Colonialism or Sovereignty? How the Global Financial System Traps Countries in Debt

Yves here. Radhika Desai, Michael Hudson, and Ann Pettifor continue their discussion of the third world debt crisis, its similarities to and difference from the 1980s debt crisis, and how they are the manifestations of a system that (whether intended to or not) operates to subject often poor borrower nations to the authority of the first world.

Get a cup of coffee! This is a meaty post!

By Radhika Desai and Michael Hudson. Originally published at Geopolitical Economy News Hour

RADHIKA DESAI: Hi, everyone, and welcome to this 13th Geopolitical Economy Hour, the fortnightly show on the political and geopolitical economy of our times. I’m Radhika Desai.

MICHAEL HUDSON: And I’m Michael Hudson.

RADHIKA DESAI: And today, as last time, we are joined by Anne Pettifor to discuss the urgent issue of our time, the third world debt crisis. And as I said last time, we couldn’t find a more authoritative guest for this show.

Anne hardly needs any introduction, but I do feel I should remind everyone of what she’s done, particularly in relation to the debt and also the fuller range of her contributions.

Anne is a prolific writer on issues of debt, finance and development. And she has also been one of the most important activists on the issue of third world debt in particular, and has had a great effect on the area.

In particular, she launched the Jubilee campaign at the end of the last century to a campaign for debt forgiveness for the poorest countries.

She has served as an advisor to the British Labour Party, important figures such as Margaret Beckett. And more recently, she was on Jeremy Corbyn’s Economic Advisory Council.

She is the author of many books and articles on these subjects, including Debt, the Most Potent Form of Slavery. I’m sure that has a lot in common with what Michael’s been writing about debt.

Another of her books is The Production of Money, How to Break the Power of Bankers. Welcome, Anne.

ANNE PETTIFOR: Hi, thank you so much, Radhika, lovely to be here again.

RADHIKA DESAI: Yeah, exactly. And so let’s get on with our raging conversation that we were having last time. So what we were going to talk about is really the third world debt crisis, the new third world debt crisis.

How similar and how different is it from the one that hit the third world back in the 1980s? What has been the specific contribution, if any, of the pandemic and the war?

And what is the future of the third world, given that in addition to all the other calamities, it is now hit with this debt crisis?

Now, last time we started with a list of seven questions and we only got through the first two. So let me just go through the seven questions and then we will begin with the third question.

So the first question was, what was the genesis of the 1980s debt crisis?

Number two, what are the causes of the crisis today?

Number three, are third world countries responsible for their own plight?

Number four, how has debt been an instrument of world power and imperialism?

Number five, is China putting third world countries in a debt trap?

Number six, what does the debt crisis have to do with the dollar system?

And finally, number seven, is there a way out?

So last time we said many things about the specific causes that we recalled the first third world debt crisis, and then we talked about the second one.

And just some of the ideas that we had about the differences between the two is, of course, there’s a greater extent of financialization today.

And also there are many similarities, of course, the vast availability of money in the first world countries, the inability to invest it in first world countries, the essentially touting of loans to third world countries, all these are common.

But we are looking, of course, at a much greater degree of financialization. So that’s one of the main differences.

But let’s launch into the third question, are third world countries responsible for their own plight?

And Anne, I thought we’d start with you because, you started the Jubilee campaign, you had a very clear understanding of the causes of that crisis and why third world countries should be forgiven.

So what was your understanding then? And how does it relate to what’s going on now?

ANNE PETTIFOR:So first of all, can I just say this, that we fought a long battle and a losing battle during the Jubilee 2000 campaign to remove the word third world and first world and to instead talk about low income countries. And I just want to stress that.

And the second thing is that, during that campaign, one of the reasons that it latched on, if you like, and we were able to form a North-South coalition was that we talked about co-responsibility for the crisis.

That, yes, there were dictators in the South who were wicked and who’d borrowed hard currency from rich countries for the purposes of buying jets and posh houses in the south of France, or used a fair amount of that for those purposes because hard currency is so scarce in those countries.

So, yes, there is an element of co-responsibility because, of course, those loans were pushed by the rich countries for reasons to do with the imbalances in trade between North and South.

So, Britain, for example, has a massive trade deficit. So one of the ways to correct those deficits, back in the day, in the 80s, was to lend money to Nigerian dictators so that they would buy British armored cars and other weaponry and create jobs, help create jobs back home and generate income from exports here, but at the same time to help the dictator repress his own people.

So we argued that there was co-responsibility.

But I want to take it a step further and say that whatever country it is, whether it’s a rich country or poor country, it is victim to a system.

And the system is one based, of course, on the dollar, but above all, based on the deregulation of capital across the world.

Now, we saw that the first world debt crisis, the first global debt crisis was caused by the collapse of Bretton Woods in 1971, but it’s actually been triggered even earlier with the establishment of the euro dollar market here in the UK.

And that was a way of evading financial regulation by governments. And the point is that what that did was to undermine the economic autonomy of governments in the north as well as the south, right?

So if money is able to flow across borders, the capital is able to flow across borders, it can do so. By doing so, it can undermine policymaking at home.

For example, if the central bank and the government want to set interest rates quite low to suit local conditions at home, and if those who own capital feel that they’re not getting enough money, earning enough rent or interest on their loan, on their money, they can take their money to another country like Brazil, where interest rates are much higher.

And so that undermines the willingness of a government to lower interest rates, to stimulate investment at home. And there are other ways in which capital mobility undermines policy autonomy at home.

But of course, the most disastrous is for poor countries.

But there’s another element to this, is that at least Western governments have a degree of policy autonomy. They have central banks.

They have the institutions which underpin the nature of credit and the management and the regulation of credit.

Poor countries are discouraged from investing and building those public institutions, an independent, fairly independent central bank run by competent technocrats, a system of taxation, which is absolutely vital to the monetary system, a system of accounting, which enables countries to balance surpluses and deficits and so on, a system of regulation and management of credit creation.

I’ve worked in countries like Malawi where those institutions do not exist, a criminal justice system for enforcing contracts.

