Developing countries' debt

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Third World debt is external debt incurred by Third World countries (the term "Third World" is still in use, although many prefer less pejorative terms, such as "developing countries" or "global South"), Unpayable debt is a term used to describe external debt where the interest on the debt exceeds the amount that the country produces, thus preventing the debt ever being paid back. It is considered by some a method of oppression or control by first world countries; a form of debt bondage on the scale of nations.

Odious debt is debt incurred by undemocratic countries and misspent (for example, on armaments or repression of the population) or misappropriated. The debt campaign organization, Jubilee USA notes that, "Odious debt is an established legal principle. Legally, odious debt is debt that resulted from loans to an illegitimate or dictatorial government that used the money to oppress the people or for personal purposes. Moreover, in cases where borrowed money was used 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. They cannot legitimately expect repayment of such debts." (PDF)

Much of the current levels of debt were amassed following the 1973 oil crisis when the western members of OPEC pushed the price of oil up making the Arab nations very wealthy. They decided to deposit this money in large Western banks. The banks didn't want all of this money lying around so it was lent to the third world countries. Banks lent large amounts of money to developing countries without much attention to where the money would be spent or whether countries would be capable of repaying the amount. While some of this money went towards trying to improve the living standards for those in the countries, most of the loans never reached the poor of the country either going towards large-scale development projects, some of which proved of little value, or to the private bank accounts of dictators. Overall, about one-fifth of loans went to arms.Introduction to Debt Crisis

One argument that exists states that "odious debt" should be cancelled at the expense of the creditors, according to the argument that those who suffer from the consequences of spending should not have to repay the money they never controlled. Additional arguments against creditors state that these funds were loaned irresponsibly in the first place. However major recent examples, such as with the Apartheid government of South Africa and the Mobutu dictatorship in Zaire (now the Democratic Republic of Congo) have not been recognized by creditors as "odious".

1 Historical background
2 Arguments about the fairness of Third World Debt
3 Debt relief in response to emergencies
- 3.1 G8 Summit 2005: Aid to Africa & Debt Cancellation
4 Impact of Debt Relief
5 Crises caused by debt
6 Borrowing through bond markets
7 References
8 See also
9 External links

[edit] Historical background

Most present-day states in Africa and the majority of Asia did not have an independent financial existence as recently as World War II. However, not all external debts of these countries was acquired after independence. Indonesia was required to assume the Dutch colonial government's debt (much of which had been acquired fighting the pro-independence rebels the previous four years) as a condition of independence in 1949. This pattern was repeated elsewhere. In order to receive recognition from France as an independent nation, Haiti was required to pay France 150 million francs (modern equivalent of $21 billion dollars) in exchange for its loss as a slave colony. Haiti's Debt Fact Sheet

Egypt, which had not been formally colonized, but had been effectively governed as first an Anglo-French and later British protectorate, did not have control over the lucrative Suez Canal, which links the Mediterranean Sea with the Red Sea (and therefore the Indian Ocean). Denied credit to build the Aswan Dam, Egypt's government moved to nationalize the canal, formally owned by a European corporation but built (at tremendous human cost) by Egyptian labor, in 1956, sparking the Suez Crisis.

In the first decades following decolonization, first world and multilateral creditors such as the World Bank and International Monetary Fund lent massively to Global South governments. Money was frequently directed towards massive infrastructure projects such as dams and highways. Additional funds focused on an import substitution model of development, creating a capacity to replace imports from industrialized countries. Such policies emerged in a convergence of ideologies towards the concept of industrial development, shared by capitalists, communists and Third World nationalists.

Additionally, a number of dictatorships and arguably neocolonial governments imposed and/or backed by foreign powers received extensive debt-based financing to conduct civil wars or repression against their own population. In Central and South America, these policies fell under the rubric of the national security state, in which armed forces were assisted by the United States to focus their attention on so-called internal security. Civil wars accumulated substantial debts in Guatemala, El Salvador and Colombia. In Haiti, the father-son dictatorship of François and Jean-Claude Duvalier accumulated massive debts, which the United States pressured then-exiled President Jean Bertrand Aristide to recognize as a condition of his return to power in 1995. Foreign military operations, such as the invasions of East Timor by Indonesia; of Angola and Namibia by South Africa; and of Iran and Kuwait by Iraq also led to massive indebtedness.

