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Why Do The Poor Still Pay The Rich?
Published on Friday, April 14, 2000 in the Times of London
Why Do The Poor Still Pay The Rich?
by Adam Jones and Lea Paterson
 
It was billed as the ultimate pre-millennium Christmas present. Last December the British Government announced that it would write off all the money owed to it by the world's poorest countries.

"Britain ends Third World debt," screamed the headlines. And the gesture - one of several ground-breaking international concessions agreed in 1999 - gave fresh momentum to a campaign backed by religious leaders, rock stars, charities, politicians and hundreds of thousands of people around the world. In the euphoria of the moment, there appeared to be a real chance of a fresh start for the downtrodden of Africa, the Middle East, Asia and South America. But now the shiny wrapping has been discarded, the "gifts" have proved to be a bitter disappointment.

Although the world's poorest countries were assured of as much as $100 billion in debt relief from the richest nations, only $13 billion has actually been cancelled, according to Jubilee 2000, the coalition that has galvanised support across church halls and student common rooms. And not one country has received the maximum debt cancellation allowed.

An Ethiopian woman holds her starving child. Many poor nations spend more on servicing debts than on health and welfare
Photograph: PETER ANDREWS / REUTERS
Just this week Ken Livingstone has claimed that capitalism has killed more people in the Third World than the Nazis did in the Second World War.And last Monday thousands of people descended on Washington DC to voice their discontent. Although the expected huge crowds failed to materialise, campaigners hope that the rally will engender a greater sense of urgency at this weekend's meeting of the International Monetary Fund and the World Bank, which have unparalleled control over the lives of the world's poor.

There is a risk of Seattle-style vandalism at "anti-globalisation" rallies in the next few days. A handful of hooligans may once again steal the headlines, impeding the cause of the broader debt relief movement and further delaying the day when developing nations can spend more on health and education than on interest payments.

One way of understanding Third World debt is to imagine falling behind on credit-card repayments. As the warning letters pile up, the money still does not materialise. Personal bankruptcy looms. Although this is a traumatic process, it does cancel the debts and allows for a fresh start of sorts. But what if there were no such thing as bankruptcy? The interest charges snowball. The credit card company knows there is no realistic chance of clearing the total amount owed but demands some form of regular payment all the same.

Such is the lot of the world's poorest. The people of the 41 most impoverished countries spend about $8.6 billion (£5.4 million) on foreign debt payments each year to avoid being totally shut off from the world financial community. In many cases they are paying for the corruption or incompetence of leaders past and present, not to mention the greed of developed nations that issued loans to support the sale of their own exports, such as weapons.

They can ill afford the repayments. Liberia, for example, has an annual budget of $60 million which has to cover law and order, education, health and so on. This is only a fifth of the $333 million it owes to the United States.

Events last year appeared to offer fresh hope. In Cologne last June, the seven richest countries, known as the G7, bolstered the value of existing debt relief commitments to $100 billion. Then the US, Canada and the UK went even farther in forgiving the debts owed to their taxpayers.

So why does the debt relief process appear to be in crisis now? The most worrying problem is the failure of rich countries to match words with cash.

It is easy to think of debt cancellation as a simple matter of saying: "OK, we will do without the money. Keep it." But cash must be raised to cancel debt in the manner envisaged by the G7 last year. Why? Because some international development organisations might go bust without a steady stream of Third World loan repayments. If that happened, poor countries would lose one of their main sources of new loans. Rich countries were supposed to raise money to protect these endangered lenders but the cash is only trickling in.

The biggest problem is in America, where Bill Clinton pledged a contribution of $600 million. However, to get the money he has to go on bended knee to the Republican politicians who control the public purse. So far, the request for the first $210 million has not been successful.

Some Republicans have resisted the idea of increasing foreign aid on the ground that it would be diverting money from "Grandma to Ghana". Never mind that Grandma is likely to be spending her retirement years furiously playing the stock market through her online broker.


Republicans say that foreign
aid diverts money 'from
Grandma to Ghana'

Other US opponents want the bureacrats at the IMF and World Bank to be reined in before they stump up the money. If President Clinton cannot win them over, it will be a political humiliation.

America's tardiness is holding up contributions from other nations. The EU has pledged up to $1 billion from its European Development Fund - but only on the understanding that the US puts its money in first. The EU is also facing claims that it wants to give its money in an inconvenient, piecemeal fashion.

"Like any bankruptcy arrangement, all the creditors must be at the table to make sure that debt relief from one creditor does not simply benefit another," says Thomas Hart, the director of government relations for America's Episcopal Church. "The rest of the world is waiting to see if the US will contribute."

Adrian Lovett, of Jubilee 2000, agrees: "Part of the problem is that so many different actors are involved in all this. They all have a role to play and at the moment there isn't the strong political will to see it through."

Without the money in the bank, the whole debt relief effort may eventually collapse.

After funding delays, the second big problem is the length of time it takes to certify countries as worthy of debt relief. Poor states must satisfy the likes of the IMF and World Bank that they are reforming their wretched economies through measures such as privatisation and the opening of domestic industries to competition. Critics say that this can lead to the imposition of a "shadow government" of foreign bureaucrats.

