Full pockets and an empty head

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By GILBERTO LOPES*

Considerations on the issue of public debt

Costa Rica's finance minister, Nogui Acosta, boasts that, for the first time in thirteen years, the government will write off the principal amount of the debt. He suggests that this is “a milestone in the trajectory of consolidation of public finances”. Pay the principal instead of renegotiating the debt and reactivating the economy, which nobody does, except under very special conditions. No serious government does what the government of Rodrigo Chaves, a former World Bank employee, proposes. This is nonsense. But selling national assets to do so is beyond absurd!

The proposal to sell assets to reduce the debt is not just a mistake – which hides the true ambition to buy, at liquidation prices, very profitable businesses –, but the true objective of these proposals, which have little – or nothing – to do with the issue of debt control.

Certainly, the debt problem must be treated seriously, as part of a country's development program, and not subjecting ourselves to unacceptable and painful conditions in order to satisfy the demands of creditors. This makes no sense if the conditions that generated the debt are maintained. Asset sales may pay off something, but nothing significant. In a short time, we will owe the same or more. If we sell national assets to pay the debt, we will, in the short term, not only be more indebted, but also poorer.

 

Debt, a bomb to defuse

A Spanish economist, Professor Juan Torres López of the University of Seville, has been dedicated to the question of debt for a long time. I went to interview Professor Torres in Seville a few years ago and have followed his writings. His texts give rise to the idea that debt is a bomb that must be defused, as in the article published in the Spanish newspaper Public on June 11, 2021.

According to him, the data on the evolution of debt around the world show us that "we are sitting on a bomb that will inevitably explode, if adequate measures are not adopted to defuse it". He was impressed by the debt data that the Bank for International Settlements (BIS), based in Basel, Switzerland, has just released. The accumulated debts in the world at the end of 2020 had reached around 286 trillion dollars, about 3,5 times the global product.

Of that debt, $221,4 trillion was in the non-financial sector: $53,8 trillion in household debt; $83,4 trillion in government debt; $78,6 trillion in non-financial corporate debt. To this must be added 65 trillion dollars from the financial sector.

A year later, that debt had risen to 303 trillion dollars, fueled by the mountain of money injected into economies to face the effects of Covid-19 on companies and individuals, according to data from the Institute of International Finance (IIF), an association of global financial institutions headquartered in Washington. These numbers are serious for their size, but mainly for their dizzying growth, accelerated by the pandemic. According to the BIS, total non-financial sector debt has tripled since 2000.

The analysis of the economy of the European Union (EU) countries is the object of special attention of Juan Torres López. According to Eurostat data, which he cites in the aforementioned article, the public debt of the entire European Union was 12 trillion euros. That of the eurozone countries was slightly lower, with 11,1 trillion euros. This, in his opinion, demonstrated that the “badly named” austerity policies were not serving to reduce the debt, “but precisely the opposite”. Since 2000, he says, the eurozone's debt has increased by 6,8 trillion euros. An amount similar to what they paid, in that period, in interest. In 2020, in the midst of the pandemic, European Union countries had to spend 191,6 billion euros on interest payments. In other words, “in return to the banks that lent them money created almost entirely out of thin air, at no cost to them.”

Just a week ago, with the BBC published a report revealing that there were people eating pet food in Britain and heating their food with candles. A few months ago, we were told that many Britons over 50, unable to pay rent, had to live in shared shelters. Perhaps in few countries have privatization policies and curbing public spending been as effective as in Great Britain. These examples highlight the need to discuss how to deal with the debt problem. This is not a technical problem, but a political one, as we will see.

 

Who are the debt addicts?

Juan Torres López asks some questions. One of them is: who are the debt addicts? It is an article that he published a few years ago, in 2017. Shortly before that, he had published a book with the provocative title Economics not to be fooled by economists. One of the most widespread myths about economic life – he says in his article – is that the enormous debt accumulated in the world is the result of people living beyond their means. Another myth is that “the center-left parties are very lavish when they govern, producing large deficits that grow non-stop”.

He cites as an example the declarations of the then German Chancellor, Angela Merkel, that no State can spend more than it receives. This makes sense in the case of a family, but not in the case of a State, says Juan Torres López. If the State stops spending, it causes a decrease in people's income, which is not the case for a family.

It is, like so many other statements, “a falsehood that is easily contradicted by elementary knowledge of economic processes and data”, says Torres. Economic mistakes have purposes, he says. Debt addicts are not families, let alone low-income families. It is the banks, “because that is the source of their profits and their incredible power, not only financially, but also in terms of media, culture and politics”. When we are told that the banks must be saved, what is intended is to create conditions for them to continue indebting people.

The explanation for this process is relatively simple and clear. We are told that spending-cutting policies should be imposed in order to create savings, reduce spending and lower debt. But what is being sought, says Juan Torres López, is the opposite: reducing the ability to generate own income so that banks can start granting loans again, thus creating new debts. The proof of the farce is that the debt increased more “precisely in the period of implementation of policies of social cuts and bank rescue”, which the financial authorities affirmed to be indispensable to reduce the debt.

