The Transnational Debt Architecture and Emerging Markets: the politics of paradoxes and punishment

Abstract

The Argentine default at the end of 2001 highlighted the ongoing problems plaguing the existing transnational debt architecture, namely the tensions between creditor rights and human rights. While these debates have thrown important light on what needs to be done in terms of improving the transnational debt architecture, few studies have actually attempted to evaluate critically the manner in which transnational debt has been managed since the outset of the Bretton Woods system in 1944. I argue that the postwar informal arrangement governing transnational debt architecture not only helps augment the power of credit to serve as an effective form of social discipline, but that it is also profoundly contradictory. Through an historical survey, spanning the beginning of the Bretton Woods system to the recent Argentine default, I demonstrate that the informal nature of the transnational debt architecture, coupled with the mounting power of global financial capitals over debtor states, has played a major role in bringing about increased levels of volatility and vulnerability in the international credit system.

Notes

Susanne Soederberg is a Canada Research Chair and Associate Professor in Development Studies, at Queen's University at Kingston, Kingston, Ontario, Canada K7L 3N6. Email: [email protected]

RN Cooper, ‘Chapter 11 for countries?’, Foreign Affairs, 81(4), 2002, pp 90 – 104; B Eichengreen, Financial Crises: And What to do about Them, New York: Oxford University Press, 2002; Anne O Krueger, ‘A new approach to sovereign debt restructuring’, Washington, DC: imf, 2002, at http://www.imf.org/external/pubs/ft/exrp/sdrm/eng/sdrm.pdf; K Rogoff & J Zettelmeyer, ‘Bankruptcy procedures for sovereigns: a history of ideas, 1976 – 2001, imf Staff Papers, No 3, Washington, DC: imf, 2002; T Lane & S Phillips, ‘Moral hazard: does imf financing encourage imprudence by borrowers and lenders?’, Economic Issues, 28, Washington, DC: imf, 2002; S Fischer, ‘On the need for an international lender of last resort’, paper delivered at the joint luncheon of the American Economic Association and the American Finance Association, New York, 3 January 1999; and AH Meltzer, ‘The international debt problem’, Cato Journal, 4(1), 1984, pp 63 – 69.

Middle-income countries, or emerging markets, will be the focus of this paper for one important reason: unlike low-income countries, many of which are subsumed under the World Bank's 1996 Highly Indebted Poor Countries (hipc) Initiative, middle-income countries receive the highest amount of private loans in the form of foreign portfolio investment (cf imf's Global Development Finance, various years). Based on calculations using the Atlas Method and Gross National Income (gni), the World Bank has three main country categories: low income (average annual income $735 or less); lower middle income ($736 – $2935); upper middle income ($2936 – $9075); and high income ($9076 or more). See, for example, http://www.worldbank.org/data/countryclass/countryclass.html.

S Strange, Casino Capitalism, Manchester: Manchester University Press, 1986, pp 32 – 33.

R Luxemburg, The Accumulation of Capital, London: Routledge, 2003, p 401.

P Körner, G Maass, T Siebold & R Tetzlaff, The IMF and the Debt Crisis: A Guide to the Third World's Dilemma, London: Zed Books, 1984.

S Strange, States and Markets, London: Pinter, 1994.

Although American power is not explicitly discussed in this article, because of space limitations, I assume that US power, or what I refer to as ‘imposed leadership’, continues to play a central role in the global political economy. See S Soederberg, The Politics of the New International Financial Architecture: Reimposing Neoliberal Dominance in the Global South, London: Zed Books, 2004; and Soederberg, Global Governance in Question: Empire, Class, and the New Common Sense in Managing Globalization, London: Pluto Press, forthcoming.

www.clubdeparis.org.

S Strange, ‘New world of debt’, New Left Review, 1(230), 1998, pp 91 – 114.

E Helleiner, States and the Reemergence of Finance: From Bretton Woods to the 1990s, Ithaca, NY: Cornell University Press, 1994.

Quoted in H Patomäki, Democratising Globalisation: The Leverage of the Tobin Tax, London: Zed Books, 2001, p 21.

The second main feature of the Bretton Woods system was the US dollar – gold fixed exchange rate system. This currency system had the effect of making currencies more predictable and thus stable for both trade and credit relations by avoiding competitive currency devaluations at all costs. This imperative has been abandoned in the post-Bretton Woods era, where the value of freely floating exchange rates is, theoretically speaking, to be determined by supply and demand, but, in reality, is largely influenced by geopolitical power relations, particularly in terms of the US dollar and currencies of the global South. See BJ Cohen, The Future of Money, Princeton, NJ: Princeton University Press, 2003; and E Helleiner, ‘Dollarization diplomacy: US policy towards Latin America coming full circle?’, Review of International Political Economy, 29(3), 2003, pp 406 – 429.

K Marx, Capital, Vol 3, London: Penguin Classics, 1981; and D Harvey, The Limits to Capital, London: Verso, 1999.

