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Debt cancellation: Victories and
challenges
By Mark Engler
Posted with permission
from Foreign Policy in Focus
An old maxim of social reform movements
(adapted from Schopenhauer's prickly take on the
history of great ideas) states: "First they ignore
you. Then they attack you. Then you win." For
years, campaigners for debt relief in the
developing world and their international
supporters were dismissed or derided. For 2005,
however, a new question has emerged: will they
finally be able to claim victory?
A decade
ago, in 1995, activists pushing for world leaders
to cancel the huge debts that stunt development in
the global South were told simply, "debt will not
be a major issue". By 1998, these same groups -
led by the Jubilee debt coalition - were warned
that they were asking too rudely for too much. "If
you make a campaign out of it," one columnist
wrote, or "use extreme language... the very people
you want to influence, the ministers and officials
of the rich democracies, stop listening to you."
The campaign continued despite these
admonitions. Now, observers of the debt issue have
predicted that a major advance for cancellation is
within reach, possibly as soon as this summer.
Although leaders from the Group of Seven, or G7,
wealthy industrialized nations failed to finalize
a debt agreement in Washington, DC in April, they
will continue their deliberations when they come
together for their annual meeting on July 6-8 in
Perthshire, Scotland. On the table is a plan to
grant up to 100% multilateral debt relief for many
of the world's heavily indebted poor countries.
That the legitimacy of 100% debt
cancellation is now widely accepted represents a
dramatic reversal in the debt debate. Many have
commented in recent years that the globalization
movement has won the moral argument about trade
and development, but that its positions have not
translated into policy. Yet the issue of debt
provides one clear instance in which a network of
international activists has affected government
decisionmaking and, in so doing, has opened real
possibilities for human development.
At
the same time, with US Treasury Secretary John
Snow presenting fresh barriers to progress on full
cancellation and with advocates discussing
difficulties that will face developing nations
even in a post-debt-relief era, a win long in the
making is bringing with it a series of new
challenges.
The making of "a major
issue"
In the early 1990s, debt
cancellation was far from the mainstream political
agenda. While in the global South a discussion
that began in the 1980s was raging - condemning an
emerging debt situation in which some impoverished
countries, especially those in sub-Saharan Africa,
were paying more in debt service to advanced,
capitalist nations than they were receiving from
them in aid - the issue had very little traction
in wealthy nations. "There was almost zero
awareness" of the debt issue in the US at the
time, says Neil Watkins, National Coordinator of
Jubilee US. When a small group of social movement
activists, along with government leaders from the
developing world, tried to gain a hearing for the
issue at the 1995 UN Copenhagen Social Summit, the
US and UK impeded discussion. President Bill
Clinton and British Prime Minister John Major
ultimately avoided attending the summit
altogether.
Not long after, though, the
grassroots work on the issue began to bear fruit.
The formation of the Jubilee network in 1997
united a broad spectrum of religious, labor, and
non-government organizations into a joint
international campaign. In May 1998, Jubilee
helped mobilize 50,000 supporters to protest the
G7/G8 summit in Birmingham, England. The protests
returned in full force at the following year's
summit in Cologne, Germany, where another 50,000
people formed a human chain through the city's
streets to represent the "chains of debt".
During the same period, concerned members
of religious congregations, in particular,
witnessed some gratifying developments. The
efforts of Roman Catholics drew notice when, in
1996, the Catholic Bishops of Africa began
publicly denouncing debt payments made "at the
expense of providing basic healthcare, education,
and other social services to the poor in our
countries". Bishops from Latin America came
forward with similar statements. In November 1998,
the late pope John Paul II, who had shown previous
sympathy for the campaign, held up debt relief as
"a precondition for the poorest countries to make
progress in their fight against poverty".
Demanding immediate action, he asserted: "It is
the poor who pay the cost of indecision and
delay."
Other religious bodies throughout
the world came forward to endorse the Jubilee
campaign. In the US alone, these included the
Episcopal Church, the Evangelical Lutheran Church
of America, the Mennonite Church, the Union of
American Hebrew Congregations, the Presbyterian
Church, and inter-faith groups like the
Inter-Religious Task Force on Central America,
Church World Service, and the Ecumenical Program
on Central America and the Caribbean.
By
this time policymakers and pundits could no longer
afford to ignore the call for debt cancellation.
