Part one : How it all began
a) Causes of the Debt Crisis
Many people know what it feels like to owe money, even if only to a building society for a mortgage. But it's a different matter altogether to be deeply in debt and unable to repay it. And even worse to be in that situation if someone else ran up the debt and left you to carry it.
When individuals become deeply indebted, we draw a line under the debt. That line is called bankruptcy. It is a line beyond which we do not allow people to fall. No such line can be drawn in international law. When poor countries become deeply indebted they fall into an abyss of economic degradation. Their governments owe vast sums to Western governments and international, Western-controlled institutions. These same institutions then take on responsibility for determining levels of debt relief.
This is unjust. It's time we did something about it.
b) In the beginning..
How were these huge debts amassed? And why are governments still making so little headway in the struggle to pay them off?
c) Born in the USA
In the 1960s the US Government had spent more money than it earned and to make up for this decided to print more dollars. So the world's stocks of dollars fell in value.
This was bad news for the major oil-producing countries, whose oil was priced in dollars. The money they made from exports now bought less. So in 1973 they hiked their prices. They made huge sums of money and deposited it in Western banks.
d) Banking on the future
Then the trouble really began. As interest rates plummeted, the banks were faced with an international financial crisis. They lent out the money fast, to stop the slide, and turned to the Third World, whose economies were doing well but who wanted money to maintain development and meet the rising costs of oil.
Banks lent lavishly and without much thought about how the money would be used or whether the recipients had the capacity to repay it. Third World governments, for their part, were pleased to take advantage of loans at very low interest rates - below the rate of inflation.
e) Dictators' development
Some countries, like Mexico and Venezuela, took out loans to repay previous debts. But for others, this was the first time they had borrowed from commercial banks. Many intended to use the money to improve standards of living in their countries.
In the end, little of the money borrowed benefited the poor. Across the range, about a fifth of it went on arms, often to shore up oppressive regimes. Many governments started large-scale development projects, some of which proved of little value. All too often the money found its way into private bank accounts. The poor were the losers.
f) Heading for disaster
In the mid 1970s, Third World countries, encouraged by the West to grow cash crops, suddenly found that they weren't getting the prices they were used to for the raw materials they sold, like copper, coffee, tea, cotton, cocoa. Too many countries - advised by the West - were producing the same crops, so prices fell.
Then interest rates began to rise, pushed further by an increase in US interest rates. Meanwhile oil prices rose again. The trap was sprung - Third World countries were earning less than ever for their exports and paying more than ever on their loans and on what they needed to import. They had to borrow more money just to pay off the interest.
g) Caught in the trap
In 1982 Mexico told its creditors it could not repay its debts. The International Monetary Fund (IMF) and World Bank stepped in with new loans under strict conditions, to help pay the interest. The IMF is a Western-dominated creditor, which in effect acts as a Receiver but unlike a Receiver makes short-term loans to help countries pay off other loans.
This pattern was repeated over and over in the following years as other countries found themselves in similar situations to Mexico's. But their debts continue to rise, and new loans have added to the burden.
Essentially, the poorest countries have become bankrupt.
h) Enter the troubleshooters...
When Mexico defaulted on its debt repayments in 1982 the whole international credit system was threatened. Mexico owed huge sums of money to banks in the US and Europe, and they didn't want to lose it. So they clubbed together and got the support of the International Monetary Fund (IMF) for a scheme to spread out or reschedule the debts.
Since then the IMF and the World Bank - the two main international financial institutions - have been involved in lending money and rescheduling debt in countries which, like Mexico, cannot pay the interest on their loans.
But their loans add to the debt burden and come with conditions. Governments have to agree to impose very strict economic programmes on their countries in order to reschedule their debts or borrow more money. These programmes are known as Structural Adjustment Programmes (SAPs). SAPs have particularly affected the countries of sub-Saharan Africa, whose economies are already the poorest in the world.
© "Thin Black Lines"
SAPping the Poor
SAPs consist of measures designed to help a country repay its debts by earning more hard currency - increasing exports and decreasing imports. In a few countries SAPs appear to have had some good effect; in most they have worsened the economic situation. In all countries applying SAPs, the poor have been hit hardest.
In order to obtain more foreign currency, governments implementing SAPs usually have to :
a) The devastating impact of debt on the poor Debt is tearing down schools, clinics and hospitals and the effects are no less devastating than war. Dr Adabayo Adedeji, of the African Centre for Development Strategy in Nigeria and a former Under Secretary General of the United Nations.
