A brief examining the urgent need to cancel debt in the developing world as part of an international emergency relief program to prevent poverty and needless death.
Despite international protest, the $2.5 trillion in debt owed by developing countries is unlikely to be cancelled within the existing framework of the global economy. Its persistence guarantees the economic advantage of dominant economies over developing nations, and compound interest reinforces this indebtedness. Ensnared in an export oriented free-market, the economic plunder of developing nations continues, exacerbating the inequality and poverty which kills 50,000 people each day.
The interests of affluent countries, investors and multinational corporations that benefit from the status quo are represented by the major multilateral lenders, the IMF and World Bank, who consequently only pay lip service to the issue of debt relief. The imposed liberalisation of emerging markets, which is conditional to lending, further compounds the net flow of resources out of developing countries whilst also facilitating the transfer of control over domestic resources and services to foreign interests.
External debt owed by developing countries must be immediately cancelled as part of an international emergency relief program to address abject poverty and needless death. A parallel shift to an economy with more public ownership and the sharing of essential resources will significantly reduce poverty and inequality in the longer term. The resulting decrease in the commercial trading of essential resources and the consequnce increase in monetary stability will allow the World Bank and IMF to be progressively decommissioned and ensure that countries no longer accumulate debt.
- The IMF and World Bank Exacerbate Debt and Poverty
- The Creation of Debt
- Existing Debt Cancellation Frameworks
- Cancelling Debt and Sharing the World’s Resources
The Creation of Debt
Historically, much of the initial debt burden of developing countries was accumulated odiously through irresponsible lending. Creditor nations often lent money to countries before they were independent of colonial rule, or to dictators such as Mobutu, the apartheid regime in South Africa, and countries in South America, Indonesia and Iraq in order to pay for foreign military adventures that favoured ‘western’ foreign policy objectives. Despite their subsequent independence and regime/government changes, the responsibility for the repayment of these illegitimate debts falls upon the citizens of indebted nations despitre the irresponsible lending practices of the past.
More recently, debt has been the result of economic globalisation and the absolute interdependency of countries through import and export (trade) activities. Decreasing levels of self sufficiency and a growing dependence on imports (international trade accounts for 75% of GDP in the European Union) has exposed all nations to the volatility of global monetary and trade regimes. With fluctuating exchange rates within an unstable global financial system, cash strapped developing countries regularly find themselves without sufficient foreign exchange currency to purchase essentials goods from abroad. In need of loans, governments approach commercial banks and private investors or allied countries which may have an interest in maintaining financial stability and facilitating mutual trade. If the indebted country has a bad credit rating, private investors and governments will not loan to the government, which is then forced to approach the IMF, World Bank or other multilateral financial institution. These institutions are financed by affluent nations and influenced by commercial interests, thereby ensuring that the neoliberal/free market agenda underpins the loan.
In this way the vicious cycle of economic subjugation is imposed upon indebted countries by creditor nations. The loans are conditional to economic structural adjustments which prioritise debt repayment, economic growth and open domestic markets to foreign investors and suppliers. After economic adjustment by the IMF, these countries find themselves at the mercy of a global free-market economy. Indebted countries are thus forced to switch to producing goods primarily for export in order to earn foreign exchange to pay off the debt. However, untenable debt burdens and unfair trade rules cripple their ability to trade on equal terms with creditor countries, which further compromises their ability to earn foreign exchange for debt repayments and increases their dependency on imports from dominant producers. Over time, compound interest has resulted in the rapid accumulation of these global debts which are now impossible to repay, amounting to $2.5 trillion.
The relationship between debt and deprivation is obvious. The diversion of public funds for debt repayment sacrifices essential welfare services such as health and education which are often very minimal already. The debt repayments also make a mockery of Official Development Assistance (ODA) as some countries pay four times as much in debt repayments as they receive in aid. As a result, debt repayments thwart national and international measures to meet the basic needs of the poor – such as access to food, clean water and medicine.
As global debt has increased to from $54billion in 1964 to $2,500 billion today, the number of people who are consistently starving has more than doubled in the same period to 850 million. For the 59 low income countries, global debt has risen 430% since 1980 and now amounts to US$532 billion. African countries alone have a $295 billion debt stock, having already paid back $550 billion in interest alone between 1970 and 2002. Between 1980 and 1996, Sub Saharan African nations paid back twice the sum of their total debt in the form of interest, but they still owed three times more in 1996 then they did in 1980.
The IMF and World Bank Exacerbate Debt and Poverty
Unlike bilateral and private creditors, the multilateral institutions (IMF and World Bank) hold ‘preferential creditor’ status, which means if their debt repayments are not met, the debtor nations risk being crippled by being cut off from all further sources of credit. As a result many low income countries are forced to channel huge portions of their budgets to repay multilateral donors at the expense of essentials such as heath care, housing and education.
