A World of Debt

Why "Debt Relief" Has Failed to Liberate Poor Countries

by Rick Rowden

The American Prospect magazine, Summer 2001

One of Bill Clinton's final acts as president was to secure Congress's approval for a $43s-million component within the foreign-aid bill last October. This provision fulfills the pledge the United States originally made in 1996 at the Group of Seven (G-7) summit, where the world's seven richest governments agreed to finance a debt-relief plan for 41 of the poorest third-world nations.

The plan-formally called the Debt-Relief Initiative for Heavily Indebted Poor Countries and commonly referred to as the HIPC initiative-was announced by the G-7 countries with much self-congratulatory fanfare. Yet, fraught with serious shortcomings and all-too-familiar strings attached, it is under fire by some of the biggest advocates of third-world debt relief.

In the 1960s and 1970s, third-world debt was largely incurred by corrupt, unaccountable regimes. Many loans were officially targeted toward large, wasteful infrastructure projects, but often the money went into the pockets of the top 100 or 200 people surrounding the regime leaders and ended up in private Swiss bank accounts back in the first world. Much of the third world's present $2.6 trillion in debt is from accrued interest on the original loans or on refinanced versions of them.

Third-world debt is administered by the International Monetary Fund (IMF) and the World Bank, which are largely controlled by the G-7 governments. Originally Keynesian in their policies, these two institutions were created to finance the reconstruction of Western Europe after World War II and to rebuild and stabilize the international payments system. It was Ronald Reagan's administration, seconded by Britain's Margaret Thatcher, that infused them with a neoliberal economics ideology and sent them in to micro-manage more than go third world economies. They sought to reduce the role of the state and increase the role of the private international investment sector in these countries' economic development.

Since the early 1980s, the IMF and the World Bank have based loan awards on nations' compliance with "structural-adjustment programs"-economic-reform policies with a free market bias.

This stamp of approval acts as a green light for the release of additional bilateral and multilateral loans. Because nearly all private foreign investment goes to about a dozen "emerging market" economies-eastern China alone receives the bulk of it-most poor nations depend entirely on bilateral or multilateral loans and foreign aid just to service the interest payments on decades of previous debt. Poor countries must prove that they are implementing the economic reforms at a satisfactory pace in order to have each "tranche," or portion of the loan, released.

HYPOCRITICAL HELPERS

By the early l990s, while the IMF and the World Bank claimed to be helping the third world develop and get out of debt, most of their clients not only remained underdeveloped and poor but had fallen deeper into debt. And by the mid-l990s, the global gap between the rich and poor countries had roughly doubled since the 19605. Today the top 20 percent of the world's population controls more than 80 percent of the world's wealth and the bottom 20 percent controls about 1 percent. Debt payments from the poor countries to the rich ones usually amount to far more than new aid or foreign investment flowing from the rich countries to the poor. To make matters worse, although the structural-adjustment programs are supposed to reduce poverty through "market-led economic growth," they have yet to help even one third-world economy achieve both a high rate of growth and a substantive decline in poverty. A study conducted by the Center for Economic and Policy Research suggests that the structural-adjustment programs have actually impaired economic growth rates.

Strikingly, the conditions attached to IMF and World Bank loans are nothing like the policies of industrialized economies over the past 150 years. Europe, the United States, Japan, and the Four Tigers of Asia (Singapore, South Korea, Hong Kong, and Taiwan) all have relied on an extensive partnership between industry and the state. Their industrialization process involved several decades or more of government providing protective trade barriers, large subsidies to domestic industry, support for public utilities and state-owned industries, tax breaks and other incentives for research and development to diversify the economy, and controls on currency and capital.

In contrast, structural-adjustment programs call for third world economies to reduce the states' role in their economic development process. These conditions-which are pushed most heavily by the U.S. Treasury Department and are thus dubbed the Washington Consensus-force third-world governments to lower or eliminate trade barriers and tariffs, lower or eliminate subsidies to their businesses, privatize public utilities and state-owned businesses, limit production to only one or two major exports, and eliminate their controls on currency and capital. A11 of this constricts the ability of the state to assist domestic industry or provide needed public services. Since no country in history has ever industrialized under such a process, structural-adjustment programs are essentially a massive, radical experiment foisted on the poorest two-thirds of the world's population.

