Debt Cancellation and Public Pressure

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  • by Anup Shah
  • This Page Last Updated Saturday, July 09, 2005

The debt “habit” is a cycle of lenders “pushing” loans on borrowers and turning a blind eye to their misuse, and in response to criticism for their behaviour, adding more conditions to new lending. These conditions sometimes seem (and indeed sometimes are) sensible, but all too often they only serve the interests of the lenders rather than the borrowers. Part of the cycle is that as countries get deeper in debt and grow more impoverished as they try to repay, the lenders impose a whole new range of what they say are anti-poverty and anti-corruption conditions, but which most often have other agendas, such as opening up poor countries to multi-national companies. Even when the conditions are sensible, they are like the health warnings on cigarette packets — they are there to satisfy the critics, but the cigarette makers hope to counteract them through ever more aggressive advertising.

Joseph Hanlon and Ann Pettifor, Kicking the Habit; Finding a lasting solution to addictive lending and borrowing — and its corrupting side-effects, Jubilee Research, March 2000

A Lot of Promises

As well as the admissions by some heads of international financial institutions such as the IMF that their various schemes are not working, there have been some additional actions, decisions or statements that would allow further pressure to be applied to leaders to do something about the debt situation, such as the following (by no means complete):

  • In Monterrey, Mexico, for the UN Conference on Financing for Development in March 2002, the U.S. and E.U. have offered a large amount of increase in aid amounting to over $15 billion over the next three years.
  • In March, 1999, Canada’s Prime Minister, Jean Chrétien, has said that Canada would act alone if other G7 countries failed to respond to the needs of the severely indebted countries.
  • Even USA’s President Clinton in September 1999 said that the United States would try and forgive all the debt that poor countries owe the USA if they use that saved money on health, education and other basic human needs. This is extremely positive indeed, although there are practical problems at hand — such as convincing the World Bank and IMF to go ahead with this. The US Congress also has to make funds available for this — and while that has not always been easy historically, they have partly agreed. (This real audio link gives a good, short insight into this aspect.) Clinton’s announcement did however, put pressure on other states to follow suite.
  • A plan in December 1999, by Britain to cancel 100 per cent of the debt owed by 26 poor countries received many positive responses. Britain said it would do this as long as the money would be used towards poverty eradication in those countries. (That is a bit ironic given that the IMF and World Bank’s Structural Adjustment policies have led to the opposite in the past.) It was feared to take a year to get through all the red tape before taking effect. As the Economist said, the British government could go further, as this would not completely eliminate poverty or debt.

    In fact, it is cruel irony to note that the UK refuses to pay to the USA almost exactly the same as it is demanding from developing nations. Yet the UK has owed USA this money since the First World War.

  • Following Britain’s example, and from public pressure, Germany has announced that it will write off 100 percent of the bilateral debts owed to Germany from some 30 poorest countries of the world, estimated to be worth around 5 billion dollars.
  • Harvard economist Jeffrey Sachs has also pressured Japan to cancel all debts owed to Japan by HIPC countries. He also heavily criticized the IMF and World Bank policies.
  • One year after the initial promise, at the end of 2000, UK’s Gordon Brown further announced that the British Government would either cancel or hold in trust all debt payments to Britain from the 41 Heavily Indebted Poor Countries. Although that is about 1 percent of all debt owed by developing countries, as the previous report shows, it is was hoped that this would put pressure on the other G7 nations to follow suit.
  • At an international conference in May 2001, the international community also agreed“to seek a moratorium on debt service payments for the world’s most highly — indebted countries in ‘exceptional’ situations — such as those plagued by civil wars, floods and natural disasters — and to facilitate access to debt relief for post-conflict countries.” (However, as the previous link also added, “For all the talk at the conference of the need for specific ‘deliverables’, rather than general and non-binding commitments, no concrete measure was announced in this area either.”)

These and many, many other promises and calls for action have been made by political leaders from many rich nations. (While the above is just an extremely small example to show that political leaders have been saying something, for a fuller and more up to date list for news releases on these aspects, see for example, the jubileeresearch campaign web site.)

However, saying something is one thing. Has anything actually happened?

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Hardly Any Promises Have Been Carried Out

Regardless of however much this sounds encouraging and promising, it must be noted that even as the G8 summit was taking place in 2000, none of those debt relief promises from as early as 1999 had actually been carried out.