We have criminal justice systems here and the World Bank advocates for criminal justice systems precisely to enforce contracts precisely because they’re afraid that if there’s a contract to provide, I don’t have military gear to a poor country that won’t be honored ultimately.

And so the World Bank is dead keen on a criminal justice system. But a criminal justice system has to be publicly financed and publicly created.

And at the same time, the international institutions prohibit, if you like, the spending on and investment in these public institutions and the employment.

You know, I’ve worked in Nigeria and Nigeria could really do with a well-trained, well-resourced, well-paid police system, a policing system and criminal justice system because they have an awful lot of crime, an awful lot of really clever people who can dodge the regulations.

But it’s very hard to build a proper criminal justice system with very little money.

And when your policemen are low paid, it’s easy as pie to take a bribe from the local driver in order to avoid penalizing him for speeding or running over a poor child or some such thing.

Same is happening in South Africa, the country of my birth. I see that happening where, but here in Britain, we pay our police fairly well. They can still be pretty corrupt, but we give them status and money and we give them resources.

And we understand that in order to enforce contracts on the one hand, but also to maintain economic stability, we need public stability.

So poor countries are deprived of the sort of autonomy that would enable them to raise finance at home instead of having to go abroad and to raise finance in somebody else’s currency.

And even when they do have a degree of autonomy, which is what South Africa has, it’s an incredibly rich country. It has its own central bank. It has relatively sophisticated taxation institutions. It has quite a lot of those.

And it still chooses to withhold borrowing, to refrain from borrowing to finance employment, the creation of employment at home. And it still prefers to borrow from abroad because that imposes apparently a form of discipline on capital.

So even where the low income country will have these institutions, they’re discouraged from using them because of the export orientation of their economy. So that’s quite a long intro to saying why, there is co-responsibility.

Both rich and poor countries are penalized by an international financial system designed effectively to serve the interests of the one percent, nobody else, whether those one percent live in Kenya, whether they live in China, whether they live in Dubai or whether they live in New York, they all benefit from it. The rest of us suffer.

RADHIKA DESAI: Great, thanks. And Michael, do you want to add?

MICHAEL HUDSON: Well, you’ve described the kind of economic and ideological interference from the IMF and World Bank. Most other countries have suffered from US political interference in their domestic affairs.

A whole century of Latin American dictators have been installed, leaving a residue of client oligarchies that are responsible for actually much of the death.

But on a broader level, US diplomats, as you’ve just pointed out, weaponized the IMF and the World Bank to confront other countries with a take it or leave it offer. Either you play by the US rules, the neoliberal rules, or you’re going to be treated like Venezuela and Iran and Russia.

So there’s force behind what you’ve described. And the debtor countries have been obliged since 1945 to follow these demands of the IMF and not just advice, but demands, because neocolonialism really has taken a financial turn, much more than armed force.

Well, except in Chile and Guatemala, Iraq, Syria, Libya, Afghanistan, the color revolution countries, Ukraine, Indonesia with the CIA. I guess it has been imposed by force, as finance is just the gentle gloved hand of colonialism.

And I think one can talk of financial colonialism. And if you think of the debtor countries of having, after World War Two, thrown off the colonial powers and nominally got their economic liberty, they didn’t get their financial liberty.

They were forced into a financial dependence. And countries that did not enact these neoliberal laws suffered currency raids and the IMF simply wouldn’t lend to them.

And there could be basically the U.S. and NATO countries would raid Chile’s currency or Argentina’s. And the IMF will only help countries that actually follow the U.S.

Like today, it’s found the most creditworthy country in the world is now Ukraine, judging from the IMF’s statement that it only lends to countries that are at peace, like Ukraine, that are not in war and that have every ability to repay the foreign debt like Ukraine.

ANNE PETTIFOR: Iraq was another one.

MICHAEL HUDSON: Yeah. But Anne, you used the word borrowed. Most of these global south debts were not borrowed. They’re simply in accrual of interest all through the 1970s and onward.

The banks and bondholders simply added the interest on to the debt. And the U.S. statistics show America’s foreign aid will lend Latin American countries enough to pay the banks and the bondholders.

I was at meetings with the Federal Reserve where they made this very clear. They’ll always lend friendly countries, meaning right wing dictatorships, the client oligarchies, the money to pay the debt.

So they actually borrowed it 50 years ago. All the rest is just added on.

ANNE PETTIFOR:And currency and also exchange rate instability as well.

MICHAEL HUDSON: Right. So to me, I think these debts should be treated as bad loans. You talked about, Gee, the debtors can’t pay. If a creditor makes a loan that can’t be paid, it’s a bad loan and bad loans should be wiped off.

But uniquely for the global south countries, instead of saying we’re at a market for finance to take responsibility, it says it’s going to make sure the loans are for credit worthy purposes. That whole principle is suspended for post-colonial countries, the global south countries.

So, yes, of course, you can’t hold them responsible if their policy has been dictated by the creditor countries themselves, which to me makes them bad loans as well as odious debts.

RADHIKA DESAI:Yeah. I mean, I just wanted to add a couple of points to some of the points you raised quite rightly.

So both of you mentioned the analogy with colonialism. And I just like to remind you of a couple of things.

Number one, if you think about, for example, anything colonialism does is really for the purposes of extraction, right?

So, for example, colonial powers built railways in colonial countries. The purpose of these railways was not to integrate the economies of those countries to help make them more productive.

It was to extract what the colonial countries wanted to extract out of those countries, bring it from the hinterland up to the coast and export it. So that’s how you got situations in which countries that were suffering famines were still having food exported during colonial times, even in the midst of famines.

So similarly, Rosa Luxemburg in her book, The Accumulation of Capital on a World Scale, has a special chapter on how exactly, as Michael says, indebtedness is made into an instrument of colonialism, whether it is the velvet glove or the iron fist or it doesn’t matter, but it is an instrument of colonialism.

And she even points out, and this relates to the point you were making about government laws and infrastructure and institutions. She said that there is a tendency to insist on a certain type of constitutionalism so that the indebted country, by its own laws, becomes obliged to prioritize the repayment of debt.

And this is and this, of course, we see today in the form of good governance and so on and so forth in the IMF and the World Bank. So in that sense, I would say that.

