The horizon is not so far as we can see, but as far as we can imagine

The Debt Trap That Helped Take Down Sri Lanka Was Not Chinese

Let’s put an end to this nonsense:

The Asian Development Banks is essentially a US proxy and the World Bank is mostly controlled by the US. Market borrowings are almost entirely from Western sources.

The article goes into more detail:

Sri Lankan President Gotabaya Rajapaksa, who spent a significant part of his life working in the United States, entered office in 2019 and immediately imposed a series of neoliberal economic policies, which included cutting taxes on corporations.

These neoliberal policies decreased government revenue. And the precarious economic situation was only exacerbated by the impact of the Covid-19 pandemic.

Facing an out-of-control 39.1% inflation rate in May, the Sri Lankan government did a 180 and suddenly raised taxes again, further contributing to popular discontent, which broke out in a social explosion in July.

Seems that cutting revenues makes you more likely to default on your debts and does not magically improve the economy. And when you do it just before a pandemic, well maybe it doesn’t work out well.

From Reuters, about that tax increase too late.

An increase in Value Added Tax (VAT) to 12% from 8% with immediate effect is among the key tax increases announced on Tuesday, which is expected to boost government revenues by 65 billion Sri Lankan rupees ($180.56 million).

Other measures, including increasing corporate income tax to 30% from 24% from October, will earn an additional 52 billion rupees for the exchequer.

Withholding tax on employment income has been made mandatory and exemptions for individual taxpayers have been reduced, the statement said.

So, the biggest chunk of it was a regressive VAT tax increase.

I’m not an expert on Sri Lanka, but the third world debt trap, which started primarily in the 1970s was based on the idea that you could borrow money and use that money to buy development. The play was to spend the money to turn to exports the West wanted (cash crops, minerals, etc…), which you had a “comparative advantage” in. Problem is that everyone was getting the same advice, so the supply of cash crops and minerals increased in multiple countries and the price crashed. Worse, to grow cash crops you had to get your subsistence farmers off the land. They went into slums, and you now had to feed them, which meant you had to import food.

In Sri Lanka’s case tea, spices and coconuts are key exports. You can only eat one of those three. When Covid happened the market collapsed, incomes were already down, debt load was high and … BOOM. According to the figures Sri Lanka is a net “agri” exporter, but it exports mostly non food agri items and can’t feed its own population.

(Rule : if your country can’t feed its own population, you are always vulnerable to outside forces.)

So, anyway, Sri Lanka spent generations servicing debt by selling the developed world luxury agri-goods, but the prices of those weren’t that high, and they didn’t get a developed economy out of their loans, but still had to pay the loans while unable to feed their own population. Pretty normal story, sadly. (Egypt is the saddest, from the cornucopia of the world to a food importer. The Aswan dam should never have been built, losing the Nile’s annual flood was too high a price to pay for its electricity.)

Now, the media is constantly full of stories about the Chinese Debt Trap. They’re bullshit.

African countries owe three times more debt to Western banks, asset managers and oil traders than to China, and are charged double the interest, according to a study released on Monday by British campaign charity Debt Justice.

This is entirely consistent with what I have discovered every time I’ve looked into the issue. It is not that there have never been corrupt high interest Chinese loans, but generally speaking, Chinese terms are far better than Western ones.

The reasons are twofold:

  1. China wants resources. In exchange they are willing to build infrastructure for cheap in countries who will sell them those resources. If you want hospitals and schools or even an entire city as well, they’re happy to build that for you too.  This seem similar to Western policies from the 70s but is different in important respects: the West wanted the resources and they wanted to make lots of money off the loans and they wanted to gain control of economic policy in developing countries so they could institute neoliberal policies like getting rid of food subsidies.
  2. China has just spent decades developing its own country. While the job isn’t done, it has slowed down and China found itself with a lot of extra development ability: companies and workers specialized in building infrastructure: from ports and airports and railways, to everything a city needs, including sewage and power. They want to keep that industry running, and not have to get rid of millions of employees and have firms downsize and go bankrupt. So those firms, and often workers now develop countries all around the world. As long as they make some profit, that’s good enough for China. It doesn’t have to be high, especially, again, as they’re getting resources in exchange.

