Who's to blame for a bad loan?
A good friend of mine has condensed a lot of good, critical thoughts on lending -- from the subprime market to the World Bank, into one good blog post, riffing off of an exploration of the subprime disaster at salon.com. After my friend reminds us that the central function of the World Bank is as a bank - lending money and recouping interest from those loans (which are development projects so wonderful that the governments involved will be able to pay the loans back from the benefits of the project), he goes on to make some specific points (warning:some curse words to make a point follow):
First, whenever you hear someone say that the Bank or other such institutions should switch to providing for basic human needs--building schools, vaccinating, empowering women--there's nothing wrong with those goals per se, but do you want to take out a loan to advocate for them? When do you think you're going to see the payoff that let's you pay off the loan?
Second, Remember that the Bank and IMF also have encouraged governments to cut taxes, among other neoliberal policies. Given that the governments are supposed to be taxing to inter alia pay off the loans they took from those institutions in the past, this advice should strike you a bit like a credit-card company telling you to take a pay cut, and just to give them smaller payments over a longer period of time. Who does that help?
So there was a debt crisis, right? Poor countries had shitloads of debt that they couldn't pay back--that they would probably never be able to pay back, because the entire premise of the loans had often been faulty. [...] I have no doubt--zero--that governments mis-used some of the money they received. [...] the more damning this next question becomes: why did creditors keep lending them all that fucking money?
I mean, remember: some asshole at the World Bank lent the government of Zaire, under Desiree fucking Mobutu, billions of dollars. Shouldn't that asshole be fired? Shouldn't his bank, which made such stupid decisions, be closed down? After all, no matter how irresponsible a borrower is, he can only become a risk of default if somebody lends to him. It takes TWO parties to make a loan, good, bad or otherwise.
In short, with both the subprime lending crisis and World Bank loans, we have the same problem; there are structural reasons protecting lenders from their bad decisions. With the Bank, they have such a stranglehold on all international funds for a country that no one can dare to default on a loan. With the subprime market, there's the last resort of a government bailout and reform that comes too late. For the lendees, they're just strapped with increasing debt, external forces guiding on their finances (bankruptcy limitations or structural adjustments), and no one sticking up for their side. My friend frames it thusly:
Lending crises usually involve large numbers of debtors risking default. But our unequal society never recognizes massive debtor default and the negative effects on debtors, in and of itself, as a crisis. Such default only becomes a "crisis" when the default is so large that it threatens to take down creditors--the rich people with the money.
HIPC (debt forgiveness for Heavily Indebted Poor Countries) was a good step, but it got bogged down in further required structural adjustments and a Charlie Brown - and - Lucy game of football with increasing requirements and decreasing relief. In short, it remains a huge mess, with only one of the parties guilty of participating in a bad loan - the least able to defend itself or recover - paying the price.