C Lipson, ‘The international organization of Third World debt’, International Organization, 34(4), 1981, pp 603 – 631; and Lipson, ‘International debt and international institutions’, in M. Kahler (ed), The Politics of International Debt, Ithaca, NY: Cornell University Press, 1986, pp 89 – 119.

Marx, Capital, ch 21, passim. See also S de Brunhoff, Marx on Money (trans MJ Goldbloom), New York: Urizen Books, 1976.

A current account refers to part of a country's balance-of-payments accounts that records payments and receipts arising from trade in goods and services and from interest and dividends that are earned by capital owned in one country and invested in another. See RG Lipsey, DD Purvis & PO Steiner, Economics, New York: HarperCollins, 1991.

J Williamson (ed), Latin American Adjustment: How Much has Happened?, Washington, DC: Institute for International Economics, 1990.

See, for example, D Harvey, The Limits to Capital, London: Verso, 1999; Harvey, The New Imperialism, Oxford: Oxford University Press, 2003; S Amin, Accumulation on a World Scale: A Critique of the Theory of Underdevelopment, New York: Monthly Review Press, 1974; S Clarke, Keynesianism, Monetarism and the Crisis of the State, Aldershot: Edward Elgar, 1988; W Bonefeld & J Holloway (eds), Global Capital, the National State, and the Politics of Money, New York: St Martin's Press, 1995; G Arrighi, The Geometry of Imperialism: The Limits of Hobson's Paradigm (trans Patrick Camiller), London: Verso, 1983; and G Arrighi, The Long Twentieth Century: Money, Power and the Origins of our Times, London: Verso, 1994.

Harvey, The Limits to Capital; and Clarke, Keynesianism, Monetarism and the Crisis of the State.

Harvey, The New Imperialism, p 147; and Harvey, The Limits to Capital, esp chs 12, 13.

Harvey, The New Imperialism, p 149.

S Soederberg, The Politics of the New International Financial Architecture.

For more information on this responsibility, see http://www.imf.org/external/np/exr/facts/surv.htm.

Louis W Pauly, Who elected the bankers?: surveillance and control in the world economy, Ithaca, NY: Cornell University Press, 1997.

C Lipson, ‘The international organization of Third World debt’, p 621.

Ibid.

P Körner et al, The IMF and the Debt Crisis: A Guide to the Third World's Dilemma, pp 21 – 22.

The so-called ‘Heimann decision’ effectively assisted US banks to overcome the legal limits placed on lending practices to the South. For example, before this decision US banks were not permitted to lend more than 10% of their capital to any single person, co-partnership, association or corporation. The Heimann decision allowed the interpretation of a legal person to apply to separate financial units. Thus foreign governments could divide their bureaucracies into separate financial entities, allowing banks to lend without fear of hitting the overall 10% limit. E Kapstein, Governing the Global Economy: International Finance and the State, Cambridge, MA: Harvard University Press, 1994, p 77.

Lipson, ‘The international organization of Third World debt’, p 614.

Ibid.

Strange, Casino Capitalism, p 33.

Cf Helleiner, States and the Reemergence of Global Finance.

Strange, States and Markets, p 112.

Ibid.

Strange, Casino Capitalism.

M Moran, The Politics of the Financial Services Revolution: The USA, UK and Japan, London: Macmillan, 1991.

Strange, ‘New world of debt’.

International Monetary Fund, Global Financial Stability Report: Market Developments and Issues, Washington, DC: imf, 2003.

Kapstein, Governing the Global Economy.

A secondary market is one in which an investor purchases as security from another investor rather than the issuer, subsequent to the original issuance in the primary market, which is the market for new securities issues.

Strange, States and Markets.

Foreign Policy—In Focus, 4(32), 1999, pp 1 – 4.

Strange, ‘New world of debt’, pp 91 – 92.

J Stiglitz, Globalization and its Discontents, New York: WW Norton, 2002. Cf M Taylor, ‘Responding to neoliberalism in crisis: discipline and empowerment in the World Bank's New Development Agenda’, Research in Political Economy, 21, 2004, pp 41 – 59.

Kapstein, Governing the World Economy.

D Rodrik, ‘Why financial markets misbehave’, in Ann Pettifor (ed), Real World Economic Outlook: The Legacy of Globalization—Debt and Deflation, London: Palgrave, 2003, p 189.

BJ Cohen, ‘Capital controls: why do governments hesitate?’, in Leslie Elliot Armijo (ed), Debating the Global Financial Architecture, Albany, NY: suny Press, 2002, pp 56 – 73.

Strange, ‘New world of debt’.

David Rock, ‘Racking Argentina’, New Left Review, 17, 2002, pp 65 – 66; M Weisbrot & D Baker, ‘What happened to Argentina?’, Center for Economic and Policy Research, 31 January 2002, at http://www.cepr.net/IMF/what_happened_to_argentina.htm, accessed 1 November 2003; and imf, Global Financial Stability Report.

