2. Corruption, debt and natural resources in the Global South

King Panchiaco Presents Gold to Vasco Núñez de Balboa, (Theodor de Bry, 1594)

The Debt For Climate campaign is built on the project of cancelling the debt of the Global South in compensation for the climate debt of the North. In other words, compensating developing economies in the South for the damage of pollution in the North by canceling the financial debt Southern countries "owe" to Northern countries. Although this concept is firmly agreed upon within the movement, the modalities of the transaction are subject of discussions. Some of these discussions concern the problem of corruption of political elites in developing economies. 

Canceling the external debt of a country could create a significant windfall for the government of a developing economy. 

In the case of Zambia for example, to cancel the total external debt as of 2022 would remove a burden of $15 billion, which represents almost twice the year’s public budget and 70% of the country’s gross domestic product. Zambia’s government negotiated a debt reduction from the IMF, while BlackRock, representing private creditors, was holding back. Zambia has been counting on its copper mines to pay back its debt. 

Theoretically, canceling Zambia’s crushing debt would allow it to reallocate the income of its ore to the public budget, instead of serving its debt. Private creditors would rather not let it happen.    

After lengthy discussions where private lenders and public creditors like China and the Paris Club took turns to hold out and claim larger payments, Zambia’s debt was finally restructured in March 2024. Creditors agreed on a clause guaranteeing higher payments if the outlook is good, but without debt relief in case of a climate crisis. At the same time, a deadly drought is striking the country.  

In the hypothesis that debt was canceled, how can anyone be sure that politicians would use this new budget to the benefit of the population ? In countries where corrupt leaders have seized power for themselves and their cronies, distrust in politicians and public institutions turns into defiance. So much that one Debt For Climate militant from Sub-Saharan Africa proposed to by-pass governments entirely and send the money to the general population by direct transfers, on the model of the measures put in place during the covid pandemic in countries like India, Germany and the USA.  

“We can’t trust politicians with this. The only way is to send the money directly to the homes, to the mothers who manage their households and can’t afford the basic necessities right now.”

While many of her African colleagues attended the meeting in audio only or through laggy video feeds, she enjoyed a stable connection. The wall in the back of her desk was decorated with posters and stickers from campaigns related to debt cancellation and climate action. I’m conveying her message by memory. 

“We can’t let Debt For Climate be another opportunity for corruption and greenwashing.”

A similar comment was made by a scientist operating in Latin America. She couldn’t trust local authorities with the management of natural resources such as water or minerals because financial interests always seemed to be prioritized over ecological concerns.  

Distrust towards public authorities is far from being limited to developing economies in the South. Democratic institutions are also being challenged in the North because of rising inequalities, the perceived sway of money over politics and the impunity of the rich and powerful in blatant cases of corruption and conflict of interest. If this sounds like a populist talking point, my excuse (if I needed any) is to merely paraphrase Christine Lagarde herself, when she was director of the IMF.

The problem of corruption is more generally the problem of accountability. In the context of the Debt For Climate campaign, it is the accountability for the public budget and accountability for the sustainability of investments. Corruption happens when an individual who is accountable for the welfare of a community betrays their duty in favor of their self-interest. 

In the globalized economy, natural resources such as fossil fuels, food products, minerals or water, are extracted and used for profit in different parts of the world by an increasingly centralized and vertically integrated private sector. This private sector is primarily accountable for profits sent to shareholders.  

By contrast, access to basic necessities such as water, food and energy, or the living conditions of populations and the environmental sustainability of the extraction of natural resources, all of this falls under the responsibility of governments.  

Giant corporations and corrupt individuals take advantage of this situation. They avoid taxes, which are necessary for governments to preserve human rights and natural resources, and destroy the environment in countries with weaker institutions. By doing so, they undermine the world’s ecology, worsen the debt crisis in developing countries and maintain their populations in a poverty trap.  

When corruption, lawlessness and dysfunctioning institutions take hold in highly indebted countries, the Big Three credit rating agencies (Moody’s, Standard and Poor’s and Fitch) take note of their failing economic indicators and degrade their credit rating, which mechanically raises the interest rate on their debt. 

By doing so, credit rating agencies operate a shift of accountability. Whereas governments are supposed to be accountable to their constituents, their ratings give an indication of how likely they are to pay off their creditors. This is effectively attributing an accountability score to countries on global markets, which is then translated into an interest rate on the debt.   

When corporations from the Global North establish branches in tax havens to shift profits made in developing economies, as they have been demonstrated to do repeatedly and systematically, not only do they dispossess these countries from much needed tax income, but they also shift accountability for their economic activities to secretive and complacent jurisdictions, which don’t look twice at human rights violations, corruption or environmental crime. 

In such a predicament, developing economies are robbed of their wealth in natural resources, while at the same time “charged” with punitive interest rates. A debt trap which benefits only their creditors and the shareholders of the companies exploiting their soil. It so happens that the largest private creditor of developing economies and the largest investor in fossil fuels is one and the same company, BlackRock, with Vanguard in close second. 