The “developing” world is a mess because of the West, not China. It is our policies which made it nearly impossible for most nations to develop. Those policies were designed to make our coporations and banks rich and to weaken the ability of poorer countries to resist us. They were exactly the opposite of what is required to develop a country, which is almost always done behind trade barriers and by moving UP the value added chain, not by selling raw materials and crops. This is how the US did it, Britain did it and almost every country in Europe did it. It is how Japan and Taiwan and Korea did it.

We sold countries like Sri Lanka advice that was bad for them and good for us, and which put them into a debt trap we refused to let them get out of by pretending that debt default was unthinkable and debts sacrosanct and by hurting any country which tried to default brutally.

This isn’t the historical norm. Previously third world countries defaulted all the time, and they soon floated new debt and yes, investors loaned to them anyway.

People who loan money should not be protected that much from default. Some protection is reasonable, but when a person or country is bankrupt, they should be able to default. Doing so keeps lenders honest: they either don’t lend, or they accept the risks, and they have incentives to keep debt reasonable, since if they don’t, they will be hurt.

When we made it so that default was virtually unthinkable, we changed the incentives (so beloved by economism believer) in ways that made it make sense for investors to lend money which was to be used in ways which crippled entire countries, indeed continents and made it impossible for countries to change course and pursue strategies which would actually allow them to develop.

That’s the story of most of the developing world.

And if you need to borrow money as a third world nation? Borrow it from China, not the West, if they’ll lend to you. As for the IMF, their job is to keep the payments going and keep countries in the debt trap so they can never develop and never have policies independent of the US and the West.







How Standard Media Skews Public Understanding


Open Thread


  1. Mark Pontin

    Ian: ‘We sold countries like Sri Lanka advice that was bad for them and good for us, and which put them into a debt trap we refused to let them get out of by pretending that debt default was unthinkable and debts sacrosanct and by hurting any country which tried to default brutally.’

    As usual, Michael Hudson has been hammering on this theme —

    ‘The End of Western Civilization: Why it lacks resilience, and What will take its place’
    Paper presented on July 11, 2022 to The Ninth South-South Forum on Sustainability.

    ‘President Biden and his State Department neoliberals accuse China and any other country seeking to maintain its economic independence and self-reliance of being “autocratic.” … What they call “autocracy” is a government strong enough to prevent a Western-oriented financial oligarchy from indebting the population … and then prying away its land and other property into its own hands and those of its American and other foreign backers …

    ‘The neoliberal pretense is that privatizing the public domain and letting the financial sector take over economic and social planning in targeted countries will bring mutually beneficial prosperity. That is supposed to make foreign submission to the U.S.-centered world order voluntary. But the actual effect of neoliberal policy has been to polarize Global South economies and subject them to debt-ridden austerity.

    ‘…It is as if the rest of the world has no alternative but to accept U.S. control of the global (that is, neo-colonial) financial system, trade and social organization. And just to make sure, U.S. diplomacy seeks to back its financial and diplomatic control by military force. ….

  2. Olivier

    Ian, as you note most of the third world is in the same boat, debt-wise. What has made Sri Lanka such a particularly atrocious basket case? I am genuinely curious.

  3. Trinity

    “President Biden and his State Department neoliberals accuse China and any other country seeking to maintain its economic independence and self-reliance of being “autocratic.”

    I haven’t read Hudson’s report yet, but wanted to note that this kind of false mirroring, accusing the opponent of exhibiting your own bad behavior, was a key component of my mother’s narcissism. If she was accused of something, she was famous for flipping it around to be about her accuser. It’s late, I’m trying to think of the right words, it’s some kind of deflection that is necessary to maintain their facade/false belief of being the “good guy”. So they accuse the accuser of having what they are being accused of to protect their lack of any sense of self (lack of humanity, imvho). This deflection is also normal behavior for normal people (usually under stress), but normal people come back later and admit they were wrong, apologize, seek to reconnect and repair, etc.

