VALENTIN KATASONOV | 29.04.2016 | OPINION
Financial Parasitism of the West
The World Bank (WB) has released its 2016 edition of International Debt Statistics. The report surveys 120 countries that are categorized as low- or middle-income (LMI countries) according to World Bank criteria.
Detailed information is provided about the external debt of each of the 120 LMI countries. In addition, these facts are often supplemented by data on foreign investment, making it possible to evaluate the role played by capital inflows, in the form of credits and loans, within the cumulative cash receipts of those countries’ financial resources. All the post-Soviet states were included in the survey.
The growth of external debt among the biggest recipients of loans and credits
A total of $1.132 trillion in capital entered the LMI countries in 2014, as well as $667 billion in the form of direct and portfolio investments, and $464 billion in the form of loans and credits. It seems that 41% of all the capital inflows into the countries on the periphery of global capitalism was actually borrowed money.
The biggest recipients of these funds were China, Brazil, and India. In particular, 51% of all the capital received by 120 countries in the form of direct and portfolio investments went to one country – China. Almost 52% of all the capital inflow in the form of loans went to three countries – China, Brazil, and India.
For LMI recipient countries, the new loans and credits were the explanation for the continuous growth of their foreign debt. In 15 years, the absolute value of the foreign debt of 120 LMI countries has surged by 210%.
The World Bank categorizes Ukraine as a colonial appendage
The relative debt burdens of LMI countries as expressed in their foreign loans and credits in 2014 looked much better than in 2000 and slightly better than in 2005. For example, China’s ratio of foreign debt to annual exports was only 34.8%, while its ratio of foreign debt to gross national income was 9.3%. The ratio of foreign-debt servicing costs to annual exports was 1.9%, while the ratio of international reserves to foreign debt was 402.2%.
But at the same time, many countries have numbers that are far below average. Take Ukraine. In that country the ratio of foreign debt to annual exports is 184.5%; its ratio of foreign debt to gross national income is 100.3%; its ratio of foreign-debt servicing costs to annual exports is 25.2%; and its ratio of international reserves to foreign debt is only 5.1%. Ukraine’s relative debt burden is similar to that of many underdeveloped countries of Africa, Asia, and Latin America that are commonly labeled as colonial appendages of the West.
There is reason to believe that the debt pictures of the LMI countries have deteriorated since 2014. Most of these nations specialize in exporting their natural resources, agricultural raw materials, and food. The prices for those commodities declined on the world market in 2015. Capital flows have reversed course, now moving from the periphery to the center of the global capitalist system. In addition, interest rates are noticeably higher on credits and loans. As experts note, «Raw materials are getting cheaper, but money’s getting more expensive». Finally, the downturn in the exchange rates of many countries has led to a decline in the volume of their international reserves (resulting from the rush of massive currency interventions intended to prop up a nation’s legal tender). According to data from other sources, in 2015 the value of the international reserves held by LMI countries exceeded their external debt.
The structure of external debt
Foreign debt can be categorized as either long-term or short-term. In 2000, almost 84% of the total foreign debt held by LMI countries was long-term. The percentage of long-term debt has been declining for 15 years, but it is still twice the share of short-term liabilities.
In turn, long-term external debt can be divided into public and private. Public-sector external debts are the obligations the state owes to repay credits and loans, as well as guarantees that have been issued. Public-sector debt as a percentage of total foreign debt has declined steadily. Currently public and private debt loads are comparable in size. Let’s take a closer look at the structure of public-sector debt.
First of all, within the structure of public debt, the proportion of official to private creditors has shifted significantly. In 2000, 61.5% of creditors were official and 38.5% private. But by 2014 most of the debt burden was owed to private creditors (55%), with official creditors taking a backseat (at 45%).
Second, of the monies borrowed from official creditors, the IMF is only responsible for a surprisingly modest share (on average about 10%).
Third, the role of loans in the form of debt securities issued by LMI states has been on an upward trajectory. In 2000, only 20% of the borrowed funds provided by private lender states was in the form of loans, but by 2014 that number had risen to 37%. Nevertheless, traditional bank loans are still the primary mechanism used by LMI countries to borrow capital.
Debt-fueled prosperity
And how does the debt picture in low- and middle-income countries resemble that of economically developed countries?
Over the five-year period of 2010-2014, the gross external debt of economically developed countries increased by $6 trillion, or 8.5%. The report views the 34 current members of the OECD as economically developed countries. That said however, the seven leading nations (the US, Canada, Japan, the UK, Germany, France, and Italy) bear approximately 63% of the gross external debt of all OECD countries. Most of this gross external debt is attributed to the banking sector – next come other sectors of the economy, followed by the state. The report claims that as of Dec. 31, 2014, total external public debt amounted to approximately $16 trillion.
Thus, the global credit picture is divided between wealthy, first-world nations (34 states) vs. the countries on the periphery of global capitalism (120 states), and the contrast is a stark one. The first group owes $70 trillion in external debt, compared to $5.4 trillion for the second group. That’s a disparity of almost 1,200%. A comparison of the relative debt burdens looks equally dramatic. According to World Bank data, the ratio of the gross external debt of economically developed countries compared to their aggregate gross domestic product (GDP) stood at 140% in 2014. This is 530% higher than in low- and middle-income countries. The average ratio is 140%. In Canada that figure is 83%, in Germany – 145%, and in the UK – 313%.
Not so long ago economic textbooks claimed that the state of a country’s economy was dependent upon the size of its external debt. The higher the debt level, the worse the plight. Using that formula, the United Kingdom and many other Western countries should be declared bankrupt: their debt liabilities are tens of times higher than their international reserves and other liquid assets. However, those countries not only exist, but thrive. This is a new form of debt-driven financial parasitism, masked by the «evaluations» of the leading Western rating agencies.
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