IOU: The Debt Threat and Why We Must Defuse It

Much like a department store (#litres_trial_promo) that provides its own charge card so that people on credit can buy the store’s own products, government ECAs facilitate loans for foreigners so that they buy the lending country’s own products. The more the ECAs sell, the happier the domestic firms from the ECA’s home country are, but also the more debts the foreign countries run up.

And Saddam’s Iraq made Western arms dealers very happy. Of the $26 billion plus (#litres_trial_promo) currently owed by Iraq to the British, the French, the Germans, the Japanese and the Americans, most of the debt was run up in the 1980s after Saddam came into power. Most of it undoubtedly resulting from military equipment procurement and weapons programmes – funding the various international military manufacturers (#litres_trial_promo) whose sales were underwritten by these creditors’ respective ECAs.

And now the Iraqi people are being told to repay this debt (#litres_trial_promo). Or at least that proportion of the debt that creditors feel they will realistically be able to squeeze out of them. The nation that suffered so much under Saddam that its cause became one of ‘liberation’ is being told to repay debts which were racked up with the express encouragement of Western companies and Western governments for purposes of oppression, violence and genocide. Debts that were clearly odious in nature.

But is the Iraqi situation an anomaly? How widespread are ECA loans in the first place? And how usual is it for them to be used so ill-advisedly?

As it is

Let’s start with some facts (#litres_trial_promo). Export Credit Agencies like the US’s Ex-Im, the German Hermes Guarantee, the Italian SACE, the Japanese Export-Import Bank, the Swiss ERG, the French COFACE, the Canadian EDC or the British ECGD are the largest source of public finance for private sector projects in the world. Between 1982 and 2001, ECAs supported $7,334 billion worth of exports and $139 billion of foreign direct investment primarily to countries of the developing world. In 2000 alone, ECAs provided a total of $500 billion in guarantees and insurance to companies operating in developing countries, and issued $58.8 billion worth of new export credits. With the two largest ones, the ECAs of Japan and the United States in recent times approving on average new loans and guarantees worth $15 billion every single year.

As overseas aid continues to fall, the importance of ECAs to developing countries continues to increase. Between 1988 and 1996, the worldwide value of new export credit loans and guarantees increased fourfold with approximately half of the new commitments going to the developing world. Eighty per cent of financing for projects and investment in developing countries today comes from ECAs. And export credits are now at levels of between two and three times the amounts of aid provided by the World Bank, regional development banks and countries of the developed world.

This is a trend which is likely to continue. The 2002 G8 Africa Action Plan stated: ‘We commit to…helping Africa attract investment, both from within Africa and from abroad and implement policies conducive to economic growth – including by…facilitating the financing of private investment through increased use of development finance institutions and export credit and risk-guarantee agencies…’

Yet, rather than being used to bankroll projects that are ‘conducive to economic growth’, export credits were and are often used to bankroll projects just as dangerous, dubious or misguided as those in Saddam’s Iraq. Time and time again, as we will see, export credits were and are used to pay bribes, support tyrannical or dictatorial regimes, or support environmentally unsound or socially undesirable projects.

And, once again, it is the ordinary people of these countries who are left to pick up the bill. ECAs are amongst developing countries’ single largest creditors, and export credit debts (#litres_trial_promo) account for about a quarter of developing countries’ total long-term debt – in some countries even more. Gabon, Nigeria and Algeria (#litres_trial_promo) all owe more than 50 per cent of their total debt to export credit agencies.

Why exactly are the governments of the developed world providing these loans? In some cases to serve their geopolitical interests (as we saw in the previous chapter) but more often to serve the different, though related, interest of their domestic corporations, so manifest in the Iraq example. The UK’s ECA, the Export Credit Guarantee Department, or ECGD, explicitly states that its goal is to ‘help exporters of UK goods and services to win business and UK firms to invest overseas by providing guarantees, insurance and reinsurance against loss.’

ECAs also serve the interests of commercial banks. As Stephen Kock, the Midland Bank executive in charge of arms deals put it: ‘You see, before (#litres_trial_promo) we advance monies to a company, we always insist on funds being covered by the [UK] government’s Export Credit Guarantee Department…We can’t lose. After 90 days if [they] haven’t coughed up, the company gets paid instead by the British government. Either way, we recover our loan, plus interest of course – it’s beautiful.’ Especially beautiful (#litres_trial_promo) because the ECGD typically pays banks about 0.75 per cent per annum on the total value of any ECA-backed loan it has provided so that the bank has an incentive to provide the capital to the British exporter.