But some went on the attack. Following the
Birmingham demonstrations, Andreas Whittam Smith,
a columnist with the London Independent, echoed
much of elite opinion by calling the Jubilee
campaign's goals "laudable", but criticizing its
political strategy as "badly conceived".
Cautioning against "monstrous accusation", he
defended the laborious negotiations about debt
taking place at the World Bank and IMF, and
charged that the Jubilee coalition's political
action would be "ineffectual... if not
counterproductive".
First
victories
In fact, as grassroots efforts to
highlight the issue grew, the G7 responded at each
stage by grudgingly expanding its limited
proposals for debt relief. In 1996, the countries
controlling the International Monetary Fund (IMF)
and World Bank introduced their first Heavily
Indebted Poor Countries (HIPC) plan, designed to
offer 42 of the world's most indebted poor nations
some relief after six probationary years.
Unfortunately, actual cancellation of
multilateral debt involved high levels of
"conditionality". HIPC required poor countries to
implement IMF-advised structural adjustment
programs, which often resulted in cuts to health
care and social service spending. Moreover, as
HIPC progressed it soon became clear that debt
relief was coming far too slowly to have any
substantial effect.
In 1999, with pressure
mounting, the IMF instituted HIPC-2. This plan
accelerated the pace of relief, but it kept debt
cancellation contingent upon structural
adjustment. Moreover, the amounts of debt it
canceled still left poor countries with
unmanageable burdens. By the end of the year 2000,
22 countries had received some relief from the
HIPC initiatives, yet the program on average had
canceled only one-third of each country's debt -
hardly an adequate solution to the crisis,
especially for impoverished nations that had more
than paid off their original loans, but still owed
massive debts.
As the United Nations
Conference on Trade and Development's (UNCTAD)
2004 report on Africa explained, "The continent
received some $540 billion in loans and paid back
some $550 billion in principal and interest
between 1970 and 2002. Yet Africa remained with a
debt stock of $295 billion." The report concluded
that the continuation of exploitative interest
payments constituted "a reverse transfer of
resources" from poor to wealthy countries.
Perhaps a more important victory came in
September 1999, when President Clinton responded
to intensive lobbying by announcing that the US
would cancel 100% of the bilateral debts owed it
by the HIPC nations. Two months later, the UK put
forward a similar plan for bilateral debt
cancellation; other creditor nations, such as
Germany, France, and Japan soon followed suit. The
governments' actions marked a critical milestone.
At the same time, in dollar terms, the total cost
of this US bilateral debt relief was estimated at
$330 million, while totals for debt owed by poor
countries to multilateral creditor institutions,
such as the IMF and World Bank, were estimated in
the hundreds of billions.
In 2000, Jubilee
activists were also instrumental in pressuring
Congress to pass legislation requiring US
representatives to the World Bank and IMF to
oppose any project that charges end-user fees for
basic healthcare and education services. Because
of the influence the US wields within these
institutions, this measure dramatically curtailed
the use of user fees, especially in education. As
Robert Weissman wrote in a September 2003
Washington Post op-ed, 1.5 million more Tanzanian
children were able to start school as a result of
the 2000 victory.
HIPC itself, with all
its limitations, had an important impact. Because
the program did provide some debt relief, it began
establishing a track record for what cancellation
could accomplish. Critics had regularly charged
(and some continue to believe) that money from
debt cancellation would be mismanaged and would
not be used to reduce poverty. In fact, HIPC
demonstrated that cancellation could be a most
effective form of foreign aid, allowing developing
countries to retain and make use of their own
resources. By 2004, HIPC had advanced some measure
of relief to 27 countries. A 2004 report from the
World Bank showed that together these countries
nearly doubled their total spending on poverty
reduction - including education, healthcare, and
clean water - in the period from 1999 to 2004.
Iraq's "unjust burden"
A final
turn in US policy came in the aftermath of the
invasion of Iraq, when the Bush administration
appealed to creditor nations to forgive Iraq's
estimated $120 billion debt. Long-time advocates
of debt cancellation unexpectedly heard their
arguments adopted by the president. In December
2003, as he was sending former Secretary of State
James Baker on a special mission to lobby allies
to cancel Iraq's debt, George W Bush argued that
such debt endangered the country's "long-term
prospects for political health and economic
prosperity", and that the world must not allow the
financial obligations to "unjustly burden a
struggling nation at its moment of hope and
promise".
