From: wolda002@umn.edu
Date: Mon Apr 12 2010 - 23:23:23 EDT
http://www.worldpress.org/print_article.cfm?article_id=3799&dont=yes
Debt Burden Cripples Poorer Nations
Justin Frewen, March 9, 2010
Members of the Freedom from Debt Coalition protest in front of the World
Bank office in Manila on July 8, 2009, to coincide with the G8 Summit in
Italy, demanding the unconditional cancellation of all debts it is claiming
from the Philippines and developing nations. (Photo: Ted Aljibe/ AFP-Getty
Images)
Between 1970 and 2002, the continent of Africa received some $540 billion
in loans. However, a U.N. study showed that, despite repaying some $550
billion in principal and interest over the same period, there was still
some $295 billion outstanding.
In 2005, as a result of its outstanding debt, Kenya was obliged to spend as
much on the servicing of its debt as it allocated to health, water, roads,
agriculture, transport and finance combined. Indonesia, whose debt was
largely run up by previous dictators, used up almost 25 percent of its
budget on debt service, some four times its combined spending on health and
education.
The origins of the current debt crisis can be traced back to the 1970s. In
1973, the Organization of Petroleum Exporting Countries (OPEC) quadrupled
the price of oil. Given the relatively inelastic demand for oil,
particularly in the northern hemisphere, OPEC accumulated vast profits,
generally stored in U.S. dollars, commonly known as petro-dollars.
Large banks in the northern hemisphere were inundated with these
petro-dollars and were faced with the dilemma of where and how to invest
them at a profit. Given the slackening growth in the North, states in the
South were actively encouraged by these banks to take out loans.
The effects of this policy can be seen in the massive rise in borrowing by
poorer states in the southern hemisphere that led to a twelve-fold rise in
their debt burden between 1968 and 1980. However, as long as the interest
rates on the loans contracted remained low and the debtor countries earned
sufficient export-based revenues to cover their repayments, the debt
incurred remained sustainable.
Initially, the interest rates were relatively low in the region—4 to 5
percent—but at the turn of the 1980s this all changed as the interest
rates began to soar upwards. Within a relatively short period, they went as
high as 16 to 18 percent, and debtor states found themselves having to
allocate three times as much to cover their debt.
Most importantly, this imposition of higher rates was completely one-sided.
It was imposed by the richer northern hemisphere states on the loans poorer
nations had taken out. These nations, mainly based in the southern
hemisphere, had no input or chance to challenge this massive increase in
their debt burden.
This situation was aggravated by the fact that the loans were denominated
in "hard" currencies, such as the U.S. dollar, Japanese yen and Swiss
franc. These currencies tend to remain relatively stable over time. On the
other hand, the borrower countries had "soft" currencies, which frequently
depreciate in value. As a result, they had to devote ever-increasing
quantities of their currency to purchase the hard currency necessary to
repay the same amount of debt.
The difficulty in meeting debt repayment obligations, provoked by these
interest increases, was compounded by the decline in the value of the
southern hemisphere's raw materials and agricultural exports. Debtor
countries now had to radically increase their exports of primary produce
and raw materials. However, as demand in the northern hemisphere remained
relatively stable, this led to a flooding of the international market in a
range of commodities.
The resulting glut and over-supply led to a severe fall in their prices. To
take just a few examples (all in cents/kg), between 1980 and 2001 the price
of coffee fell from 411.7 to 63.3, sugar from 80.2 to 19.9, lead from 115
to 49.6, and palm oil from 740.9 to 297.8. As a result, the southern
hemisphere was left unable to access sufficient foreign currency to repay
their loans.
Unable to cover their debt repayments, states in the southern hemisphere
frequently found themselves obliged to resort to the tender mercies of the
International Financial Institutions (IFI). The best known and most
powerful of these IFI are the International Monetary Fund (IMF) and the
World Bank.
However, in order to access IMF and World Bank funds, borrowing states had
to introduce and adhere to a range of neoliberal economic measures,
commonly known as the Washington Consensus. These conditions included
limiting state involvement in the economy, removing protection from local
industries and companies, opening their domestic market to foreign
competition and facilitating the free movement of goods and investment.
With the removal of state protection, local industries and companies found
themselves faced with competition from large-scale transnational
corporations with which they were unable to compete. This frequently led to
foreign companies owning and controlling crucial industries in developing
economies, effectively preventing the creation of a sustainable, indigenous
commercial sector.