And there’s a third thing that is very critical. And indebtedness also essentially empowers those people, a sort of comprador class that has an interest in keeping the country indebted, that has an interest in actually borrowing, as you said, in international currency.

And although in many countries the borrowing has been used for developmental purposes, there are also many other countries in which it was not used for developmental purposes.

And so, for example, today, the greater freedom of capital flows allows big Indian companies to raise foreign capital for completely vanity purchases of foreign corporations and so on.

This is not something that the Indian people should be responsible for. But in the end, they will be made responsible for it.

So that’s one set of points. That is to say that in third world countries, all the things that used to happen through formal colonial control or nearly all of them today happen through the mechanisms of indebtedness.

And that’s all the more reason why, as Michael says, since these are bad debts, they should be repudiated because they are the denial, they are at the core of the denial of development.

So the second set of points I wanted to make is also connected with what both of you are saying, that it has to do with the international financial system and the way it’s created.

And as we’ve talked, Michael, in the past, in many of our shows, and I think we also talked in the first episode of this set of shows on third world debt crisis, the international financial system is the accompaniment of the dollar system.

And the fact of the matter is that if Keynes’s original proposals for bancor and an international clearing union had been accepted or if a new such system is created as elements, elements of which are being put up as we speak by various third world countries or developing countries, I’ll go into third world countries later, because I’ve always argued that people object to third world because they think third world means third class.

But it doesn’t. Third world is the self-designation of the Bandung countries, the non-aligned movement, they said that they represented a third way, not communist and not capitalist, but a third way.

And of course, this third way always leaned distinctly to the left, but anyway, we’ll leave that aside. So I don’t have a problem calling them third world countries.

But anyway, the thing is that third world countries or developing countries, they essentially would never have these problems of chronic indebtedness, debt crisis, et cetera, if we had had that kind of system, but we didn’t have that kind of system because the United States insisted on imposing the dollar on the rest of the world, leaving them with no other option.

And it sort of, it has succeeded. And after 1971, of course, the dollar system has required financialization. So it requires the creation of vast quantities of monies chiefly for financial transactions.

And then as both of you have pointed out, and I think, Anne, you said, there’s so much money sloshing around in the first world, which cannot be invested in first world countries because first world countries are themselves undergoing their own growth slowdown.

So then all these banks are going around touting loans to the rest of the world. The IMF and the World Bank have acted as cheerleaders to this increase of indebtedness of third world countries, saying, isn’t it wonderful that now the private sector is able to lend to third world countries?

And so all this lending has taken place.

And today, for reasons entirely having to do with the preservation of capitalism in first world countries, interest rates are being jacked up, which is why we have the creation of this debt crisis, which is coming on top of the pandemic, on top of the problems created for the third world in terms of supply constraints and so on through the conflict in Ukraine, et cetera.

Interest rates are being jacked up in first world countries entirely because to tackle inflation in any other way would be to question the existence of capitalism because the other and more sensible way of tackling inflation is to increase supply.

And you can increase supply by making public investments. If private sector will not increase supply, you can increase supply by making investments and expanding supply.

And of course, as many people have pointed out, another way to tackle inflation would be to stop what’s called the greedflation, the ability of big multinational corporations to jack up prices because they are monopoly suppliers of what they are saying.

So all these ways of tackling inflation would be to put capitalism in question. This is what first world countries are refusing to do. And that is why, one of the key reasons why, we have this third world debt crisis.

In addition to the creation of the debt in the first place. But the fact of the matter is as in the 1970s and 80s, so today, the debt was incurred in much easier credit conditions. But now we have a debt crisis because suddenly credit conditions have tightened.

So yeah, and I would say that, and therefore third world countries are essentially, I mean, in some nominal sense, they may be responsible for the debt crisis, but they are the victims, as you say, of essentially this international financial system whose existence is again guaranteed only by the United States.

And I think the rest of the world has to go back, essentially create a different financial system.

So in closing, I just like to say that, to say the third world countries are responsible for their own plight, forgets the principle of creditor responsibility, which you reminded us of.

And essentially what happens is that the principle of creditor responsibility is officially denied in general, but of course it naturally crops up. It cannot be completely erased and it crops up in the form of debt reschedulings and moratoria and so on and so forth.

ANNE PETTIFOR: So I wanted to make several points. First of all, the IMF and the World Bank are important and they are, there’s no question, Michael, they are the levers used by the United States Treasury to influence and to impose pressure on countries.

But actually capital flows from the IMF and the World Bank are tiny relative to capital flows from the shadow banking system.

So in a sense, from the 1970s and 80s, the system has evolved even more into this new form of hyper capitalism where shadow banks, which operate beyond even the regulatory frameworks of the United States, the powerful United States of America, and is what caused the 2007-8 crisis.

The 2007-8 crisis began in a shadow bank as a result of the activities of a shadow bank, right? The IE, one that the treasury doesn’t, the Americans do not regulate.

The flows from those to low income countries are enormous.

And as Brett Christophers has shown in his latest book about asset managers, in the shadow banking sector, a small number of powerful capitalists are using our savings, our pensions, our insurance, our money we’ve set aside as a result of our economic activity and using that to lend to low income countries.

And for example, the worst example is the proposal by these rich institutions to create a green boundary across the North of Africa, below the Saharan desert.

And, but they won’t do that without one, guarantees from the United States taxpayer, the British taxpayer and European taxpayers, that they will never make any losses on those investments in a green belt across Africa, number one.

And number two, that they should be free to do as they please essentially, regardless of what local governments think and so on. But it’s the risk free nature of that lending, which I find extraordinary.

We’re now in a form of capitalism, which Rosa Luxemburg fortunately was one of the few to foresee. And I’m always despairing at the left for failing to understand the scale of what’s happened to capitalism today.

But the lending by those institutions, and I just summarize them by calling them Wall Street, makes the lending by the IMF and the World Bank look puny. So that’s my one point.

But that’s not to say that I don’t completely agree with you, the IMF, World Bank are there as enforcers. They’re there as the enforcers. And they are the gatekeepers to all capital essentially.