Massive lending was followed by the threat of major defaults, such as that of Mexico, in the early 1980s, precipitating what became known as a debt crisis. Faced with the possibility of losing their investments lenders proposed a variety of structural adjustment programs (SAPs) to fundamentally reorient Southern economies. Most called for the drastic reduction in public welfare spending, focusing economic output on direct export and resource extraction, providing an attractive investment climate to multinational investors, increasing the fluidity of investment flows (by replacing foreign direct investment with the opening of stock markets) and generally enhancing the rights of foreign investors vis-a-vis national laws.

As these programs became a prerequisite of lending and other development assistance from all major multilateral creditors, and as Soviet economic assistance evaporated in the late 1980s, SAPs became the dominant economic plan for much of the world's population. Saddled with massive debts, and unable to collectively alter unfavorable terms of trade, many Southern governments were pushed from the role of legislating economic policy to negotiating it. Many of them, such as Jamaica's Michael Manley, have argued they were even pushed into the job of managing an enforced economic transition against the wishes of their populations.

[edit] Arguments about the fairness of Third World Debt

First world critics of this point of view state that many of these debts were freely entered into by those countries' governments; it has, however, been argued that many of these governments were dictatorships or kleptocracies, and that the people of Third World countries cannot be held responsible for the actions of those governments. These critics further question if "unpayable debt" truly exists, since governments can refinance their debt via the IMF or World Bank, or come to a negotiatied settlement with their creditors.

Debt relief activists claim that the debts of poor countries could easily be paid off by first world countries. For example, the Jubilee Debt Campaign argues that the UK could pay off all of the debt owed to it for £3 per person per year for the next ten years.

Some economists argue against this course of action on the basis that it would motivate countries to default on their debts, or to deliberately borrow more than they can afford, and that it would not prevent a recurrence of the problem. Economists often refer to this as a "moral hazard". But some critics and debt relief activists say the problem is not necessarily with borrowers, but with lenders, and thus the moral hazard is not necessarily immoral borrowing, but immoral lending. [1]

Libertarian economists also question the fairness of a government taxing its own citizens to pay off debts owed to it. Perhaps as a result of these considerations, there is little political will to write off the debts of third world countries.

[edit] Debt relief in response to emergencies

In 2004 the United Kingdom wrote off some of its third world debt to the poorest countries. As part of its response to the humanitarian crisis caused by the Indian Ocean earthquake, the G7 nations organized an international agreement to suspend repayment of international debt by the countries most affected. [2]

However, Sri Lanka, still recovering from the December 2004 Tsunami, has a debt of more than $8 billion, and an annual debt service bill of $493 million. Though payments have been deferred on some debts by the Paris Club after the Tsunami, Sri Lanka must continue to service its multilateral debt while 29% of its children are malnourished. Likewise, Indonesia, the nation hit hardest by the 2004 Tsunami, has debt of more than $132 billion (much contracted under the dictator Suharto) (PDF), of which $28.4 billion is to multilateral creditors. Debt service payments to the World Bank amounted to $1.9 billion last year while 40% of Indonesians live on less than $2 per day. [3]

[edit] G8 Summit 2005: Aid to Africa & Debt Cancellation

The traditional meeting of G8 finance ministers before the summit took place in London on 10 and 11 June 2005, hosted by Chancellor Gordon Brown. On 11 June, agreement was reached to write off the entire US$40 billion debt owed by 18 Highly Indebted Poor Countries to the World Bank, the International Monetary Fund and the African Development Fund. The annual saving in debt payments amounts to just over US$1 billion. War on Want estimates that US$45.7 billion would be required for 62 countries to meet the Millennium Development Goals. The ministers stated that twenty more countries, with an additional US$15 billion in debt, would be eligible for debt relief if they met targets on fighting corruption and continue to fulfill structural adjustment conditionalities that eliminate impediments to private investment and calls for countries to privatize industries, liberalize their economies, eliminate subsidies, and reduce budgetary expenditures. The agreement, which required weeks of intense negotiations led by Brown, must be approved by the lending institutions to take effect.