In 1996, when the current international debt relief scheme was first dreamt up, countries had to spend six years on probation. Today they may be able to qualify in three. Even so, only Uganda - which spends almost six times more on debt service each year than on health - is close to fulfilling all the criteria for maximum debt cancellation. Other countries are observing a holding pattern, like planes above an airport. The delays are sometimes legitimate: poor countries that act as aggressors in local wars should be excluded, as should those that get a reputation for aiding terrorism. But a legitimate change of government, such as that which took place recently in Senegal, can also lead to delays while the credentials of the new ruling politicians are checked.

The UK Treasury admits there has been "some slippage" in the timetable but still stresses, in public at least, that it is on track for getting at least 25 of the 41 poorest countries through the initial stages of the scheme, called the the Debt Initiative for Heavily Indebted Poor Countries and known by the acronym HIPC, by the year's end. Privately, however, Treasury officials are more critical and Gordon Brown, possibly the most committed Western politician on the debt issue, last week called on the World Bank and the IMF to set up a joint group aimed at getting the process back on track. "The speedy, effective implementation of HIPC will be an acid test of the international financial institutions' ability to help the poorest countries," said the Chancellor.

Professor Jeffrey Sachs, a Harvard economist, is one of the fiercer critics of the IMF and World Bank's roles in the debt relief process. He condemns the HIPC scheme as "roundabout, untransparent and utterly limited", reeling off a list of recently agreed conditions that Burkina Faso must meet to keep its IMF and World Bank backers sweet. These include specified targets for computerising audit systems and for establishing visitor centres at government ministries.

Even if the bureaucracy worked perfectly, total debt cancellation for the world's poorest countries is not in prospect. Although developed nations such as the US and UK have promised to wipe out every penny of debt due to their taxpayers, this so-called "bilateral debt" represents only a small amount of the overall burden. Poor countries are more likely to concentrate on repaying "multilateral" debt owed to international bodies such as the IMF or regional development banks, because defaulting on loans from these has been likened to resigning from the world financial system. Multilateral debts are subject only to partial cancellation.

Emmanuel Tumusiime-Mutebile, the Ugandan Treasury Secretary, told The Times that overseas debt payments will fall from $115 million in 1999-2000 to about $66 million in 2000-2001 as a result of the maximum relief that should be shortly awarded.

Jubilee 2000 has calculated that in many cases the debt burden will be reduced by an average of just 40 per cent. Even after the additional relief on offer through the new initative, Mauritania will still be handing its creditors more than it spends on health and education combined.

Supporters of this gradual approach say that partial debt forgiveness is less unfair on those countries, such as Bangladesh, that have struggled to introduce reforms. They also warn that if all debts are forgiven, there is a risk that rich countries will then recoup the money by reducing overseas aid. Tony Gaeta of the World Bank says: "Debt relief is just one piece of the puzzle." Charity will not work, he insists.

Others claim that more generous concessions would present a "moral hazard", ie, that poor countries would be encouraged to be reckless, safe in the knowledge that someone else would pick up the bill.While there a kernel of sense in that argument, it is also hypocritical, given the willingness of the developed world to rescue its banks and investors when crises occur. And it ignores the fundamental truth that Third World debt will never be repaid in full. Why should anyone continue to pretend otherwise?

If the world's politicians are serious about debt relief, they need to use the coming IMF and World Bank meetings to try to tackle the inadequacies of the current scheme. If they balk at this, we must suspect that their millennium "present" was nothing but clever public relations.

What they say about Third World debt

Bob Geldof: "The West poured money into their client states during the Cold War and wedged up the guys they wanted in power, regardless of how money was being spent. Who was corrupting whom?

"The leaders need to face up to the fact that these countries will never repay their debts, they can't repay their debts, and we need to look at the problem from a totally different perspective."

Bono: "It's a funny old world when pop stars are needed to bring to the attention of the media the colossal problem of debt and the impoverishment of the Third World."

Gordon Brown: "We want to see faster progress on getting debt relief to the poorest countries."

Pope John Paul II: "We have to ask ... why progress in resolving the debt problem is still so slow. Why so many hesitations? Why the difficulty in providing the funds needed even for the already agreed initiatives?

It is the poor who will bear the cost of indecision and delay."

Kofi Annan, UN Secretary-General: "The deeper, faster and broader debt relief promised last year has yet to materialise."

Bill Clinton: "If we keep working on this, expanding it, and we all pay our fair share, we can turn a vicious cycle of debt and poverty into a virtuous cycle of development and trade."

Thom Yorke from Radiohead wrote in a special message book/petition: "Please realise, we the population of this planet are very concerned about the faceless, unaccountable forces now ruling the planet like giant cranes roaming the earth, Kalashnikovs in hand, killing indiscriminately."

Pavarotti, The Edge, Quincy Jones, Muhammad Ali, Jesse Jackson, Desmond Tutu and Nelson Mandela have also given support to the cause of debt reform.

Copyright 2000 Times Newspapers Ltd.

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