Seventy years ago this Monday, the London Debt Agreement saw half of Germany’s (then West Germany’s) borrowings, accumulated after two world wars, written off. The debt cancellation, worth more than a fifth of national GDP, was driven by the United States, the UK and France. Eventually, South American, Asian and African nations signed up – including, in a bitter twist of history, colonial precursors of today’s bankrupts.
Germany’s economic miracle was built on debt relief. Unlike today, Germany was allowed to repay a large part of its debts in its national currency. Meanwhile, the cost of servicing the country’s external debt was capped at 5% of export revenues. In 2021, the comparable figure was 16% for poor, indebted nations – money that should be used for schools and hospitals. Creditors in the 1950s were expected to take a haircut if the German economy faltered. The country was allowed to industrialise by replacing imports with home-manufactured goods, while creditor nations agreed to reduce their own exports. Unlike the current International Monetary Fund bailouts, West Germany’s state was allowed to get bigger. Social welfare spending zoomed upwards.
Wealthy nations put the Wunder into postwar Wirtschaftswunder. They are either the most important creditors, or home to the most important creditors, for poor countries. The institutions they run – the World Bank and the IMF – only began forgiving poor nation debts, with strings attached, in the late 1990s. Yet the generosity shown to Germany is denied to today’s developing nations. There is no space for them to regain industrial strength and control. Firms in the global north make windfall profits in global manufacturing, even though they rarely make the products.
The big powers aren’t in a hurry to encourage poorer countries to develop away from sectors such as agriculture and mining, where bountiful surpluses are extracted by rich-world multinationals. Europe was integrated through trade – with the anti-Soviet West Germany at its core – yet, in Latin America and Africa, outside powers seek the opposite outcome through bilateral trade agreements. It’s no surprise that impoverished nations end up stuck in development dead ends. The secret of making poor nations rich has been known since Henry VII, in 15th-century England, began taxing the export of raw wool to subsidise the manufacture of woollen textiles.
Poor countries face a hostile political and economic environment. With the US Federal Reserve raising interest rates, their currencies are depreciating, making it harder for developing nations to purchase goods priced in dollars and pay back dollar-denominated loans. Rebeca Grynspan, of the United Nations Conference on Trade and Development, has warned that such “debts will never be realistically repayable” – with G20 restructuring talks this weekend deadlocked. Poor nations face too high a cost for the climate emergency that the rich world created. Countries should be spending cash to indigenise production, while keeping within planetary boundaries. Instead, they are trapped into shelling out vast sums to their creditors.
What would help them is unconditional debt relief and adequate grant-based green finance. Private bondholders, not China, would be the biggest losers. Banks, institutional funds and investors advanced $250bn to the 55 most climate vulnerable countries, while Beijing lent $47bn. Bonds are governed by either English or New York law – and the UK and US should pass legislation requiring bondholders to take part in internationally agreed debt relief. The globalisation currently being orchestrated by the world’s richest countries is suffocating poor nations. What the German experience revealed is that removing the economic straitjacket would allow developing countries to breathe again.