    Or put another way, their accusations reveal the truth of their own behavior. Their accusations aimed at their opponents tell us who they really are, it’s when their truth, who they really are, is revealed.

  4. anon

    America sells out its own people all the time ( ex. non-dischargeable student loan debt, privatized healthcare, and subprime mortgage loans), so why would anyone expect the US to be more compassionate to any other nation, particularly those whose people are black and brown? America’s system is to always, first and foremost, benefit corporations and banks. That rule applies to both US domestic and foreign affairs.

  5. Z

    I have read that our rulers are using derivatives (futures contracts) to push down the price of oil. The derivative markets are huge and unregulated and allow for “investors” to leverage up and place large bets that they don’t have the capital to cover because the derivatives are essentially insurance that if an investment bet goes bad on them they won’t be wiped out since the insurance limits their losses. That is if the counter party can pay off the insurance; I’ll mention again that the derivative markets are unregulated. They are unregulated because the Committee to Enslave the World (Robber Rubin, Greenspan, and Summers) essentially overruled Brooksley Born who wanted to regulate derivatives during the first Robber Rubin Administration, often naively referred to as the Clinton Administration.

    If Putin decides to cut off selling his oil and the price for it explodes and the other end of those derivative bets can’t pay them off then we could see a complete blow up of our financial system which could possibly be a basis for the Global South and other countries to walk away from their debts to the West. This scenario might be a reason why The Lead Stiff of Weekend at Biden’s is getting ready to belly dance for MbS to get him to pump more oil into the market. Now, of course, the Fed and Larry’s and Stanley’s Asset Inflation Factory BlackRock, which is plugged into the Fed’s money hose, will do their best to cover the losses to keep the system intact but there may be practical limits to that.

    Off-topic, but in relation to Trinity’s post: narcissistic mothers are very damaging to their children because a mother’s love is a seed for self-love and if you don’t get it it can create all sorts of emotional and psychological infirmities. Complex PTSD (CPTSD) can often come from it.


  6. someofparts

    Someone I was listening to on a podcast this evening spoke of projection as a form of confession, when someone accuses someone else of the problematic things they are guilty of themselves. The context for the remark was the way that the things the western press accuses Putin of actually describe Biden.

  7. Ché Pasa

    Isn’t it possible that the Sri Lanka situation is being studied and used as a model for future enslavement and destruction of nations and economies as the general degradation of the globe gathers steam.

    How much will the Lankans endure? How long can their anger be kept in check? What, ultimately, can or will the rabble do about it?

    One is reminded of Greece, no? The terrible financial constraints put on the Greek people, primarily by German banks, seemed to be resisted mightily by the People in the Streets, Governments fell. And yet in the end, it was a lot of sound and fury signifying nothing. Tsipras turned into a Juda Goat leading the lambs to slaughter. Nothing at all but more suffering came from the uprisings.

    Will we see the same in Sri Lanka?

    As for blaming the Chinese, we’ll see much more of that. It’s always the fault of whatever demon of the moment our rulers choose. It doesn’t much matter whether people believe it; it matters whether the diversion is effective, whether it keeps the focus elsewhere. If it weren’t the Chinese, it would be the Russians, Venezuelans or Iranians.

    Obviously, nothing at all is being done to alleviate the suffering of the People. Nothing will be done, either.

  8. Joe

    Much of this well done post is further detailed in “The New Confessions of an Economic Hit Man” by John Perkins. What Ian left out is the role of the CIA and the US military as enforcers when leaders of other countries decide they do not want “help” from the IMF and USAID. I believe Perkins calls them the jackals, which include coups, assassinations, and/or invasions. As a young man, I worked with a private firm that partnered with the World Bank, until my conscience told me to do something else.

  9. Willy

    projection as a form of confession, when someone accuses someone else of the problematic things they are guilty of themselves.

    Modern conservatism in a nutshell, that place where being able to play the game is the most important thing. Biden is more about rationalization.

