The history of the world’s poorest nations is intertwined with the history of Imperialism, particularly European and U.S. attempts to build global empires. As the Maddison book has explored, once Columbus, Magellan, de Gama, and other explorers led the way in the 16th century, a handful of European nations (the U.S. would join in the late 19th century) have pursued the colonization of other lands. For the most part, many of those “new lands” have become what we now call the third world. This legacy of imperialism colors all the present-day economic issues.
Originally, the Europeans were interested in either direct exploitation or establishing new land for settlement. In general lands that were colonized for settlement eventually grew into developed nations themselves, albeit often after genocidal wars against the native inhabitants. This includes the U.S., Canada, Australia, and New Zealand – nations that are most definitely NOT third world. But the countries targeted for exploitation have fared differently. Latin America was primarily exploited by the Spanish and Portugal for resources and minerals (gold and silver). Africa was originally exploited to provide slaves for plantations in the Americas. Eventually, Africa would be exploited for its many natural resources such as diamonds (or oil today).
But the mid-to-late 19th century, the fashion had changed. As Europe itself industrialized, the colonies became sources of raw materials and controlled markets in which to sell manufactured goods. Europe engaged in a frenzy to divide the continent of Africa at this time. This rivalry led to consideration of the colonies as possessions to be developed. Given the racism of the era, it led to the view expressed earlier by Rudyard Kipling that Europeans had a burden or obligation to bring “civilization” to the “barbarians” and “primitives”. Thus at the turn of the 19th to 20th century there was an explosion of development in these nations, usually taking the form of railroads to facilitate extraction of resources or agricultural products and schools for the privileged elites.
These development efforts largely ceased when World Wars I and II arrived. By the end of World War II, the major European colonial powers could no longer afford their empires. Germany had hers stripped away. The Spanish had lost theirs in war with the U.S. earlier. Now the British and French set out to (reluctantly) shed the colonies. Independence arrives eventually for almost all the former colonies.
This is the “golden age” for the first world of 1945-1975. High growth built on improving and more open world trade. Some colonial independence movements were peaceful and smoother transitions were smooth. Most were not and were marked by violent struggles for independence or by civil wars.
Aid, Development, and State-promoted Import Substitution
At this time the first world was dominated by Keynesian thinking and to some degree by democratic socialism. Leaders in the newly freed colonies generally pursued economic systems or policies that also involved heavy state involvement in the economy. Trade barriers were high. Domestic subsidies were provided to encourage the growth of local industry and manufacturing. Capital investment came in the form of loans from first world nations and grants or aid packages from those same first world nations.
Success was varied. In those nations with a core of well-educated native leaders, a peaceful transition to independence, and a port to the ocean fared best. Eventually these countries, Brazil, Argentina, India, and Malaysia would become today’s “emerging markets”. For the others, traps lay ahead.
The First Trap: Cold War and Civil Wars
This period was not only the “golden age” for the free, “first world”, it was also the cold war between them and the Soviet-dominated “second world”. Since outright war between the nuclear-equipped U.S. and U.S.S.R. was unthinkable, the two superpowers took to fighting over the “third world” – what were originally unaligned nations. The weapons were aid, military coups, and proxy wars. Aid increasingly took the form of military aid. Military coups were encouraged by both sides, undermining democracy and good governance. Corruption grew.
French Indochina, a colony gaining its independence via a revolutionary war in the 1950’s, gave birth to Cambodia, Laos, and Vietnam. Soon a bloody destructive war between the U.S. and the Soviets emerges. Later it would be Cuba, the Congo, Angola, Afghanistan, and others.
In other former colonies, civil wars often emerged destroying what little infrastructure and development existed. The instability of such nations scared off international investors and forced the new nations to depend on international loans from the IMF and World Bank as sources of capital.
Economics development suffers throughout many of these former colonies. Increasingly “aid” is directed to those governments that are “friendly” and not based upon whether the government could actually develop the nation. A culture of corruption and poor governance emerges in many nations.
The Second Trap: Oil, Currencies, and Loans
In 1971 the world monetary system, the Bretton Woods agreement collapsed. Two major results would impact these nations. The first was that world currencies were no longer convertible into gold. Instead, each nation’s central bank now had to maintain a large reserve supply of US dollars to “back” the local currency and to enable trade. The second was that currency exchange rates would now “float” (be determined in global currency markets) and not be fixed.
Nations became desperate for US currency. There were two ways to get US currency. One, price exports very cheaply and sell to the US so you get the currency (one reason imports into the US grew). The other was to borrow.
These changes made international aid into a “ticking bomb” that could explode any government or economy at any time. The reason is most international “aid” is not in the form of gifts or grants, but is in the form of loans. Typically the loans are denominated in the currency of the lender, such as a major US bank. When exchange rates are fixed, it’s not a problem. Let’s take a look at could happen.