Map courtesy of For a Change
The UK Charity Comic Relief raised £26 million in 1997. Africa paid this back in debt service in just over a day. Each person in the Third World owes about £250 to the West - much more than a year's wage for many. Of the 32 countries classified as severely indebted low-income countries, 25 are in sub-Saharan Africa. Africa spends four times as much on debt repayment as she does on healthcare. In 1960, the income of the wealthiest 20 per cent of the world's population was 30 times greater than that of the poorest 20 per cent. Today it is over 60 times greater. For a billion people, development is being thrown into reverse. After decades of steady economic advance, large areas of the world are sliding back into poverty.
Millions of people around the world are living in poverty because of Third World debt and its consequences.
Latin America owes £365 billion in debts to other countries and banks (36 per cent of what it produces - its Gross National Product), while sub-Saharan Africa owes £140 billion (83 per cent of its total GNP). These enormous debts mean that repayments to Western Creditors take priority and ordinary people suffer: in poor health, in restricted access to education, in lack of employment and in limited ability to trade and provide for themselves.
b) Health
Spending on healthcare has fallen in many of the world's poorest countries since the 1980s. This often means that people have to pay for healthcare, so the poorest cannot afford it and simply go without. In Zimbabwe spending per head on healthcare has fallen by a third since 1990 when a Structural Adjustment Programme was introduced. In Uganda, £2 per person is spent on healthcare, compared with £11.50 per person on debt repayments.
Some improvements in health gained over the 1960s and 70s have been turned back or stopped in many countries since the 1980s when the debt crisis broke. The number of children who die before the age of five, or before the age of one, has risen in many deeply indebted countries, including Zimbabwe, Zambia, Nicaragua, Chile and Jamaica, after decades of falling numbers. Diseases thought to be eradicated - tuberculosis, yaws, yellow fever - are making a comeback in some countries as treatment and vaccination coverage declines.
c) Education
As schools are forced to charge fees, fewer people are able to send their children and education is mainly available only to the better-off. In sub-Saharan Africa the damage to education has been particularly significant: the percentage of 6-11 year olds enrolled in school has fallen from nearly 60 per cent in 1980 to less than 50 per cent in 1990. In Tanzania, school fees have been introduced as part of a Structural Adjustment Programme, leading to a drop in primary and secondary school enrolment.
d) Employment
The IMF encourages hard-pressed governments to cut back spending and downsize government departments. This often means a rise in unemployment and a cut in wages.
Real wages in most African countries have fallen by 50-60 per cent since the early 1980s. In Mexico, Costa Rica and Bolivia average wages have fallen by a third since 1980. And unemployment has risen in many countries in Africa and Latin America since the 1980s - in Zambia, Tanzania and Ghana, over 20 per cent of the working population are unemployed. High levels of unemployment are counterproductive as there are fewer taxpayers to contribute to the public purse. So governments raise less through taxation.
d) Trade
SAPs mean that countries must increase their export crops - and as many poorer countries are encouraged to grow the same crops, they cause a glut on the international market and prices fall. So the workers on plantations and farms get lower wages than ever.
Mexico first grew maize as a staple crop thousands of years ago. But today, thanks to IMF economic policies, it has to import 20 per cent of this staple food from the USA.
The IMF encouraged Mexico to replace its vital food crops with cash crops - like strawberries and exotic fruits. The IMF also made sure that any trade protection for the country's agricultural goods was lifted. So Mexico's export crops now compete with those from the USA, which, as in many northern countries, are highly subsidised and protected, using all available techniques to improve their quality.
Mexico is the loser, and the poor suffer. Almost 20 per cent of Mexicans have no cash income; more than 30 per cent make less than the minimum wage of $3 a day.
e) Jubilee 2000 calls for...
cancellation of the backlog of unpayable debt of the poorest countries - most of which are in Africa. Such a cancellation will not on its own eradicate poverty - but it will remove a significant barrier to progress and justice. The year 2000 could signal the beginning of dramatic improvements in healthcare, education, employment and development for countries crippled by debt.
See also :
Debt and the Rwandan Genocide
Bringing it all back home
Part three : Too little, too late
Since the late 1970s there has been a growing concern in the West that the Third World will not be able to pay back much more of its debts. A number of people from various countries have come up with plans to try to ensure they do.
None of these plans have been adequate to deal with the whole debt problem. So although some improvements have occurred, mostly in South America, the problem remains.
b) The Brady Plan
By 1989 debts to commercial banks were no longer worth their value on paper because the banks had written off large chunks of them in theory, assuming they would never be repaid. Brady argued that the banks should reduce the actual value of the remaining debt for larger debtor countries, so that they had less to pay.
The banks would do this in one of two ways :
c) Trinidad/Naples Terms
John Major originally proposed that creditor countries cancel half the debt owed to them by the lowest income countries, while rescheduling the rest. This could have resulted in debt relief worth £18 billion to the poorest countries.
