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All illegitimate debts should be cancelled, but we must remain aware that the difficulties are real. At present, there is no government that is really ready to resist.”
Anis Germany interviews historian and political scientist Éric Toussaint on international debt and it’s use in progressing an extractavist agenda across the globe.
The present interview with Éric Toussaint aims at constructing a common position about debts and their payment. It also helps to understand the part played by debt and its mechanisms in the extraction of resources of the South by the North at an international level, and in the transfers of wealth from the poor to the rich within each society.
The interview is not limited to Lebanon, except insofar as the Lebanese situation can be seen as a model of what is happening in many other places in the world and other times in history.
For close to three years Lebanon has experienced a severe economic downturn, the consequences of a failed banking system, a continued collapse in the value of its currency and triple-digit inflation. Some see the crisis as a result of corruption, of excessive public spending and of an accumulated sovereign debt while others insist that having stopped paying debts in foreign currency since March 2020 has triggered and aggravated the crisis. In spite of the prevalence of these two narratives, the fact is that banks have failed and that all is done to force the burden of the losses onto the Lebanese people.
Anis Germany: You describe debt as an arm against public property and assert that capital lives at the expense of the sovereign debt it uses to eliminate the most basic forms of social-democracy and to force countries to liberalize their economies, to open their markets and to impose austerity on their own populations. This is indeed what we have experienced here in Lebanon, in Egypt and in many countries of the South. Can you explain how the mechanisms of the debt works, and whom they serve?
Éric Toussaint: The two dominant narratives on the Lebanese political scene brings to mind the current situation in Sri Lanka, where the focus is on corruption, which is of course odious, dangerous and outrageous. Yet we cannot but observe that it is impossible to reduce crises of the scope of what is happening in Lebanon, Tunisia and Sri Lanka to either corruption or an incompetent political class. This approach is used by the global capitalist system to broach corruption as the source of the problem and an agreement with the International Monetary Fund as the solution. Whereas of course the IMF and the economic and social model it defends and perpetuates are the cause of the problem and not merely a symptom. The IMF can thus in no way be part of the solution.
A classical analysis of political economy, particularly that of Karl Marx and Friedrich Engels (but also that of Adam Smith) explores several kinds of primitive accumulation. In Das Kapital, Marx asserts that public debt, among all the various forms of primitive accumulation, plays a significant part and partly explains the victory of the capitalist system over former modes of production. Indeed you cannot account for the European hegemony in the capitalist globalization process from the 16th century onward, or its ascension over other continents and other economic powers, including China in the 19th century, without investigating the debt issue.
First we have to be aware that debt is one of the mechanisms that made it possible for ruling powers and their financial capital to extract a large part of other powers’ wealth, notably that produced in the gold and silver mines in Latin America in the 16th and 17th centuries, and to boost Western Europe’s dominance. Such accumulation, bolstered by the industrial revolution, made it possible for Europe to develop a capitalist economy and rule over the rest of the world as from the first half of the 19th century.
I mentioned China because it was almost as powerful as all the Western European countries together until the early 19th century. But it withered because of foreign borrowings which gave financial powers a hold on China, until they eventually used force (the famous “opium wars”) to claim part of its territory, ownership of which was transferred to its creditors. In her book The Accumulation of Capital, published in 1913, Rosa Luxemburg developed the analysis of events in India and China that Marx had started working on before his death in 1883.
Next, in the 19th century, the arm of debt was used by financial capital, which dominated international economy through the major lending banks in London, and to a lesser degree in Paris, then Berlin. Odious and unfair loans were granted to borrowers in various regions of the world, such as Egypt and Tunisia, that were part of the Ottoman Empire at the time. Loans were also granted to the governments of the Ottoman Empire in Istanbul, which eventually led to its downfall. In my book The Debt System, which was translated into Arabic, I explain the history of Egypt’s borrowing during the first half of the 19th century. The khedive (i.e. head of state) had imported the most recent British industrial technologies while refusing to sign free trade agreements with Britain or to borrow abroad. He exploited the Egyptian peasant class, industrialized his country in a rather exceptional way, and exported goods while importing relatively little and without resorting to external debt. However, from the 1850s, French and British creditors managed to persuade his successor to borrow massively in order to develop the Suez canal and increase the production of cotton, which burdened the country with foreign debt from the 1870s onwards and completely subjugated Egypt to its creditors. Rosa Luxemburg devoted many pages of analysis to the subjugation of Egypt and to the exploitation and capital accumulation by the ruling imperial powers of the time. Such subordination of Egypt made it possible to drastically weaken the Ottoman Empire as from the 1870s and for Britain to completely control Egypt from 1882 onward. In my book I also analyze France’s hegemony on Tunisia, and the transformation of this Ottoman province into a French protectorate from 1881 onward. Such conquests occurred through subjugation achieved by external debt and the arbitrary conditions that make normal repayment impossible and give creditors the possibility to wage war on debtor countries to recover their loans by force. The Ottoman Empire did not experience the same fate as Egypt and Tunisia, it was subjected later, a direct military attack would have been much too difficult. In fact the Ottoman Empire did not fall directly into the hands of European powers, its defeat and final disintegration only occurred in the wake of the First World War. The regime of Kemal Atatürk (founder and first president of the Republic of Turkey from 1923 to 1938) allied with Soviet Russia complicating the Western powers’ relations.