Example: Suppose we have a poor undeveloped nation called Lukistan. Lukistan needs investment capital to build a factory and to pay for education to develop the workforce. With the encouragement of the U.S. government or the World Bank, it gets a loan of $10 million U.S. Dollars (USD )at 10% (a rarity, they usually pay a higher rate). Suppose the local Lukistan currency is the “Jimbak” (each piece of the currency has the smiling face of your professor!) The first column represents receiving the aid or loan under fixed rates. Lukistan gets the loan dollars, converts them to jimbaks and spends them locally. They then use 20% of all the taxes they collect to pay the interest on the loan. But consider columns two and three. Lukistan takes a loan initially under the same terms as before. But now, after receiving the loan the exchange rate changes (perhaps due to international currency speculators). The value of the jimbak has fallen to 1/4 of what it was before. Now in order to pay the annual $1 USD in interest payments, Lukistan must dedicate 80% of all its taxes to paying the international loan, leaving very little for vital government services such as health, education, or even security.
|all numbers in millions||With fixed rates||With floating rates – initially||With floating rates after exchange rate changes but loan already exists – Jimbak has depreciated/ Dollar appreciated|
|exchange rate: 1 Jimbak =||$ 1 USD||$ 1 USD||$ 0.25 USD|
|Lukistan GDP in Jimbaks||20 jimbaks||20 jimbaks||20 jimbaks|
|Total Lukistan Govt Budget (total taxes paid = 25% of GDP)||5 jimbaks||5 jimbaks||5 jimbaks|
|Total Loan Value (in USD)||$ 10 USD||$ 10 USD||$ 10 USD|
|Total Loan Value (in Jimbaks)||10 jimbaks||10 jimbaks||50 jimbaks|
|Interest payments (in USD)||$ 1 USD||$ 1 USD||$ 1 USD|
|Interest payments (in Jimbaks)||1 jimbaks||1 jimbaks||4 jimbaks|
|Interest payments as % of government budget||20%||20%||80%|
|Government budget (jimbaks) left to pay for govt svcs (education, health) after loan interest payments||4 jimbaks (80%)||4 jimbaks (80%)||1 jimbaks (20%)|
After initially dropping in value after 1971, the US dollar eventually rose in value, especially against developing nation currencies. The exchange rate changes went against the developing nations. Since during this same period oil exporting countries (OPEC) decided to only sell oil in return for US dollars, many developing nations found themselves needing international assistance and loans to both finance the interest on earlier loans and to buy the oil needed to industrialize. They fell into the“debt trap”.
The Third Trap: Structural Adjustment and the “Washington Consensus”
As we have already seen in the video series, Commanding Heights, a free-markets, pro-global-capitalism viewpoint came to dominate the governments of leading G-7 countries in the 1980’s. Led by Ronald Reagan, Margaret Thatcher, and Milton Friedman, governments swung away from Keynesianism, democratic socialism, and other types of state-regulation. It is not just domestic policies that are effected. International aid changes also. Free-market fundamentalism spreads to the International Monetary Fund, World Bank, and other major international aid (loans) agencies. Actually the process had started earlier with the Chilean coup of Augusto Pinochet and the reforms promoted by Friedman and the “Chicago Boys”. The coup itself, the plans of the “Chicago Boys”, and the brutal repression that enabled the reforms to take place were in fact directly supported financially and logistically by the CIA, the US State Dept, and major US corporations such as ITT.
Chile, it turns out, was a “lab experiment”. The experiment was repeated in the 1970’s and 1980’s in Argentina, Brazil, El Salvador, and Bolivia. By 1989, the experiments have led to a kind of blueprint of how radically remake a country’s economic system according to the ideology and using economic “shock therapy”. Markets are opened to trade, government functions privatized, government budgets slashed, and the borders thrown open to investment and purchases of local businesses by large multi-national corporations.
Any nation seeking loans from the US, the World Bank, or the IMF was forced to adopt a“structural adjustment” plan as a precondition for the loans. As Wikipedia notes:
Some of the conditions for structural adjustment can include:
- Cutting social expenditures, also known as Austerity.
- Focusing economic output on direct export and resource extraction,
- Devaluation of currencies,
- Trade liberalization, or lifting import and export restrictions,
- Increasing the stability of investment (by supplementing foreign direct investment with the opening of domestic stock markets),
- Balancing budgets and not overspending,
- Removing price controls and state subsidies,
- Privatization, or divestiture of all or part of state-owned enterprises,
- Enhancing the rights of foreign investors vis-à-vis national laws,
- Improving governance and fighting corruption.
These conditions have also been sometimes labeled as the Washington Consensus.
These structural adjustment programs became extremely controversial. Today, more than 20 years later, there is little evidence that these programs accomplished much to improve the local economies or living conditions. They have, however, been extremely effective in expanding the global reach and power of major multi-national corporations and banks.
All changes to economic systems have both intended and unintended, unforeseen consequences. The intent of the Washington Consensus was to promote free markets, increase world trade, reduce the power of governments in economies,and make the world safe for large multi-national corporations. It was believed as a matter of ideology that such changes would produce higher living standards and economic growth.
One consequence is the massive expansion of the global financial markets and financial speculation. While labor is not really very mobile and still encounters barriers at the borders today, international financial capital, money, faces no such barriers. The result has been an increasing series of financial crises, many of which spill over into the real economies, such as happened in the Asia in 1997, Russia in 1998, and the whole world in 2008.