Later he went further and proposed two-thirds debt remission. In the end, 67 per cent cancellation was agreed at the G7 Summit (a meeting of the seven main Western powers) in 1994.
However in practice, this level of reduction has only been applied to a small proportion of poor countries' debts. Creditors have been very reluctant to offer debt relief. Countries have to keep to stringent Structural Adjustment Programmes to get debt relief and were not exempt from any repayments to the IMF or World Bank.
© "Thin Black Lines"
The Highly Indebted Poor Country (HIPC) Initiative
In October 1996, there was a major shift by the IMF and the World Bank when they produced a debt relief initiative which contemplated for the first time the cancellation of debts owed to them. The agreement also recommended a strategy to enable countries to exit from unsustainable debt burdens. Britain's Chancellor proposed that the Initiative should be financed through the sale of IMF gold. The Initiative proposed 80% debt relief by the key creditor countries (Japan, the US, Germany, France and the UK). The World Bank announced the establishment of a Trust Fund to finance the Initiative.
The World Bank has committed resources to the Trust Fund. The IMF has not. Instead it will offer cheaper loans to pay off expensive loans. There has been no agreement to sell IMF gold. And the Paris Club of key creditor countries have been reluctant to give the necessary minimum 80% debt relief.
In practice, HIPC has been very limited in effect. So far only Uganda has received debt relief. Mozambique, after treatment under HIPC will only pay 1% less in debt payments than it is paying now. As a result no money will be released for spending on health and education. Only 3 countries are likely to see any benefit before the year 2000 and they will have to maintain strict Structural Adjustment Programmes. According to Christian Aid, only 6.4% of the the total debt of 41 poorest countries will be tackled, while at the same time debt service is due to rise and commodity prices to fall.
d) Mauritius Mandate
In September, Gordon Brown tried to put some fresh impetus into the HIPC initiative at the meeting of Commonwealth Finance Ministers' Meeting in Mauritius. He called for three-quarters of the 21 countries designated as highly indebted countries to reach their decision point for debt relief by the year 2000. Jubilee 2000 Coalition believes at least 50 countries should reach their completion point by the year 2000. Yet even this limited proposal was met with hostility from other creditors at the Autumn 1997 World Bank and IMF meetings in Hong Kong. (See feature article Mauritius Mandate - one year on).
Creditors' inherent reluctance to grant debt relief has been revealed more recently in delays in debt relief for Nicaragua and Ethiopia. Guyana, Mozambique and Uganda's debts have been reduced by far less than expected. Policy advisors in the aid agencies that make up our Coalition are beginning to raise real concerns about HIPC. One says that it is only a framework for "accounting" sustainability ie all that it sets out to do is to guarantee that some debt service is paid by debtor countries. Substantial political pressure is still clearly needed to bring about effective debt relief for the world's poor.
See also :
Eurodad: The Heavily Indebted Poor Countries (HIPC) Debt Initiative
:
Any Impact on Poverty? Uganda, Mozambique and Nicaragua
Oxfam International: Making Debt Relief work: A question of political
will
Part four : Resisting Debt
For years, southern movements have been resisting debt and the imposition of economic adjustment policies (SAPs) linked to external debt burdens and new credit agreements. Jubilee 2000 in the south comes out of many of those struggles.
As the developing world declared its independence from colonial rule, newly emerging countries found themselves enticed into the debt trap with offers of big loans at very low rates of interest. Many countries in Latin America took up the offer and soon found that with interest rate rises and commodity price decreases they couldn't keep up the repayments.
a) Warnings
Countries in Africa, which proclaimed independence later, were forewarned about the pitfalls of the debt trap but were powerless to avoid it. Still lacking control over their own resources, they were desperate for credit to match the high expectations of their people and inevitably took the loans eagerly offered by governments, the World Bank and IMF. Before long the conditions attached to these loans became onerous to the people, who found they were not benefiting from this secret international lending process.
b) Riots
From Argentina to Zambia, initial resistance took the form of strikes and demonstrations when the first price rises for basic goods followed the implementation of various programmes based on the adjustment models of the IMF and World Bank. One of the most bloody IMF riots took place in 1984 in the Dominican Republic when the price of basic foodstuffs doubled and the price of medicines increased fourfold. Four days of rioting left 112 dead and 500 wounded. In Caracas, Venezuela, riots broke out following the adoption of an adjustment programme in 1989 which caused wages to collapse to less than half their 1980 level and prices to shoot up as subsidies were cut. Hundreds died (estimates vary widely from 300 to 1,500). Demonstrations, strikes and riots continued intermittently across various countries, highlighting the divisive and destabilising effects of these policies.