On the other hand, Japan is a typical instance of the part played by external debt as an instrument of domination. In the early 19th century, Japan was a secondary economic power compared with China, but refused to borrow abroad while going through a bourgeois revolution based on internal accumulation, called the Meiji revolution. The exploitation of lower classes by ruling classes resulted in the transformation of Japan into an imperial power that invaded Formosa (Taiwan today) and South Korea – which was a Chinese provinces at the time – at the end of the 19th century and the beginning of the 20th century, as well as the Philippine islands and part of China during the Second World War, before it was defeated. Such events show that a minor power succeeded in becoming an imperial power because it steered free of foreign creditors’ domination. By contrast, China, which might have achieved considerable development as shown by several authors, failed in this because it accepted foreign loans and made free trade agreements.
When we analyze the debt system, we have to take into consideration the role of local ruling classes. Will they favour their country’s own development as did the Khedive in Egypt during the first half of the 19th century? Or will they rely on foreign lenders to enrich themselves, as did the ruling classes in Egypt, Turkey and Tunisia during the second half of the 19th century? That foreign creditors gain domination can only be accounted for through the cooperation of local ruling classes. Lebanon is a typical instance of this. The Lebanese ruling class had no project for industrial development, or the conversion of a farming product such as cotton into textiles, or more diversified industrial productions.
From the 19th century until today, this Lebanese class has specialized in a specific section of the international division of labour and capital, namely trade and finance, and has played a secondary and subordinated part. Such dependence does not mean it did not get rich, quite the contrary, the local ruling class has accepted subordination to the imperial system and its central authorities, and in return has been granted positions where it could get rich either by exploiting the local population, or by exploiting Lebanon’s strategic geographical situation and its position in international finance and trade.
After this reference to the past circumstances leading to the present situation, I can return to the current issues for if we do not understand the historical context, we will keep talking about corruption, and about a political class that cannot position itself within a system, whereas what is currently occurring in Lebanon is integral to the system and lies at the heart of the crises of the global capitalist system.
Anis Germany: In the various examples you mentioned, you have focused on external debt. Is the issue exclusively related to external debt and to the position of the local ruling class towards this debt? Or is it a problem that stems from the operating mechanisms of the debt itself, whether external or internal?
Éric Toussaint: Resorting to internal debt has been mentioned in the economic literature of the Ottoman Empire since the first half of the 19th century. The Bey of Tunis (i.e. the head of state) resorted to creditors within Tunisia, whether Tunisian, Italian, French or British merchants or financiers, who lent money at usurious interest rates. Local ruling classes lending money at very high interest rates for their own profits occurred under the Ottoman Empire from the early 19th century and continued under Western colonial domination and after independence.
Indeed the Lebanese ruling class derives part of its resources from loans to the State, as do other countries in the region. It also invests part of the capital it raises through these various mechanisms abroad, often undeclared and buys Lebanon’s external debt securities in order to make profits in foreign currency as well.
When we describe the debt system, we have to distinguish between the various kinds of creditors. First, foreign private creditors, such as major foreign banks or foreign investment funds like BlackRock. Second, multilateral institutions such as the International Monetary Fund that make profits by lending to countries such as Lebanon and recommend the continued implementation of the neoliberal model, notably by transferring the burden of the debt onto the people. Third, bilateral debts between governments (the most conspicuous creditors are China and members of the Paris Club), who are but a small percentage of Lebanese debt. Fourth, the internal debt created by the local ruling class through local banking institutions.
Anis Germany: The Covid-19 pandemic exacerbated the situation of several economies that already suffered under the burden of their debts, and limited most of those countries’ ability to protect their population against the pandemic as they prioritized paying the service of their public debt. You are the international spokesperson of the Committee for the Abolition of Illegitimate Debts which leads an international campaign to cancel the debts of countries of the South, which you call “odious debts”. The common doctrine is that each country is responsible for paying its debts since it chose to borrow and to spend this money. Can you explain what an odious debt is and why it must be cancelled?