MICHAEL HUDSON: Well, many of these private lenders will not make a loan unless the World Bank is part of it. So it may be only 1% or 2%, but it says we set the rules for all of the 98% of the private loans. They’re in cahoots.

I think it’s worse than that, Michael. I think they will not make any loan, even in combination with World Bank, unless they’re guaranteed against losses.

This is not capitalism. For me, this is Soviet style economics. And I hope people aren’t too insulted by that.

But under Soviet style economics, the capitalists of those days were protected wholly by the state, by ordinary Russians. They were not allowed to make losses. So we’re back in that.

So I call this Soviet style capitalism really, to mock it really, because it’s a pretense at so-called free market capitalism. So that was one point I wanted to make.

And, the thing is that, I just don’t know, until we have a level of awareness about that, we’re not going to be able to tackle them because they are invisible. You can’t see them.

You know, you can see, you can go to Washington and bang on the door of the IMF and the World Bank. You can throw bricks at the IMF and the World Bank.

You can’t throw bricks at the asset management sector and what it’s doing, because it’s utterly invisible. So that poses the left with an enormous problem.

And secondly, I just wanted to say one of my great passions, as you know, we began the Jubilee 2000 campaign. We’re backed by the churches and by the NGOs.

And they said to us, look, cancel the debts because these countries can’t pay. So we began a cancel the debt campaign, but no sooner had we got going on, then it became clear to me that we could write off the debt.

And we did write off about $100 billion of debt. And then in 2005, I worked with Ngozi Okonjo-Wala and we cleared $30 billion of debt for Nigeria. But that wasn’t going to prevent the buildup of future debts, really.

So we needed what we have in private capitalism, which is a form of bankruptcy for countries. Now that is opposed by countries. The last thing they want anyone to think is that they’re bankrupt. And I understand that completely.

But there comes a point at which they’re not solvent. They’re not able to mobilize the hard currency needed to repay the debt. And in those circumstances, we need an independent arbitration process between creditor and debtor.

And that, Radhika, is where we say, sorry, the creditor made the mistake here. I always think of Charles Dickens’ novels, right?

Charles Dickens’ father went to Marshallsea Prison because he failed to pay his debts.

And Charles Dickens, as a child, had to visit his father in this ghastly prison, which is still there, actually, in South London, just across the Thames, the bridge across the Thames.

It was the most cruel thing. And in the 19th century, capitalists realized that it really wasn’t, didn’t make economic sense.

Because if you locked up a man behind prison bars, that meant, or a woman, that meant they weren’t any longer economically active and they couldn’t undertake new loans.

So the best thing to do was to clear their debt under something called bankruptcy. And that was invented in the 18th and 19th century by old-fashioned capitalists.

You cleared their debts and you pulled them back into the market so that they could participate, and again, and perhaps take out a new loan.

So they saw the logic of having a framework of dissolving and dealing with debt, which we cannot see in the world economy, because creditors, the shadow banking system, the IMF, the World Bank, but also governments are too blind with their own power to understand that actually they would benefit the whole of the world economy.

If they had a system of arbitration where there was a decision made, sorry, you lent money to build a nuclear power station on a volcanic fault, you will lose that money. You know, it’s not rocket science.

I think I may have said this in the first session, so forgive me if I’m repeating myself, but we failed in the campaign to call for this independent arbitration process and we’ve watched the dramas of Argentina, because you’re quite right, Radhika, Argentina is the IMF’s oldest client.

When I last looked, and that was some time ago, 2001, Argentina had been an IMF client for 50 years. So for 50 years, Argentina’s economic policies were dictated by the IMF, and it only led to one succession of debt crises after another.

So, I mean, Argentina is the case, is our case, the case to be made.

And after the 2001 crisis, there was an examination by the independent, whatever they are called at the IMF, into the way in which the institution had conducted itself in Argentina in 2001.

And they found it should have failed dismally, but then, and for a while, so interesting, because in 2003, Nigeria wrote off or wrote down $30 billion of debt.

There was a period between 2003-7 where all the higher income, low income countries, Brazil, Nigeria, all of those countries pulled their money out of the IMF. The IMF and the World Bank were almost going bust, right?

 The guys employed by the IMF and the World Bank, all of whom have got two PhDs, not one, each one of them has two PhDs, had no work. And then thank God came the financial crisis and Greece, and suddenly they were back in business.

So, there was a period in which low income, I call them low income, third world countries, whatever you want to call them, understood they had the power to withdraw from and get out from underneath the IMF. And they did for a while.

RADHIKA DESAI: Yeah, exactly. And this is a great segue into our next question, because, what you’re saying, by the way, about Argentina is really important and interesting.

Argentina, at the end of the Second World War was one of the richer countries of the world. Everyone expected that it would essentially become a first world country.

So the role of the IMF in ensuring that it has remained one of the poorer countries of the world, or not much more than a sort of middling income country, but the IMF has played a central role in it.

So our next question is really, how has debt been an instrument of world power and imperialism?

And again, essentially what we are saying is that, you were talking about the emergence of a bankruptcy law in Britain, after putting people in debtors’ prison and so on.

What you’re talking about is a sensible financial system. A sensible financial system is what every country needs.

And a sensible financial system would be one which is focused on giving long-term patient, productive credit for creating productive enterprises and not engaging in speculation and not being a loan shark, et cetera.

But such a sensible financial system is precisely what is denied to the world by the US system, by the insistence on imposing the dollar, by the choices made by the first world countries in terms of expanding the financial sector in the way that they have and so on, in opposition to the productive sector.

So this denial lies at the core of the denial of development, which is the core of imperialism today.

And it is not surprising, therefore, that the elements of a response to this, which are now emerging in the form of China-centered finance, in the form of agreements between countries to pay each other in one another’s currencies, in the form of initiatives like the Chiang Mai Initiative or the New Development Bank or the Contingency Reserve.

These are all small initiatives, but they embody the beginnings of an alternative set of principles, which will be based, I think, Anne, again, you rightly recall, based on the kind of consciousness that has now emerged in the third world, which came in the aftermath of the series of financial crises in the third world, which culminated in the East Asian financial crisis of 2007 and 2008.

