| A New Global Debt Crisis? |
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An era of 'reckless finance' encouraged by the IMF and the World Bank has resulted in a debt crisis engulfing the world's poorest countries. We urgently need a new wave of debt cancellation to protect the poor from a deepening global financial crisis, says a report by the Jubilee Debt Campaign. Campaigners Warn of a 'New Global Debt Crisis' 15th June 09 - STWR 31st March 09 - Nicholas Dearden, Countercurrents Even ardent proponents of the free market find it hard to argue today that globalisation is improving the lives of the majority of the world. A system of inherent crises, which has fuelled historically unprecedented levels of inequality, has collapsed, leaving in its wake a nightmare for many developing countries who find the trade and investment that globalisation has made them dependent on, suddenly drying up. Across the world 40 million jobs are predicted to be lost in 2009. Against this backdrop, world leaders who profess concern with the fate of the global poor should be asking themselves some soul-searching questions as to why they have stuck behind the dogmatism of free market fundamentalism for so long. Instead, some of the ideas for new funding put forward by Gordon Brown and others could, after an immediate injection of desperately needed cash, mean more of the same policies that have created the mess in the first place. Reckless finance is nothing new. Throughout the 1970s banks and governments made enormous loans to developing world countries without much consideration as to who they were lending to or what they were lending for. Many countries have spent much of the subsequent 30 years weighed down by an unpayable debt which has allowed the rich world to force all manner of free market policies onto their economies. Indeed Chile’s finance minister Andres Velasco said last year that the credit crunch was “a more modern and much bigger version of what we have seen in emerging markets over the last couple of decades”. And unless the poorest in the world are going to pay for this crisis in the way they paid for the Third World debt crisis in the 1980s and 90s, solutions have got to be radically different this time around. The clearest lesson to be drawn from the ongoing crisis is that financial globalisation has been inimical to development. A recent report by ActionAid clearly shows how those countries that have become most dependent on capital inflows to their economy have been most vulnerable to the financial crisis . In times of crisis, capital leaves the peripheries to shore up the centre, and that is happening now. Countries without a strong domestic capital base with which to fund their own development are being left high and dry. In many countries this could easily lead to another full-blown debt crisis, especially where countries have taken out a large quantity of short-term loans to repay longer-term debts. In 2006 $660 billion of loans were short-term (falling due within a year or less), $43 billion in sub-Saharan Africa. The World Bank reckons 43 countries are particularly vulnerable to the financial crisis. Of these countries, we believe 38 were in need of debt cancellation before the crisis. The IMF predicts that if the crisis continues for a year, the average low-income country debt burden would be raised by 4% of GDP. Included in these countries is Zambia, a country which has already received debt relief once but, as a result of falling copper prices and a reduction in copper production, could see its debts become twice the level deemed sustainable by the World Bank and IMF. The Philippines – a middle income country with a high dependency on private finance – has an enormous $8 billion of debts come up for repayment this year, while suffering a trade balance tumbling into the red. Bangladesh, dependent on income from exporting garments, will likely suffer a major fall in demand which will also make it difficult to meet repayments on its $1.7 billion of short-term debt. But solutions which the G20 will consider on Thursday focus heavily on new lending – rather than clearing debts – and resuscitating the International Monetary Fund, the very institution that turned the crash in South-East Asia in 1997 into an unprecedented crisis with a raft of ‘pro-cyclical’ austerity measures. Recent details of IMF loans suggest they haven’t learnt their lesson – Pakistan was recently told to raise interest rates and electricity tariffs, Hungary to devalue its currency and increase interest rates, Latvia to reduce its local government wage bill, Serbia to cut public sector pay and El Salvador not to increase its fiscal deficit . In an announcement made last week, Brown called for a new $100 billion for a fund to guarantee trade deals. This will mean big money for export credit agencies which have been responsible for an enormous build-up of ‘illegitimate’ debts in the last three decades – debts which have done little or nothing to benefit the populations of recipient countries, while propping up our own arms manufacturers. More serious proposals, on the other hand, have recently come out of a UN Commission of Experts established by the President of the General Assembly on the financial crisis. The Commission, led by Nobel laureate Joseph Stiglitz, has called for far-reaching reform of the global economy, including an international debt work-out process which would allow for far greater and fairer debt cancellation, an end to forced