    I keep mentioning Musk because his political leanings directly confess the personal benefits for himself and his own personal business interests instead of whatever he tries to convey in his tweets. The question for many of these power players is, are they being carried along by forces they cannot control, or is this actually how they want things to be?

  10. Olivier

    Answering my own question, some pointers here (in French, though):

  11. Tallifer

    Sri Lanka’s worst affliction was not bankers but the egregious corruption and wasteful spending of its kleptocratic dynasty. Of course, bankers are culpable for lending money to them and facilitating their corruption. (See British banking’s money-laundering support of Russia’s kleptocracy.)

  12. someofparts

    “narcissistic mothers are very damaging to their children because a mother’s love is a seed for self-love and if you don’t get it it can create all sorts of emotional and psychological infirmities. Complex PTSD (CPTSD) can often come from it.”

    Me. I’m one of those people and I have CPTSD. I only discovered the existence of CPTSD nosing around on the internet. Figuring out how to support myself for several decades, while working around the disability, has been a nightmare. Needless to say the same mother who crippled me, with the support of other family members she deceived, never offered anything but renewed abuse while I struggled to survive. Mom died a few years ago and, far from missing her, I feel safe for the first time in my life.

  13. Z


    Sorry to hear that. Life is particularly difficult and treacherous to navigate when you’ve been taught that you have no right to boundaries and to be somebody and instead have been trained to please people under the threat of guilt and shame who don’t truly care about you. You’ve probably been trained to care more about others than yourself and in this world, especially in recent times, that leads a multitude of problems since so many folks, especially ones with power, see that as weakness to prey upon.

    Best of luck. Again, I’m sorry that your mom tossed this burden on you as a child, it’s a heavy one and one that is almost impossible to shrug off since most everyone wants to love their mother. It doesn’t whither away with time either, in fact, CPTSD can get worse.

    Hang in there. Know that you’re a survivor and are tougher than you think or else you wouldn’t have made it this far. You must have experienced a lot of emotional anguish, I’d imagine, and you have to learn to have compassion for yourself. You undoubtedly deserve it. I think that’s the key to healing from CPTSD.


  14. Rule #1: if your country can’t feed its own population, you are always vulnerable to outside forces.

    This list of the major wheat producers should be an eye opener. How many people know that China and India are #1 and #2? This makes them non-dependent for the most important staple.

    The Russia, US, Canada, Australia and Ukraine come next, and they may have “comparative advantage”. But then come France and Germany, who have no comparative advantage but do it as a matter of policy, against the neoliberal rules which are only applied to weak countries to keep them weak.

  15. Ian Welsh

    India barely has enough food as it is, despite having so much wheat. China has also been on the edge as well.

  16. Eric Anderson

    Look at this through the lens of addiction and it quickly becomes clear. It’s the same playbook drug dealers use to rip off their marks. Will anyone here argue money doesn’t act on our brains in the same way drugs do? Most drugs affect the brain’s “reward circuit,” causing euphoria as well as flooding it with dopamine. So does money. Or, the promise of untold riches for a “taste”.

    The IMF is the dealer. They give their marks a “taste.” Once addicted, the rules of the game change. The national resources are the payment, the interest is the skim. The “skim” is the light bag. Or, the diluted bag. Don’t pay, more skim. But, ya still gotta have it until your selling your shoes for your next fix. THEN, comes the corruption. Ya gotta steal. So who do the marks in this analogy steal from? Well, their own people obviously.

    That’s Sri Lanka in a nutshell.

  17. NR

    Production is obviously only half of the food equation. China and India may produce more wheat than the United States, but they (each!) have four times as many people to feed.

  18. Astrid

    Food and resources security is precisely why China and India and much of the global South will always side with Russia, even if Western propaganda on the Ukraine conflict war true and not transparently false to anyone willing to see. Support Russia and join the Russian/China block, and you might get the food and loans necessary for your people to not riot this year. Join the US and see your economy implode liked Europe.