And when the world saw the way in which the IMF and the World Bank acted as bailiffs for private creditors, in the case even of a country as advanced as South Korea, people said, okay, if they can do this to South Korea, God knows what they’ll do to us.

And that was the beginning of the shrinkage of the World Bank IMF loan portfolio. So we are really at the cusp of the financial structure being an instrument of world power and imperialism and the beginnings of the creation of a totally different type of financial structure.

MICHAEL HUDSON: Yeah, the big feature of the [Argentine] debt is that the debt is not to be settled under Argentine courts. Any dispute over debt in Argentina has to be subject to U.S. courts.

Argentina waived its rights to be a sovereign country. So what you’re really talking about is, yes, the financial system has been weaponized as a tool of U.S. political control, but it’s also directly, the U.S. is the creditors or the judge, not the debtors.

The government of Argentina has no voice at all in the terms of this debt, as you saw from Judge Grisa in the United States, turning over Argentina’s debt that was bought for 15 cents on the dollar, saying that Paul Singer gets to collect all of this debt in full.

So you can buy Argentine debt for $15 million and immediately seize its assets abroad, its naval assets they tried to seize, for $100 million. And that’s why the IMF promised in 2001, no more Argentinians.

Many of their people resigned from the IMF. They said, we’re supposed to judge the credit worthiness. It can’t pay. And it’s all overwritten by the U.S. thugs that are telling us what to do and overrule what we want.

And they said directly, the IMF is a tool of the U.S. State Department. And what you’ve seen is that financial control has been just as powerful as military control under the old colonialism.

And you can think of it, maybe we should use the word financial colonialism, because one of the conditions of the IMF and the World Bank is, well, you have to sell off your mineral rights to pay your debt.

So you have plenty of ability to pay your debt. Look at all the land that the government has. Sell your government to the foreign countries. This goes against the 1648 principle that every country should be in charge of its own internal affairs.

If you could reestablish that 1648 principle at the end of Europe’s 30-year wars, any country is a sovereign country in charge of its own affairs, then you would have the legal ground saying these debts were not taken over under conditions that we agreed to.

Argentina not only was an occupied country by the mass assassinations that the United States held in Argentina out of Chile, but basically a whole political oligarchy there.

It’s not only the debtor countries of the global South today. The IMF and the World Bank began this way in 1944 and 45 at Bretton Woods when the main debtor country in the world that had to be crushed was England.

And my Super Imperialism goes over all of the discussions there that England was told, you have to essentially give up your empire to the United States.

And if you look at England, there were many debates in the House of Commons and the much more intelligent House of Lords that saw that, wait a minute, all of our assets are being stripped by the country we thought was our ally, but there’s nothing we can do because we’re broke.

And so the IMF had to promise, instead of the IMF telling England, you have to devalue your currency to pay, the United States under the British Act said, you cannot devalue your currency, you have to leave your pound so overpriced that nobody can afford to buy from you, and the sterling area countries, especially India, will have to buy from the United States.

So if you look at how the United States did a dress rehearsal for the global south debt and breaking up the British Empire, it’s a wonderful way of seeing what happened.

The real problem is behind all of this political control, there’s a way of thinking, and the real thing, what we’re all really talking about is the kind of neoliberal thinking that the IMF and the World Bank and the universities all over the world are teaching, that somehow the debts must be paid without any consideration of the effect of paying the debt on overall domestic growth and overall economic independence.

That’s really the key. We have to change the way of thinking, which is what we’re trying to do today, before we can actually mobilize enough support to change the law.

ANNE PETTIFOR: So I would go further and I’d say we’ve got to change the system, Michael, and I mean by that not just we in the West, I also mean countries of the global south, as you say.

So I wanted to make two points. One was, the system is export-oriented, and I think I explained that before.

I mean, very deliberately, everybody thinks the only way to survive, and it is the only way to survive, if you want to buy an Apple computer and you want dollar bills to pay for it, you’ve got to flog your oil or whatever assets you have to those rich countries.

We’ve got to persuade countries of the global south that there must be a reorientation back onto the domestic economy, and that applies most particularly to China. China is neglecting its home base.

It’s neglecting, social benefits for its people. It’s neglecting the kind of welfare state necessary to China in favor of the export orientation of the economy in order to make China more powerful in the world and to build up the dollar reserve it needs to maintain that power.

Now, I understand that, but I think there’s something deeply wrong, and I think President Xi, and you will be able to tell us more, Radhika, has begun the process of looking away from the world and back onto the domestic economy, which after all is a huge economy.

The Chinese people find it hard to move from the rural areas to the cities because there isn’t welfare support in making that transfer and so on and so forth.

And incomes are too low. Incomes are low in China. They’re low in South Africa. They’re incredibly low in South Africa. They’re low in the United States. They’re low in Britain. They’re low in Europe.

And that’s very deliberate policy because markets can’t stand to spend too much on labor costs. So, that orientation has to shift, number one.

Number two, we need new financial institutions. And I just wanted to get on to this talk about replacing the dollar. And I think replacing the dollar is to take us down a blind alley, essentially.

It’s not the dollar that’s the problem. You’re not going to fix the dollar by having the Chinese currency or European currency or the Sudanese currency or whatever.

And the way to fix the dollar is to change the system. And I was so excited when the President of Kenya spoke to Macron’s meeting recently. What was it called? It was on the Internet in the new institutional architecture he called for at this conference convened by Macron on the 23rd of June.

And he said this. We need to hammer out in this Paris agreement and need a new financial mechanism to deal with climate change that is not controlled by a shareholder or is not subjected to the interest of any one country.

This new mechanism, he said, would be akin to a global green bank and should be funded by green taxes and levies applied globally.

And this could include, he argues, taxes on financial transactions, which is the Tobin tax, fossil fuels and levies on shipping and aviation, which would generate, according to the World Bank, something like 60 billion dollars in revenues every year. Now, this is a radical proposal.

And I think he’s on to the right case because he’s arguing for an institution independent of China and independent of the United States, because ultimately China will also use that power of her currency to enforce, to serve her own interests naturally.