In this way low income countries often need to borrow more, at high rates of compound interest, increasing their debt burden and perpetuating their dependence on rich nations. This ever increasing cycle of debt experienced by developing countries is used as leverage by dominant economic powers, through the agency of the IMF, World Bank and WTO to pressurise them into adopting neoliberal models that focus on economic growth and debt repayment.
The IMF is referred to as the lender of last resort, bailing out cash strapped economies that have no further foreign exchange reserves and are unable to import goods. Such countries are usually in this position as a direct result of trying to compete with rich nations in a biased trading regime whilst being severely handicapped through poverty and debt. Further borrowing is conditional to IMF imposed Structural Adjustment Programs (SAPs) which benefit donors whilst damaging struggling economies and welfare programs.
The IMF is closely allied to Wall Street bankers and private investors, regularly donating billions to bail out banks during times of economic crises. For example, it bailed out foreign investors in Russia with an $11 billion package and orchestrated a massive bailout of the big banks that made bad loans to Asian countries. In 1995, the IMF gave almost $18 billion to Wall Street interests who stood to lose billions with the peso devaluation. The Paris Club of creditors, through the IMF, quickly approved the cancellation of 80% of Iraq’s debts, approximately $39 billion. Using this as leverage, neo-liberal structural changes were swiftly enacted including the privatisation of assets and state owned enterprises. The IMF’s actions demonstrate its self confessed ambivalence to poverty reduction as a mere $49 million is required to cancel the debt of the poorest countries (i.e.HIPCs).
The World Bank on the other hand does state that it is a ‘development bank’, lending for large scale development projects with the aim of reducing poverty. To qualify for World Bank loans and expertise a country must agree to implement SAPs. Once agreed, programs are chosen that attract private investment into the country. World Bank projects are well documented as having a strong commercial bias in countries such as Chad, Somalia, Rwanda, Mozambique Ghana, Brazil and the Philippines, providing corporate welfare at the expense of effective poverty reduction. The overall result is an increased debt burden compounded by an increased flow of capital out of the developing country to private investors and corporations, usually based in the north.
Indebted countries are repaying $100 million each day (most of which is compounded interest), 2.3 times the amount they receive in aid. As such the nature of the debt burden is insidious, affecting all aspects of economic and social life, perpetuating the causes of poverty. In Africa in 2002, governments in Cameroon, Ethiopia, Gambia, Guinea, Madagascar, Malawi, Mauritania, Senegal, Uganda and Zambia all spent more on debt repayment then on heath care or education.
Debt burdened countries, lacking funds for essential social services, are forced to resort to methods of cash generation such as exporting their natural resources for profit. The environmental effects of such measures are devastating. In addition, when these cash strapped countries experience natural disasters, financial capacity is insufficient for the necessary emergency and rebuilding projects that are so urgent.
In the meanwhile, economically dominant countries, which are also the primary creditors, profit from both the compound interest charged on the loans and the increased access to developing markets imposed through Structural Adjustment Programs (SAPs). The design of this system is such that developing countries are left with no choice but to capitulate to the demands of the export oriented, market economy espoused by affluent nations despite ample evidence of inability of economic growth to reduce poverty.
Existing Debt Cancellation Frameworks
Existing debt cancellation frameworks are created by creditors, particularly the International Financial Institutions (IFIs), on their terms and to their advantage. As such the mechanisms fail to ensure that the needs of the people most seriously affected by the human cost of repaying debt are adequately represented. Under the current international debt relief scheme (Heavily Indebted Poor Countries - HIPC initiative) only $33billion of the total $532 billion debt stock of the poorest, most heavily indebted countries has been cancelled. The majority of this has been debt owed to bilateral institutions, which were often not in receipt of payments anyway as they do not hold preferential creditor status unlike the multilateral institutions. Debt cancellation was also conditional to implementing structural adjustment programmes (SAPs) that exacerbate poverty while tying the country into a competitive, growth based economy.
The amount needed to write off the entire multilateral debt burden for all 59 low income countries is about $80 billion or $40 billion for just the HIPC. Whilst devastating indebted countries, this constitutes a tiny amount of expenditure for the developed world. Comparatively, in 2004 the US alone spent $455 billion on their military budget - almost half the global military expenditure, or 3.9 percent of US GNP. In 1998 industrialised countries devoted US$353 billion (seven times total ODA spending) simply to protecting agriculture, according to the UNDP.
A popular proposal to fund this debt cancellation that is favoured by many NGOs and the UK government is the selling of IMF gold reserves. The IMF holds in reserve over 100 million ounces of gold, which is still valued at historical prices. If this is sold at current market price it would generate an additional $35 billion, which would enable HIPC multinational debt to be repaid. Given the potential impact on the gold market, the reserves would have to be sold very gradually, maybe 10% each year. An additional sum of $17.5 billion as well as a further $600 annually can be mobilised through the World Bank reserves. However, due to the usual resistance mainly from the US, and a lack of political will, such proposals are unlikely to be implemented.