While negotiations have essentially taken place between the G8 member states, some of which are reluctant to endorse debt cancellation and aid increases, African governments, advocacy organizations and their allies have criticised the Blair-Brown plan as inadequate and argued that the continuation of structural adjustment policies outweighs the benefits of debt cancellation, while also pointing out that only a small proportion of the Third World debt will be affected by the proposal. Structural adjustments have been criticized for years for devastating poor countries (Structural Adjustment, Global Issues, July 10, 2005). For example, in Zambia, structural adjustment reforms of the 1980s and early 1990s included massive cuts to health and education budgets, the introduction of user fees for many basic health services and for primary education, and the cutting of crucial programs such as child immunization initiatives. [4]

While applauding the deal as an important first step, Jubilee USA has called for a much broader initiative that includes all countries that need cancellation to achieve the MDGs and all creditors . Jubilee USA reported that only 1 in 10 people in the developing world will benefit from the G8 deal because so many nations (both low- and middle-income) are left out of the deal. [5]

Besides the small number of countries included in the deal and the required structural adjustment reforms, the agreement has also been criticized as being inadequate for its failure to include all creditors. While countries that qualify for the HIPC process would have their debts cancelled to the World Bank, IMF, and African Development Bank, Asian and Latin American countries will still have to pay debt service to the Asian Development Bank and Inter-American Development Bank. The Latin American countries that qualify for the G8 debt deal – Bolivia, Guyana, Honduras and Nicaragua – will pay almost $1.4 billion in debt service over the next five years to the Inter-American Development Bank (IDB). [6]

Agreement was not reached on Brown's proposed International Finance Facility, partly because the United States said that its budget procedures meant it was unable to make the necessary long-term funding commitments.

[edit] Impact of Debt Relief

In response to pressure from civil society groups in both the Global South and North, a number of impoverished countries have received partial or full cancellation of loans from foreign governments and international financial institutions, such as the IMF and World Bank.

Under the Jubilee 2000 banner, a diverse coalition of groups joined together to demand debt cancellation at the G7 meeting in Cologne, Germany. As a result, finance ministers of the world's wealthiest nations agreed to debt relief on loans owed by qualifying countries.[7]

A 2004 World Bank/IMF study found that in countries receiving debt relief, poverty reduction initiatives doubled between 1999 and 2004. Tanzania used savings to eliminate school fees, hire more teachers, and build more schools. Burkina Faso drastically reduced the cost of life-saving drugs and increased access to clean water. Uganda more than doubled school enrollment. [8]

In 2005, Live 8 concerts paralleling the G8 Summit in Scotland brought the issue of debt once again to the attention of the media and world leaders. Debt cancellation for the 18 countries qualifying under this new initiative has also brought impressive results. For example, Zambia has used savings to drastically increase its investment in health, education, and rural infrastructure. [9]

While celebrating the successes of these individual countries, debt campaigners continue to advocate for the extension of the benefits of debt cancellation to all countries that require cancellation to meet basic human needs and as a matter of justice.

[edit] Crises caused by debt

A recent and telling example of the problems posed by external debt was the Argentine economic crisis. Argentina's debt grew continuously during the 1990s, climbing above $120 billion USD. Creditors continued to lend money, while the IMF suggested less state spending, as recession deepened. The crisis exploded in December 2001. In 2002, a default on about $93 billion of the debt was declared. Investment fled the country, and capital flow towards Argentina ceased almost completely.

The Argentine government met severe challenges trying to refinance the debt. The IMF became wholly uncooperative. Other creditors denounced the default as sheer robbery. Vulture funds who had acquired debt bonds during the crisis, at very low prices, asked to be repaid immediately. The state was broke and the foreign currency reserves were almost depleted. For four years, Argentina was effectively shut out of the international financial markets.

Argentina finally got a deal by which 76% of the defaulted bonds were exchanged by others, of a much lower nominal value and at longer terms. The exchange was not accepted by the rest of the private debt holders, who will continue to present a challenge to the country in years to come. However, in January 2006, President Kirchner announced the liquidation of all the remaining 9.81 billion USD debt to the IMF, along with Brazilian President Lula's similar decision. This move was seen as a means to end IMF's control of Argentinian and Brazilian economy.

[edit] Borrowing through bond markets

Main article: Emerging Market Debt

Historically, developing countries sought to borrow either from other sovereign governments, institutions such as the IMF and banks. Since the creation of the Brady Plan, however, the issuance of bonds by developing countries, known as Emerging Market Debt has increased sharply, leading to its development as a securities