The Global Debt Problem

Poor countries owe a vast amount of money to rich nations and international financial institutions like the World Bank and the International Monetary Fund (IMF).

For developing countries as a whole this debt is over $2 trillion. Most of this is owed by "middle-income" developing countries. But some of the lowest-income countries in the world also are heavily indebted, owing around $250 billion.

Ordinary people did not benefit from many of the loans that gave rise to this debt. Yet they bear the principal burden of repayment.  Without major debt reduction, poor countries are trapped, making unending interest payments on their debts. This requires them continuously to divert large amounts of scarce resources from health care, education and food security. The debt burden inhibits the social and economic development that is needed to lift people out of poverty.

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The Origin of the Debt

The 1973 OPEC oil price hike earned the OPEC (major oil-producing) countries more money than they could absorb, so they deposited it in commercial banks in Europe, the United States and Japan. These banks had to earn enough interest to attract the OPEC depositors; so they lent to developing countries who had to pay high oil bills, and who wanted to maintain their rates of economic growth. Governments borrowed because interest rates were relatively low and the banks put few conditions on their loans. Banks thought countries were secure risks since the economies were growing, and their belief was firm that countries could not go bankrupt.

The 1973 oil price hike triggered inflation in the United States and other northern countries. When the second oil price hike of 1979 occurred, the U.S. Federal Reserve Board raised interest rates very high to halt inflation. International interest rates skyrocketed as well. In reducing inflation, the northern economies went into severe recession. As a result they purchased fewer products from southern producers. The southern economies became desperate: how could they pay higher interest rates when they could not earn more by selling their products to the northern markets?

The problem was compounded especially in Africa because, during the Cold War, donor governments were more interested in gaining allies than in whether the governments served the people or the money went to productive purposes. Newly independent African nations were led by inexperienced governments. Many projects financed by donors were poorly designed and unproductive: roads that went nowhere, factories that never produced, and power plants that were left uncompleted. This misspending left nothing behind except debt with no productive capacity to pay for the projects. In addition, some leaders wasted money on military expenditures and personal corruption.

Because of inadequate resources to reduce poor country debt, governments built up huge arrears. They paid a portion of their debt obligations, especially to the IMF and the multilateral institutions; what was not paid was added to the still unpaid principal of the debt. The size of the debt ballooned.

As Oxfam International states in its April 1997 report, Poor Country Debt Relief, "Debt repayments have meant health centers without drugs and trained staff, schools without basic teaching equipment, and the collapse of agricultural extension services. . . poor communities [are] forced to fill the financing gap left by withdrawal of public investment. . . [For] many millions of families in poor villages and urban slums, the daily consequence is that they are unable to maintain health and nutritional standards, and unable to keep their children in school."  Malnutrition and child mortality rates are increasing in some countries. In others an entire generation of children is losing the opportunity to get an education or learn a trade.

The obligation to meet debt service payments also means that aid from other countries like the United States is often used to refinance debt payments rather than for improving health care, education and other social services. In addition, the total debt burden discourages foreign investment, which many believe is necessary to stimulate growth.

The need of highly indebted countries to earn "hard" currency like U.S. dollars to make debt service payments is one reason why some countries have been shifting resources from the production of basic foods for domestic consumption to cash crops for export. This has sometimes helped a country generate more income, with the hope the benefits will "trickle down" to everyone. Indeed, some farmers are able to start growing the new crops and take advantage of the export economy. Their incomes have increased. Many small peasant farmers, however, lose their farms. They are unable to get technical help and credit to make the transition to production for export. They cannot afford seeds and fertilizer or compete against cheap food imports. Larger farms buy or force them out.

Impact of Debt upon the Environment

Inadequate domestic production and the dependence on food imports can also result in local food shortages and higher prices that increase food insecurity for many people living in poverty. In addition, when many countries try to export the same products, their prices fall. Producers and workers in poor countries earn less.

International debts have to be paid back in the creditors' currencies or so-called "hard currencies" like U.S. dollars. One easy -- though not lasting -- way to gain more foreign currency for debt repayments has been to mine the earth's resources for the hard cash they generate. As a result, countries have heavily overused soil to grow cash crops. Farmers are under pressure to produce more crops on small areas of land. They often apply heavy doses of expensive chemical fertilizers that degrade the soil. Vital natural resources are depleted. Fish stocks are damaged through overfishing. Forests often are cut down by national or multinational companies, displacing local people.

