Friday April 12, 2024

The global debtocracy

By Ammar Ali Jan
May 24, 2017

The 205 percent increase in Pakistan’s current account deficit over the fiscal year has raised much debate about the alleged ‘economic recovery’ under the Sharif government.

Since the deficit has increased to $ 7.8 billion (from $2.38 billion in the same period last year) as a result of debt servicing, as well as declining exports and remittances, it is expected that Pakistan will soon need a massive bailout from international financial institutions. According to Moody’s Investors Services, Pakistan’s external debt is expected to reach a staggering $79 billion at the end of the current fiscal year, an increase of over $ 4 billion from December 2016.

It is clear that Pakistan has not moved beyond the debt trap, which means the promised economic turnaround will remain a distant dream, while ordinary people will continue to suffer through increased taxation and hopelessly inadequate levels of investment in health and education. Yet, much of the debate on Pakistan’s economic woes remains restricted to squabbles among experts on the exact figures for the economy, or the potential policy changes that can remedy the situation. What is completely missing in the analysis is the political dimension of the debt crisis – ie its relation to the existing power structures.

Let’s look at the political significance of debt accumulation in the global context. Credit is central to the functioning of capitalist economies, not only to kick start the production process, but also to deal with the lag between the production of commodities and their consumption in the market. It is also the purest revelation of the raison d’être of the capitalist mode of production, where making more money out of existing money trumps all the rhetoric of innovation, efficiency and rationality.

While power and politics on economic issues remain obfuscated during times of economic wellbeing, they manifest themselves with a vengeance in times of economic distress. In a nutshell, a financial crisis results from the perceived inability of existing investments to generate enough revenue to recover costs, including debt repayments, thus leading to an economic downturn coupled with accumulating debt. Behind the complex arguments on economic reforms, institutional restructuring and stimulus packages, a more sinister question lurks: who will bear the costs of the accumulated debt – state institutions, banks or ordinary people?

The resolution of this question exceeds the purely scholastic debates on maximal efficiency and brings us onto the political terrain, since it is the accumulated power of each group that decides who will pay. For example, the Great Depression of 1929 was resolved in the aftermath of the Second World War with the establishment of welfare states across Europe. This was not simply a question of charity or sound economics on the part of the Western establishment. It was a result of increased militancy of organised labour in post-war Europe, with the ‘red threat’ of communist revolutions dangling over the heads of European governments. It led to a compromise between capital and labour, with job security and social welfare guaranteed to the working class in order to integrate unions within the ambit of the capitalist system.

One can compare the benefits won by organised working people in the post-war period to the current financial crisis that hit the world in 2008. Since the 1970s, the power of organised labour has been crushed by conservative leaders, with Margaret Thatcher and Ronald Reagan at the helm of this ‘neoliberal’ revolution. The neoliberal policies resulted in greater power for corporations to dispose of labour by moving capital to the Third World, curtailing the welfare state and making real wages stagnant. Unlike the 1940s, the shift of financial and political power in favour of the elites meant that working people were not in a position to fight back to demand a better deal.

The financial crash of 2008 was primarily a result of the lending practices of the major financial institutions in the Western world, including a complex set of financial instruments formed to benefit from speculation in the housing bubble. Once the bubble burst, the anticipated bankruptcy of the financial institutions brought the entire global financial system to a standstill. The result was an intensive campaign of scaremongering launched by the global media and the US government under George Bush, claiming that the state had to intervene to save the banks, leading to a $700 billion bailout to save the same banks whose recklessness had caused the financial crisis. Yet, in the US and in Europe, working families were told they would have to sacrifice, tighten their belts, work harder and be patient!

By using taxpayer money to bail out financial institutions, the global elites were accused of practising “socialism for the rich”, as the losses were socialised and the profits remained in private hands. Such a situation was even more palpable in Europe, where countries such as Greece were permanently trapped in unsustainable levels of debt. Rather than instituting any meaningful structural reforms to hold the elites accountable, the international financial institutions demanded that the “Greeks” tighten their belts. This meant increasing taxes on essential commodities, cutting spending on health, education and pensions and reducing minimum wage. In other words, this was a total assault on the country’s social fabric to pay for the corruption of the elites.

In 2015, the Greeks elected Syriza, a party of the Left that called for an audit of the debt and asserted that the repayment of an impossible debt burden was less urgent than the social catastrophe engulfing Greece. Yet, Greece’s lenders closed ranks to thwart the electoral mandate of the Greek people, and threatened dire consequences for the country if it did not follow the failed prescriptions of privatizations, austerity and debt servicing. In scenes worthy of a Greek tragedy, Greek Prime Minister Alexis Tsipras accepted the terms of the lenders, despite the overwhelming referendum vote by the Greek people opposing the agreement, thus continuing the dictates of the financial institutions. Such episodes of brazen use of force by lenders suggest that democracy is being replaced by ‘debtocracy’, where those holding the debt of a country become more important than the ‘nation’, ‘the people’ or any other such term used to designate popular sovereignty.

Pakistan’s situation is unique and complex in many ways, and we do not have space to explore it here. Yet, the basic questions we must ask about ‘our’ debt burden remain the same. Who took on such high amounts of debts, where were they spent, and who will repay them? By asking such questions, we transform the problem of debt from a technical issue of economics into a political question about democracy and priority-setting. This means challenging the notion of the ‘we’ that takes loans and insisting that the loans were taken by ruling elites, whether civilian or military, without a system of accountability for their deployment.

Moreover, these loans did not result in any meaningful structural changes at the institutional level that could lead to substantial revenue generation through such funds. In fact, they were used to ensure that the basic infrastructure of the state, particularly with immense subsidies for the elites in the form of tax avoidance, were not touched. The Pakistani elites have been able to play their international donors by threatening an imminent collapse in case of a liquidity crisis (no one wants a strategically located nuclear power to collapse), while ensuring that the public remains disorganised so as to remain irrelevant in such negotiations. The result is that, while there remains enough money to build housing societies and new malls for the elites, the Pakistan government repays debt by extracting resources from ordinary people through increasing general sales tax on basic commodities, spending cuts in healthcare, education, sanitation and now even drinking water.

Thus, debt should be not be viewed as simply a technical issue, but a class project in which ordinary people become the guarantors for the risks taken by the elites. All around the world, the question of debt repayments has become a central part of political discourse, with a resurgent Left resisting the imposition of debt obligations on the working class. In Pakistan, there is a dire need for a political force to demonstrate the will to hold the government accountable for its (mis)use of loans acquired in the name of its citizens.

The future of democracy depends on the crystallisation of such a political will that breaks the monopoly of anonymous bureaucrats on financial matters, and turns it into an arena for popular deliberation.

The writer is a doctoral candidate at the University of Cambridge and a lecturer at the GovernmentCollege University, Lahore.