Breaking Third World Debt

Robyn Munn

Originally published in 1998/1999, Issue 1

Imagine if your student loan determined every decision you made in your entire life… Imagine if you owed 30 times more than you could ever earn in a lifetime…. Difficult to imagine because if this situation happened in a developed country at a domestic level, you would be declared bankrupt to enable you to rebuild your life.  There is no such system when it comes to international debt.

Jubilee 2000 is an international campaign involving over 40 countries advocating a debt-free start to the Millennium for a billion people.  They are calling for a one-off cancellation of the unpayable debts of the world’s poorest countries by the year 2000, under a fair and transparent process.  It is vital that this campaign is successful.  At present over 50 countries in the world have debts that can never be paid back but continue to be paid daily with peoples lives.  How can countries such as the UK continue to demand money from countries such as Uganda where more than £11 per person goes toward debt repayment, while £2 per person is spent on healthcare?

The debt burden of the poorest countries is 93% of their income.  In Zambia, the government owes creditors the equivalent of $790 per person- more than twice the average annual income.  Every year resources are being diverted from health, education and sanitation towards unproductive debt service.  The United Nations Development Programme in 1997 stated that 21 million childrens’ lives could be saved if the money used for debt service was put into health and education.  Education gives people the ability to make more informed decisions about their lives, and has been shown to reduce birth rates.

Even with the help of money raised in the developed world these debts are too large to be repaid: the UK Charity Comic Relief raised £26 million in 1997.  Africa paid this back in debt service in just over a day.  For every £1 given to these countries in aid, £9 is taken back in debt repayment. The Jubilee 2000 campaign therefore is working towards the cancellation of unpayable debt – it will never be paid economically or will be paid only by exacting unacceptable costs in diverting resources from areas such as healthcare and education, preventing countries from developing in a sustainable way.

Jubilee 2000 is calling for the unprecedented opportunity of the millennium to be celebrated in a meaningful way – by cancelling debts and giving a new start to the world’s poor.  The cost of building the Millennium Dome (£750 Million) would cover Britain’s share of cancelling all of the debts of the 18 countries with the lowest Human Development Indicators (as calculated by the United Nations).

With the World Bank/International Monetary Fund Heavily Indebted Poor Countries (HIPC) Initiative, international governments have recognised that up to 80% of the debts of the poorest countries are unpayable.  A House of Commons Library Research Paper (Cancellation of Third World Debt by Mick Hillyard, 4 August 1998) points out that 11 cancelling unpayable debt is a cost free option”.  If these countries cannot actually repay their debts then the money can never be recovered and there is no further loss when that debt is written off.

The poorest countries have three kinds of debts:

  • Bilateral debt – that is, debts to governments like Britain.  In the case of Britain and most other countries, these are mainly export credits.  Poor countries bought British machinery (and arms) on credit, which was provided in order to encourage British exports.  In some cases, these countries are now unable to pay.
  • Multilateral debt – the World Bank, the International Monetary Fund and regional development banks (which are part of the United Nations System and therefore effectively controlled by governments) lent money to the poorest countries.
  • Private or bank debt – the big transnational banks provided money to the newly industrialising countries like Brazil and Mexico, in the form of loans or by buying bonds.

Many organisations have been calling for Britain to follow the example of Norway and act on its own to cancel bilateral debt.  However, cancelling bilateral debt alone is insufficient to relieve the poverty in the poorest countries – multilateral and private debt must also be cancelled.  Under HIPC, the international community has already agreed to share the cost of debt cancellation in just proportions under a programme of ‘burden sharing’.

In order to put developing countries debt in perspective let us compare some figures. It is estimated that Britain’s total liabilities from the civil nuclear progranime will be £70 billion – this is the amount British taxpayers will need to pay in future to maintain and decommission reactors, etc. (Independent 26 September 1998).  This would pay Britain’s share (approximately 6.5%) for cancelling nearly all developing country debt, which totals $2095 billion. It is estimated that the windfall profit made by account holders when the building societies were converted to banks was in excess of £20 billion.  This is Britain’s share of cancelling around a quarter of developing countries debt, with money remaining.

Money from these sources obviously cannot be used directly to pay off these costs.  However,      as these countries cannot pay these debts anyway, the debt cancellation will only “cost” money when repayment was due.  The debt can therefore be paid off over many years: for example over 30 years it would “cost” each British taxpayer only £2 per year.  Also, consider international financial speculation.  The Bank of England estimates that in April 1998 the daily turnover of foreign exchange dealers world-wide was $1.6 trillion.  But its figures suggest that trading in derivatives (such as options to buy foreign currency, which are a common form of speculation) must be running at $4.4 trillion per day.  That suggests annual global turnover of $2 million billion.  It has been proposed that these trades be taxed, both to generate revenue for poor countries, and to control capital flows.