In addition, public-sector expenditure cutbacks were demanded. These cuts
usually targeted areas such as education and health and therefore had the
greatest negative impact on the more vulnerable members of the population.
Such policies led to the southern hemisphere states accusing the IFI as
being primarily concerned with protecting the interests of the lenders to
the detriment of the debtor countries' citizens.
Given the growing international criticism of their operations, the IFI
reacted by introducing a number of initiatives aimed at relieving the debt
burdens of heavily indebted poorer countries. The latest of these
programmes is the Multilateral Debt Relief Initiative (MDRI), launched at
the G8 meeting in July 2005.
Unlike preceding schemes, MDRI provided relief to multilateral debt, that
is, debt to multi-state membership institutions such as the World Bank and
IMF, in addition to bilateral debt, that is, debt owing to individual
states. Specifically, the MDRI would cancel all debts owed to the World
Bank, the IMF and the African Development Bank (AfDB) to states that
satisfied certain conditions.
While this deal was obviously an extremely positive development for many
countries, it fails to prove a solution to the overall problem. Although
participating states will benefit to the tune of billions of dollars, many
other heavily indebted countries have been excluded.
The MDRI's limitations become clear when one compares its estimated $50
billion debt relief with the total estimated low-income country debt of
some $500 billion. Furthermore, debt owing to multilateral institutions
apart from the IMF, World Bank and AfDB was not cancelled. This is a
particularly critical issue for Latin American countries who have
significant debts outstanding to banks such as the Inter-American
Development Bank.
Moreover, the MDRI imposes a range of conditions on the debtor countries to
be approved for debt relief. In the case of the IMF, eligibility to the
MDRI initiative requires debtor countries to be "up to date" on their IMF
obligations. Furthermore, they are required to implement "satisfactory"
macroeconomic policies, a poverty reduction strategy and public expenditure
management.
Similar to previous initiatives, the MDRI does not take illegitimate debts,
otherwise known as odious debts, into consideration. Odious debts refer to
debts that should be regarded as illegitimate given they were lent to
oppressive regimes and corrupt administrations who were well known to be
misappropriating the funds borrowed. Creditors are refusing to assume
responsibility for their lending practices while still expecting repayment
from the poor. In the case of South Africa, the citizens were expected to
repay debts incurred by the previous apartheid government that had
oppressed them.
Of course, there are many who would argue that debt cancelation would only
result in corrupt regimes having more money to pilfer and squander. While
corruption is undoubtedly a problem in many countries, not just in the
southern hemisphere, this should not obscure the fact that much of the debt
contracted was odious debt or that punitive debt repayments are preventing
the successful tackling of poverty. Furthermore, research has shown that
debt relief has led to a significant rise in allocations for health and
education.
Prior to its debt cancellation, Zambia was obliged to spend twice as much
on repaying debt as on health care in 2003. Following its debt relief, user
fees were abolished at rural clinics so that all citizens could access free
basic medical services. The government also committed to providing
anti-retroviral drugs for 100,000 citizens. The removal of primary school
fees in Uganda, following debt relief, saw enrolments double over the next
four years, with a further 50 percent increase in the subsequent four-year
period.
In addition, there is a danger that the debt crisis could re-emerge in the
near future, even amongst those states that have already received debt
relief. Countries more open to financial investment, often as a result of
IFI persuasion, now find themselves extremely vulnerable to capital flight,
as institutions in the North withdraw funds as a result of the current
recession. Furthermore, the continued slide in commodity prices has meant
that countries such as Zambia, which did receive debt relief, are now in
danger of seeing their debt appreciate to twice the level deemed
sustainable by the IMF and World Bank.
It is clear, therefore, that if we are to be serious about changing the
debt crisis cycle, cancelling international debt, although essential, will
not be sufficient on its own. There is an urgent need to change the whole
structure of our current financial framework if a sustainable solution is
ever to be realized. We need to move away from a monetary system based on
debt and interest payments that enables control to be kept in the hands of
a small and prosperous elite.
Above all, if there is to be any real hope for global development and an
end to poverty, it is imperative that developing countries regain their
sovereignty and dignity, free from the crippling dependency the burden of
debt has placed on them.
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