Governments in many less perfluent countries have borrowed thousands of millions of dollars in attempting to achieve permanent increases in the level of national economic activity and living standards.
The belief was that by borrowing “wealth” from the “rich” nations, they would be able to use it to generate more “wealth” of their own, enough to pay back the original “wealth” with interest and still leave enough to make their own country permanently wealthier.
This scheme can appear to work but can also fail disastrously. Its chances of success can be improved if the real nature of the transactions is understood.
Money represents throughput, and diversions of cash represent diversions of throughput. What the governments were borrowing was not wealth but throughput.
In return they were obliged to pay back not just the equivalent of the original throughput (less or more, depending on the change in value of the currency in which the loan was negotiated) but the equivalent of much more besides, the amount depending on the interest rate, the time over which the loan was to be repaid, and the self-reinforcing degree to which the repayments fell into arrears. A loan repayable at high interest rates over many years can demand the return of many times the original amount of money.
So the original loan, in its net effect, is not a helpful transfer of a quantity of throughput from a more to a less perfluent nation, but a transfer of many times that amount in the reverse direction – quite the opposite of what’s needed.
The borrowed throughput would have to generate many times itself, and then some. But wealth is what generates throughput, when acted on by throughput agents. Throughput itself is only a throughput agent to the extent that it consists of capital goods, i.e., manufacturing equipment that still needs wealth to feed it and to be throughput as goods and services. But wealth is not what has been borrowed, and a country’s quantity of wealth is not increased at all by the money loan.
The other side of the coin is that the international banks who sold these huge loans, believing that huge profits (throughput gains) would thereby come their way, will gain far less than expected, if anything. This has caused great problems of solvency for them.
What should deeply indebted nations have done to improve their lot, rather than borrow huge amounts of money from international banks?
Useful measures have been suggested earlier. Keeping always in mind that their aim is the direct transfer of throughput in their favour, less perfluent but wealthy nations should:
- Follow the example of OPEC and raise the price, while restricting the supply of any resource that they export. The degree of success will vary, but the experience of OPEC shows that considerable success is possible with an important resource.
- Encourage tourism from high-perfluence countries and extract from tourists the maximum amount of hard currency while tolerating no large or permanent environmental interference from them.
- Accept money as outright gifts, never as loans.
- Fight by every means to tear down import barriers. Much has already been achieved with this. More perfluent nations would prop up high wages in many of their industries by restricting or discouraging the import of goods from similar industries in less perfluent places where wages and prices are lower. An absence of tariff barriers forces industries in more perfluent econmoies to cut wages or close down, in either case benefitting the less perfluent.
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Posts in this Series
- Review of 1988 edition of Economics for a Round Earth
- Ends and Means
- Evolution Not Revolution
- Notes on Evolution Not Revolution
- Concepts and Terms – What is ‘wealth’?
- The Throughput Chain
- The Derivatives of Wealth
- Global Inequalities in Wealth
- Economic Growth Redefined
- Misconceptions in Practice
- Borrowing to Invest to Get Rich
- Environment versus Economic Progress
- Digression: Pollution Red Herrings
- Digression: Depletion and Inflation
- Value Inflation – the Trigger, not the Bullet
- Living Standard and Quality of Life
- Digression: Resource Consumption, Jobs, and Hands Off
- When the Boom comes
- The Effect of People’s Expectations
- Hard Work – Virtue or Vice?
- Who needs the Snail Darter?
- More Dollars for Conservation?
- Non-renewable Resources – Leave Them in the Ground?
- Digression: Fast Breeder Nuclear Fission Reactors
- Minerals in National Parks – Leave Them in the Ground?
- Population and Wealth
- Left, Right and The Environment
- Digression: “So Long As We Profit, Costs Elsewhere Aren’t Our Problem”?
- Limits to Growth?
- Solar Energy – a Special Case
- The Solar-Powered Car
- Money Supply, Throughput and Inflation
- Real and Money Wages: Living Standards
- Digression: Caution about “Increases” and “Decreases”
- The Idea of Proportionate Flows Applied to Wages: the Great Depression
- Deficit Financing
- The Optimum Proportionate Flow Condition
- Digression: Thrift versus Spendthrift
- Digression: the Private Motor Car – a Basic Necessity?
- The Idea of Proportionate Flows Applied to Wages – the Stagflation of the 1970’s and 80’s
- Excessive Wages Can Cost Jobs
- Fight Unemployment or Inflation First?
- Digression: Work and Jobs
- Other “Job Creation” Schemes
- Visual and Noise Pollution
- Digression: Renewal and Recycling of Resources; Wages and Jobs
- Ratio Distortion and Consumption
- Aggregate Demand – Components and Internal Ratio
- The Slave Economy
- Employment and the Steady State
- Consumer-Led Recovery
- Interest Rates and Ratio Distortion
- Demographic Trends and Living Standards
- Digression: Bad Economics Good for Conservation?
- Coping with Aging Populations
- Stabilising the Human Population
- Costs – What Really Costs Us and What Doesn’t?
- Digression: Other Comments on Statements in UN Report
- Discussion of Costs Resumed
- Budget Balancing Methods – Cost or Gain?
- Digression: Government Expenditure – Government Employees
- Expenditure on Weapons