And while 0.75 per cent per annum may not sound that much, on a $500 million project it amounts to around $3.8 million. And this is on a completely risk-free loan – the equivalent of lending to the Bank of England! No wonder banks spend serious amounts of money cosying up to big corporations. They want to be the bank through which the company secures its ECGD-backed loan.

From the point of view of a Western corporation, export credit arrangements are great because they enable them to pass some of the risk of doing business in developing countries on to their own governments. By providing lower fees, premiums and interest rates than the private market can, and by backing transactions that the private market would refuse to back, ECAs are implicitly subsidizing their domestic exporters.

Export credit arrangements also offer companies the added bonus of harnessing a government’s interests to their own. Once corporations have export credit guarantees they can rest assured that if things go wrong their government will protect their investments. ‘The Export Import Bank (#litres_trial_promo) can be a powerful ally,’ Edmund B Rice of the American pro-ECA corporate lobbying group Coalition for Employment through Exports, has said. ‘You’ve got the full weight of our US embassy, our ambassador, the Treasury Department here and overseas the State Department all coming in.’

No wonder corporations lobby hard for ECAs to continue their work. When there was a move to eliminate the US Overseas Private Investment Corporation (OPIC) in the late 1990s – a similar agency to Ex-Im but focused solely on the developing world – Kenneth Lay, the now disgraced former CEO of Enron, wrote a letter to every single member of Congress staunchly defending the institution.

Why do Western governments want to serve corporate interests in this way? Typically, because they are so caught up in the ‘business interest serves national interest’ myth that they don’t stop to question it. They should. First, most economists remain highly sceptical that a nation can improve its long-term welfare by subsidizing its exports. Second, subsidies radically reduce the incentive for exporters to do all they can to ensure that the companies they are selling to will make good on their debts. In much the same way that many more homes would be built in flood-prone areas if their owners were compensated for flood damage by the government, ECAs provide exporters with incentives (#litres_trial_promo) to maximize their exports in the knowledge that they will be bailed out if their deals go bad. Third, export subsidy policies have tended to be very costly for the exporting countries, many ECAs have made huge losses (#litres_trial_promo) over the past two decades. And, finally, rather than benefiting the interests of their host country, ECA-backed companies often turn out to be only benefiting themselves.

Most of the companies that have received large amounts of Ex-Im support in the US, for example, are companies that have ruthlessly shed jobs and have shifted production abroad to save money. Ex-Im’s five biggest corporate beneficiaries in the 1990s – AT&T, Bechtel, Boeing, General Electric and McDonnell Douglas – collectively cut more than 300,000 jobs (#litres_trial_promo) during that time, shifting production away from the US to India, Mexico, Japan and elsewhere. Worse still, Ex-Im is extremely selective in the businesses it serves, choosing merely to benefit a small handful. In 2001, more than 60 per cent (#litres_trial_promo) of Ex-Im’s loans and guarantees went to just three corporations, and almost 90 per cent went to just ten. Similar trends can be seen in other countries.

Lining the wrong coffers

The lion’s share of the subsidies is not, however, usually paid for by Western taxpayers despite the high failure rate of ECA projects. That burden more commonly falls on the peoples of the developing world – the masses in the developing countries who have to face the consequences of an increase in their debt burden as a result of the importer not paying up. For, as we have seen, export credit debt accounts for a significant proportion of the debt that developing countries owe to official creditors, and in some cases for almost all the debt they owe. And the interest paid on export credits is particularly onerous for developing countries because it corresponds to commercial rates of interest, not the lower rates incurred by bilateral or multilateral (the World Bank, IMF or regional development banks) loans.

If it could be shown that countries now carrying ECA debt burdens were better off because of ECA-backed projects, a reasonable case could be made that the resulting debt burden was worth it. In many cases, however, the promised benefits never materialize, and a large number of projects do not even see the light of day. A former employee of HSBC (#litres_trial_promo) told me that, of the export credit agency deals he worked on over a 12-month period at the bank, every single one went bankrupt..