Greenpeace Canada reports that despite all the promises, “By 2002, however, the G8 had delivered only three cents on the dollar of its commitments, meaning the South’s debt load continues to spiral upwards.”

Also, the IMF and World Bank are the biggest remaining creditors to the poorest countries, so there is a long way to go, even though the previous link shows that the IMF and World bank can afford to cover the costs of cancellation without affecting their ability to function.

Accompanying some of these announcements at possible partial debt cancellations, has been vocal concerns about ensuring that the freed up money is used for things like poverty eradication, health and education provisions and so on, instead of any continued corruption or wasteful spending. While the concerns are fair, the following quote highlights why those concerns should not be a stop gap:

[F]ears that the money will not be used well cannot be offered as an excuse [to not cut the debts of the poorest nations] here either. ... All these countries have jumped through every hoop and over every hurdle put in their way in order to qualify for debt relief, meeting highly unpopular conditions that, if implemented in western countries, would provoke electoral obliteration for the government of the day.

Adrian Lovett, Tear up the envelope!, DebtChannel.org, May 30, 2001

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The “Moral Hazard” of Debt Cancellation

Economists often refer to a moral hazard of forgiving debts, because it may encourage people to take on new loans and refuse to pay. Yet, as Action for Southern Africa notes, the problem is not necessarily with borrowers, but with lenders:

....to repay odious debts is to encourage lending to pariah regimes. If banks could lend to apartheid South Africa in the face of global opposition and global calls for sanctions, and still collect on the loans, then the signal to international banks is that they can lend to any regime, no matter how repugnant. There is a “moral hazard” here: that we will encourage immoral lending.

Paying twice for apartheid, Action for Southern Africa, May 1998

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Growing Protests against unfair IMF, World Bank, and Rich Country Policies

As people are becoming more aware of the issues, more campaigns and protest movements have been seen around the world (with varying degrees of success, of goals, agendas, and so on). As one example that followed the WTO protests in Seattle, 1999, for April 2000’s annual IMF and World Bank meeting, protestors once again campaigned against their policies in the light of globalization in its current form. For more information about these protests, see this site’s section on the IMF and World Bank protests.

Protests have occurred around the world for many years against what is increasingly being seen as unfair policies, though often without much mainstream media attention, even when there are hundred or thousands of protestors. G8 Summits which often attracts mainstream media interests have therefore also seen similar protests.

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G8 Summits — a chance to push for debt relief?

This section has now moved as part of a larger, new section on the G8.

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Who Spearheads Debt Reduction Strategies?

While public pressure is forcing action by political powers, as the following reminds us, we need to be aware of who would control any debt reduction strategies that may occur:

[T]he new attention of the Bretton Woods institutions to governance and institutional reform is not cosmetic but real — and, potentially, all the more hazardous for being so. The worry is that the new paradigm could amount to the worst of both worlds: on the one hand, the new orientation justifying intervention by the IMF and World Bank into aspects of national policy development and institution building well beyond the economic sphere; on the other, such increased leverage being used for much the same exploitative purposes as before.

Some see this trend manifested already in the limited moves towards debt forgiveness and reduction which have been spearheaded by the IMF. The Washington-based research and campaign group Development Gap, for example, sees these as creating new and deeper opportunities for IMF control, rather than as a genuine transfer of authority to client countries.

“The IMF would be given the additional role of imposing, and determining the adequacy of, poverty-reduction programs. Perhaps the greatest and most outrageous irony in the proposed debt-reduction plan is the far greater penetration that it would allow the Fund into the societies of its client countries. Its new role as judge and financier of anti-poverty programs is a frightening prospect given that the institution remains wedded to an orthodox adjustment paradigm and has demonstrated that it knows considerably less about poverty than the Third World poor know about classical economics. The plan would allow the IMF to determine the adequacy of government consultations with civil society.”

“For decades, the Fund has imposed its will on the countries of the South, reshaping their economies with virtually no input from the millions of people affected by their policies. Farmers, workers, consumers, small entrepreneurs, indigenous people and many others have taken to the streets to express their anger and frustration, but to little avail. Not only has the Fund failed to respond, but it has ensured that governments are unresponsive as well by threatening a cut off of all international financing if its adjustment policies are not implemented. Now the institution that has undermined democratic processes around the world as it forces the adoption of poverty-inducing measures is set to be the arbiter of the adequacy of citizen involvement in the design of poverty-reduction programs.” [Remarks to the UNCTAD Trade and Development Board meeting, 25 October 1999]

Brendan Martin, New Leaf or Fig Leaf? The challenge of the New Washington Consensus, Bretton Woods Project, March 2000.

