by ERIC TOUSSAINT
In their book, Sovereign Debt Diplomacies: Rethinking Sovereign Debt from Colonial Empires to Hegemony, Pierre Pénet and Juan Flores Zendejas are correct in saying that it is essential to understand why the economic elites of the former Third World nations eventually accepted conservative policies for the management of international debt.
Pénet and Flores Zendejas correctly state that: “Understanding how and why debtor countries gave their assent to structural adjustmentpolicies, austerity programmes and privatization plans is instrumental to better understanding how the current hegemonic regime of sovereign debt disputes came into being and how it is reproduced.” (p.28).
The book which they co-edited offers no explanation for this phenomenon. For my part, I have often written on the subject. Here is a very brief summary of my explanation:
Since the start of the 19th century, the ruling classes of the Global South (by which we mean all the countries that were formerly referred to by the term “Third World” or “Periphery,” as opposed to the imperialist powers or “Centre”) have been favourable to financing the State via debt, since that allows them to pay as little as possible in taxes. Further, the fact that the governments of their countries contract debts in foreign currencies (pounds sterling and French francs in the 19th century, and largely dollars since the Second World War) enables them to have access to the hard currencies necessary for importing the products and services required for their business activities and for their own consumption. Lastly, the ruling classes derive revenue in the form of rents from public indebtedness since they purchase sovereign debt securities on both internal and external debt.
The ruling classes of the Global South are favourable to financing the State via debt, since that allows them 1. to pay less in taxes; 2. to have access to the hard currencies needed for importing the products and services needed for their business activities and for their own consumption; 3. to derive revenue in the form of rents from public indebtedness since they purchase sovereign debt securities on both internal and external debts.
I have shown this in detailed fashion in several studies devoted to Latin America (with the emblematic example of Mexico or Simón Bolívar’s Gran Colombia), or those of Egypt and Tunisia, etc.)
And what was true in the past remains true in the present.
This explains why acts of debt repudiation by countries of the Global South have come about as a result of revolutions or major popular movements in which the people enter into conflict both with the interests of the local ruling classes and with those of the major creditor powers of the North.
Acts of debt repudiation by countries of the Global South stem from revolutions or major popular movements
Among the popular mobilizations that have ended in debt repudiations in countries of the Global South are the one in Mexico, between 1910–1920, which ended in a major victory over the country’s creditors in 1942 following some thirty years of suspension of payment; the triumphant Russian Revolution of 1917, which led to the repudiation of debts by the Soviets in 1918; the popular uprising of 1919 in Costa Rica, which also led to repudiation of debts; the Chinese revolution of 1949; the revolution in Cuba in 1959; Algeria’s revolution in 1962; the popular uprising against the Shah in Iran in 1979, and yet others.
Alexander Sack believed that States should be liable to prosecution by private creditors
The conservative Russian jurist Alexander Sack, in 1927, developed the doctrine of odious debt [2] in order to warn private creditors about practices that could generate financial losses for them. This was a response to a series of debt repudiations that impacted the capital of private lenders between the end of the 18th century and the 1920s. At that time, as sovereign powers, States had a special status with regard to private creditors, and few judicial bodies were inclined to rule that a country must pay compensation to a private creditor.
In the 19th and early 20th centuries, the majority of jurists clearly affirmed that it is not possible for private individuals to prosecute a State regarding matters of debt. Below is a series of jurists’ opinions:
We may cite Louis Berr, Étude sur les obligations (Paris, 1880), p. 236, who says: “The Frenchman who concludes a contract with a foreign government subjects himself in advance to the laws of that government concerning the jurisdiction and law of its courts; he renounces voluntarily the protection of his own national laws. In consequence, questions concerning the performance and liquidation of obligations directed against a foreign state can only be brought before its own courts in accordance with the rules of public law there in force.” [3]
In the 19th and early 20th centuries, a majority of jurists clearly affirmed that private individuals may not prosecute a State regarding matters of debt.
Sir Robert Phillimore, in Commentaries upon International Law, [4] writes: “The English courts have decided that bonds payable to bearer by the government of a state only create a debt in the nature of a debt of honour, which cannot be enforced by any foreign tribunal nor by the tribunal of the borrowing state itself, unless with the consent of its government.” [5]
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