The Great Ship
Once upon a time a great ship plied the oceans. Resplendent in their glittering uniforms, the officers occupied the top deck. They ate gourmet foods and drank expensive wines in their luxurious dining room, served by a waitstaff dressed in livery. On the middle deck lived merchants who could do business only if the officers allowed them. They paid enormous sums for these permissions and endured days and weeks of signing documents whose only purpose was to make the officers feel pompous or to give them an excuse to extract fees. Nevertheless the merchants enjoyed comfortable quarters and ate reasonable food in their own dining rooms.
The principal product of the ship was fish, which were sold in the various ports. The principal occupation of the merchants was to supervise the catch, which they turned over to the officers for sale at a great markup at every port.
On the lowest deck were a multitude of servants, who did the actual work of hauling the fish from the nets. Some servants cleaned the bathrooms on the officers' deck. A few set up their own businesses, making clothes for the merchants. By law, they should have obtained expensive permissions to do so. But everyone ignored the law, knowing that the cost of obeying it would be beyond the capacity of the merchants and that the supply of clothing would be interrupted if the law were strictly enforced. A large number of the servant class wandered about aimlessly, living in meager quarters they had constructed out of leftover boxes.
Since fish sales were not enough to maintain themselves and their crew, the officers signed promissory notes to the shore people for some of their supplies. Realizing how poor the servants were, and wanting to help, the shore people usually extended the maturities of the debt, and often they donated supplies free. Many of the shore people, called Quakers, demanded that their fellow countrypeople give or lend money to finance the ship stores, whether as individuals they were willing or not.
With smirks on their faces, the officers promised that they would use borrowed funds to provide schools and hospitals for the servants on the lowest deck. But they knew that once the ship was again at sea they could devote the supplies to whatever they wanted. So, instead of schools and hospitals, they built ornate corridors on their own deck, and a superstructure above the ship that was not necessary for navigating but that gave them a glitter to be admired by other ships.
The officers set up ship enterprises to produce electricity, gas, and water. In order to calm the restless servants, they hired many more workers than they needed and paid them with money they had printed. They also paid themselves high salaries for their "management," again with printed money. Also to keep the servants happy, they sold them these products at ridiculously low prices.
Soon there was so much money chasing so few goods that all prices rose enormously. The ship was so greatly in debt that the shore people began to wonder if they would ever be repaid. They called on organizations such as the International Monetary Fund and the World Bank to extract even more money from their compatriots (always without their individual permission) so the debts would not yet have to be repaid.
Many Quakers argued that the debts should be forgiven, since the servants on the ship were so poor. Provided, of course, the officers would build schools and hospitals with the money saved by not repaying debt. Again the officers smirked, knowing that once the ship was at sea they could again do as they pleased. Some Quakers suggested that the shore people send monitors on to the ship to make sure the money was spent on the poor. But others noted that "ugly Americans" telling the ship's officers what to do would interfere with their sovereignty.
Finally the inflation became so great, the debt so huge, and prospects for repayment so slim (or nil) that the Fund and Bank stopped lending money. "You will not have any more funds until you clean up your act," they proclaimed. "You must confiscate the surplus money from your people (by lopping off three digits), stop spending profligately and stop harassing the merchants. You must sell the ship enterprises to private investors, who cannot afford to spend funds unprofitably. (This was called "structural adjustment.") Many Quakers were aghast at the interference, and some thought the Fund and Bank must somehow be serving the interests of people at home, even though they did not know exactly how that was happening.
The officers sold the ship enterprises, but then they did not have the same "profits" as before. Without enough funds for themselves, they closed the schools and hospitals for the servants and gave them cheaper food. When the servants became fed up with this abuse, they rioted, went to the bridge, seized the captain and other officers, and tied their hands. With no one to run the ship, it ran into rocks. Everyone took to the life boats.
But the journey to shore was very stormy, and waves tossed over the boats. Many became seasick. Finally, someone shouted, "The ship was so comfortable, let's go back." So they rioted again, and made the lifeboats turn back toward the sinking ship.
What happened then? I don't know, because that is where they are right now, and the future is misty.
Some members of my editorial board thought some readers might not know what I was talking about in this allegory. They suggested an explanation, which I supply below.
Sincerely your friend,
In eastern Europe, Africa, Latin America, and Asia except Japan, wealth is more concentrated than in western Europe and America. The elites run the government and make the rules. Many laws and regulations are passed for no other reason than to force people to pay so the authorities will wink. Even a driver's license can often be bought without a test.