Structural-adjustment programs drew lots of criticism throughout the l990s. Such objections culminated in the boisterous protests last year outside the IMF and World Bank joint conferences in Prague and in Washington, D.C. Critics note that the trade barrier reductions and subsidy cuts have wiped out domestic businesses, which could not compete with foreign multinational competitors; and that when a country's public utilities and state-owned companies are privatized, only foreign investors or the few domestic elites can afford to purchase them. Being forced to stick to one or two main exports has repeatedly made entire economies vulnerable to sudden price drops in international commodity markets. And currency-and-capital-control deregulation is now widely understood to have exacerbated the recent currency crisis in Asia.

In its 2001 annual edition of Global Economic Perspectives and the Developing Countries, the World Bank itself has pointed to one of the largest hypocrisies of all in global trading: The rich countries maintain high levels of trade barriers and subsidies for their own protection but force third-world governments to remove barriers and subsidies that support their industries. These prevent third-world goods from being sold in their markets. The effects of such hypocrisy have been disastrous.

THE POLITICS OF DEBT RELIEF

Criticism of the IMF and the World Bank gained political momentum in the late l990s with the emergence of international activist groups such as the Jubilee USA Network of religious organizations and development organizations-Oxfam International, Bread for the World, and so Years Is Enough Network-whose grass-roots campaigns have successfully put debt relief on the public agenda. Many groups have called for total debt cancellation, and their demand has been echoed by the pope, UN Secretary General Kofi Annan, the United Nations Conference on Trade and Development, the Meltzer Commission, and others. Bono of the rock group U2 also has taken on the cause; he lined up with key members of Congress to highlight the importance of debt relief and to urge full funding for the U.S. contribution to the HIPC initiative.

The HIPC framework, which promises cancellation of limited portions of countries' debts over a two- to four-year period, is supposed to invite nongovernmental organizations (NGOs) and civic groups to consult with their governments, the IMF, and the World Bank in an open, inclusive group effort to draft a road map of economic reforms called "poverty reduction strategy papers." These papers are meant to direct new budgets to emphasize poverty reduction strategies while also implementing the old loan terms.

The HIPC initiative's stated goals include "community participation," "country ownership" of the loan, plans to "decentralize" budgetary administration, and greater "transparency." These provisions are designed to placate critics of the traditional top-down approach. The lexicon of new terms, a veritable hodgepodge of themes and concepts long supported by the World Bank's progressive critics, has been co-opted for a public relations bonanza. All of this is akin to MasterCard telling its customers they have ownership over their debt payment plan. Its only substance is rhetorical.

There are no clear guidelines about who is a legitimate NGO or who should be allowed to participate. In countries such as Ghana and Tanzania, governments handpicked which groups were allowed to represent civil society in the poverty reduction-strategy process; and even those who participated were working with incomplete information. In Cambodia the available documents were not even translated from English. NGOs have criticized the process as "a joke" in which "a preoccupation with structural adjustment targets suffocates the strategy" of poverty reduction. Participants have complained that there are two discrete tracks-one for poverty reduction and the other for structural adjustment.

Many quarters, ranging from international citizens' groups to the UN Human Rights Commission, have questioned the sincerity of the World Bank and IMF's promise to consider local participation when drafting the country strategy papers required for HIPC debt relief. When pushed, the IMF admits that the Joint Staff Assessment committees will also evaluate the "soundness" of the economic policies in each strategy paper before offering their final judgments to the governing boards of the IMF and the World Bank.

Furthermore, while everyone watches the poverty reduction process unfold, the IMF and the World Bank silently continue to wring hundreds of other concessions and commitments from governments, through several secret loan agreements that impose traditional structural-adjustment conditions. Documents such as the "President's Report" or the "Letters of Development Policy" are never disclosed. And even when sectoral-adjustment loans or country assistance strategies are disclosed, important information can be omitted by governments, and the documents are made public only after IMF and World Bank executive board approval.