Mineral resources are exploited by mining companies that often dump toxic tailings in local water supplies, destroying nearby lands in the process.

Environmental management becomes a low priority, with the result that businesses can pollute the environment and not worry about being prosecuted.

Deforestation accelerates beyond the limits set by the state. Illegal dumping of pollutants into the air and rivers increases. And endangered or threatened species continue to be exploited.

The shrinking government budget has another more indirect impact on the environment. As fewer resources are directed toward poverty reduction, people living in poverty try to survive by cutting down trees to build makeshift homes and provide heat for their families. As they are forced off farmland by large landowners, they turn to marginal lands to subsist. This leads to deforestation, soil erosion, and soil infertility.

Debt Relief Programs

The prevailing philosophy adopted by economists of the creditor nations, international financial institutions and the IMF, has been that "free market" economic reforms, reduced government economic involvement and creditor nation regulation are the best medicine for indebted ailing economies.

Designed by the World Bank and International Monetary Fund (IMF), Structural Adjustment Programs (SAPs) are implemented by debtor countries in order to qualify for debt relief and new loans, as well as to attract foreign investment. The debt crisis of 1982 made SAPs practically synonymous with lending from institutions like the World Bank and IMF. Virtually any country that wants low-interest loans or debt rescheduling must implement a Structural Adjustment Program.

Such reforms seek firstly to stabilise the negative economic trends such as inflation, trade imbalances and budget deficits, and secondly to adjust the economy by altering the nature of production and increasing export earnings. However such programs generally lead to devaluation of the national currency; raising interest rates and decreasing the availability of credit; reducing government spending and increasing taxes (especially sales taxes) in order to balance the budget; lowering tariffs and dismantling trade and investment regulations; privatising public enterprises, which are sold to domestic and foreign investors; reducing real wages; and shifting agricultural and industrial production from food staples and basic goods for domestic use to commodities for export.

SAPs have sometimes succeeded in improving government balance sheets, by shrinking budget deficits, eliminating hyperinflation, and maintaining debt-payment schedules. However, the types of structural adjustment measures that the World Bank and IMF require too often fail to promote a sustainable economy. Instead they have frequently led to increased income inequality and poverty, social disruption, and environmental degradation.

At last, at the September 1996 Annual Meeting of the World Bank and International Monetary Fund (IMF), the Heavily Indebted Poor Country (HIPC) Initiative was launched by creditor nations and the multilateral development banks. It was a groundbreaking agreement. The World Bank and IMF finally recognized debt as a serious problem for the poorest countries. HIPC represents the first effort to coordinate all creditors (governments, private banks, and international financial institutions, like the World Bank and the IMF). Consideration for the first time was placed upon the need to reduce (not just refinance) debt, reduce debtor burden to sustainable levels, and the need for poverty reduction.

Lack of political will on the part of creditors has led however to serious problems in HIPC's implementation. Its implementation has been more with a view to minimizing the costs to creditors than to maximizing the benefits for debtors.

The G7 June 1999 Debt Relief Initiative

Following the dramatic escalation of the third world debt problem in the 90's and the seeming ineffectiveness of relief programs, civil society launched a massive campaign called the Jubilee 2000, aiming for the cancellation of unpayable debts of the world's poorest countries by the end of the year 2000. Pressure was placed upon member nations of G7, the seven richest nations, to completely cancel poor nation debt, when they met in June 1999. Because they collectively control about half the assets of the IMF and World Bank, they play a key role in influencing the economic and debt policies of these two international financial institutions. Though an agreement emerged with some positive steps forward, the G7 failed to grasp this historic opportunity.

The G7 governments promised to cancel the debts of 33 impoverished nations. This compares with at least 50 countries in Africa, Latin America and Asia burdened by high levels of human need and environmental distress.

The G7 Initiative is problematic because it strengthens the role of the International Monetary Fund in poverty alleviation, an area in which the IMF has neither a positive track record nor significant expertise.

The G7 Initiative fails to break the linkage between debt relief and the imposition of austerity policies that perpetuate or deepen poverty or environmental degradation.

