THIRD WORLD DEBT
Innumerable afflictions plague the world’s poor and disadvantaged. The financial debt owed by underdeveloped countries to international financial institutions, commercial and regional development banks, as well as to the governments of developed countries, is undoubtedly one of the greatest of these hardships, and certainly a tremendous force working against the eradication of global poverty. Due to the burden of international debt, countless countries are prevented from developing, and from even providing a minimum standard of living for many of their citizens. This is not only because much-needed money is being diverted from domestic spending to repay creditors, but also because of the stringent conditions attached to certain loans. These conditions require countries to cut spending on social services such as education and healthcare- two necessary elements for development. Regardless, some still believe that the debt must be repaid. The rationale behind this position must first be addressed and outlined prior to discussing the reasoning for canceling the financial debt of the world’s poorest countries.
Though a large international effort (mostly from civil society) exists to forgive the debt of poor countries and has become increasingly popular over the years, arguments against debt cancellation remain. This essay will cover what may be considered two of the most prominent arguments, in addition to their counterarguments. The first rests on a basic principle of finance: since the money was borrowed, it ought to be paid back. This position is most advocated, unsurprisingly, by creditors and their supporters. Debt forgiveness should not be seriously considered, for it is ethically unjust to financiers, since the money was lent, not given. Countering this argument, those in favour of canceling the debt point to an important consideration: the history of the developing world’s debt.
During the Cold War, Western governments, international financial institutions, and commercial and regional development banks provided billions of dollars in loans to numerous developing countries that, considering their high levels of poverty and low levels of growth, could hardly refuse. As Cambridge economist Noreena Hertz asserts, rather than being a case of “altruism” or “even of enlightened self-interest,” Cold War lending was “a time when loans to countries and regions shot up in direct proportion to their perceived geopolitical influence or ideological loyalties and when loans were used as a means of securing powerful allegiance and ensuring political stability.” Indeed, Cold War lending had nothing to do with any meaningful considerations for self-sustaining economic growth, as it was premised more on politics than economics. “Profligate lending,” Hertz continues, “actively helped to jack up the debt mountain,” resulting in developing countries owing amounts of money much higher than they could service, and thus “sowing the seed of the crisis the developing world currently faces.” Hence, leaders of developing countries are not the only ones to blame for the debt; creditors are also guilty of lending funds to countries that were unable to realistically repay the funds. More importantly, Western creditors were lending to regimes that not only ruled lacking the consent of the governed, but also used the funds to enrich themselves rather than benefit the country. For instance, often dictators used money from the loans to purchase weapons to further oppress their citizens.
Hence, developing world debt is illegitimate and should be forgiven, since Western creditors drowned developing countries in loans to serve their Cold War interests, and corrupt rulers who did not represent their citizens used the funds for personal profit, not economic development. This is a legal principle known as ‘odious debt,’ which the Jubilee USA Network (a non-governmental organization that has been calling for 100% debt cancellation for several years) noted prior to the 2004 Group of 8 summit, saying, “debt that resulted from loans to an illegitimate or dictatorial government that used the money to oppress the people or for personal purposes…[creditors] cannot legitimately expect repayment of such debts.” Jubilee adds that in cases when loans were made available to rulers who used the funds “in ways contrary to the people’s interest, with the knowledge of the creditors, the creditors may be said to have committed a hostile act against the people.” This is certainly the case for the Democratic Republic of Congo, one of the most heavily indebted countries, where Congolese citizens are forced to repay loans made to a knowingly corrupt dictator, Mobutu Sese Soko. Loans to Mobutu were made throughout the Cold War after he assumed power in the early 1960s, and continued even after an 1978 IMF internal memo made public indicated that creditors were aware that the funds were not being spent to benefit Mobutu’s country and its people: “The corruptive system in Zaire with all its wicked manifestations is so serious that there is no (repeat no) prospect for Zaire’s creditors to get their money back.” How can Congolese citizens be expected to repay loans made to a corrupt dictator who used the borrowed funds to enrich himself and was doing so while creditors were aware of this? Clearly, in this case as well as countless others, the principle of odious debt is applicable. For this reason, these debts should be cancelled.
The above paragraphs also counter the second powerful argument against debt forgiveness that this paper will discuss: the ‘moral hazard’ principle. This position advances an ethical argument much more concerned with developing countries’ welfare, than the welfare of creditors’, a concern found in the first argument did. The moral hazard principle is perhaps best articulated by former Alabama “libertarian conservative congressman” Sonny Callahan, who, as chairman of the Foreign Operations Subcommittee of the House Appropriations Committee, was responsible for “recommend[ing] how much money to allocate to debt cancellation.” In 1999, he articulated the moral hazard position in his opposition to any meaningful debt forgiveness, by stating that forgiving the debt would be “money down a rathole,” since it “would encourage the World Bank and others to continue to make bad loans and leave poor countries to have to borrow and get into debt all over again.” Forgiving the current debt, according to Callahan, would only be a temporary solution, since developing countries would likely fall right back into debt. However, this position does not take into consideration that the majority of loans to developing countries were done during the Cold War, when geopolitical importance superseded sound lending policies. It is unclear and also hazardous to assume that the international political situation in the years to come will mimic the Cold War.