And this brings us back to what Radhika mentioned earlier, which was Keynes’s proposal. We need to remember that Keynes was defeated heavily at Bretton Woods.

The Bretton Woods agreement that emerged was not Keynes’s. It was Harry Dexter White’s agreement. And he knew, he understood that by making the dollar the key currency that actually he’d been, that killed him, actually. He came home and died soon after.

So, but what President Ruto is talking about is something independent of the interests of any country that would serve just like a commercial bank and the central bank, just as the central bank operates relative to the commercial banks.

They clear transactions overnight. So if you’ve built up, if you’ve lent out a mortgage of 300,000 pounds in this bank and that bank has had 300,000 pounds deposited in the bank, this is going to cause imbalances between banks.

And the role of the central bank is to clear those imbalances overnight and to enable the banking system to thrive. Keynes went further and argued that there should be penalties for countries that build up surpluses and there should be penalties for countries that build up deficits.

The United States has the biggest trade and capital account deficit of all the countries of the world. It should be penalized for that, right? China has the biggest surplus. It should be penalized for that.

And it has a surplus because it’s oriented its economy and hasn’t invested enough in its own people. And I know that’s changing. And Radhika, please help us on that.

RADHIKA DESAI: Well, yeah, no, I’d love to love to come in exactly here. So you raise a number of really key points. There’s a substantial agreement between among us, but probably a couple of points of disagreement as well.

So first of all, I mean, I agree with you that at the end of the day, that it’s not the issue of the dollar. I mean, if the dollar was the United States’ currency, just as the rupee’s India’s currency, nobody would have a problem.

The problem is that the dollar is not that and therefore it’s imposed on the rest of the world. And this is done precisely by the very financial system to which you two object. So I think that’s our agreement on that.

Now, I also wanted to clarify that, yes, Keynes was defeated, but the defeat was a political defeat, not an intellectual defeat. And the principles of the new system that we will have to have, for example, you just mentioned that the United States is the biggest deficit country. It has the biggest current account deficit.

The system that the U.S. has created relies on the systematic generation of imbalances. Keynes’ system relied on precisely discouraging imbalances and encouraging a balanced system of trade, financial flows, etc.

And of course, the other big difference is that the U.S. system relies completely on the most unproductive types of financial flows, whereas Keynes was determined to focus the financial system both at the national level and such as it was at the international level in the form of the International Clearing Union to focus on increasing productive capacity in every country.

So in that sense, I think those are the principles to which we need to go back to.

Now, I think this is a good segue. The points you made about China are a good segue into our next question, which is about China.

So let me just say that, I think you’re absolutely right that, it may have been that between about the middle of the 1990s and the middle of the 2000s, there was a certain extent to which we heard a lot about China’s exports.

But you have to remember, China is a huge economy and the proportional reliance on exports of the Chinese economy has always been exaggerated, even for that period.

And then what you got was, you saw after the 2008 crisis in particular, you saw the ability of the Chinese authorities to turn this massive economy on a dime. So immediately, they realized that even their relatively limited reliance on exports was now in danger with the crisis in the United States.

They immediately engaged in a massive investment boom. And that really has helped the Chinese economy.

And as that boom petered out, because you can have only so much investment in one big boom, they have since then followed the policy of allowing wages to rise so that, you are right that, of course, Chinese wages could be higher, but they have risen quite substantially over the last decade or 12, 14 years.

And so much so that there are now industries that can no longer thrive in China, they are now in the old sort of the wild geese pattern, they are moving down to other lower income countries, Vietnam, we are being told is one of the major beneficiaries of this, and there will be other countries that will also benefit.

And now, that increased focus on domestic consumption, which I agree with you is important, has been formalized in the so-called dual circulation model.

And the dual circulation model involves an understanding that domestic demand has to be a much bigger stimulus to growth in China. But at the same time, not neglecting foreign engagement, whether it is in the form of exports or investment.

And the reason is, I think the Chinese use foreign investment and export strategically. They want their companies to produce at world market levels of quality, and so on.

That little exposure ensures that the production remains effective. But at the end, they also take investment as a way of expanding the capacities of the Chinese economy. So this strategic external orientation is also very good.

So China is actually already on that path.

And I would say with President Xi’s declared ambition to create a moderately prosperous society, the focus will be on Chinese internal demand.

But I totally agree with you that in the rest of the world, wages, incomes of ordinary productive workers, whether they are employees, informal sector workers, or petty producers of, peasants, and so on, incomes are a problem.

And the overall financial system, which we have today internationally, which is supported too much by internal, by the internal laws and economic policies of too many countries are the problem.

Today, if countries want to develop, they will have to not just partner with China, they will have to learn from China, that you need to have something like the sort of socialist economy China has, otherwise, going down the capitalist road is not going to work.

And just one final point before we go, relating to our last question, the whole point of the IMF and the World Bank and the current financial system, the reason why it operates as a instrument of imperialism, colonialism, whatever you want to call it, is because it functions to pry open non-Western economies to service the need of first world economies and particularly first world corporations to supply them with cheap, to serve as markets and investment outlets, safe markets and investment outlets, which means they must always not have capital controls.

So that means they are giving up their one major way of controlling, having policy autonomy.

China has very substantial capital controls, that’s right.

And in fact, the importance of capital controls was underlined, the importance of capital controls was underlined when in the 2000, in the 1997-98 financial crisis, because the countries that suffered the most were the ones that had recently lifted capital controls.

Meanwhile, Taiwan, India, Vietnam, China, all the countries that had capital controls.

So anyway, the point I’m just trying to make is that they pry open these economies, supply cheap labor, supply cheap goods and accept commodities and accept capital, but on the terms of the first world.

So essentially, it means that third world countries cannot develop. This is not the way to develop. The way to develop is precisely to control flows of capital and flows of trade and to invest in your own country’s capacity to produce.

So with that, maybe I can just pose the next question, is China putting third world countries in a debt trap? Michael, do you want to go first?

MICHAEL HUDSON: Well, the only comment that I have on that is that China has not insisted that other countries impose austerity on their economy. It doesn’t have conditionality for its loans.

