"Debt-trap diplomacy" is the political process to use the indebtedness of a debtor country to earn favours or get political concessions out of them.
"The world has become divided into a handful of usurer states on the one side, and a vast majority of debtor states on the other".
Lenin wrote that more than 100+ years ago in Imperialism: The Highest Stage of Capitalism to highlight how foreign debts have been used to subjugate countries. This also highlights how "debt-trap diplomacy" is not a new or unique political idea of the modern world. But the political process to it has varied over the centuries (and has existed long before China started lending money to others). During imperialism defaults on foreign government bonds bought by Europeans provided a diplomatic excuse to obtain favourable political terms from the debtor state or even to annexe its territory.
In the 1870's, for example, the Egyptian debt crisis was used by the French and the British to take away financial control due to the debt owed by its ruler to the Europeans. When the Egyptians rebelled, military force was used to subjugate and occupy it:
Egypt in the 1870s was under foreign influence, corruption, misgovernment, and in a state of financial ruin. Huge debts rung up by its ruler Ismaʻil Pasha could no longer be repaid and under pressure from the European banks that held the debt, the country's finances were being controlled by representatives of France and Britain. When Ismaʻil tried to rouse the Egyptian people against this foreign intervention, he was deposed by the British and replaced by his more pliable son Tewfik Pasha.
(There were other factors too leading to the invasion, but the debt crisis provided a useful pretext for the invasion).
The Roosevelt Corollary in 1904 was created to ensure that Americans didn't lose influence in their neighbourhood to Europeans who were eager to use the debts they were owed for political and economic influence:
In the early 1900s Roosevelt grew concerned that a crisis between Venezuela and its creditors could spark an invasion of that nation by European powers. The Roosevelt Corollary of December 1904 stated that the United States would intervene as a last resort to ensure that other nations in the Western Hemisphere fulfilled their obligations to international creditors ...
But the world has since evolved as waging wars and using armies to collect debts are risky and costlier. And so today we have an international financial system, accepted by nearly all countries, that allow a less violent approach to let the debtor state repay what it owes. This actually makes debt-trap diplomacy easier today as you can use international pressure against a debtor state to force them to comply to a contract or negotiate a new one.
The western world have been the pioneers in this since Imperialism and created most of the international controls and financial institutes. But other countries have joined it and integrated their own financial institutes to it too. Apart from the central banks of each country, and financial institutes like the IMF, World Bank, New Development Bank (BRICS bank), Asian Infrastructure Investment Bank, EIB etc. that lend money to other countries are all created for varying levels of debt trap diplomacy. An economically rising China is involved in some of these too.
... but China keeps renegotiating and cancelling debt while it is lending at a much lower rate than commercial lenders from Europe and the United States.
Two points to note here:
- They lend at a lower rate.
- They keep negotiating and cancelling debt
Why do you think that is? Does that make business sense - you lend money to earn interest on it. The higher the interest, the more profit you make. If you have to keep renegotiating and cancelling debts, you suffer a loss.
Is China stupid?
No, ofcourse not. They do it to reduce western influence and to increase their own with the debtor country. (Here are some examples of how China has been doing this).
So how can we measure or assess that a country does it objectively
Not every foreign loan needs to be to be looked at cynically as a "debt-trap". Sometimes friendly countries too give such loans with reasonable and generous terms to earn goodwill and strengthen their relationship with another country. And then there are the loans given with ulterior motives or the "debt-trap" that can be used to place demands on them.
One of the ways a foreign loan can be assessed as "fair and free" is when they are given without coercive conditions and when failure of repayment doesn't invite even more coercive measures. Any pre-conditions and post-conditions associated with a loan that work against the debtors country's own sovereign interest is a clear sign of debt-trap diplomacy. Some of these include:
- Forcing debtor to change some government policy.
- Forcing debtor country to import goods from them.
- Forcing debtor country to use business services from lender country.
- Forcing debtor country to give up or lease strategic assets.
- Using the debt as an excuse to invade the country.
and are there other countries than China practising debt-trap diplomacy?
