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Democratic lessons on public debt from developing countries

Costas Lapavitsas

Publishing Date: July 26th 2011

Public debt has become a focal point of the current economic crisis, serving to justify policies that cut public expenditure, push wages downwards and raise unemployment. But public debt also poses fundamental issues of democracy. What do working people – the "hard-working families" who are the favorite of UK politicians – know about its causes and composition? The answer is probably next to nothing. On what grounds are they then called upon to make severe sacrifices presumably to put public debt under control?

Elections are not an answer even when a government has been elected on an explicit debt ticket as, for instance, the UK Conservative party was. Electoral platforms offer little more than general, and often ideological, arguments about the implications of debt. The reality is that public debt is a multilayered magnitude that remains largely obscure to voters.

Further issues of democracy are posed by the social repercussions of public debt. The holders of public bonds lay claim on part of the annual product of a country collected by the state through taxes. In effect, public debt acts as a mechanism for the transfer of income and wealth among entire social classes and nations. It seems fundamental, therefore, that those who are called upon to bear the burden of servicing it should have an active say in its management. Public debt is far too important to be left in the hands of unelected technocrats and even politicians who are transparently ignorant of its nature.

But is there a way of translating into actual practice the democratic right of knowledge and active participation in the handling of public debt? An answer can be gleaned from the recent experience of developing countries.

The current crisis is the third great financial upheaval to have hit the world economy since the start of financial liberalization in the 1970s. The first, in the 1980s, devastated Latin America and the then Eastern bloc. The second, in the 1990s, battered the Asian "tigers", but also Russia, Argentina and Turkey. The disaster that commenced in 2007, on the other hand, has affected the core of the global financial and economic system, mainly the EU, the US and the UK.

All three crises have been associated with the so-called financialisation of capitalism, and hence exhibit common patterns. Stricken countries have often faced strong growth of domestic credit, but also heavy borrowing from abroad. Domestic and foreign credit frequently went to real-estate speculation, financial transactions and consumption, rather than production. When the inevitable crisis burst out, borrowers were left with vast debts, domestic and foreign, private and public. Multilateral organizations then arrived, imposing austerity, protecting the interests of lenders, and shifting the costs of debt on to society at large. The result was years of falling incomes and high unemployment.

Decades of bitter experience have produced several lessons, three of which merit mentioning. First, engagement with multilateral organizations, principally the International Monetary Fund (IMF), is to be avoided. Stabilization policies lead to stagnation, and for sustainable growth it is best to keep the IMF at a distance. Second, the international machinery to deal with debt favors lenders, typically large banks and other bondholders. Effective debt relief requires sovereign intervention by borrowers to achieve substantial cancellation of debt. Even more, it calls for international co-operation among borrowers.

Third, protecting the interests of borrowers’ works best when broad layers of people are involved on a democratic basis. An important innovation has been the formation of independent debt audit commissions–often drawing on popular movements – that have demanded open access to information. An audit commission could examine public debt for its legality, legitimacy, odiousness and social sustainability, providing grounds for its cancellation.

Social and political conditions are different in developed compared with developing countries, needless to say. But the democratic right independently to examine public debt with the aim of advocating radical policies for its management, including cancellation, is the same. There are signs that this lesson from developing countries is increasingly appreciated across Europe, starting in Greece but also in Ireland, Portugal, France and elsewhere. Let us hope that working people in developed countries will find the strength to deploy the weapon of democratic audit commissions in confronting public debt.

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