China has been developing the infrastructure of these countries in a way that helps their own countries develop and their mutual trade with each other, not dependency on the United States.

So the whole purpose and the aim, as you just pointed out, of China’s loans is different from the IMF loans. And if you look at what is the purpose of these loans, what’s the difference?

Well, you see that the system of Chinese lending is different from the US dollarized system. And the United States is trying to say, well, we want China as a creditor too. We want other countries for the debt breakdown to put China in the same page as the dollar bondholders.

And it’s a completely different system, not the same thing.

RADHIKA DESAI: Thanks, Michael. Anne, did you want to add anything?

ANNE PETTIFOR: I mean, I don’t think that they’re setting a debt trap, but I do think there are big dangers with China’s lending. And that’s because China is desperate to get its hands on scarce commodities, essentially, but also land.

Africa is the site of immense competition between the countries of the Middle East and China for this huge, vast quantities of land there are in Africa.

And buying it up cheaply, cheating local chieftains and ordinary peasants of the value of their land, essentially, because of this urge to have these resources.

So you saw, for example, and I think there’s a risk of corruption also associated with that.

So if you look at Ghana, when there was even the rumor of oil, offshore oil supplies for Ghana, money from China rushed into Ghana.

I remember visiting Accra at the beginning of that boom, and house prices in Accra were as high as they were in London. It was quite extraordinary.

So my friends, Ghanaian friends, were finding it impossible to put a roof over their heads. Now, that’s a function of the global flow of capital.

I mean, globally, residential housing is now a global market. It’s not a national market or a local market. It’s a global market. Any money from anywhere can land on or could be aimed at a finite resource like land or property. And that happened.

But that happened most particularly to Ghana at the beginning of what was seen to be an oil rush.

So I think there isn’t a conditionality, but there is such a desperation for China to get her hands on these resources and, of course, global competition for those resources that there is a risk of being able to buy off local elites in order to have access to those. That’s my only concern.

But on the whole, I’ve seen that China doesn’t impose the kind of imperialist conditions that we’ve seen from the IMF and the World Bank. The deeply, deeply reactionary and old-fashioned and out-of-date economics imposed by the IMF and the World Bank.

And indeed, countries of the North.

RADHIKA DESAI: Yeah, and I just like to say, well, thanks for that.

And on China and whether China sets a debt trap, I mean, basically, I think one has to understand that this whole discourse of debt trap diplomacy is actually emerging as a way of muddying the waters of the discourse on the third world debt crisis, because the Western countries themselves essentially want to be repaid the full amount and essentially want the Chinese to take whatever haircuts that they have to take.

And I think in return, the Chinese are saying that, folks, that’s not going to work. We are willing to participate in any kind of debt restructuring you like, but everyone has to take a haircut. Bondholders cannot be excepted. The IMF and the World Bank cannot be excepted.

So that’s the first thing.

Secondly, I think China actually invests in long term investment, provides long term patient infrastructure capital. It’s actually not true that they only invest in resources.

They are investing in manufacturing in third world countries as well. And I would say, by the way, and that you should look at the figures more closely.

But the last time I looked at the figures, the countries and agencies that were buying land and resources, the pension funds of first world countries and certain agencies, for example, Indian capital going out and buying land were proportionately much greater.

And I think that this issue has to be examined more closely. I think even if China wanted resources, I think China has the ability to get resources from mutually beneficial deals with third world countries that are far superior to anything the West has ever done.

So I just like to point this out. And I think we should probably be closing because we are nearly at one hour.

I think we’ve talked a lot about what the relationship is between the debt crisis and the dollar system. So I think we should skip quickly to the final question, which is what is the way out?

And as a segue into what is the way out, I’d simply say that, Anne you were talking about the imposition of austerity via the mechanisms of debt and so on.

And the fact of the matter is that, sometimes I like to put it to my students, explain it to my students like this. You know, if you owe money, there are two ways of repaying.

Number one, restrict your consumption, which is essentially a punishment to yourself, or increase your capacity to earn. That is an investment in yourself.

The second one would be far better for everyone. The creditors would be repaid and the debtors would not suffer.

But the fact of the matter is not only does the current world financial system dominated by Western financial institutions, particularly US financial institutions, not only does it lend for unproductive purposes, but it actually in the process denies by imposing austerity, by restricting and putting policy conditions and so on.

It denies these countries the capacity to make money, to expand their productive capacity, thereby lightening their debt load, because that will be the result of the expansion of productive capacity.

So this is the miserable, punitive, miserly, and financial system that we have. And that is essentially denying the possibility of development and essentially killing off people, killing off economies.

So the question then is what is the way out? And Michael, I think you wanted to go on this one first. So please.

MICHAEL HUDSON: Yes, I wanted to sort of set the scope of what we’re talking about. The advocates of today’s financial colonialism say there is no alternative.

And their whole philosophy of development is to say that we’re all for central planning. American neoliberals are for central planning by Wall Street and by the financial sector.

Financial imperialism wants to take planning out of the hands of government and put it in the hands of the financiers. And obviously, this is what the whole fight of the British countries is about.

And we’re in a position today, much like 1944 and 45, which is why we’ve all been talking about that for the last hour. We’re really creating a new system, the system that was not created in 1944 and 45.

This is the first time, and it’s taken over 75 years to actually develop. How should an international financial system be structured if it’s going to help everybody? We’re asking that question.

That is not the question that the World Bank and the IMF and the US Diplomacy and the European Guard talk about. They really don’t believe there’s an alternative.

So we’re watching a new alternative being created right now.

And the whole idea is to free the global majority from the debts that would hold them and lock them into colonialism, just like Haiti got its nominal political independence, but owed France so much debt that it never could get out of it, or Greece owed so much debt after 2015 that it couldn’t get out of it.

So we’re really dealing almost with ideological imperialism and it’s the intellectual control over how to think about what an ideal or workable alternative structure become. And China has pointed out, well, if we’re going to have this discussion, we have to realize that all these countries have different political systems.

Obviously, there has to be some new means of settlement. A new system won’t work until they get rid of the existing debt overhead.