 

privatize to pay

On December 1, Brazilian economist José Álvaro de Lima Cardoso denounced the public debt as an “infinite mechanism for draining public money”. José Álvaro de Lima Cardoso was referring to the limitation of spending to meet social needs imposed on the Brazilian budget after the coup d'état against President Dilma Rousseff in 2016. A measure similar to that adopted in Costa Rica, through a law passed without the need for a coup d'état. In Brazil, government social spending was also frozen for 20 years, resulting in a severe economic recession and disastrous social outcomes.

In 2004, in the midst of a new international financial crisis, Ernesto Gutiérrez Betancor published an article in the UNAM magazine Social Concepts (reproduced by various media) entitled “The external debt, who owes whom?”. There he pointed out that “in recent years, the living conditions of the majority of the population in Africa, Latin America and Asia have deteriorated drastically”. “In sub-Saharan Africa, for example, average per capita consumption is lower than it was in 1970. The income of most Latin Americans is also 20% lower than it was in 1980. This desperate situation is often presented as the product of corruption, incompetence or inefficiency”.

But, says Gutiérrez Betancor, the statistics show a very different reality. “In 1999, the 41 heavily indebted poor countries (HIPCs) transferred $1,68 billion more to the North than they received. In the same year, the so-called 'Third World' countries as a whole made a net transfer of resources of 114,6 billion dollars”. Despite this, a debt that in 1982 reached 780 billion dollars had risen to just over 2 trillion dollars less than 25 years later.

At the end of 2019, the total external debt of middle and low-income countries (not at all the so-called Third World, or “emerging markets”) reached 8,1 trillion dollars, according to data from the World Bank, the institution responsible for the debt and poverty reduction programs, where Rodrigo Chaves worked. As early as the 1970s, Robert McNamara, a former Ford executive, US secretary of defense during the Vietnam War, and later president of the World Bank from 1968 to 1981, warned that “the average rate of increase in debt after the 1960s XNUMX is about double the growth rate of export earnings, with which indebted countries must service this debt. This situation cannot continue indefinitely.”

When it became clear that underdeveloped countries would not be able to fulfill their commitments under the agreed conditions, the World Bank and the International Monetary Fund proposed the so-called “structural adjustment policies” as a solution. The fundamental measures of these policies are the reduction of public spending and the privatization of state-owned companies. Forty years of these policies resulted in the acceleration of a process whose unsustainable consequences McNamara warned against 50 years ago.

In Costa Rica, the government is proposing the privatization of Banco de Costa Rica, one of three state-owned banks. The finance minister boasts that, for the first time in thirteen years, the government will write off the principal amount of the debt. But the secret is not there, but in the sale of the bank, an exceptional deal, for which potential buyers (including Colombian banks) have always had their eyes turned.

“How much would be amortized with the sale of Banco da Costa Rica?”, I asked an economist who follows these processes in the country. “There is no set amount. It is estimated at around 1,85 billion dollars. It is enough to pay interest on the debt for six months. But this is a purely book value. The economic value of the bank is much higher. For the country, its social value must be considered, which includes the training of its personnel – around four thousand people – the value of its facilities, the various services it provides to society, not only financial, but also the handling of documents, such as passports or driving licenses”.

“What does it mean to be very efficient for a private bank?” he asks: it means making as much money as possible. This is achieved by reducing personnel, salaries and services provided and, above all, by increasing the interest rate on loans, which today is 8,4% per annum in public banks and more than 15% in private banks. An extortion for the country!

On the other hand, there is no proposal to eliminate or reduce the various tax exemptions that favor investors, particularly in the free zone regime. Among the measures for transferring resources to banks is a bill – negotiated at the request of the financial sector – to allow 30% of savings from the Mandatory Complementary Retirement Regime (ROP) with debt problems to be transferred to creditors. A measure that will affect them later, by reducing the amount of their future pensions, in addition to weakening the pension system.

In its “Medium-Term Debt Strategy”, published last April, the Costa Rican Ministry of Finance stated that the central government debt is equivalent to 66,46% of GDP. He added that, “thanks to the dynamics of revenues and the containment of expenses, it seems that the country is moving towards stabilization of public finances”. Nothing is said about social conditions, structural unemployment, the growing concentration of wealth, or the systematic assault on efficient public institutions – banks, telecommunications, energy, health, education, roads, airports, ports – whose privatization measures have weakened public services, without any country project that offers a development model to reduce debt or poverty.

For years, the promoters of these projects have been traveling the world with full pockets and empty heads. They try to sell us the old ideas that got us into this crisis as a solution to our problems. For that, in Costa Rica, they have control of the presidency and a comfortable majority in the Legislative Assembly. The sale of assets will not solve the debt problem, but it will exacerbate a process of wealth concentration and greater social suffering for the Costa Rican population. Privatizations and cost containment, a surefire recipe for the deterioration of living conditions for the Costa Rican population, as history has shown.

*Gilberto Lopes is a journalist, PhD in Society and Cultural Studies from the Universidad de Costa Rica (UCR). author of Political crisis of the modern world (Uruk).

Translation: Fernando Lima das Neves.

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