    The Western world order depreciated the value of natural resources and commodities through “value adds” of IP and financialization, while actively working to destroy any non-Western efforts to industrialize and create alternate trade systems under “humanitarian interventions” against “authoritarians”. This system justified rentiering under the disguise of free trade. If the IP is broken and the new block could offer more equitable terms for access to their financial/logistics/ip regime, the West would pretty much lose all their wealth overnight.

    This skimming also makes me wonder about the value of GDP as an indicator of wellbeing. Appliances that break immediately after their warranty period, college tuitions, medical bills, and high rent are all economic activity. Is that off any value to any users of those “services”? Isn’t a Chinese peasant with 150K RMB in savings (pretty common as they must save for home buys, school fees, etc) better off than 90% of Americans who have little in savings and wouldn’t survive a lengthy period of unemployment without going into debt?

  19. Ché Pasa

    There’s a lot of yakking about “sovereignty”, but in reality, which nation-states or regions or indeed affinity groups or individuals are or can be ‘sovereign’ in today’s world?

    Which ones can produce enough food to feed their entire populations? Who has the ability to create and produce their own technology, sufficient material goods, housing, electricity, clean water, and on and on and on for their people?

    None on a large scale, right? Few on modest or small scale. It’s just impossible in today’s world — which those who would proclaim their “self-sufficiency’ soon discover.

    Impossible. Or is it? Sri Lanka has fallen to the wolves, as so many have done before, and Italy seems close to falling tomorrow. The blame-casting going on is a primary diversion — since nothing at all is being done to mitigate the suffering. Oh no, it’s being made worse. Sri Lanka relied on the unreliable outside interests to keep it whole. Had they not, would the nation have survived? Is it better that the nation survive whilst the people… erm do not?

    Since there’s nowhere a society can survive on its own except on a very small scale, how do we realistically envision a future? How does it differ from that of Sri Lanka’s failure? Or Italy’s? Or Greece? Or Britain?

  20. Eric Anderson

    Che, the whole concept of “liberalism” in its original conception was about curtailing sovereignty. “Sovereign” nations, as you rightly point out, are capable of standing entirely on their own. Thus, as the theory has it, they’ll be more prone to fight other countries who have resources they may be running scarce on, or have become dependent on. The liberal order established post-WWII sought to integrate nation’s economies, thereby making them dependent upon one another, under the premise that it would decrease their bellicose tendencies. This was the original concept of the “Rules Based Order.”

    It worked well until neoliberalism came around and turned it into a cudgel.

  21. NL

    And this — lending in dollars with the purpose to entrap and strip mine whole countries — is the basis for the dollar as the reserve currency. The play is nearly always the same — western sources freely land to the country’s private corporations without any regard for the loans being sound –> apparent economic boom –> becomes obvious the private borrowers can not pay back or whatever –> the loans are made due –> the currency collapses, making foreign products unaffordable –> the debt is transferred from the private corporations to the state (in a most wicked act, every person in the country is made to suffer for the moral failure and greed of the financiers) –> IMF moves in –> austerity, economic suppression, looting, etc, etc wealth transfer to the west. To guard against the attack by the western raiders through the country’s own economic fifth column — i.e., its western educated financial elite, it must have dollar reserves — that is state money to pay off private debts taken by the financial elite from the west. You know — those Harvard scholarship to foreign kids aren’t free at all…

    Take away the western debt entrapment lending and the need for dollars as a reserve currency is no longer there. These stories about petro dollar and some such only serve to obfuscate the issue. As the tool of the third world countries exploitation by the west, the dollar is really irreplaceable.

    Regarding Sri Lanka, it would be interesting to see what China does. In Pakistan, it wrote the check and IMF was never called in. China may do the same here. China has trizillions of dollars that it has no use for. It could easily write a check in dollars and refinance Sri Lanka’s debts (after these debts are inevitably consolidated and transferred onto the state budget) into yuan. In this way, the west would get back its worthless paper i.e., get essentially nothing, while China would now own the place. And that’s – kids – why we hate the CCP so much…

  22. Feral Finster

    Did not Simon Johnson speak of this many years ago?

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