Perhaps the most powerful and morally persuasive argument in favour of debt forgiveness is the fact that debt servicing obligations not only prevent underdeveloped countries from developing (thus keeping countless people in abject poverty) but have also contributed to the unnecessary deaths of millions. The World Bank and the IMF are responsible for a large amount of developing countries’ debt, and provide austere conditions to a number of their loans. These conditions are known as structural adjustment programs (SAPs), which require countries to enact significant cuts to areas such as spending on healthcare and education. SAPS also result in the dismantling of subsidies to domestic industry and agriculture, the deregulation and liberalization of internal and external markets, privatization, and the devaluation of a country’s currency. These policies have done little to promote economic growth or improve living standards in poor indebted countries that have followed these guidelines. For example, from 1980 to 2000, the incomes of the poorest twenty countries in sub-Saharan Africa fell by two percent annually while experiencing an annual decline of growth of 0.8%, compared to an annual rise of 2.3% between 1960 and 1975 when SAPs were not implemented. In 1997, the United Nations Development Program reported that had heavily indebted African countries not been forced to service their debts, the lives of twenty-one million children could have been saved, largely from the cuts to healthcare and clean drinking water the debt and SAPs result in. Poverty in Africa has increased by an estimated 63% from 1994 to 2001, which, in addition to the dismal numbers listed above, makes it no surprise that the All-African Conference of Churches called the debt “a new form of slavery, as vicious as the slave trade.”
In Ecuador, the Structural Adjustment Participatory Review Initiative Network (SAPRIN) reported that in 2002 “unemployment more than doubled under adjustment from 6% in the late 1980s to 14.4% in 1999.” Indeed, SAPRIN notes that the “intransigence of international policymakers as they continue their prescription of structural adjustment policies is expanding poverty, inequality and insecurity around the world.” It has been made clear to underdeveloped countries that repaying money to creditors is far more important than saving millions of lives and aiding the poor. These statistics indicate that rather than helping countries develop, an idea that is generally viewed the basic principle behind borrowing, poor countries have been left much worse off, with SAPs accelerating their immiseration. Unequivocally, indebted developing countries are effectively prevented from developing and “undermining their economies” because of the barriers implemented by the debt, which SAPs have increased rather than decreased.
The rare occasions in which some debt reduction has occurred in certain countries and thus freed up funds have demonstrated that debt reduction has contributed to health and education spending, necessary conditions for economic development, since an economy and citizens’ standards of living can only grow when citizens are healthy and educated: “the debt relief delivered to date has resulted in increases in spending on education and health in Africa…[i]n some cases, health spending has increased by 70%, and education spending has grown by more than 140%.”
Considering arguments in favour of forgiving the developing world’s debt have been made for several years, it is important to address how debt cancellation could go about. Numerous politicians have argued that debt forgiveness is a high priority, with British politician Gordon Brown, Chancellor of the Exchequer, stating that the world’s richest countries “should match bilateral debt relief of 100 per cent with the bold act of offering 100 per cent multilateral debt relief,” and Canadian politician Stephen Owen, Minister of Western Economic Diversification and Minister of State, stating that “G-8 Finance Ministers [have] put forward a proposal that will lead to 100 % debt cancellation of outstanding obligations owed to the International Monetary Fund (IMF), the International Development Association of the World Bank and the African Development Fund,” to name a few. However, more than just rhetoric is required to cancel the debt. The “50 Years Is Enough Network” argues that any funds required for debt cancellation “should come from positive net capital and assets held by those institutions [the IMF and World Bank],” and if “other institutions, such as the African Development Bank, require assistance to write off the debts owed them,” the IMF and World Bank should “make such funds available.” Noreena Hertz, mentioned above, suggests a plan that, while she admits “is radical…but is not completely unprecedented,” would ensure that funds from forgiven debts would not simply flow to government bureaucracies, but would instead flow to what she calls “National Regeneration Trusts,” which, as “islands of good governance,” would decide how these newly available funds should be spent, to make sure they go towards such needed sectors as health and education. Those in charge of these Trusts would have to be “majority nationals, with the only nonnationals appointed from the United Nations bodies such as the UNICEF or the World Health Organization…whose experience on the ground would be invaluable.” Pressure from civil society would certainly need to be continued and increased, as well as pressure from citizens on their elected representatives. While a number of other possibilities exist, these undoubtedly provide important first steps towards achieving the debt forgiveness.
While numerous groups of people have been urging their governments for several years to forgive the debts of poor countries, some still argue against debt cancellation. Perhaps the most notorious are that the debt ought to be repaid since the money is owed, and that canceling the debt would only encourage developing countries to recklessly borrow once again, only to find themselves again in debt. These arguments tend not to be tremendously persuasive when one examines the history of developing countries’ debt, and ignores a much more crucial aspect of the debt, the fact that it prevents countries from saving the lives of its poorest citizens, and places barriers to economic development. Debt forgiveness is undoubtedly much more ethically desirable than insisting that millions of dollars be taken out of developing countries’ government coffers; money that could save lives and raise standards of living for present and future generations. Though the solution to debt cancellation is more complex than simply forgiving the debts owed, civil society groups such as the Jubilee USA Network and the 50 Years Is Enough Network are on the right track. As well, National Regeneration Trusts, as advocated by economist Noreena Hertz, should be taken into consideration by governments and international organizations as a meaningful way for ensuring that funds from cancelled debts are not misspent. Without these important efforts, debt forgiveness may not be possible. We must ensure that the plight of the world’s poor does not continue unnoticed.
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