Who Benefits From Sovereign Debt Crises? (4/5)


Economist Jayati Ghosh continues her discussion of the 136-nation move to address sovereign debt in the context of global finance

LYNN FRIES, TRNN: Welcome to the Real News Network. I’m Lynn Fries in Geneva.

Unlike the UN Security Council, resolutions of the UN General Assembly are non-binding, but carry political weight. In part one of this series we reported on a General Assembly resolution that’s put principles to guide sovereign debt restructuring into play in the world system. And we opened a conversation on the issue with our guest, economist Jayati Ghosh. This is part four of that report and conversation. First, more on the General Assembly.

On September 10, the United Nations General Assembly will vote on nine principles concerning the restructuring of sovereign debts. Abiding by such principles would have avoided the pitfalls of the Greek crisis, in which political representatives gave in to creditor demands despite their lack of economic sense and their disastrous social impact. The Greek crisis has made it clear that individual states acting alone cannot negotiate reasonable conditions for the restructuring of their debt within the current political framework even though these debts are often unsustainable over the long term. [This quoting] an open letter from renowned economists calling on Europe and the UK to back the UN General Assembly resolution. Yanis Varoufakis, Thomas Piketty, Heiner Flassbeck and James Galbraith were among the signatories.

Backed by majority support, days later the resolution was approved with only six countries voting no–Japan and Israel, and major countries on both sides of the Atlantic. The U.S. and Canada, the UK and Germany.

We now continue to part four of our conversation with our guest, economist Jayati Ghosh. Jayati Ghosh is a professor of economics, and chair of the Center for Economic Studies at Jawarharlal Nehru University in New Delhi. Welcome.

JAYATI GHOSH: Thank you. It’s a pleasure to be here.

FRIES: So let’s pick up where we left off at the end of part three in your comments about excessive debt. I’m just going to replay a few lines.

GHOSH: You must have a transparent, clear mechanism of enabling default, enabling bad debt to be restructured in a way where you can actually pay it eventually, over time.

FRIES: So let’s take it from there.

GHOSH: It’s not just that you have to restructure the debt, which of course you have to do. But you have to combine that restructuring with a way of getting that economy back on a growth path. And it doesn’t really even matter which level of development you are. Because what we have seen is that the current strategy, which is one of fiscal austerity, cutting down government spending, forcing people to actually reduce their living standards, their wages, et cetera. This doesn’t work. This puts you on a downward spiral of stagnation and depression and unemployment and emigration, and this is true whether you’re a developing country or a developed country. In the European periphery countries are experiencing it today. But this has happened to many developing countries over the last four decades when they’ve been forced to do structural adjustment that actually makes things worse.

So the strategy has to be to grow your way out of debt. This has really been the only thing that has ever worked in debt crisis, is when the economy starts growing again, that’s when they can start repaying. Now, what makes you grow? That’s the critical difference. People who argue in favor of austerity argue that in fact you will grow based on outside income. You will grow based on exports because you will become more competitive, because you will actually reduce wages, you will become more flexible, you won’t spend on all the flab. And this will allow you to become very competitive, and therefore you will grow. That’s the basis of the austerity position.

But there is another and much more sensible way, because we know that this position doesn’t work. We know it gives you that downward spiral. The other more sensible way is to actually spend on building your productive capacities, on investing in innovation, investing in infrastructure. Investing in wages, because wages are not just costs, they are a source of demand. And when you actually increase wage income people go out and spend more. That has positive multiplier effects. That generates more economic activity, more income within the economy.

So if you actually followed that path, then you can grow your way out of debt. Germany had debt forgiveness, yes. But thereafter it grew its way out of the remaining debt. Japan grew its way out of the debt. South Korea originally took IMF medicine. It didn’t work. When it finally started growing again because of the Miyazawa plan when the Japanese gave them money, that’s when in fact it was able to get rid of its debt problem. Argentina the same. It had to restructure its debt, but the growth of the 2000s enabled it to reduce the existing debt. That’s really how you have to do it.

Looking at the debt-GDP ratio only in terms of how you’re going to deal with this by somehow extracting it out of a given GDP makes no sense. If you increase the denominator then your ratio declines. You’re in a much more reasonable position to repay. Many developing countries have found this over history. Unfortunately, Europe still doesn’t seem to learn this.

FRIES: Talk more about the case of the German debt burden. It was cut down to size when creditors agreed to take a haircut. And under the agreement reached in 1953, the German external or foreign debt agreement that was negotiated in London. How, then, did Germany grow its way out of the remaining debt that was left after the creditor haircut?

GHOSH: In fact, Germany has been a major beneficiary of debt workouts that have allowed it to benefit in a way that is unthinkable today. So that, when it had its debt workout after the war, it was actually able to ensure that it would not have to repay interest beyond levels that would allow it to maintain certain minimum current account surpluses. That was absolutely crucial to enable Germany to recover and then to grow.

FRIES: So that means in technical terms, in the strings attached, that Germany was in a situation where it no longer had to borrow to pay its debt. Instead it was given space to earn its way out of its debt. And what else enabled German growth and recovery at the time, and how does all this compare to what we see elsewhere?

GHOSH: Well, there were two things that happened in that period. One was, of course, that the terms of the debt restructuring were infinitely more generous than what Germany is today offering Greece. But much more important, after the war Germany benefited from the U.S. Marshall plan, which provided a huge impetus for German investment, consumption increases, GDP growth, everything. And part of the Marshall plan was not just that you got finances, but that you were encouraged to trade within the region and encouraged to build up your own domestic markets. So it was a much more forward-looking strategy that Germany benefited from after the war.

FRIES: And the takeaway from that?

GHOSH: I think you will find that across history wherever you have had debt restructuring that has been reasonable, that is to say, has accepted that both the debtor and the creditor take some loss, but that subsequently the debtor is allowed to grow and is given the means and the capacity to grow, then you get a solution to the debt problem.

FRIES: And what about developing countries?

GHOSH: In the case of developing economies there’s a different and even greater issue, which is that you do need additional investment simply to enable your productive structures to grow in a way that you can eventually become more competitive. Because many developing countries are primary commodity exporters. They haven’t got diversified economies. They haven’t got the means to actually expand and increase their exports.

So in addition to the money that let’s say Germany got in the Marshall plan, you would need specifically money in developing countries to allow them to diversify their economies, to allow them to enhance their productive structures and their technological capacities. And it’s only then that you would actually get a sustainable reduction of debt.

FRIES: Let’s talk more about what all this means in part five of our conversation. Please join us as we continue our series in the next segment. Jayati Ghosh, thank you.

GHOSH: You’re welcome.

FRIES: And thank you for joining us on the Real News Network.


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