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In the South as well as the North: from the Great Transformation in the 1980s to the current crisis
by Eric Toussaint
1 October 2009

After World War II, there was a period of strong economic growth in the North in the 1950s and 60s (the “thirty-year boom”), which enabled workers to improve their social conditions significantly. They fought to obtain a major increase in buying power, a stronger, more coherent social security system, and improved public services, notably in education and healthcare. The State also nationalized many companies, strengthening its power to make economic interventions. Common citizens had a greater share of the wealth created at the national level and the amount of their wages as a percentage of national revenues increased.

At the same time, in the South, whereas the Latin American countries were experiencing rapid industrialisation, most of the Asian and African countries were proclaimed to be independent – at least officially. Some of them took steps towards becoming truly politically and economically autonomous (certain, such as India, Indonesia, and Egypt, did so while respecting the capitalist system, whereas others, such as China, Cuba and Vietnam chose to break away from it). Meanwhile, most of the newly independent countries were in fact still obedient to the authorities of a major power, often their former colonial masters.

Debt is one of the major vectors of their obedience: when the administration and army of the colonizing countries had to physically leave the countries that had become independent, the governments of the latter were strongly encouraged to contract massive amounts of debt, while the creditors ignored – or even encouraged – the embezzlement of money by the local ruling classes. The Southern countries, which were deeper and deeper in debt, had to produce more and more goods to export in exchange for cash that was supposed to be used to pay off their debts. In this process, they started competing with each other because they were sending the same raw materials to market (cotton, coffee, cocoa, bananas, sugar, nuts, and ores, among others), needed by the economies in Northern countries. This overproduction would prove to be tragic in terms of the evolution of prices, all the more since as of 1973 the Northern countries were faced with the first major recession since World War II.

Power relations were radically transformed in the 1980s between both the most industrialized countries and periphery countries, and between capitalists and wage earners. This was the result of several interrelated factors:

1. The reckless intervention by Paul Volcker (Barack Obama’s current economic adviser), who suddenly increased the interest rate in 1979 when he was the Director of the US Federal Reserve;

2. The 1981 oil glut, which put an end to the policy of high prices for raw materials that was at the time favourable to the periphery countries exporting them (all of the prices of raw materials and agricultural products experienced a long-term drop from 1981 until the beginning of the 2000s);

3. The generalized offensive by Margaret Thatcher’s and Ronald Reagan’s governments against wage earners, all within the context of the generalized economic crisis in 1980-1982.
There was a clear deterioration in the balance of power for both periphery countries and wage earners.

Forced to pay back more and more with dropping revenues, Mexico (followed subsequently by other Latin American countries) had to stop its debt payments for a short while in August 1982 [1]: the world was plunged into the “debt crisis”, which would subsequently affect all of the Southern countries. The slip knot of debt tightened its grip around the necks of ordinary third world citizens. Afterwards, the stock of DC’s external public debt rose rapidly.

Massive transfers sent cash from the periphery countries to the most industrialized ones, notably via the repayment of their debt. In the mid 1980s, the net transfer on debt tipped from positive to negative: the public authorities in developing countries (DCs) had to pay back much more every year than what they received in the form of new loans from their creditors, without, however, succeeding in paying off their debts. On the contrary, their debt stock continued to rise.

The figures below illustrate this for all DCs (figures 1 and 2).

Figure 1. Evolution in net transfers on DCs external public debt



Source: World Bank, Global Development Finance, 2008. Figure created with the help of Sébastien Dibling and Damien Millet.

External public debt includes long-term external public debt and IMF credits.

The net transfer on debt is the difference between the loans granted to countries and the amounts paid back during a given year.

If the amount is positive, this means that the amounts borrowed by the authorities of a country were greater than the total amount of repayments made. If the amount is negative, this means that the amount of the repayments was greater than the total amount of loans received.

Figure 1 shows that net transfers were negative from 1985 to 2007, except from 1993 to 1998: if everything is taken into account, the DC governments have sent far greater sums to their creditors than they have received in the first place (see below).