Perhaps the biggest problem with the HIPC initiative is that the amount of debt relief it provides is insufficient to free the indebted countries from unsustainable debt burdens in the future. By December 2000, the IMF and the World Bank had finalized debt-relief plans for 22 of the 41 HIPCs and officially lifted some $34 billion in debt service obligations. Yet the payment reductions are spread over the next 20 to 25 years, so these countries are still left with vast amounts of debt to be serviced.

The HIPC initiative's ultimate goal is to reduce each country's debt service by an average of 37 percent. It aims to reach a certain ratio of debt-to-exports earnings, a point at which the rest of the debt burden is considered to be sustainable. The 22 countries furthest through the process have had their payments reduced on average by 31.2 percent. But groups such as Drop the Debt in the UK and the Jubilee USA Network argue that this is inadequate because a majority of countries that have already gotten reduced payments will continue to pay more toward their debt than they spend on health care or education.

For example, Cameroon's annual debt payments will be reduced by 40 percent over the next five years. But Cameroon will still pay, on average, $280 million per year during this period. The projected payments far exceed the amount the country spends annually on education ($239 million) and health care ($87 million). The total relief is about $2 billion, but as with most HIPCs, it will be spread thinly over the next 20 to 25 years. The amount looks especially inadequate in light of the extremely high level of poverty in Cameroon, where one-third of the children are malnourished and 60 percent of the population lack access to clean water.

The IMF and the World Bank never said the HIPC program would completely eliminate the countries' debt; they claimed only that it would reduce the debt to a sustainable level, as determined by a debt-to-exports ratio of 150 percent. Yet this claim- based on projections that the HIPCs would have an annual economic growth rate of g.1 percent for 20 years-was found to be overly optimistic in studies by both Oxfam International and the U.S. General Accounting Office. Additionally, the HIPC program neglects to account fully for countries that fall back into unsustainability as they borrow more money.

In a report prepared this April, the World Bank conceded that the debt-to-exports ratio of 150 percent may not be enough to prevent countries from reverting to unsustainability: There may be unanticipated increases in the costs of oil imports for the HIPCs, as well as declines in the prices of many HIPC exports in international commodity markets. More telling, at a seminar in London this February, the World Bank admitted that the HIPCs will gain only 40 cents for every dollar of official debt relief. Ishac Diwan of the World Bank explained that "the HIPC initiative is more helpful to multilateral organizations than it is to poor countries." The "relief' being offered does not come from writing off the debts in question but rather from the establishment of a trust fund composed of contributions from wealthy first-world governments to make dollar-for-dollar payments to the World Bank and the IMF-a setup that has amounted to a taxpayer-funded bailout for the decades of reckless lending by the institutions. In many cases, the debt being forgiven was not actively being paid back anyway, so its disappearance from the official books did not translate into any new tangible savings for the indebted countries.

A FEW MAJOR ADJUSTMENTS

At first activists debated whether or not debt relief that comes with structural-adjustment programs is better than nothing. Some groups refused to support the HIPC initiative because its relief is too limited and structural-adjustment conditions remain attached. But other groups lobbied Congress to continue funding the HIPC program because they believed that it was the best deal they would get and that calling for full debt cancellation was politically unrealistic. Moreover, they acknowledged that even the limited relief offered has allowed some countries to put more resources toward health and education than they otherwise would have. And as flawed as the poverty-reduction strategy process is, the call for local NGOs to participate in a civic process with their governments has opened up positive channels of communication in some countries.

While the disagreement about whether or not to support the limited HIPC initiative divided many citizens' groups in the past, today the emerging consensus among a growing number of debt cancellation activists and NGOs is that the initiative is largely smoke and mirrors, because the debt relief does not entail total cancellation and because the structural-adjustment programs are still being pushed. Critics say that structural adjustment programs prevent poor countries from industrializing the way the Four Tigers and the first world did, and that the debt burden itself is illegitimate.

