.

Not all development economists were ideological advocates of planning. A committee of leading development experts, in a volume sponsored by MIT’s Center for International Studies, simply believed that “there are limits to the effectiveness of the private market institutions, especially where development must be accelerated. It may be necessary to plan out in advance the key pieces of a general development program (Millikan and Blackmer 1961, p. 64).” Columbia University professor Ragnar Nurkse (1953, p. 84) believed that “private foreign enterprise in the past has not done much to spread industrial development to the backward agricultural countries, but has concentrated rather on primary production for export to the advanced countries.” Other economists were more strident in their beliefs. Stanford professor Paul Baran (1962, pp. xxviii) wrote: “If what is sought is rapid economic development, comprehensive economic planning is indispensable.” He then explained (p. xxix): “No planning worth the name is possible in a society in which the means ofproduction remain under the control ofprivate interests which administer them with a view to their owners’ maximum profits (or security or other private

advantage).” Baran (1962, pp. xl—xli) cast aside the history of economic development with a wave ofthe hand:

To conclude: the dominant fact of our time is that the institution of private property in the means ofproduction—once a powerful engine of progress—has now come into irreconcilable contradiction with the economic and social advancement of the people in the underdeveloped countries and with the growth, development, and liberation of peoples in advanced countries. That the existence and nature ofthis conflict have not yet everywhere been recognized and fully understood by the majority ofpeople is one of the most important, if not the decisive, aspect of this conflict itself. It reflects the powerful hold on the minds of men exercised by a set of creeds, superstitions, and fetishes stemming from the very institution of private property in the means ofproduction which now desperately needs to be overthrown.


The above passage, from a widely used textbook by an internationally renowned development expert, exemplifies the basic problem of the development field. Development economics asserted that private property was incompatible with progress. By telling this to the Third World, we exposed a lack of belief in our own institutions and undermined the role ofprivate equity in the development process.

Baiter’s Reply to the Planners Peter Bauer disputed the notions used to justify central planning.

In an argument similar to Nurkse’s, Baran (1962, p. 177) claimed:

“The economic surplus appropriated in lavish amounts by monopolistic concerns in backward countries is not employed for productive purposes. It is neither plowed back into their own enterprise, nor does it serve to develop others.” Bauer’s (1984, p. 22) response was straightforward: “This statement is patently untrue. In the less developed world large industries such as the oil, copper, tin, rubber and coffee industries, to mention but a few, have been financed through reinvested profits.” Likewise, the general argument that the manufacturing industry was the key to a developing economy, and thus requires a government plan to ensure its even development, was disputed by Bauer (1972, p. 142): “This argument is again irrelevant: the development of manufacturing industry does not depend on comprehensive central planning; and development does not depend on the enlargement of the manufacturing sector.” The endowment of governments with extensive control over their economies set up conditions exactly opposite to those required for economic growth. Individual initiative and independence gave way

to manipulation ofgovernment connections. Bauer (1984, p. 27) wrote:

In closely controlled economies, the decisions of politicians and civil servants take the place of private decisions in production and consumption. Economic life is extensively politicized. Official directives replace voluntary transactions. The decisions ofthe rulers largely determine people’s incomes and employment opportunities.

Indeed, these decisions often determine the economic or even the physical survival of large sections of the population. In such conditions, who has the government becomes all-important for large numbers of people.

Western insistence on development planning helped to saddle poorer nations with easily corruptible economic and political systems. Today Professor George Ayittey (1986) damns the “kleptocrats (armed governnient looters) and incompetent bureaucrats” who have squanTHIRD WORLD DEBT dered and stolen billions of dollars of development resources from the people who could least afford to lose them.

Economic planning in the Third World came to mean much more than government bureaus channeling loans, approving licenses, and applying tariffs and subsidies. Planning entailed state ownership of industries, including the nationalization of enterprises owned by foreign companies. Third World nations have been little concerned with the effect of outright confiscation on the flow of private investment, because, as Myrdal (1965, p. 183) noted, “There is a widespread feeling that the direct attraction of private investment from abroad is too costly a way of inducing capital inflow.” Disregard for Property Rights The disrespect for private property in the Third World not only impaired the ability of underdeveloped nations to attract private investment from abroad; it led also to a loss of massive amounts of capital from domestic sources. A sampling of 18 Third World countries by Morgan Guaranty Trust Company (1986, p. 13) revealed that these nations suffered $198 billion in capital flight from 1976 to 1985.

Mexico alone lost $53 billion.

It is remarkable that in our own hemisphere, despite the example of American capitalism, the state dominates so many economies.

After “the largest privatization campaign” in Brazilian history, there are still over 340 state-owned companies in Brazil. It has been estimated that “in 1980, 70 percent of all capital investments went to state-owned companies” in Brazil (Infobrazil 1985).

In Argentina an estimated 60 percent ofthe economy is state owned, with the rest subjectto all forms of government regulation. A member ofthe Argentine Chamber ofDeputies related an especially poignant example of government inefficiency: the annual interest on the debt of the Argentine coal mines amounting to more than $80 million, compared with annual sales ofless than $30 million (Alsogaray 1984).

Mexico, which expropriated its private banks in 1982, is now selling back 34 percent of the banks’ shares. This meets privatization demands of creditors without freeing the banking system. To secure its latest debt bailout package, Mexico also promised to “modernize, merge or close about 300 of its 500 state-owned corporations” (Pine 1986). Some nations find it harder to deprogram themselves of the fear of private enterprise drummed into their heads by so-called development experts. One would think that Peru, unwilling or unable to service its debts, would be encouraging private investment. This was hardly the message sent out by Peruvian President Garcia in


August 1985, when the foreign oil company, Beloc, was confiscated by the government, with no compensation paid for its book assets of $400 million (Graham 1986).

Bias Against Private Investment Third World distrust of foreign private enterprise, called by the MIT committee “a convenient symbol of the external domination from which such a society seeks to liberate itself,” led in many countries to an outright blockage of direct private investment (Millikan and Blackmer 1961, p. 65). This sort of policy was urged by

Baran (1962, p. 184), who wrote:

It is very hard to say what has been the greater evil as far as the

economic development of underdeveloped countries is concerned:

the removal of their economic surplus by foreign capital or its reinvestment by foreign enterprise.

Baran (1962, p. 184) complained of “the pronounced paucity of the direct benefits derived by the underdeveloped countries from foreign investment.” Countries wishing to finance the planned development prescribed by experts were advised not to depend on private investment (domestic or foreign); instead, they borrowed and relied on fore:ign loans to finance their pet projects. As Nurkse (1953, p. 89) advised, “Foreign loans for capital expenditure by public authorities have the advantage that they can be used for domestic economic development in accordance with a coherent over-all programme.” This program, of course, devised and implemented by government bureaucrats, was by definition the best use ofresources, and it would easily pay back the debts incurred, or so it was thought.

Some Western observers realized the danger of leaving to chance the ability of underdeveloped nations’ governments to borrow the necessary resources. They proposed stepped-up lending by Western governments. In his famous report to President Truman, Gordon

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