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 cancellation 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.