Notwithstanding claims by the World Bank and the IMF that they cannot afford to provide greater levels of relief, Adam Lerrick-former head of product development at Credit Suisse First Boston and an adviser to the congressionally appointed Meltzer Commission-concluded in the September 2000 issue of Euromoney that the capital reserves in the big multilateral banks are more than large enough to wipe out the $4s-billion share of multilateral debt owed by the HIPCs. More recently, the United Kingdom's Drop the Debt campaign teamed up with Oxfam International to release the findings of an independent audit of internal reserve accounts and other sources of revenue held by the IMF and the World Bank. Completed by the London accounting firm Chantrey Vellacott DFK, the audit indicated that the World Bank, the IMF, and regional development banks do, in fact, have the funds available to cancel HIPC debt. These reports have emboldened a large international coalition of citizen activists to go far beyond the limited HIPC initiative and call on the IMF and the World Bank to use their own internal funds, not first-world taxpayers' money, to eradicate the debts.

However, many worry that some countries would not spend the saved money on development programs for their people. One possible solution to this problem is to emulate Uganda's Poverty Action Fund-which puts debt-relief proceeds into schools, roads, and the like and is run entirely by local NGOs. But it should be noted that even if 100 percent of HIPC debt were canceled, many oppressive regimes would not automatically raise health or education budgets for their impoverished masses. Indeed, third-world elites benefit from the existing situation and are among the first to purchase the state-owned enterprises that are privatized under structural adjustment.

And regardless, total debt cancellation would still leave most countries in need of future financial assistance. This is why more activists are starting to think that the World Bank and the IMF should get out of the lending business and switch to providing development grants. In an era of staggering poverty and a worsening AIDS crisis, it no longer makes sense to give loans. One thing that activists and World Bank officials appear to agree on is that as first-world governments get richer, they could be giving much more to developing nations. While many countries officially have agreed to provide o.7 percent of their annual GDPs in foreign aid to poor countries, few first-world governments do so. Also, more than 75 poor countries are not included among the 41 formally recognized HIPCs. They, too, must borrow, simply to service their debt payments. Since 1996 the debt burden of all developing countries has climbed from $2.2 trillion to $2.6 trillion.

Once again, it's apparent that the real issues posed by third world debt are political, not financial. Karin Lissakers, who resigned in April as the U.S. executive director of the IMF, has admitted that if conventional financial standards were applied to third-world debt, "a substantial portion" of it would be wiped away overnight. After all, credit card companies will cancel charges on a stolen card-also known as "odious debt"- because of the widespread belief that cardholders shouldn't be held liable for such charges. Even the IMF and the World Bank have insisted that Russia and the Eastern European countries write off the debts owed to them by Nicaragua and other third world countries in order to have their books "better reflect reality," since these debts are not payable. Yet the IMF and the World Bank do not take it upon themselves to "better reflect reality": They refuse to employ the odious-debt approach. As a consequence, the largely youthful third-world masses continue to have their health and education budgets slashed to pay for the debts of corrupt regimes from long ago.

Because the IMF and the World Bank continue to impose structural-adjustment programs and show no willingness to forgive third-world debt in its entirety, the vaunted HIPC initiative is bound for spectacular failure. When the G-7 governments, along with Russia, meet for a summit conference in Italy this July, they will have another opportunity to improve the initiative. Tens of thousands of protesters will be outside the G-7 summit, as well as outside the IMF and World Bank annual meetings in Washington, D.C., this September, to call for total debt cancellation and an end to the controversial structural-adjustment programs. Unless the core issues surrounding relations between first-world and third-world nations are fully acknowledged and dealt with by the richest countries, the HIPC program will end up as just another historical footnote and the crises of deepening debt and global poverty will continue to be unresolved.

Rick Rowden conducts research on IMF and World Bank policies for the RESULTS Educational Fund in Washington, D. C. He has taught international political economy at Golden Gate University in San Francisco.

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