Debt cancellation alone is not enough

The London Accords of 1953 & the Marshall Plan

Greetings from Quito, Ecuador, the Center of the World!

I am here with a small group of colleagues from across the Global South for a workshop on debt and development. It was the beginning of an amazing collaborative effort that will unfold over the next few months (more on this in due course). And it was a wonderful opportunity to visit the Mitad del Mundo (the Middle of the World) at the 0 latitude point on the equator (which pre-Incas native people have identified with GPS-like accuracy and marked it on Mount Katequilla, which means he who follows the moon), where we took turn finding our perfect balance (balancing that egg!) and enjoying samples of the best Ecuadorian chocolate and coffee.

One of the main arguments I discussed during the workshop is that all of the ongoing efforts to restructure, reduce, or even cancel the external debt of the Global South will not be sufficient to transform our economic structures and to eliminate the root causes that generate the external debt in the first place. External debt is a symptom of deeper structural issues that can be summed up in three main areas: food deficits, energy deficits, and value-added deficits in the manufacturing sector (I explain this in more detail here).

The London Accords of 1953

A good example of a country that has gone through this process of simultaneously having a huge chunk of its external debt cancelled and having strategic investments via grants rather than loans propel it into becoming an industrial powerhouse was post-WWII Germany.

This year we celebrated the 70th anniversary of the German debt cancellation agreement -- the London Debt Accords of February 27, 1953. Note that the original agreement included debt cancellation by Iran, Sri Lanka, Pakistan, South Africa, Namibia, Zambia, Botswana, and Angola, and after 1953 other Global South countries followed with more debt cancellation to Germany (including private sector creditors): Egypt, Argentina, the Democratic Republic of Congo, Cambodia, Cameroon, New Guinea, Malawi, Zambia, and Zimbabwe. One hell of a debt jubilee! 

At the time Germany's total external debt was 30billion DM (about 25% of its GDP). By comparison to today’s Highly Indebted Poor Countries (HIPIC), Germany didn’t even come close to a HIPC status, yet many of the countries that did cancel Germany's debt are now HIPCs. 

The 1953 Accords cancelled 50% of Germany's debt or 15billion DM when the DM was at its lowest level 4.2DM/$ and even at that exchange rate the amount cancelled is the equivalent of $40 billion in 2023 dollars. The amount would be double ($80 billion!) if we consider the pre-WWII exchange rate when most of the debt was acquired. Here is a brief piece putting this in context.

The 1953 debt cancellation was a necessary but not sufficient condition to propel Germany into the economic powerhouse that it became after WWII.

Giving a country some debt relief without also giving it the tools to climb up the global value chain of industrialization is the equivalent of giving someone who is trapped in a deep whole some food and water to survive another week, but without giving them the ropes and ladders they really need to escape inevitable death. In other words, what appears to be an act of generosity and kindness is in fact an act of intentional cruelty. That is precisely what the Global North has been doing with every Global South debt crisis.

From Morgenthau to Marshall

If you read this excellent article by Erik S. Reinert, you will discover a hidden truth about how the United States dealt with Germany after WWII. Former US Treasury Secretary, Henry Morgenthau Jr. designed a plan dubbed the Morgenthau Plan in 1943 to deindustrialize Germany and to turn it into a “pastoral state” that would be energy poor, food poor, and technology poor country that can never fight another war. In other words, the plan was to make Germany a developing country that is structurally colonized and permanently dependent of the West. Does that sound familiar?

The Morgenthau plan was implemented immediately when the war ended and continued until 1947 when it was abruptly stopped, and replaced by its exact opposite, the Marshall Plan, which as Erik S. Reinert correctly describes as an industrialization plan, rather than a financial (aid) plan. The Marshall plan was designed to explicitly bring Germany’s industrial capacity back to its 1938 level and set the stage for the country to be an industrial powerhouse of economic prosperity that can withstand the Soviet threat. And as they say, the rest is history.

Remember that that Marshall plan represented about 5% of the United States’ GDP at the time. In today’s dollars, that would be nearly $1.5 trillion. And that was on top of a very expensive war, which came after the economic misery of the Great Depression. So when someone from the US government says the US cannot afford climate reparations today, you can simply call them out.

At a minimum, we should expect some kind of proportional reciprocity, and the use of this historical precedent in similar contexts such as colonial debt and climate debt. The Global South is owed climate debts, colonial debts, and post-colonial debts. Period.

To conclude, we must fight for Global South debt cancellation and simultaneously channel strategic investments (via grants and reparations rather than loans) in food sovereignty and agroecology, renewable energy, and high value-added industrial policies.

For more on this, you can read this excellent editorial from The Guardian, “The Guardian view on Germany’s economic miracle: it was built on debt relief.”

Happy 70th Anniversary to Germany for its debt cancellation! And a shout out to the fearless activists from Debt for Climate who now have chapters all over the world calling on Germany to reciprocate the debt relief it received from the Global South, and to lead the Global North on this front in the context of the climate crisis.

My next post will be from Tunis. I will be giving a keynote speech at the FSEG Sousse conference on “Climate Crisis and Food Sovereignty.” Join us if you’re near Sousse.