Attributing the “original sin” of corruption to the governments of developing countries allows the private sector to shift accountability towards the states, while corporations and financiers of the North, such as BlackRock, reap the profits of natural resources and high interest rates on public debt without having to invest in the welfare of populations or paying for the damage caused by climate change. 

The current debt crisis in the South worsened during the covid lockdown. It has so far caused the defaults of Sri Lanka, Ghana, Lebanon, Suriname, Zambia and Ukraine (for specific reasons). 

When debt becomes unbearable to “poor” countries, the International Monetary Fund (IMF) intervenes as a mediator between the indebted countries and their creditors. The IMF seeks a deal with public lenders first, the “rich” countries of the North, who will usually “haircut” the debt and propose a new, lighter loan through the World Bank, an institution they control. The objective is to allow indebted countries to breathe, but only so that they continue paying. The logic of the World Bank and the IMF is not altruistic. Loans might receive a “haircut”, but they will always be expected to be paid back with interest. 

In recent years, private creditors have begun to bite in the “emerging markets” of developing countries, and they are resisting debt reductions orchestrated by the IMF.

Contrary to public creditors, they don’t have a public opinion to worry about and are only accountable to their wealthy investors. These hedge funds, just like BlackRock, are doing everything they can to keep “poor” countries paying. They don’t want debt to be reduced, let alone canceled.   

While the IMF and the World Bank are supposed to act as lenders of last resort for countries with financial difficulties, there is evidence that their economic policies actually provide incentives and support to the elite moving wealth out of the country and into tax havens. 

IMF and World Bank loans are always associated with conditions, commonly known as structural adjustment plans. These conditions effectively hand out a large part of the control over the country’s economy to the bureaucracy of the twin institutions. Structural adjustment plans always obey the same logic. Cutting public investment, raising taxes, privatizing public services and opening the interior market to foreign investment. This liberalization of the economy is exactly what corrupt actors need to socialize the cost of keeping the country afloat, while privatizing the benefits of exploiting its resources. 

Researchers analyzed data from the Bank of International Settlements and discovered that developing countries with a high degree of capital fleeing to tax havens are more likely to seek a conditional loan from the IMF and the World Bank. Not only that, but they are more likely to accept more stringent conditions and more austerity for their populations. Researchers observed a peak in capital flows towards tax havens just before the official request for an IMF loan, a move interpreted as a way to shelter wealth from the increased taxes associated with IMF loans. While the rhetoric of the twin institutions has always been virtuous and well-meaning, many critics on the left have denounced that structural adjustment plans often result in increased inequality, slower growth and dysfunctional institutions, particularly in the case of Sub-Saharan Africa.      

IMF programs and World Bank loans follow a history of economic interventions presented as “foreign aid”. These economic reforms dictated from the North and written by the International Monetary Fund, are served as packaged deals with World Bank loans, each time with the promise of reducing public deficit, opening the local market to foreign investors and ultimately lifting up the economy of the concerned countries. When this recipe fails, as it often does, the public deficit widens and distressed economies slip again into bankruptcy. 

Then the North blames the governments of indebted countries. For example, a blog post by a World Bank director imputes the current debt crisis in Sub-Saharan Africa to bad policies and excessive government spending, while offering a condescending helping hand full of new loans conditioned to new economic reforms. 

This opinion from a World Bank official doesn’t mention any compensation for the damage caused in the South by pollution in the North, thereby ignoring the concept of canceling the debt of countries most impacted by climate change. 

It also ignores the role of tax havens in the capital flight that is siphoning the income of both external debt (so called foreign aid) and natural resources in Sub-Saharan Africa, which is stuck in a debt trap benefiting creditors and shareholders in the North. 

This ignorance is deliberate. It is not in the immediate financial interest of the World Bank to compensate developing countries for the climate change caused by the wealthiest corporations. Nor is the World Bank willing to act against tax havens, because they present a strategic advantage that the same powerful actors refuse to abandon. This strategic advantage is none other than the rule of the mighty. A bureaucratic gateway of lawlessness for a privileged few, that is causing the rapid deterioration of the climate and impeding the living conditions of billions.  

The case of Sub-Saharan Africa needs to be highlighted because of the abundance of rare metals in its soil, which gives the region enormous strategic importance in the transition to battery-powered transportation. It is urgent to convey the fact that the poverty where Africa is trapped is not of its own making, as some voices at the World Bank imply. It is designed by the financial institutions of the North, which gave private interest primacy over the interest of the populations, as these institutions perpetuated the colonial subjugation of past centuries and gave it the name of liberalization. 

When Blackrock refuses to cancel or reduce the debt of Zambia and other distressed economies, while investing heavily in African renewables, the intent is very clear. Africa is to remain a territory to exploit for the interest of Northern investors. 

For activists everywhere, a transition to sustainability can only be obtained through debt cancellation and a massive overhaul of global financial institutions, starting with tax havens. 

This article is the second in a series: Sink logic: how BlackRock and tax havens worsen the climate and debt crisis