This is known as the Tobin Tax.  If it were set at the tiny level of 0.01% (one hundredth of one percent — one penny in £100) on international foreign exchange and derivatives transactions, it would generate enough revenue to pay off all developing country debt (placed at $2095 billion).

The cost of not cancelling the debt

To poor countries, debt is not about not buying luxuries or even cigarettes – it is a matter of life and death. Poor country debt actually costs us money.  War and genocide in Africa, drug exports from Latin America and Asia, and economic refugees coming from Eastern Europe are partly due to poverty.  If we keep people poor by forcing them to pay their debts, we impose higher costs on ourselves.  We generously gave aid for famines in Sudan and Rwanda, when these crises partly resulted from debt bondage.

There is a precedent for granting debt relief.  After the First World War there was strong resistance to granting debt relief to Germany despite warnings from individuals such as John Maynard Keynes who argued that, without debt relief, Germany would never be able to recover stability – economic or social.  He was proved right – with disastrous consequences. After the Second World War, in 1953, Allied leaders, fearing another rise in fascism and the spread of communism amongst an economically degraded and demoralised German people, granted Germany massive debt relief.  Germany was given generous relief that required her to spend no more than 5% of her export revenues on servicing debts.

Today Western creditors, led by the IMF and including Germany, expect Africa to do without debt relief, after decades of a great economic depression on that continent.  Where some relief is granted, rich country creditors require poor countries to divert at least 20% of their export revenues to servicing debts.  The Jubilee 2000 Coalition believes that what was good for post-conflict Germany is good for the many post conflict states in Africa today.

Isn’t the debt the fault of corrupt elites?

Of course there are corrupt leaders in Africa today, just as there were potential militarists and fascists in Germany in the 1930’s.  But they will only thrive in areas of social and economic degradation.  If the British people had followed Keynes’ wise advice – they could have saved themselves a world war.  This is a vitally important issue: any debt relief remitted for the poorest countries should be diverted towards the poor in that country and not to powerful local elites.

However, control or oversight of those corrupt elites cannot take place here in the North.  These elites should be accountable to their own people.  Such accountability can best be achieved through transparency openness in government – and democracy. This is the reason that Jubilee 2000 is calling for the international lending system to be run in a fair and transparent way.  The current lending and debt relief process is fundamentally unjust.  International loans are negotiated in secret between local elites and powerful creditors like the IMF, the World Bank and government export credit agencies.

Loans are often made for political reasons or to promote exports.  Zaire’s President Mobutu Sese Seko received $8.5 billion dollars in loans despite widespread knowledge of his corruption and abuses of power.  In Britain, 96% of the debts owed to Britain by the poorest countries are owed to the DTI’s Export Credit Guarantee Department, as inducements to buy British exports.

Yet it is ordinary people, unaware that their local elites are agreeing to take on very large public loans, who pay the costs as funds are diverted from water, health, education and sanitation into debt repayment.  There is no international bankruptcy law so no line is drawn under unpayable debts.  It is therefore in the interests of both the creditors and the borrowers to conduct loan negotiations in secret.  In cancelling poor country debt every effort should be made to ensure that debt relief is diverted directly to the poor.

This is difficult to achieve from the North, and it is difficult to achieve without dictating to developing countries how they should allocate resources.  However, Jubilee 2000 works closely with UNICEF, who run programmes alongside governments in developing countries, for the benefit of women and children.  The money saved from the cancellation of debts could be channelled to programmes such as these, programmes that are also owned by the developing country government itself.  These issues must be addressed if these unpayable debts are to be written off to a level that allows developing countries to regain control of their economy: ways must be decided to ensure that the debt crisis does not happen again.

Jubilee 2000 calls for the powerful creditors to take responsibility for unwise lending; for channels to be opened that allows debt relief to go directly to those who need it most; and for a new more open international lending system. Throughout the centuries, when people have joined forces to change society they have often, against all odds, succeeded.  One of the closest parallels to the debt crisis is the Atlantic slave trade.  It, too, was a system of international oppression accepted for generations as a normal and necessary part of trade and life.  And it, too, resulted in the West benefiting from the resources of the Southern Hemisphere while southern countries, and particularly sub-Saharan Africa, were devastated.  But in 1833 the slave trade was abolished in all British possessions.  It was not because of one powerful individual or institution, but because of the concerted effort of thousands of people.  Ordinary people in Britain backed people resisting slavery on plantations.  They were convinced by the uprisings and leadership of slaves and by the passion of individuals like William Wilberforce that the status quo was wrong and could be changed.

Powerful people in Parliament, like Wilberforce, took up the cause, but it needed the agreement and support of thousands of ordinary people to ensure the destruction of the slave trade.  In the same way, the oppression of the debts of the poorest countries could be ended by the year 2000.  In that way the world could begin the new millennium with new hope for the poor, and a new start for international relations.