Moreover, billions of dollars worth of ECA loans have ended up lining the pockets of corrupt government officials. Acres, for example, the EDC-(Canadian ECA) supported company, was convicted in a Lesotho court (#litres_trial_promo) in September 2002 for having paid $260,000 in bribes to a Masupha Sole, the former CEO of the notorious Highlands Dam Project, a project which, besides being riddled with corruption, displaced hundreds of subsistence farmers and directly and adversely affected the lives of approximately 27,000 people. And it is commonplace for the prices of projects that receive ECA funding to be massively inflated so as to be able to cover the related ‘commissions’. An investigation into power contracts in Indonesia in 2000, for example, revealed that most power transmission projects financed by foreign export credit agencies ‘smacked of mark up practices (#litres_trial_promo)…[and] on average they cost 37 per cent more compared to projects that underwent international tenders.’ This reflects similar findings (#litres_trial_promo) by the corruption-fighting non-governmental organization, Transparency International. It revealed that it was common practice for the value of an ECA contract to have been inflated by between 10 and 20 per cent to account for the ‘commissions’ (otherwise known as bribes) necessary to secure the deal.

Yet rather than trying to screen out corrupt countries from export credit agency funding, some of the world’s most corrupt countries – Indonesia, Turkey, the Philippines – continue to figure in the top 10 markets for export credit support. As Transparency International has written: ‘The continued lack of action by export credit agencies to address the issue of corruption has brought some export credit agency practices close to complicity (#litres_trial_promo) with a criminal offence.’

Corruption, yet again, seems not to be a factor when governments of the rich world decide to which countries to lend. Indeed, it remains so pervasive in the world of the ECA that it can almost be thought of as a complementary export that our governments finance. One of Britain’s most prominent contractors in Africa, a man who has built countless schools and hospitals using British ECA funding to do so, told me proudly that he has paid bribes of over $75 million to secure his contracts over the past 10 years.

Of course, ECA loans aren’t necessarily or always a bad thing. Poor countries wouldn’t be able to finance many projects without them, many of the projects they facilitate are beneficial or at least harmless, and even though the contractor in the story mentioned above did pay out tens of millions of dollars in bribes over the past ten years, he did at the same time build schools and hospitals. The bribes could be considered a kind of operating tax.

It is just that by lining the pockets of elites, ECA loans undermine not only the possibility of democracy, but also by essentially legitimizing corruption, can impede economic growth. Empirical study after empirical study (#litres_trial_promo) has shown that corruption is a barrier to significant numbers of potential investors. Which means that the overall return on the debts incurred through ECA loans can be extremely low, or even negative.

There have been some token gestures made recently on the part of ECAs to appease mounting criticism – Britain, for example, has introduced a new warranty procedure which requires companies to state (#litres_trial_promo) that they have not engaged in bribery. But in practice reforms tend to be insufficient and unenforceable (#litres_trial_promo). Britain’s ECGD still has no investigatory powers, and thus no way of ensuring compliance. As Transparency International has recently said, ‘None of the ECAs (#litres_trial_promo) seem to seriously consider or even allow the possibility of denying access to export support to a country that has previously been shown to use bribery.’

Moreover, the projects ECAs choose to fund are often highly contentious. President Boigny of the Ivory Coast built the world’s largest church in Yamoussoukro, his birthplace, a cathedral modelled on St Peter’s in Rome with 36-metre high stained-glass windows, a 280-ton dome twice the height of Paris’s Notre Dame, and a 30-ft gilded cross, with $150 million worth of European export credit financing. A St Peter’s replica with air-conditioned seating for 7,000, standing room for 12,000 and an open-air piazza built to hold a congregation of 350,000 in a town with a population of 100,000 in a country where only 15 per cent of the population is Christian, and still fewer Catholic. Worse still, Boigny built this huge edifice at a time when millions of people in the Ivory Coast were dying from disease; funding for immunization programmes was nil; and AIDS was beginning to get out of control.

Or take the Bataan Nuclear Power Plant (#litres_trial_promo) in the Philippines. Built in 1976 for over $2 billion with loans largely provided by the US’s Ex-Im. The largest and most expensive construction project ever undertaken in that country, the loans taken out to build it are still costing the Philippines $170,000 a day (#litres_trial_promo) to service, and will continue to do so until 2018. This in a country in which GDP per capita is $4,000, 40 per cent of the population live below the poverty line and annual per capita expenditure on health is only $30. And all this expense for a plant that never worked. ‘Filipinos have not benefited from a single watt of electricity,’ said the Philippine National Treasurer Leonor Briones. Thankfully not, because the plant’s design was based on an old two loop model that had no safety record of any sort; and because the plant lies along earthquake fault lines at the foot of a volcano.