Figure 2. Evolution of total external public debt stock of DCs (1970-2007)



Source: World Bank, Global Development Finance, 2008. Figure created with the help of Sébastien Dibling and Damien Millet.


DCs have transferred the equivalent of 7.5 Marshall Plans to their creditors.

The increase in the volume of the public debt and the amounts to be repaid have also had long-term effects on the most industrialized countries, which has led to a massive transfer of the incomes of wage earners towards the capitalists. Northern governments have been repaying the debts they contracted with private banks and other institutional investors (insurance companies, private pension funds, and “mutual funds”) while taking a larger and larger share from the taxes that have been paid increasingly by wage earners instead of by capitalists. Indeed, from the 1980s to now, neo- and social-liberal leaders have continuously lowered the taxes paid by capitalists, which has increased the share of taxes coming from workers in the total fiscal revenues used to repay the debt.

In the most industrialized countries (which is also true for the Southern countries), employers have put more and more pressure on employees in order to substantially increase their profits, and with the help of their government leaders, they have attained their objective. This trend is very clear in the following table. The rate of profit, which had declined in the 1960s and 1970s, began a long-term increase as of 1981-1982.

Figure 3. Evolution in rate of profit in the United States and Europe from 1960 to 2007



* The rate of profit in Europe is made up on the basis of the average rates of profit in Germany, France, and the UK.

** The rate of profit is the national operating surplus divided by net capital stock of that country.

Source: Created by Nacho Alvarez and Bibiana Medialdea on the basis of the European Commission’s AMECO website: http://tinyurl.com/ameco8

Meanwhile, the amount of wages as a percentage of the gross domestic product also experienced a sharp decline as of 1981-1982 (the downward trend that had begun in Europe during the great recession of 1974-1975 was exacerbated as of 1981). On the other hand, the share of income that ended up in the pockets of capitalists increased.

Figure 4. Evolution of wages as a % of GDP in the United States and the 15-state European Union from 1960 to 2008


(15-state European Union)

Source: Created by Michel Husson with data from the European Commission’s AMECO website: http://tinyurl.com/ameco8

If Japan and other industrialized countries are added to the United States and Western Europe, more or less the same type of evolution is observed. The amount of wages as a percentage of GDP began to drop as of 1974-1975. As of 1982, there was an abrupt decline.

As illustrated by Saez’s research (see figure 5), the share of national revenues in the United States that went to the wealthiest 10% of Americans skyrocketed during the same period of time. This increase was particularly remarkable as of the early 1980s. Whereas the richest decile were taking in 35% of the national revenues in 1982, this figure exploded to 50% twenty five years later, returning to the same level as just before the 1929 Wall Street stock market crash.

Figure 5. Evolution of the share of total income going to the richest 10% of Americans between 1917 and 2006



Source: Saez E. (2008), “Striking it Richer: The Evolution of Top Incomes in the United States”, March, http://elsa.berkeley.edu/ saez/saez-UStopincomes-2006prel.pdf

The major transformation of the 1980s was also expressed in the growing gap between the rate of profit, which increased, and the rate of accumulation, which dropped. Expressed in simple terms, as of 1980, a growing share of profits was not re-invested in production, it was consumed by capitalists or steered toward the financial world in connection with a “rentier” attitude.

Figure 6. Rate of profit and rate of accumulation
United States + European Union + Japan




Rate of accumulation = rate of growth in the volume of net capital

Rate of profit = profit/capital (base 100 in 2000)

Sources and data in figures: http://hussonet.free.fr/toxicap.xls

Another change completes the picture of this major transformation: in the United States, whereas the share of salaried income as a percentage of gross domestic product decreased, individual consumption increased sharply as of 1981-1982, which signifies two things:

1. Wage earners were increasingly financing their consumption by going into debt. The poorest 20% of households increased their level of debt the most (by 90% between 2000 and 2007): they were the weak link in the chain, the natural targets for subprime loans;

2. Capitalists consumed more and more using a growing share of their profits to make extravagant purchases. They also increased their debts. Indeed, in terms of the total amount of credit, the richest 20% alone contributed to half of the increase in household debt recorded between 2000 and 2007. The richest took on more debt to speculate on the Stock Market or in other sectors, such as the real estate sector where prices were rising so fast.