And as Jubilee Research (formerly known as Jubilee 2000, the debt relief campaign organization) highlights, aid relief is a political tool based on top-down conditionalities and devastating “structural adjustment” policies:

Not only is debt cancellation itself overtly political, but the process is as well. And the main means of imposing “political ends” has been through conditionality. To gain any aid, loans or debt relief, Western public and private creditors insist that a country must have IMF and World Bank programmes. Most creditor countries, including Britain, withhold aid from countries which do not have agreed IMF and World Bank programmes. “International agencies typically insisted on a large list of 'conditions' in return for the provision of funds,” explained Joseph Stiglitz, (31) until recently Vice President and Chief Economist of the World Bank. These conditions are based on what he calls “the Washington consensus of US economic officials, the IMF and World Bank” and are not primarily about poverty and governance. (32) Instead they are about following a particular economic programme known as “structural adjustment”. The conditions “often were quite broad [and] often entailed trade liberalisation, privatisation and macroeconomic stability — all the elements that were central to the Washington consensus reforms,” continued Stiglitz. (33) ... Stiglitz recognised the failings of such heavy conditionalities and called for a new consensus which “cannot be based in Washington”. He called for “a greater degree of humility, the frank acknowledgement that we do not have all the answers”.(35) And he called for an end to conditions imposed by “experts who are not disciplined by having to be accountable to the citizenry.” (36) But he failed to convince the World Bank, and was forced to resign from his post at the end of 1999.

... Conditionality undermines democratic processes, according to Joseph Stiglitz. (58) “Ultimately, if we believe in democratic processes, the countries must make the decisions for themselves .... Given the weaknesses in the checks on the international institutions ... it is all the more important that different voices be heard. To be sure, the different voices may give rise to a vigorous democratic debate, which may be uncomfortable to those wishing to ensure that their views prevail, but it is one of the ‘prices’ we pay for democracy.”

Joseph Hanlon and Ann Pettifor, Kicking the Habit; Finding a lasting solution to addictive lending and borrowing — and its corrupting side-effects, Jubilee 2000 Coalition, 2000

In addition, Hanlon and Pettifor continue and provide a useful analogy, saying that “just as we would never leave anti-smoking campaigns to the cigarette companies, or ask drug pushers to run the health services, so we can no longer allow the loan pushers to determine how to break the loan habit.”

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What about the underlying causes?

While campaigns against debt are welcome and positive and have helped highlight some impacts of today’s form of globalization upon many people, some debt campaign strategies end there. The underlying structure and financial systems that have created the modern form of globalization also needs to be addressed. Ground up, community level development strategies empower the local, poor people, but only within the confines of existing financial structures. If such systemic problems from these angles are not addressed as well, then effective and real change for the world’s majority is less likely. It is difficult to get just one or a group of countries to change, because capital will just flow to those countries which do not change.

As John Bunzl calls it, a simultaneous policy may be needed, whereby all nations need to choose to adopt a changing strategy, which capital will also agree to, because it will see no advantage for others or for themselves in opposing it, as there would be nowhere else to turn.

The World Watch Institute also report similar things suggesting that “even full cancellation would only be a Band-Aid for a broken system” (April 26, 2001).

The Jubilee 2000 Initiative

Jubilee 2000 was an international movement in over 40 countries advocating a debt-free start to the Millennium for a billion people. They were fighting 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. While the ultimate goal of the debt cancellation was not achieved, and perhaps initially their campaign could have fallen under the above criticism of stopping just at the debt issue, their work was crucial in getting the issue of debt in to the mainstream media of many industrialized countries. In addition, they continue on as Jubilee Plus looking into deeper and related causes as well.

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Author and Page Information

  • by Anup Shah
  • Created: Monday, July 20, 1998
  • Last Updated: Saturday, July 09, 2005

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Document Revision History

DateReason
July 9, 2005Small note about the Moral Hazard argument. The rest remains untouched since July 6, 2002 (for now!)