Paying for pollution and gun-runners

ECAs do not only finance self-aggrandizing or misguided projects or corrupt elites, they are, historically, rarely subject to any safeguards, even those designed to protect human rights or the environment. Most export credit agencies, for example, have no legal obligation to screen out projects with adverse environmental and social impacts, no obligation to ensure that their projects comply with a set of mandatory human rights, environmental and development guidelines, and no obligation to consider the environmental impact of their investments or the contribution they will make to local development. Attempts to get G8 countries to agree on minimal social and environmental standards for their ECAs have resulted only in a non-binding arrangement, with companies now being asked to fill out questionnaires on their environmental and social impact. Once again, however, no procedures have been implemented to allow independent verification to take place. This clearly limited agreement was the compromise solution reached after Germany and France initially boycotted the talks, frustrated that their ECAs were losing their competitive advantage in the face of US demands for higher standards – it is ironic that Green parties were part of governing coalitions in both France and Germany at the time.

In practice what this all means is that many of the projects ECAs end up financing – leading favourites are big infrastructure projects and resource extraction projects such as mines, dams, oil refineries and nuclear power plants (#litres_trial_promo) – continue to be environmentally damaging and, frequently, socially undesirable as well.

The Three Gorges Dam project (#litres_trial_promo) in China is a perfect example. Here is a project that will force the relocation of 1.3 million people and drown 13 cities. It has been characterized by large-scale corruption and massive construction flaws and has been protested against by numerous Chinese scientists, engineers and journalists. Yet it has already received almost $1.5 billion in loans guarantees and insurance from various European ECAs. As one senior British official mused: ‘There was some problem about moving peasants there, wasn’t there?’

Although the American ECAs are more strongly regulated than their European counterparts – President Clinton imposed mandatory standards in 1992 and 1997, which prevent them from investing in ‘projects that require large scale involuntary resettlement’ or ‘large dam projects that disrupt natural ecosystems or the livelihoods of local inhabitants’ – Ex-Im and OPIC have also invested heavily in projects with dubious environmental credentials. From 1992-8, for example, the two agencies between them underwrote $23.2 billion in financing for oil, gas and coal projects (#litres_trial_promo) around the world. Over their lifetime, these plants will release 29.3 billion tons of carbon dioxide, the equivalent of the amount of carbon dioxide produced by 24 billion round-trip New York-Heathrow flights, an amount that would need to be offset by the planting of 48 billion trees.

One of the American ECAs’ biggest clients during the 1990s for these kind of projects, was Enron. The Houston company’s Cuba pipeline from Bolivia to Brazil, for example, cuts directly through the world’s largest remaining dry tropical forest, and also part of the Pantanal wetlands, damaging 39 indigenous communities and several other non-indigenous communities on its way – as well as devastating the environment. It was a project the World Bank said it would not have financed. Many of OPIC’s own staff recognized it was in violation of its own guidelines. Yet no one stopped it. Indeed, this was typical of the kind of project backed by Ex-Im and OPIC.

No wonder, as we will see in Chapter 10, Ex-Im and OPIC are currently being taken to court (#litres_trial_promo) in the US for allegedly failing to conduct environmental reviews before financing projects that contribute to global warming. Although let’s not forget that it’s the industrialized rich world that is responsible for far more carbon dioxide emissions than the poor, a point we will return to in that chapter as well.

As Iraq illustrates, arms sales are another category of exports which account for large percentages of ECA loans. In the United Kingdom, between 30 and 50 per cent of all export credits are allocated to cover sales by UK arms exporters – though not, since 2000, to facilitate sales to the 63 poorest countries in the world, thanks to an intervention by British Chancellor of the Exchequer (#litres_trial_promo) Gordon Brown. This percentage is extremely high, particularly when one considers that defence exports only account for approximately 3 per cent of total UK exports. While a third of France’s export credits (#litres_trial_promo) go to subsidize their arm exporters.