These elites set up state enterprises that they themselves manage. In order to solve unemployment, they hire more persons than needed for whatever their functions. Many investments, such as super-highways to the President's house, have little economic justification but merely feed the ego of the elites. China is notorious for its state enterprises, many of which are failing or have failed.
Vast sums have been borrowed from abroad to cover the losses of these enterprises. Foreign banks and others once made these loans in the belief that "governments never default," but more recently on the high probability that the International Monetary Fund or World Bank will rescue them if they are on the verge. In addition, the governments cover losses by printing money, which causes triple-digit inflation.
A small middle class produces most manufactures and services, while peasants grow the food on land the government owns. Export crops were often turned over to government for sale by state monopolies, while farmers and other producers are paid only enough to survive.
The poorest of the poor make clothing, soap, and other necessities to sell on the streets. They pay no taxes and do not respect regulations. They do not have enough funds for bribes, and if they were not informally allowed to continue the economy would stumble.
The debts have piled so high that they clearly will never be repaid. Many Friends have wanted to forgive these debts, and some of them have been forgiven, on the promise that governments would provide schools and social services with the money saved. However, these governments have rarely spent enough on these services and do not intend to do so now. On their own soil they have ways to get around promises to foreigners. For example, the people riot against attempts by the United States to interfere with their sovereignty.
By the end of the twentieth century, as creditors lost faith that the debts would be repaid, the World Bank and the International Monetary Fund demanded that borrowing governments sell off losing state enterprises, balance their budgets, and stop inflation. These programs are called "structural adjustment." Many Friends oppose them, fearing that the I.M.F. and World Bank somehow are toadying to the rich (for example, New York banks that would lose if loans were defaulted). The I.M.F. replies that the problem lies in profligate governments, and if they want I.M.F. money they must live up to I.M.F. conditions.
Remembering how things were better when the society was living beyond its means, rioting and violence now demand a return to the impossible.
My reason for opposing structural adjustment is not the same as many Friends. Many think that structural adjustment causes the government to cut down on social spending, when in fact the failure results from longstanding government profligacy financed by excessive borrowing and inflation. Just as with our children, the less developed world must learn many lessons for themselves, and "parental" (e.g., IMF) demands in the long run are not obeyed.
(Obviously, this description does not completely apply to every country in the Third World, only 98% of it to almost every country. It conforms to my own experiences on professional assignments in about 35 countries of the Third World, and is understood by virtually all economists with similar experiences.)
Please send comments on this or any TQE, at any time. Selected comments will be appended to the appropriate letter as they are received. Please indicate in the subject line the number of the Letter to which you refer! The email address is tqe-comment followed by @quaker.org. All published letters will be edited for spelling, grammar, clarity, and brevity. Please mention your home meeting, church, synagogue (or ...), and where you live.
Another excellent piece, Jack. As someone who invests in sovereign debt for a living, I often wish countries did have bankruptcy available to them. But what sovereign government would allow a trustee to oversee liquidation of state assets to pay foreign creditors?
Tom Cooper, Boston (MA).
Do I read your Letter 51 correctly to say that government development assistance doesn't work, so we should stop trying? If so, what new approaches do you propose that would have a reasonable chance of working in the future? I spent 24 years, 1965-1989, negotiating loans from the U.S. government to various countries in Latin America. I agree with you that most structural adjustment loans from the World Bank and IMF now are not working, and most of the problems are in the recipient governments, but there are also serious problems in the World Bank and IMF. My experience with successful structural adjustment loans, 1965-69, was that if your economic team was in-country in constant contact with government staff, you could support those in the government who agreed with your development objectives and help them defeat their enemies. I am guilty, but I do not repent, of having made many loans for food commodities because I thought it was more important to keep the population properly fed, even if much of the hunger came from bad government policies; the loans could always be renegotiated or forgiven later if the country could not pay, and this has been going on for more than forty years now at the so-called "Paris Club." Our Congress voted funds for these loans more in the name of "surplus agricultural commodity disposal" than of "economic development."
Bill Rhoads Germantown [PA] Meeting
Reply: (1) Hungry people should be fed, regardless of circumstances. (2) I did not propose any policy in Letter 51. Rather, I told the story that I see. What you make of it is up to you. Jack
The market system, with its allocation of resources to those activities with the greatest economic return in the short term, has its shortcomings when it comes to activities whose rewards have a longer horizon. This is one area where the role of a central government, not constrained by a need for short-term results, would be appropriate.
Tom Selldorff, Weston MA
Reply: It is the people, not the market system, that have horizons. What makes you think government horizons would be better? Don't they often extend only to the next election? Jack
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