Figure 7. Share of wages and private consumption as a % of GDP


A - United States



B - European Union



Source and data in figures: http://hussonet.free.fr/toxicap.xls

In the United States (figure 7A), consumption increased sharply, whereas total wages dropped. In the European Union (figure 7B), the share of wages dropped more significantly whereas consumption remained steady. The difference between the United States and the European Union in terms of changes in consumption is due to the fact that with the exception of Great Britain, Spain, and Ireland, household debt, even if it has also increased, remains much lower than that of Americans. Therefore, it has been used to a lesser extent by Europeans to finance consumption.

Figure 8 shows that in the United States, it is the banks, insurance companies, and other institutional investors that experienced the greatest increase in profitability, whereas the rate of profit in the manufacturing sector rose less.

Figure 8. Difference in the rates of profit of the financial sector and the non-financial sector in the United States between 1980 and 2005 (as a %)



* The rate of profit of non-financial companies is computed as the relationship between the profits and the net stock of fixed capital of these companies. The rate of profit of financial companies is computed in a similar way.

Source: Created by Nacho Alvarez and Bibiana Medialdea on the basis of the US Department of Commerce, BEA, National Economic Accounts.

To sum things up, the major transformation that began in the 1980s on the basis of the offensive launched by Capitalists against Workers presupposed economic growth with an increasingly inequitable distribution of profits. This growth was supported by an accumulation of debt within the framework of the increasing financialization of the economy. This model of accumulation was bound to experience a crisis sooner or later, when the weakest link in the debt chain would break (the subprimes market), which is precisely what happened in mid 2007.

Far from being an economic accident or the consequence of the wrongful ways of a few, [2] it is the natural consequence of the logic that prevails in the capitalist system. In addition, as Michel Husson argues: “Finance is thus not a parasite on a healthy body. It feeds off uninvested profit but, in time, it acquires a degree of autonomy which reinforces this mechanism. Free capital circulates in search of maximum profitability (the famous 15 per cent norm) and it succeeds, at least temporarily, in obtaining it in certain sectors. The banks themselves collect an increasing share of profits. This competition for maximum profitability raises the norm of profitability and rarefies a little more the places for investment that are considered to be profitable, thus releasing new free capital which will in its turn go in search of financial hyper-profitability. This vicious circle is based once again on a distribution of income that is unfavourable to workers and to the recognition of their social needs.” [3]

To understand the crisis that erupted in 2007, we must go further than simply identifying what triggered it off. While the wave of financial bankruptcies is clearly the visible part of this iceberg crisis, it is not its fundamental cause.

160 years ago, Karl Marx warned us against a superficial interpretation of capitalist crises: “1843-1845 were years of industrial and commercial prosperity, necessary consequences of the almost permanent depression of industry from 1837 to 1842. As always, prosperity soon resulted in speculation. This happens regularly in periods in which there is overproduction. It gives temporary outlets to overproduction. At the same time, it hastens the eruption of the crisis, and makes it more violent. The crisis itself erupts first where there is speculation and only later in the realm of production. The superficial observer does not see the cause of the crisis in the overproduction. The consequent disorganization of production does not appear to be a necessary result of its former exuberance, but rather a reaction when the speculative bubble bursts. [4]

The conclusion is obvious: today’s crisis has its roots in the very essence of the capitalist system, not simply in its neoliberal phase.

How, then, can we get beyond it? There are several capitalist ways out of this crisis, because our system will not simply allow itself to collapse. The option proposed by the governments in power today involves strengthening the offensive of capitalists against workers: in the form of austerity programs or a decrease in wages, exploiting workers and small-scale producers more, using a greater share of tax revenues to save the capitalists and pay off the public debt that has been skyrocketing since 2007-2008. At the same time as this offensive is being implemented, some small measures for regulating the financial markets are being adopted, and some financial companies are being placed under public control (mainly in the United States and Great Britain).