Éric Toussaint :There is a definition of odious debt which is part of the jurisprudence of international law. This definition was elaborated in the 1920s and published in Paris in 1927 by Alexander Sack, a conservative Russian jurist, former professor of law in the Tsarist Empire in St. Petersburg, exiled to Paris after the Russian Revolution. I mention this to point out that he neither was a Communist nor had any sympathy for the Soviets or the Bolsheviks, in fact he was somewhat outraged by the Soviets’ refusing to repay the Tsar’s debts. He analyzed all the litigation he could find on sovereign debts since the French Revolution in 1789, and formulated a doctrine in international law stipulating that in the event of succession or change of regime, previous obligations are transferred to the new regime regardless of the nature of the regime in question – democratic, tyrannical, religious, or popular republican – except in the case of an odious debt. If the debt is contracted against the interest of the population of a State, or against the objective interest of the State – and thus in favour of a privileged minority – and if the creditors cannot prove that they did not know this, then the debt can be described as odious. Thus, according to this doctrine, it is the use of the debt that makes it odious or not, void or not.
In the case of Lebanon, most of the debt has not served the interests of the Lebanese or of the State of Lebanon – if we consider the State to be an actor that must defend the interests of its citizens – but has served the private interests of a privileged minority, whether the political or capitalist class of Lebanon or foreign interests. Moreover, the creditors who lent money to the Lebanese government were aware of this, notably those bankers who made loans to the Lebanese government knowing that part of the money went to the local political class. Bankers made it possible for the local political class to invest part of the borrowed money on numbered accounts in Switzerland, Monaco, London and elsewhere in exchange for loans to the State of Lebanon at high interest rates. If we apply the criteria of the odious debt doctrine, we can prove upon examination that Lebanon’s internal and external debts are odious debts, and therefore void under international law. This is a battle to be fought because simply calling the debt “odious” will not convince creditors to forego payment of the debt. Instead, a government with popular legitimacy can conduct a debt audit with the participation of the citizens of Lebanon, take a sovereign and unilateral decision to cancel odious debts in accordance with international law and defend its position against creditors and gaining international public opinion support.
Anis Germany: How significant is the repudiation of those debts for local economies, whether in Lebanon or elsewhere?
Éric Toussaint : The more we study the history of debt repudiations the more we discover. In 1933,the US President and Congress decided to end the repayment in gold of all public and private debts. Overnight, the US government devalued the dollar by 69% against gold and repaid its debts in dollars only. This is effectively an act of debt repudiation, which was discussed in the US Congress, outraged senators feared that the US would be unable to borrow on the financial markets. This fear was unfounded: the US was victorious, as were the Soviets who cancelled the debts of the Tsarist Empire and the Provisional Government in 1918. History shows that many of the countries that cancelled their debts came out well, unlike the countries that continued to pay. It is true that in some cases the creditor powers resorted to force, but in the end, the countries that resisted won out, and the countries that submitted or did not resist to the end – such as Tunisia in 1881, Egypt in 1882 and other countries that more recently submitted to the terms of the agreements dictated by the International Monetary Fund – had to accept their role as subordinate states to the creditors without succeeding in extricating themselves. These countries suffered from not having the courage to resist.
Anis Germany: The examples you mentioned, such as Bolshevik Russia and the United States, were both great powers when they cancelled their debts. Wouldn’t it take a minimum of military and economic strength to be able to resist the creditors?
Éric Toussaint: Mexico cancelled its debts several times (1861, 1867, 1913), it was invaded by a French contingent of 35,000 men in 1862 to force it to pay its debts. The invasion failed. Between 2007 and 2008, Ecuador, a country of 17 million people that is neither a military nor an economic power conducted an audit of its debt under the progressive government of Rafael Correa, decided to suspend payment of part of its illegitimate debts and scored a victory over its creditors. In 2008 Iceland – a northern country with a population of 350,000 – refused to pay financial compensations of €3.5 billion reclaimed by the United Kingdom and the Netherlands. In contrast, Greece – a country of 11 million people – was humiliated before its creditors in 2015 by its own government. Despite its government’s promises to resist, it capitulated whereas the people demanded that it stand up to the creditors. By resisting, one is not absolutely certain to win, but by submitting, one is certain to lose.
Anis Germany: Are we on the verge of a global sovereign debt crisis? The World Bank estimates that 60% of low- and middle-income countries need to restructure their debts and has expressed concern that many countries will suspend payments in an unregulated manner? Do you think the time has come to engage in debt cancellations?
Éric Toussaint: All illegitimate debts should be cancelled, but we must remain aware that the difficulties are real. At present, there is no government that is really ready to resist, so I expect governments to struggle to finance their debts after internal and external shocks, despite (and indeed because of) their submission to the neoliberal model. In the case of Sri Lanka, the loss of tourist revenue due to the Covid-19 pandemic, as well as the lack of oil resources and dependence on grain imports – which has increased the commodity import bill – have undermined the country’s ability to pay. Ghana and Zambia are both in the midst of a default crisis.
