Washington has intensified its Latin American charm offensive (onus on the word “offensive”) by warning of the dangers posed by China’s increasing use of “debt trap” diplomacy in the region.
It’s clear who the message was intended for, given it was conveyed via a Spanish-only interview of the Commander of US Southern Command, General Laura Richardson, published by the Spanish edition of Voice of America. In the interview Richardson says that China is taking advantage of the growing economic vulnerability of many Latin American countries in order to offer them, among other things, high-interest loans that the countries will later struggle to service.
This, she says, is one of the strategies by which China is trying to expand its power and reach in the region. By helping to finance the construction of ports, telecommunications facilities and other infrastructure projects, China is saddling countries with huge amounts of unpayable debt. Battered by the ongoing economic slowdown and high global inflation, many governments in South America see these projects as a means of shoring up their finances. But in reality, says Richardson (translated below by yours truly), they are mortgaging their future:
“We call it a ‘debt trap’ that doesn’t help these countries in the long run. So we try to work with them and advise them on the pitfalls that could occur.”
There may a kernel of truth to what Richardson says: China has indeed dispensed huge amounts in loans (over $840 billion, according to AidData) to developing and emerging economies, including in Latin America, as part of its global infrastructure development program, the Belt and Road Initiative (BRI). A few of those economies, including most recently Sri Lanka, are now defaulting on that debt and we’re yet to see how Beijing will respond if their number reaches a tipping point. There are also justifiable concerns regarding the lack of transparency of some of the Chinese government’s loan agreements.
Nonetheless, Richardson’s warning reeks of rank hypocrisy. After all, no country has done more to trap the economies of Latin America (and beyond) under an insurmountable mountain of toxic debt than the US. Since the 1980s over exuberant lending on the part of the largely US-controlled World Bank, regional development banks, US and European commercial banks and investors has repeatedly fuelled speculative booms that have quickly turned to bust. Once that happens, the IMF swoops in with a prescription for crippling austerity medicine.
Until the late 1970s, the IMF had played a relatively harmless role in Latin America as a lender of last resort concerned primarily with maintaining international currency exchange stability. But that changed in the 1980s as the IMF began intervening more and more in domestic economic policy making, as Alexander Main, the director of International Policy at the Center for Economic and Policy Research, documented in his 2020 essay, “Out of the Ashes of Economic War“:
As country after country in the Global South became submerged in debt crises provoked by a combination of easy lending of petrodollars, global recessions, and a sharp increase in U.S. Federal Reserve interest rates, the IMF swept in with bailout programs with unprecedented and painful conditions attached. In order to receive funding, Latin American and Caribbean governments were required to abide by an IMF-driven neoliberal agenda that included labor and financial market deregulation, massive public sector cuts, and the elimination of tariffs and other protectionist measures. While workers throughout the region took to the streets, a significant portion of domestic elites supported these measures, in part because they weakened the power of organized labor and allowed companies to buy up state assets at heavily discounted prices.
The Fund’s dogged insistence that crisis-hit countries double down on austerity has exacerbated poverty and inequality across Latin America. By advocating for the free movement of capital as well as a smaller role for the State, accomplished through privatisation and limiting the ability of governments to run fiscal deficits, the Fund has not only exacerbated boom-bust cycles; it has hampered governments’ ability to respond to them. Even the IMF itself acknowledged as much in its 2016 report “Neoliberalism: Oversold?”:
“Increased capital account openness consistently figures as a risk factor in [boom-bust] cycles. In addition to raising the odds of a crash, financial openness has distributional effects, appreciably raising inequality… Moreover, the effects of openness on inequality are much higher when a crash ensues.”
A Case in Point: Tequila Crisis
This is precisely what happened to Mexico the last time it suffered a major crash, in 1994, when a sudden reversal of hot capital flows triggered the Tequila Crisis. Over the space of just a few months, the free-floating peso lost almost 50% of its value against the dollar, wiping out the savings of much of the country’s middle class and raising fears that collapsing asset values would push Mexican banks over the edge.
The Crisis threatened to engulf not only most of Mexico’s banks but also a number of Wall Street titans, including Citi and Goldman Sachs. Thanks to the hurried intervention of the U.S. Treasury Department (led by former Goldman co-Chairman Robert Rubin), the IMF and the Bank for International Settlements, Wall Street’s finest were saved, Mexico’s banks and other assets were bailed out and sold off at bargain basement prices, largely to US and European lenders, while the Mexican people were lumbered with untold billions of dollars of compounding debt they still service to this very day. In fact, Mexico still owes 1.4 trillion pesos, more than double the amount it did in 1999 (552 billion pesos).
The IMF may have fessed up to some of its errors, if indeed they can be described as errors, but it doesn’t seem to have changed them. In 2019, the fund signed a loan agreement with Ecuador, coincidentally just after the Moreno government had agreed to eject Julian Assange from its London embassy, straight into the outstretched arms of the Metropolitan Police. As reported at the time by Open Democracy, in an article featured on NC, the bill contained a number of provisions that aimed “to weaken and essentially render Ecuador’s capital controls ineffective.” The provisions allowed local elites to yank their money out of the country cost-free; they made tax avoidance and speculation easier; and they included regressive taxation measures that placed the lion’s share of the fiscal pain on Ecuador’s most vulnerable.
In other words, same old, same old, just as is playing out right now in Sri Lanka, where the Fund’s usual prescription of structural reforms, austerity measures, and a “firesale” of strategic assets is being offered in exchange for a bailout. Much is being made in the Western press of China’s role in Sri Lanka’s default in May yet in actual fact China accounts for just 10% of Sri Lanka’s foreign debt while market borrowings, mostly from institutional investors such as BlackRock and British Ashmore, account for 47%.
Abusing the Exorbitant Privilege
The US has also used its power as the issuer of the world’s dominant reserve currency — what is commonly known as “exorbitant privilege” — to narrow the economic policy choices available to governments in Latin America, as Vijay Prashad outlined in a 2018 interview with the Real News Network:
If the international agencies, if the banks, if the ratings agencies want to punish a country for breaking from the neoliberal consensus, it’s quite easy for them to do so. I mean, we’ve seen this happen quite strictly with Venezuela, where the ratings agencies, the banks, the International Monetary Fund, if they start to sniff and make a noise saying that we don’t like what you’re doing, then finance dries up. Then it becomes hard to use the dollar for trade. And you might even run into a sanctions regime.
That has already happened to three countries in the region: Cuba, Venezuela and Nicaragua. As Main notes, the sanctions, which in Cuba’s case date all the way back to 1962, are ostensibly meant to “advance human rights and liberal democracy and to weaken — and ultimately topple — the governments of a so-called Latin American ‘troika of tyranny,’ in former national security advisor John Bolton’s words. However, in all three instances, sanctions have ended up violating the human rights of ordinary citizens while failing — so far — to produce the political change advocated by the U.S. administration.”
In recent years, Washington’s abuse of its exorbitant privilege has gone into hyperdrive. As Michael Hudson noted in “America Shoots Its Own Dollar Empire in Economic Attack Against Russia,” it has backfired spectacularly…
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