The question of how the arms might be used tends to be considered irrelevant. It’s not only Iraq to which the British ECGD provided loans. In 1993, for example, it provided loans to the Indonesian authorities (#litres_trial_promo) so that they could buy 24 Hawks from British Aerospace, and provided subsequent cover for a further 16 Hawk jets three years later. These same Hawks were later used by Suharto’s armed forces to attack villages in East Timor and, more recently, to deliver what the Indonesian authorities called ‘shock therapy’ against separatists in the Aceh province (#litres_trial_promo). A similar story can be told of Germany. On top of its ‘export über alles’ policy regarding credits to Saddam, Germany offered $407 million in export guarantees to the Suharto government to catalyse the purchase of 39 East German PT boats. When students protested (#litres_trial_promo) against the purchase, the Indonesian government threw them into prison. France, as we saw in the previous chapter, provided export credits to its arms manufactures to finance the weapons most probably used in the Rwandan genocide.

When the loans are used to buy arms, they frequently fuel conflicts, kill huge numbers of people, uphold repressive regimes and subject citizens to internal repression. They also perpetuate a cycle in which arms manufacturers, with loans in tow, encourage war-crazy powerful elites to borrow more and more to fund the purchases of their own weapons.

By supporting arms sales, wealthy nations also encourage developing world governments to spend money on military equipment rather than on their health or educational needs. The money spent on one British Aerospace Hawk fighter jet, for example, could provide 1.5 million people with clean water for the rest of their lives. Export credits, deployed to serve the interests of the lender’s domestic corporations, so often end up working to the severe detriment of the borrowing countries’ populations. Those spared death from the barrel of a gun find their lives shortened by poor health care or famine.

And the dreadful irony is that the lender’s weapons can end up being used against them. The US military, for example, has had to face troops supplied with its own weaponry in Haiti, Somalia, Panama, Afghanistan and Iraq.

Export credit agencies illustrate in shocking form one of the most serious imbalances in today’s world. Not the geopolitical one in which countries with monies to lend wield power over those that need to borrow, nor the imbalance within developing countries which can allow developing world leaders to take out loans without being held to account for their use. But an imbalance that lies at the core of developed nations themselves. An imbalance of power between corporate interests and the public interest, between economics, politics and society.

Subscribing to the myth that business interests serve the national interest, Western countries use ECAs for 80 per cent of their investment in developing countries subsidizing them and providing a risk-free bonus for the commercial banks that have lent the investment capital. And with no quid pro quo at all that the favoured business employ the peoples of the subsidizing government, invest in its country or fulfil any national interest.

The story of the ECAs is also a story of barefaced hypocrisy.

The rich world censures the poor for its high levels of military expenditure, yet continues to provide the funds so that it can buy its arms. The Europeans deify multilateralism and sign up to a range of environmental conventions – Kyoto, the Convention on Biodiversity, and so forth – supposedly to protect the environment and slow down climate change, yet Europe’s ECAs finance the very fossil fuels and energy intensive projects that will lock in higher emissions in the developing world (thus recreating there the same environmentally unsound development path these countries themselves followed). While in the US, the justification for rejecting Kyoto is supposedly in part because the Protocol does not require emissions limits (#litres_trial_promo) for developing countries, countries in which American ECAs are financing the building of environmentally unfriendly power plants. The developed world unapologetically uses its ECAs to subsidize its exporters (#litres_trial_promo), yet demands in the name of ‘free trade’ that developing countries do not protect their producers in any way at all. And, in the name of investment, saddles the developing world with yet more repayment of debt and debt at the higher rates of the commercial banks rather than the lower rates of the bilateral or multilateral loans.

The case of export agencies rams home the Janus-faced nature of the West. A developed world that espouses concern for human rights, transparency and environmental issues on the one hand, yet on the other bankrolls projects that are at complete odds with any such concern. A developed world wedded to multilateralism which it defines in a way that serves the narrowest of corporate interests.

So it is that the world’s poorest countries sink further and further into debt whilst Western corporations grow fat from government-backed projects that fuel conflicts, harm the environment and have built-in kickbacks. Rather than being a tool for development, ECA funds often serve to feed the vicious cycle of corruption, underdevelopment, conflict, and debt.

CHAPTER FOUR Pushers and Junkies (#ulink_ec07c242-6f4d-56ac-a206-ad4f05ecef24)

‘Imagine a bank manager you didn’t know came knocking on your door, begging you to borrow some funds.’

Crossbones and bananas