Apart from the one's during the imperialist era I've already mentioned, some recent one's by IMF, World Bank and EIC are:
India
In 1991, India faced an economic crisis due to a balance of payment deficit (pdf). After international credit rating agencies downgraded India's bond, they could not easily borrow more money. India had to pledge its gold reserves with foreign banks to get some capital, stabilize its economy and repay some of the foreign debts. During this crisis, the IMF and the World Bank suspended their loan program and demanded that unless India changed some of its economic policies, they would not lend any more money to India. India was forced to accept their terms.
It's open to the public now. Declassified documents from the World Bank show how it and the International Monetary Fund chivvied and cajoled India into economic liberalisation in the summer of 1991 ... The papers make clear how keenly the Bretton Woods institutions tracked the political developments in India during that period to assess whether India could stomach the economic reforms,which would change the economic and even the political history of this country. - How WB,IMF got India to adopt reforms in 1991
Argentina
In 2018, IMF offered $57 billion to Argentina. By December 2021, Argentine economy was still not healthy. When Argentina went to back to the IMF to renegotiate the loan, the IMF demanded that they agree to appoint a British economist to "audit" and "guide" the Argentine economy. This demand was criticised by some politician as a dangerous infringement on the sovereignty of Argentina:
[Google Translate] “The British Ben Kelmanson will be virtually the new finance minister, this is a co-government. He is extremely serious ” , warned Castro in a radio dialogue with the journalist Cynthia García. The former national deputy also pointed out that on Christmas Day, “while we were celebrating, although not all Argentines can celebrate, the British Kelmanson was appointed to lead this mission. He will be a general audit of our economic policy ”. To depict what she denounces as an intolerable interference, the leader asked herself: “Can we guess how many officials she would disembark with? With 112 officials. It will not only audit the Nation bank, but the entire economic policy, AFIP, Central Bank, ANSES, Ministry of Production ". - Alicia Castro denunció que el FMI designó a un británico que “será virtualmente el nuevo ministro de economía”
Greece
In 2010, the European Commission, the European Central Bank and the IMF agreed to bailout Greece from its economic crisis with a €110 billion loan. The conditions imposed for the loan included, austerity measures that forced Greece to reduce pension and wages abolish bonuses for workers, increase tax, reduced spending on social security, changing labour laws, reduce military budget, privatisation, pension and labour law "reforms" etc. (IMF Survey: Europe and IMF Agree €110 Billion Financing Plan With Greece).
Ukraine
Ukraine now owes private lenders, foreign countries and international financial institutes more than $50+ billion dollars and many in Ukraine and Russia believe it is being pushed into a debt-trap that the "west" will use as a leverage against it in the future.
The Ukrainian government has seemingly jumped at the opportunity of enforcing a business-friendly environment, even as Russian bombs rain down. Ensuring the power of business at the expense of Ukrainian workers, parliament recently passed legislation that curtails trade union representation, makes it possible to remove Ukrainian workers from national labour law protections, and allows firms to suspend employees arbitrarily. The government is also planning to merge its social insurance fund with its state pension fund, firing personnel, cutting state expenditure and reducing benefits in the process – even though millions of Ukrainians asked for social assistance ... Even the government itself estimates that 60% to 80% of Ukrainians may end up below the poverty line.
The long list of monetary problems that Ukraine is facing – crushing debt obligations, runaway inflation, collapsing exports, downgraded credit ratings, devalued currency – means that, once the war is finally over, the country will have to dance to the tune of the IMF and World Bank. - Ukraine’s debts to Western banks are destroying its social safety net
The US and the World Bank have also used debt-traps to force a debtor country to change their agricultural policies in favour of the US by coercing them to grow cash crops for western industries, instead of food their citizens need and forcing them to buy food from the US instead. Economist Michael Hudson cites many such examples of debt-trap diplomacy by the US in his book "Super Imperialism", and also claims that the Chinese hired him to teach them how the US uses its economic powers to influence the world.
Debt-traps as a political instrument is a fact. China doing it today is a fact. Any western magazine claiming otherwise is simply doing so to reduce the negative publicity towards such international loans or because it has been paid by the Chinese to do so.