Other countries, such as Pakistan, Bangladesh and Tunisia, risk suspending payments, and only avoid it by contracting new debts in particular with the IMF. So, yes, as the World Bank says, there will be great difficulties. But according to the model it applies with the International Monetary Fund and the Paris Club, the World Bank is not talking about cancelling debts, but rather of restructuring them under emergency aid agreements with the IMF with conditions that will deepen and prolong the neoliberal model, and thus increase the vulnerability of fragile economies. This is the scenario predicted by the World Bank and the International Monetary Fund, and unfortunately it is likely to be so. Therefore, if popular movements such as those observed in Lebanon in 2019 do not raise awareness that the IMF is not part of the solution but rather a source of the problem, then there will be no alternative to governments breaking with this model, in the manner described by the Egyptian academic Samir Amin, i.e. by deciding to distance themselves from a series of mechanisms and agreements that are harmful to the country. But such a stand requires courage.
Anis Germany: Unfortunately, in Lebanon there is no serious opposition to the IMF, rather the IMF is seen as the only saviour to obtain foreign currency financing in the face of the inability to borrow from the markets. So what is the role of the International Monetary Fund and the World Bank in keeping countries in the debt trap and imposing austerity conditions on societies?
Éric Toussaint: They play a central role. The International Monetary Fund waits until a heavily indebted country is in crisis and asks for an emergency loan of a few billion dollars to impose measures to open up economies further, cut public spending and remove subsidies on staples and fuel. It also imposes increases in indirect taxes such as the value-added tax to raise government revenues, which in turn will be used to pay off debts, as well as changes in mining, forestry and labour laws. These measures aim to liberalize, deregulate and privatize economies at the expense of their stability. Therefore, all who say that the Monetary Fund is necessary, and all who cling to the anti-corruption narrative, are either honest but naive, or are complicit with the regime. There are also the economic advisors who present themselves as defenders of the general interest, when in reality they are acting for the creditors. Indeed, behind the International Monetary Fund and the World Bank are the big private creditors, the local and/or foreign ruling class, as well as the main shareholders of financial companies, investment funds or banks, all of whom benefit from the application of the neo-liberal model, and ask these two institutions to impose their doctrines to preserve this model. Therefore, the role of the World Bank and the International Monetary Fund is an essential element to maintain the system of domination.
Anis Germany: If we take a broad view of the situation of the world economy, we see that societies in the South and the majority of societies in the North are suffering. Reports from the IMF, the World Bank, central banks, monitoring centers and NGOs all warn that we are entering a major and long-term global crisis. Public and private debts seem increasingly difficult to pay, inflation is becoming widespread, poverty and inequality levels are at an all-time high, and the World is heading for an environmental collapse to which leaders and authorities refuse to respond. Faced with this tragic scene, what is the alternative political project, or what means are available to change course?
Éric Toussaint: There are two main starting points. Firstly, to act, and secondly, to act according to a clear agenda and strategy. On the first aspect, there is no doubt that a popular mobilization is needed to force governments to take decisions different from those they would take in the absence of pressure and mobilization. But this is not enough and may not change much, hence the second aspect, which is to act according to a specific agenda and strategy. In fact, there is a real need to develop an agenda and act on it. In this case, the programme starts with the cancellation of debts and the severing of ties with creditors. This is the basic condition for a country to regain sovereignty over its own choices, its natural and financial resources, and above all over its future instead of delegating its present and future to creditors. The programme is then completed by each country defining the strategic economic sectors over which the public authorities, with the support of the citizens, must regain control. In Lebanon, the financial sector is considered strategic, and the government must regain control over it, in addition to controlling foreign trade. They must also impose mechanisms to control the movement of capital to prevent its flight and avoid destabilizing the economy and its currency, as well as control the currency. Therefore, we must be ready and ambitious to implement a programme of structural change that includes radical reforms against a capitalism that is deep-rooted.
On the other hand, we must be careful not to fall into the illusion that the adoption of nature-friendly behaviour by millions of households tending towards an alternative economic system would change the course of the catastrophic and tragic development of the planet, as long as big oil companies, investment funds, banks and agribusiness continue to dominate the world economy. We must certainly change what we can around us in our way of life, but without deluding ourselves that this is the solution to save humanity. I recall here what Rosa Luxemburg wrote during the First World War in her book Socialism or Barbarism, because it is more valid today than ever. Firstly because many countries have the nuclear means to destroy all of humanity, and secondly because climate change and the ecological crisis are taking a catastrophic turn. We need a socialist, ecological, feminist and anti-racist world system to address all the problems facing humanity. Therefore, if citizens do not make a conscious choice to break with the capitalist model and move towards another model, barbarism, crises and catastrophy will dominate the future.
- This article was originally published and translated into English by the Committee for the Abolition of Illegitimate Debt (CADTM) on February 26th, 2023.
- Eric Toussaint is a historian and political scientist, the spokesperson of the CADTM International, and sits on the Scientific Council of ATTAC France.