You can’t have a new system and still have governments having to pay the accumulation of debts, mainly compound interest, that’s been in the past. There really has to be a break. And the break of an intellectual system and the policy is a break from having to pay these debts.

That’s why we’re focusing on who to pay the debts. And obviously, as long as the foreign debts are handled along the current relations, then the countries are going to have to impose austerity, just like Germany imposed austerity in the 1920s to try to pay its foreign debts.

It doesn’t work. If a country’s told to destroy its economy and make itself less able to pay its foreign debts in the future in order to pay debts now, there has to be, in principle, a way of wiping these out.

So what we’re really talking about is a kind of constitution of principle, the Bill of Rights for debtor countries that would shape the new system as really their kind of America’s Revolutionary War.

So the problem then is to outline, we’re talking about a remedy. So the remedy of the current problem is you begin with a debt cancellation that needs to clean the slate for any kind of a new system.

You need to renationalize basic utilities that have been forfeited to foreigners. And you can do this under local law.

What foreigners wanted, as Radhika pointed out in the very first statement today, they wanted the resources of the colonies. They wanted the raw materials and the mines and the land.

All of this can simply be fixed with a rent tax. You can tax away the raw materials rent and the land rent, and that’s all under domestic national rights.

So that would not only free the country from foreign debt, it would free them from the foreign ownership that has carved out the control of basic infrastructure away from government control, away from the government’s ability to provide basic services on a subsidized basis like the United States and Europe did.

So the tax system has to be part of the reform of the debt system. And that requires a whole economic analysis of what is a country’s ability to create an economic surplus.

And that’s really, you need a national accounting system to reflect these ideals. So we’re talking about something much more than settling the debt problem. We’re talking about settling the whole financialized economic structure that debts have put in place.

ANNE PETTIFOR: So sure, I mean, I have to agree with Michael that actually it is cheering and it is optimistic that we are talking about new systems and that hasn’t been the case for a while.

It’s exciting to hear of the alliances building up around China and so on to discuss replacing the dollar.

However, there is another way in which we can deal with this American imperialism and that is protectionism, authoritarianism and the rise of fascism.

And here I am at Polanyi. Polanyi was right that the whole notion which we have today of a global market in capital, the shadow banking system, governing the world is a utopian notion, right?

And it would lead to so much annihilation of human civilization, the ecosystem that society would react and demand protection. And that gives the rise to authoritarianism.

And I’m afraid it’s very exciting to see Lula elected as president of Brazil but he cannot get a thing through his Congress. He got a single item of policy through his Congress because of the far right domination of the Congress.

We look around the world and we see authoritarian dictators pulling up the protectionist walls.

Now, I’m not against all forms of protection but from a capitalist point of view, from the point of view of this Soviet style capitalism, it is disastrous because that will bring down the dollar.

That will defeat the system. That will, fascism will deal with this form of utopian capitalism.

So, I think while we must be encouraged by the discussions that are happening, we must also be very alive to the, I mean, I’m watching my own country, Britain, so-called home of liberalism and parliamentary democracy.

We’re being read now by a very far right government which is overtaking our institutions, our broadcasting institutions, our health services, doing everything it possibly can to break down, if you like, the liberal democracy on which Britain is based.

And it’s terrifying to watch because it is, you can see the rise of fascism in some of our political leaders.

So I don’t wanna, I know this is not a cheerful way to end this podcast but I just want to warn us that, and I want to warn if you like, hyper-capitalism, that if you go along that road of actually treating countries in this way, you are going to get fascism as you did in the 1930s.

RADHIKA DESAI: Yeah, I think, Anne, you’re absolutely right to remind us of Polanyi and I think you’re absolutely right that he exactly, he said that when you have this kind of hyper-liberal system and of course, as you rightly pointed out, it’s no longer even liberal, it’s some kind of risk-free government guaranteed capitalism but let’s leave that aside.

But what it does is it imposes these relations, liberal relations on the rest of us. And in that situation, you do face, humanity faces a choice between fascism and socialism.

And I think that the point is that yes, fascism is, I completely agree with you, it’s a danger. I mean, look at India, for example, right now. I mean, there we have, just kind of full-blown fascistic type of government, fascist type of government, whatever you want to say.

So, and of course we had Bolsonaro in Brazil and you still like, as you say, the Congress is packed with right-wing people in Brazil today and so on. And I would say that the fascism is rising across Europe.

The West is allying with fascist forces in Ukraine. I mean, the things, the contradictions are multiplying and that’s really why we need to raise the whole issue of socialism today.

Because I think the only sensible way out of this is actually, because once liberalism fails and it’s bound to fail, it’s too contradictory, then you’re faced with the two forms of non-liberal societies or anti-liberal societies.

One is fascism, the other is socialism. And you have to say that socialism is the way forward. You cannot have authoritarian fascism.

So I thought, I mean, first of all, let me say, I think this has been a wonderful discussion. Again, thank you very much to everyone, to Paul and of course to our audience.

I thought I would just end by making the following remark.

You know, somebody mentioned planning just now. I forget which one of the two of you it was, but you know, one way of thinking about the system today is that, all financial systems are a form of planning. There’s no doubt about it.

So the real issue is, do we have planning for broad-based prosperity and the development of productive forces for equal societies, for ecological societies, for prosperous societies?

ANNE PETTIFOR: And for managing the climate crisis. And exactly, for ecological and attacking the climate crisis and dealing with the other two ecological emergencies as well, the loss of biodiversity, pollution, all these things.

So do we have that kind of planning or do we have the kind of planning we have right now, which is essentially financial planning to subordinate the whole world to the big corporations of a small number of rich countries, not even the rich countries as a whole, just the big corporations of these rich countries.

This is the choice before humanity. This is the choice that we confront when we are trying to face, when we are trying to answer the question, what kind of financial system do we have?

Because if there’s one question that the current debt crisis is raising, current debt crisis of the developing world, the third world is raising, it is this question.

And so I think we thought we would leave you with that question. Thank you very much for joining us. Thanks to Anne for joining us.

Hopefully we’ll have you back soon on another exciting set of discussions like this. And so yes, goodbye until another fortnight. Bye-bye. Goodbye. Cheers.