By extension, the
administration's stance on Iraq's debt put the US
on the record in favor of debt relief for a wide
range of struggling countries. Yet even before
this shift, calls for cancellation had become
increasingly mainstream. A most visible example of
the issue's popularity was then-US Treasury
Secretary Paul O'Neill's highly publicized May
2002 tour of debt-stricken African nations with
Bono, the rock-star-turned-humanitarian. A notable
bloc of conservatives, led by economist Allan
Meltzer, also defended the economic soundness of
debt cancellation, arguing that a scaled-back
World Bank should extract itself from the hopeless
cycle of debt re-loaning and refinancing.
Meltzer's position has been influential within the
Bush administration.
With even the US
government on board, the moral legitimacy of debt
cancellation had been almost universally
acknowledged; what remained was for policy to
catch up. Observers were hopeful this would happen
at an October 2004 meeting of G7 finance ministers
in Washington, DC. Disagreements over details of a
debt plan kept anything concrete from being
completed at that time, however. G7 ministers came
closer to an agreement when they met again in
early February in London. In the wake of the
tsunami disaster in Asia, the wealthy countries
issued a statement agreeing in principle to "as
much as 100% multilateral debt relief" for the 42
HIPC nations. Their stance in support of full
cancellation marked another milestone for the
Jubilee movement, but it left many practical
questions unanswered.
The G7's current
debate
Currently, there remain several key
disagreements between US and the European
countries, led by the UK, about how a new debt
plan should go forward. These issues will be on
the table at July's G7/G8 summit in Scotland. A
first issue concerns how many countries will
receive cancellation. The UK proposal, while
theoretically open to all HIPC nations, would only
offer immediate relief to the 15 countries that
have completed a mandated program of economic
reforms, along with five or six other non-HIPC
countries who receive poverty-reduction support
from the World Bank. The US plan, while less
concrete, would likely grant relief to 27 HIPC
countries, but not to poor nations outside of
HIPC's purview.
Activists have criticized
the fact that not all the leading proposals
actually cancel these countries' debts. The UK
proposal would make debt service payments on
behalf of poor countries over a period of 10
years, after which developing countries would
still be responsible for the original debt stock.
Finally, perhaps the most contentious
question that finance ministers are now debating
pertains to how the program, whatever its scope,
will be financed. The UK has proposed that debt
relief be financed primarily through a sale of the
IMF's gold reserves. The reserves are widely
acknowledged to be undervalued, and a simple
revaluation could allow relief to be granted
swiftly and painlessly. But the political will
required for such a move is not necessarily easy
to come by. One reason the White House opposes
this approach is that existing laws would require
it to gain congressional authorization for such an
action, something it is not eager to do.
Instead, the White House contends that
funds for debt relief should come out of the
budgets for the IMF's and World Bank's poverty
reduction initiatives. Its plan would attempt to
avoid any major gold revaluation that would
require congressional approval. European
representatives are opposed to this idea. They
argue that a new debt program should include
additional aid for poorer nations, and should not
simply substitute debt relief for other aid that
the countries are now receiving. To finance
supplemental aid the British plan calls for
increased contributions to the World Bank from its
member states.
European complaints about
US financing proposals are rooted in a broader
political opposition to American unilateralism. In
economic foreign policy, as in its push for
"regime change" in Iraq, the Bush administration
has shown a willingness to sidestep international
bodies and act alone. In contrast to the Clinton
administration, which relied heavily on
International Financial Institutions (IFIs) to
enact its trade and development agenda, Bush's
officers have largely shifted toward using direct
aid payments as incentives for poorer countries to
comply with US goals and also toward initiating
bilateral trade negotiations with nations that
they consider strategically important.
In
this context, European nations are interested in
maintaining the World Bank and other Bretton Woods
institutions as multilateral checks on US
prerogatives. With regard to debt relief, they are
distressed that the US plan will reduce the power
of the bank. They are opposed to suggestions made
by Meltzer, and increasingly forwarded by the
White House itself, that the World Bank phase out
loan-making in favor of giving grants. With large
loans absent from its portfolio, the bank's
standing as a major creditor - and thus its
influence on development policy - would be
significantly diminished.
While European
governments are convinced that this would be a bad
thing, many critics from across the political
spectrum would disagree. Interestingly, this
debate has united unilateralist conservatives and
long-standing progressive opponents of the IMF and
World Bank. Each group favors decreasing the power
of existing IFIs, although for different reasons.