While the call to cancel all bilateral concessional debt is welcome, most donor countries have already done so. Canceling market rate loans is a modest but still inadequate improvement. The approximately $100 billion total of old and new offers of debt cancellation almost exactly matches the estimated $100 billion in HIPC country debt that is currently not being serviced (paid). In effect, the G7 are offering to cancel what poor countries are currently unable to pay. Except for a few countries, no new resources would be freed up to be redirected to reduce poverty or provide basic social services.

The Initiative proposes contingent debt reduction, where the creditors forgive a portion of the debt only as long as the debtor country meets certain macro-economic and poverty targets. This is a step backwards from the current HIPC which at least has the merit of canceling debt outright without further conditions once a country finishes jumping through its long series of hoops. This proposed "floating completion point" will maintain creditor control over debtors for a longer period of time (what the US Treasury refers to as "leverage" to ensure the country adheres to its "reform" policies).

The G7 also proposed lowering the debt-to-government-revenue ratio from 280% to 250% for countries that qualify. Countries could qualify if their exports are more than 30% of Gross Domestic Product (GDP) (previously 40%) and government revenue more than 15% of GDP (previously 20%). The G7 partially recognized that governments must rely primarily on their own revenues, not the country's export earnings, to service the debt. But the proposed new ratios are still based on political calculations, not the needs of the debtor countries and their citizens, and are still too high for many of the world's poorest countries. The amount of debt a government can afford to service should be calculated only after the basic needs of its people have been met. This is the principle adhered to in domestic bankruptcy procedures; it places the

survival of the debtor before the repayment demands of creditors. Despite statements affirming the need for sustainable development, the G7 continue to define the need for and amount of debt cancellation primarily in terms of "debt sustainability" as defined by creditors only, rather than on sustainable development criteria.

On the relationship between debt reduction and poverty eradication, the Initiative is at best ambiguous and possibly a step backwards. Every debt campaign has argued for debt cancellation for poorest countries as an essential first step toward poverty eradication. The G7 took this theme and gave it an unwelcome twist, instructing the IMF and World Bank to help poor country governments develop poverty-reduction plans. This looks like paternalism. Many groups question the more central role proposed for the IMF in designing poverty reduction plans, since it has a largely negative track record on ensuring sustainable development.

Jubilee South, in a 19 June 1999 Press Release, said in response, "Jubilee South rejects the Koln debt initiative as a cruel hoax...For moral reasons, the debt of the South is illegitimate. Furthermore, it has been paid over and over again. ... We demand total, unconditional cancellation of all the debt of the South." CAFOD-UK (Catholic Church overseas development agency for UK) said, "(the Initiative) just isn't enough to make a major impact. Although it appears a lot on paper, in reality it will leave many countries still pending more on debt servicing than on health and education of their children"

Future Safeguards

Most inter-governmental loans have in the past taken place in secret, often for dubious purposes; all future international loans need to become totally open and transparent, as a mandatory requirement. Creditors need to become accountable and responsible for bad lending decisions. There is need for an international bankruptcy law, whereby unpayable debt in the future is acknowledged and written off. IMF and the World Bank need to release all regulatory demands. Controls need to be established to regulate future international lending, both by governments and by international financial institutions. There needs to be introduced taxes upon short-term and speculative lending. Loans to the poorest nations need to be governed by a Southern government coalition working together with civil society, in a way that aims for transparency, exposure of corruption, long-term economic and environmental sustainability and poverty alleviation.

The goal of major creditor countries and the IMF, has in the past focused upon ensuring debt sustainability targets; this policy needs to be reversed to ensure sustainable development. The real answer is to find ways, through participatory processes, to ensure that the resources newly available from debt relief are used for poverty reduction and other socially useful expenditures. Sound economic and social policies are vital; but these policies must be crafted with broad public participation and must protect the most vulnerable. Debt cancellation should be implemented in ways that widely benefit ordinary people and not just economic elites, corrupt public officials and military establishments. Unconditional debt cancellation is an essential beginning, but it is just one of many measures necessary to reverse the global problem of poor nation debt.

(This chapter has been prepared and edited from research material available on the website for Jubilee 2000/USA. Anyone desiring more extensive information and news on unfolding developments is recommended to link into this most informative site. Website: ) -- David Keane, "The Global Debt Problem," being section 42 of a book he is writing, 17 October 1999.

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