Other comprehensive debt cancellation frameworks have been proposed by the Jubilee 2000 Coalition, UNCTAD and the International Forum on Globalization (IFG). Although not identical, they generally entail the creation of an independent International Insolvency Council (IIC), working within the Chapter 9 or Chapter 11 legal framework of US law to ensure that the interests of the indebted country is represented and an impartial assessment can be made on debt cancellation, reduction and rescheduling. Again, it is unlikely that such a system would be created whilst creditor nations are content to continue benefiting from the indebtedness of developing countries.
In the meanwhile, despite much high-level talk of debt relief, the debt burden continues to rise. The outcome of the 2005 G8 Summit provides an insight into the level of spin and slight of hand employed when governments address debt issues. In June 2005, G8 leaders announced a proposal to write-off the debt of the 18 poorest countries. They claimed the write off would amount to a total of $40 billion. This was confirmed at the final G8 Summit and was widely reported as one of the few successes of the summit for developing countries. However a more detailed analysis revealed that the cancellation is spread over 40 Years and so amounts to only $17 billion in real terms, and it only deals with 10% of countries in need of debt relief.
Given the financial benefits and political leverage that debt confers on creditor nations, and the huge resistance to cancelling significant amounts of debt, it seems unlikely that the global debt of $2,500 billion owed by the 122 developing countries will ever be written off. An alternative way of dealing with severe debt crisis was recently championed by President Kirchner of Argentina and President Lula of Brazil who both resorted to liquidating their remaining debt as a way to end IMF control over their economy. Default in this manner is one of the possible methods by which global debt can be overcome, although most countries are fearful of political and economic response from creditor nations.
In effect, creditors and banks in developed countries are owned by the debt ridden economies of the developing world to the tune of $2.5 trillion, significantly more than the combined reserves of all the world’s central banks ($1.3 trillion). However, mass default on this level would need to be coordinated between debtors and the resulting instability in financial markets would have global ramifications. Whether debt default is proactively pursued by indebted nations and the catalyst to economic redistribution or the result of global negotiations when implementing measures to redistribute and share essential resources, it is clear that the debt must be written off.
Cancelling Debt and Sharing the World’s Resources
There cannot be any significant improvement in the social and economic life of heavily debt burdened countries until their multilateral, bilateral and private debts are cancelled in full - without attaching detrimental policy conditions. Debt cancellation would reduce the level of policy leverage the IFIs currently have over the poorest countries, allowing governments to invest in their social systems and infrastructure and lift millions out of poverty.
The process of debt cancellation cannot be successful within the current economic framework, which remains biased to the advantage of already affluent countries. Debt cancellation within the existing framework would likely result in the immediate accumulation of new debt as developing countries continue to be forced to trade on unequal terms, maintain financial stability and compete in a growth-based, free-market economy.
However, debt cancellation is an essential element in the establishment of an economy based on the public ownership and distribution of key resources to secure basic human needs. Sharing the world’s resources in this way involves international cooperation under the direction of a new United Nations agency, such as a UN Council for Resource Sharing (UNCRS), and entails two fundamental stages:
1. An emergency relief program to provide all the necessary resources required to lift the 850 million permanently starving people out of poverty and prevent the 50,000 daily poverty related deaths.
2. An international program to share those resources, goods and services which are essential to life. This would entail the severance of these resources from commercial trade and their cooperative ownership and democratic management by the global public under the auspices of the UNCRS. This framework will ensure their economical allocation, distribution and sustainable use globally, according to the needs of individual countries.
Within an international framework for sharing the world’s resources, the debt cancellation process would be straightforward, entailing a complete cancellation of all unjust external debt. As such, it might not be necessary to establish an International Insolvency Court (IIC) as proposed by groups such as the Jubilee 2000 Coalition, or even to sell IMF gold reserves to finance the cancellation (although through a decommissioning program, all IMF, World Bank and WTO assets would eventually be credited to appropriate UN agencies such as ECOSOC, UNCTAD or the UNCRS). The process could be overseen by the UNCRS which would be involved in every aspect of coordinating the redistribution and ongoing sharing of essential resources between nations. Two points must be noted however:
2. The release of national funds from debt repayments would be conditional to the developing country channelling these finances into the provision of basic human needs for their citizens. Overseeing this process could also be a function of the UNCRS
As a framework for sharing resources is gradually implemented and essential resources, services and knowledge are removed from the field of commercial trade, the volume of global trade would be greatly reduced and balance of payment problems would be less common. The result could be increased monetary stability, greatly reducing the possibility of any country incurring sizable financial deficits in the future.
In addition, loans would not be necessary to finance development as goods that cannot be produced domestically could be redistributed from a global pool of resources supplied by the excess production of countries. Most of these surpluses are likely to be located in the more productive northern countries until a degree of global economic and productive equilibrium has been established as a result the redistribution program.
Under such a framwork, the international community could beigin the process of progressively decommissioning the IMF, World Bank and WTO, and transfering any remaining bureaucracy to appropriate UN agencies such as UNCTAD and UNESCO.