Massive grass-roots mobilisations could lead to a reorientation of governmental policy more or less comparable to the New Deal formulated as of 1933 by Franklin Roosevelt, nearly four years after the Wall Street crash, which was followed by several Western European countries (Great Britain, France). [5] Will the same option be chosen this time? Nothing guarantees that. Everything depends on how strong the resistance is from the women and men who are victims of the crisis. It is class struggle, a reality that one-way thinking would like to make disappear, which will decide the outcome.

Meanwhile, citizens in DCs are also directly confronted with a renewed offensive of capitalists against workers. Indeed, in many countries, particularly the emerging ones, 2004-2007 had been years during which there was considered to be a slight improvement in living conditions, mainly due to the high prices of raw materials (including oil), which generated significant income for the exporting countries. For China, it was the constant increase in the exportation of manufactured goods to the international markets that was responsible for this change for the better. As a result of their mobilizations, Chinese and Russian workers obtained wage increases. The governments of countries like Venezuela, Ecuador, Bolivia, Algeria, Argentina, Brazil, and India had increased the amount of money given to social programs.

The food crisis in the first half of 2008, followed by the effects of the financial and economic crises, has radically modified the situation, even if all of the countries are not affected in the same way. A new debt crisis is brewing. In all of the countries concerned, grassroots struggles will be decisive. Instead of waiting for the solution that the capitalists and governments serving them want to impose on us, we must quickly propose an anti-capitalist way out of this crisis and show them our discontent as quickly and loudly as possible if we want to have a chance to succeed.

Translated by Charles La Via


Footnotes :

[1See Eric Toussaint, The World Bank : A Critical Primer, Pluto Press- London, David Philip-Cape Town, Between the Lines – Toronto, 2008, chapter 14, « The Mexican debt crisis and the World Bank ».

[2During the G8 summit in Italy in July 2009, Barack Obama declared: “The irresponsible actions of some have caused a recession that has swept across the globe” (see Le Monde 11 July 2009). As if it were not the capitalist system and the financial deregulation endorsed by the USA and the other G8 members that were responsible for the current economic collapse.

[3« Toxic capitalism», International Viewpoint n° 406, November 2008 http://hussonet.free.fr/toxicapa.pdf

[4“Crisis, prosperity, and revolutions,” Marx-Engels, Journal from May to October 1850 in Marx-Engels, La crise, 10-18, 1978, p. 94.

[5See Eric Toussaint “A Glance in the Rear View Mirror to Understand the Present” (3/6)
“The 1930s to the 1970s: liberalism eclipsed,” 9 June 2009 http://www.cadtm.org/spip.php?article4495 “Keynesian Revolution and neo-liberal Counter-revolution,” 11 June 2009, http://www.cadtm.org//spip.php?article4446

Eric Toussaint

is a historian and political scientist who completed his Ph.D. at the universities of Paris VIII and Liège, is the spokesperson of the CADTM International, and sits on the Scientific Council of ATTAC France.
He is the author of Debt System (Haymarket books, Chicago, 2019), Bankocracy (2015); The Life and Crimes of an Exemplary Man (2014); Glance in the Rear View Mirror. Neoliberal Ideology From its Origins to the Present, Haymarket books, Chicago, 2012 (see here), etc.
See his bibliography: https://en.wikipedia.org/wiki/%C3%89ric_Toussaint
He co-authored World debt figures 2015 with Pierre Gottiniaux, Daniel Munevar and Antonio Sanabria (2015); and with Damien Millet Debt, the IMF, and the World Bank: Sixty Questions, Sixty Answers, Monthly Review Books, New York, 2010. He was the scientific coordinator of the Greek Truth Commission on Public Debt from April 2015 to November 2015.