S Gill, Power and Resistance in the New World Order, London: Palgrave, 2003.

D Felix, ‘The economic case against free capital mobility’, in Armijo, Debating the Global Financial Architecture, pp 126 – 158; and R Shiller, Irrational Exuberance, New York: Random House, 2000.

U Beck, Risk Society: Towards a New Modernity, London: Sage, 1992; and Beck, World Risk Society, Cambridge: Polity Press, 2001.

Beck, World Risk Society.

S Clarke, Keynesianism, Monetarism, and the Crisis of the State, Aldershot: Edward Elgar, 1988, p 86; de Brunhoff, Marx on Money; and Harvey, The Limits to Capital.

Harvey, The Limits to Capital.

G Soros, The Alchemy of Finance: Reading the Mind of the Market, New York: John Wiley, 1987.

Patomäki, Democratising Globalisation.

‘Fishing in frothy waters’, The Economist, 30 October 2003.

‘The coming storm’, The Economist, 21 February 2004.

International Monetary Fund, ‘Financial markets update’, November 2003, imf International Capital Markets Department, Global Markets Analysis Division, 2003, p 1.

S Gill & D Law, ‘Global hegemony and the structural power of capital’, in S Gill (ed), Gramsci, Historical Materialism and International Relations, Cambridge: Cambridge University Press, pp 93 – 126.

Rodrik, ‘Why financial markets misbehave’.

Weisbrot & Baker, ‘What happened to Argentina?’.

B Mahnkopf & E Altvater, Globalisierung der Unsicherheit, Muenster, Germany: Westphaelisches Dampfboot.

Cf GRD Underhill, ‘Private markets and public responsibility in a global system’, in G R D (ed), The new world order in international finance, Basingstoke, UK: MacMillan, 1997, pp 4 – 21.

MA Haley, ‘Emerging market makers: the power of institutional investors’, in Leslie Elliot Armijo (ed), Financial Globalization and Democracy in Emerging Markets, London: Macmillan, 1999, pp 74 – 90.

J Boorman, ‘Sovereign debt restructuring: where stands the debate?’, speech by Jack Boorman, Special Advisor to the Managing Director, International Monetary Fund, given at the conference co-sponsored by the Cato Institute and The Economist, New York, 17 October 2002.

Interestingly, the sdrm was not based upon Chapter 9 of the US legal code. Unlike Chapter 11, which applies to corporations, Chapter 9 applies to municipal and other public institutions. Chapter 9 recognises that when a public government institution enters into insolvency, the subsequent debt restructuring must acknowledge human and social rights of the population in the form of, for example, education, health and other forms of welfare provisions.

S Ambrose, ‘The imf's latest ruse: sovereign debt restructuring mechanism’, 50 Years is Enough—Economic Justice News Online, 6(1), April 2003.

Y Akyuz, ‘Some reflections on the sdrm’, remarks made at the International Policy Dialogue: New Sovereign Debt Restructuring Mechanism—Challenges and Opportunities, Berlin, 21 February 2003, available at http://www.networkideas.org/misc/reg.htm.

M Miller, ‘Sovereign debt restructuring’, “Sovereign Default by Argentina: ‘Slow Motion Train Crash’ or Self-fulfilling Crisis?” (with Lei Zhang and Javier Fronti), CEPR Discussion Paper, No. 3399, May 2002, p 4.

imf, Global Financial Stability Report, pp 64 – 66. One critic from the Brookings Institution in Washington, DC, Lex Rieffel, went so far as to suggest that the sdrm was a reincarnation of the International Debt Commission (idc), which was discussed earlier. L Rieffel, Restructuring Sovereign Debt: The Case for Ad Hoc Machinery, Washington, DC: Brookings Institution Press, 2003.

MM Chamberlin, CH Dallara, RB Gray, M Green, ME Lackritz, J Langton & A McKenna, Letter to the Honorable Paul Henry O'Neill, Secretary of the Treasury, 2002, at http://www.sia.com/international/pdf/O_Neill.pdf, accessed 3 January 2004; and MM Chamberlin, ‘Remarks of Michael M Chamberlin’, emta Executive Director, Third Annual Insolvency Conference, New York, 9 June 2003.

Boorman, ‘Sovereign debt restructuring’; M Mussa, Argentina and the Fund: From Triumph to Tragedy, Washington, DC: Institute for International Economics, 2002.

Boorman, ‘Sovereign debt restructuring’.

Ann Pettifor, ‘Chapter 9/11? Resolving international debt crises—the Jubilee Framework for international insolvency’, report from Jubilee Research at the New Economics Foundation, February 2002, at http://www.jubileeplus.org/analysis/reports/jubilee_framework.pdf.

Additional information

Notes on contributors

Susanne Soederberg

Susanne Soederberg is a Canada Research Chair and Associate Professor in Development Studies, at Queen's University at Kingston, Kingston, Ontario, Canada K7L 3N6. Email: [email protected]