Erecting a new roadblock, Snow announced
in late April that the US is unwilling to
compromise on the issue of IMF gold sales,
removing this option from the negotiating table.
This has led to increasing skepticism that the G7
will reach a deal on this institution's debt stock
in time for their July meetings in Scotland, and
it represents a step backward from previous
statements supporting broad relief in the near
future. At the same time, an agreement on World
Bank debt may still go forward; this step would
create a landmark precedent for full cancellation.
A movement looks forward
"As we
celebrate our victory, we should remember that we
have our work cut out for us," wrote Watkins to
Jubilee USA supporters after the G7's nod toward
100% relief. In the build-up to and aftermath of
the July talks, Jubilee and other advocates of
debt cancellation will closely monitor
negotiations and will push for several key
demands.
First, they will lobby to ensure
that the plans adopted actually reach the 100%
target. The formulas created in upcoming meetings
will determine whether full cancellation becomes a
reality for many countries or whether it will
remain rhetoric for all but a few of the very
poorest debtors.
Second, advocates will
continue to push for non-HIPC countries to receive
cancellation. A number of very poor countries,
such as Nigeria, Sri Lanka, Bangladesh, Jamaica,
and Haiti, are not included in the HIPC process.
Some "middle income" countries, such as Brazil and
Mexico, have large populations living in desperate
poverty, yet are too prosperous to qualify for
debt cancellation under the HIPC guidelines. These
countries require a new process that would allow
them to spend their resources on poverty reduction
and human development rather than debt service.
Many of the debts held by these countries
were accumulated by dictators or other corrupt
leaders; these are "odious" debts. Campaigners
have long argued that peoples who overthrow
undemocratic governments should not be saddled
with debts accumulated by the deposed leaders. (As
President Bush argued in the case of Iraq, the
future of a people "should not be mortgaged to the
enormous burden of debt incurred to enrich" a
despot.) Instead, the international community must
create a mechanism through which debts can be
ruled illegitimate.
Third, activists will
demand an end to neoliberal conditionality,
working to see that the plan enacted by the G7
does not come with structural adjustment mandates
like those included in the HIPC initiatives.
Campaigners have rightly expressed concern that
proposals such as the UK's only cancel the debts
of poor countries that have completed the HIPC
program. In effect, countries would continue to be
required to submit to economic restructuring
before being granted relief.
Finally,
other advocates are moving beyond "historic" debt
and working to see that, in a post-cancellation
era, new debts do not accumulate anew. In 2004,
the IMF and World Bank introduced a Debt
Sustainability Framework to address new lending to
developing countries. Civil society organizations
have welcomed discussion of the new initiative,
but they charge that the current proposal would
keep negative "conditionality" firmly in place. As
proposed, the framework would make the
international institutions responsible for
rewarding "strong policies" - which in IMF
parlance has too often meant structural adjustment
and trade liberalization. Given these policies'
poor record of producing growth in many developing
countries, it is unclear how perpetuating them
would preempt a new debt crisis.
This
debate demonstrates that, ultimately, debt is only
one aspect of the system of economic neoliberalism
- better known in the US as "corporate
globalization" - that in the past 30 years has
deepened the divide between wealthy countries and
the South. Even if thorough debt relief comes to
fruition, most developing countries will still
face steep barriers to exercising true
self-determination and pursuing economic models
that are not favored by the US Treasury. Whether
through making use of the IMF or directly
leveraging their power as major donors and trading
partners, G7 countries have often been zealous in
promoting programs of economic restructuring
similar to those forced on HIPC nations - even
among countries that are not heavily indebted.
As neoliberalism falls into increasingly
ill repute, and as a greater number of countries
escape the bonds of debt, a globalization movement
that has attracted many new supporters with its
call for debt cancellation will face the task of
defending alternative economic courses that defy
Washington orthodoxy. In this respect, debt relief
will not be an end in itself, but a means of
confronting the broader issues that are shaping
the course of international development. Long-term
challenges need not detract from historic
advances, however. If 2005's meetings match
expectations for progress, campaigners in the
global South and their broad network of allies
should be able to savor an important, if
incomplete, victory.
Mark
Engler, a writer based in New York City, is an
analyst with Foreign Policy In Focus.
He can be reached via his website. Research
assistance for this article was provided by Jason
Rowe.
(Posted with permission from Foreign Policy in Focus.
Copyright FPIF 2005) |
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