conditionality, and a new reserve currency to replace the dollar. The Governor of the Central Bank of China has echoed this call last week, calling also for an International Clearing Union – an idea dreamt up by economist John Maynard Keynes to help ensure that enormous the trade deficits and surpluses of recent years do not build up in future. These are hopeful signs, as are proposals by Latin American governments to finally launch the Bank of the South, which would allow countries greater independence from the IMF and World Bank, this May. Essentially, what the solutions need to answer to is not just economics but politics. More than anything, developing countries have been robbed of their sovereignty and dignity for over 30 years, and they need to be able to regain their independence. The dependency created and sustained by debt for decades needs at last to be broken if there is to be any hope for global development and an end to poverty. But such ideas are unlikely to be taken up by the G20 this Thursday. Only a concerted movement of people can bring about the necessary changes. It’s that movement which the protests of this week need to launch, an unprecedented movement to confront an unprecedented moment of both crisis and opportunity. A new Jubilee Debt Campaign report has warned that a debt crisis approaching that of the 1980s could engulf many countries as a result of global financial turbulence. In the same week that Gordon Brown announced a World Bank fund for vulnerable countries, our new report finds that at least 38 of world’s most vulnerable countries risk spiralling debts due to financial crisis. It proposes alternative methods of helping those countries deal with the financial crisis without increasing long-term debt. In the report, ‘A New Debt Crisis?’ , published today, we warn that the significant falls in income and falling currencies expected in 2009 will seriously damage developing countries’ ability to service and refinance their debts. Of the 43 countries which the World Bank judges to be most vulnerable to the financial crisis, 38 had what we judged to be ‘unpayable debts’ before the crisis. JDC believes that at least $270billion needs to be cancelled to allow those countries to fight poverty. In particular:
The report lays the blame for the crisis at the failure to make radical changes to the international financial system after the first Debt Crisis and calls for these changes to be made immediately. It demands a new wave of debt cancellation, led by an international ‘Debt Tribunal', internationally binding responsible lending standards, and reform of the global tax system to allow developing countries greater independence from global finance. Sarah Edwards from Jubilee Debt Campaign said: “This is a wake up call to anyone who believes that the ‘Third World Debt Crisis’ has been solved. "The failure of the West to learn the lessons of that crisis, which in many ways mirrors the financial crisis the whole world is now experiencing, means that many countries are still suffering from debts arising from reckless lending 30 years ago. “The funds which the Prime Minister announced earlier this week could make matters worse – they are likely to include new loans, with harmful conditions attached, when we should actually be cancelling old debts, without those conditions. “We need a radically new international lending system, if we are to come out of the current financial crisis sooner rather than later. 14th March 09 - Jubilee Debt Campaign
As the financial crisis leads us into a deep recession at home, what impact is the economic downturn having on the world's poor, and in particular what might be the consequences for developing country debt? This report is intended as a wake-up call to anyone who thinks the developing world debt crisis has been resolved. In fact, it assesses fears of a new debt crisis, as serious as that Jubilee Debt Campaign was set up to combat, spreading to nearly 40 countries. 38 of the 43 countries that the World Bank calculates are most vulnerable to the economic crisis already required substantial debt cancellation before the current crisis, in order to meet the needs of their people. As their situation considerably worsens, many more countries could join them. This should not come as a surprise. Debt relief to date has not only cancelled too little debt for too few countries, but has made very little attempt to implement the sort of structural reform which would end the rule of global finance. In fact, the same reckless and irresponsible lending which created the developing world debt crisis in the 1980s, is also behind the current financial crisis that the whole world is now experiencing. In particular:
The IMF and World Bank, which are being called on to help solve the crisis through greater lending, have themselves often been central to the problem of debt, the increased dependence of Southern countries on export industries, and the liberalisation of finance which has increased countries' vulnerability to international financial flows. As such, it is impossible to see, without really radical reform, how these institutions can play a constructive role in bringing the crisis to a sustainable and just solution. We believe the solution lies in far-reaching reforms of the global economy which would ensure more responsible, sustainable and just lending whilst also reducing the dependence of developing countries on international capital, namely:
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