As debt and adjustment have continued, a more co-ordinated people's response has emerged. Campaigning groups have formed in debtor countries and regions to raise awareness of how debt and structural adjustment underpin many of the economic and social problems people are facing. These groups campaign for debt cancellation, for radical changes in SAPs and the involvement of civil society - especially local non-governmental organisations - in dialogue on these policies.
c) Alternatives
In response to this mass opposition, policy-makers in the developing world have been putting forward various alternatives to the IMF's SAPs. For example, the African Alternative Framework to SAPs (AAF-SAP) was put forward in 1989 by the United Nations Economic Commission for Africa (UNECA) under the leadership of Professor Adebayo Adedeji who later became an Under General Secretary of the UN. Later adopted by the Organisation of African Unity (OAU) and receiving the support of the UN General Assembly, debt cancellation was a key factor underlying the strategic approach of AAF-SAP. But the plan was ignored by the WB and IMF and Western leaders.
d) Demonstrations
With the belittling of international opposition to the IMF programmes, by the 1990s they had been enforced upon most countries of the impoverished world. This triggered another wave of angry demonstrations against the imposition of VAT and cuts in health and education. These demonstrations were often violently crushed with the military arsenals of local and foreign governments.
The struggle continues in the developing world and there are positive signs, with some governments beginning to take notice of calls from civil society for default under the banner 'Can't pay, won't pay'. Only with increased links and solidarity between peoples in developed and developing countries can we break the stronghold the IMF-imposed blueprint, and implement real alternative strategies for the third world.
e) Around the globe
In Africa, Asia and Latin America, people's movements are a growing force for change. They include Chimurenga, the African Network on Debt and Development, the Third World Network, the International Movement for a Just World, the Sao Paulo Forum and the Philippine Freedom from Debt Coalition. - the longest established and the most visible campaign in the developing world.
Women's organisations are also tackling structural adjustment and debt, uniting their efforts through groups such as Moyo Wa Taifa, the Pan-African Women's Grassroots Network - which aims to ensure that women understand how debt and structural adjustment underpin many of the problems they are facing and to develop ways to influence the government, IMF and the World Bank.
Part five : Bringing it all home
a) The impact of the debt crisis on all of us
The debt crisis is clearly a disaster for the people who live in Third World debtor countries. But what about the rest of us? The fact is that many of the results of international debt boomerang back to hurt the rich world as well as the poor.
Susan George explains in her book, The Debt Boomerang, how six boomerangs affect the Western world and the creditor countries as much as the indebted countries: the environment; drugs; bailing out the banks; lost jobs and markets; immigration; conflict and war. The following paragraphs highlight some of the issues she covers in the book.
b) Killing the Earth
Serious environmental destruction began in many Third World countries in the 1970s and 1980s. Easy money was available from industrialised countries for 'development'. Much of it was spent on large dam projects, power plants and charcoal driven industries. These usually didn't help the poor, and did damage the environment.
As debts mounted, what poorer countries needed most was foreign currency to pay back their debts. One easy solution was to milk the earth's resources for the hard cash they brought in, and cut back on environmental conservation programmes.
c) Third World countries have done this by:
heavily overusing soil to grow cash crops, often forcing small farmers off their land producing more crops on small areas of land, often using chemical fertilisers, and so degrading the soil allowing overfishing of their waters, so that fish stocks are damaged allowing multinational companies logging rights to their forests, destroying the lifestyle of those who live there chopping down forests to make room for beef cattle grazing or crop farming.
FACT: It is the world's largest debtors who are chopping down their forests the fastest. Brazil is the world's largest deforester and one of its largest debtors, owing US$112 billion. It is cutting a staggering 50,000 sq km of forest every year.
d) Debt and the Dole Queue
As Third World countries struggle to pay back their debts, they have to export as many goods as possible and cut back on imports. This might seem like a good way to earn money. In fact they don't earn as much as they should, because many Third World countries are exporting similar products, flooding the market. So prices have been plummeting over the last few years.
It is not only debtor countries who lose out by the 'earn more, spend less' principle. The countries demanding repayment also suffer economically. Western countries are losing out on earnings from some factory and farm produced goods because it is so much cheaper to import them from the Third World. At the same time they are not able to export equipment and other manufactured goods to Third World countries which used to be trading partners, because these countries have no money to buy them. So jobs are lost and unemployment rises. FACT: Before the debt crisis broke, Europe sold about a fifth of its exports to the Third World, particularly Africa. By 1990, it was only a little more than a tenth.
e) Dirty Drugs
Millions of Americans and Europeans regularly use illegal drugs. Governments across the Western world have poured money into the struggle against drugs. The narcotics market in Europe is expanding rapidly, contributing to social breakdown and violent crime.
But for all their strategies to fight against drug trafficking, no government has come up with a solution which tackles one of the factors making it possible - international debt. Almost all the major drug-producing countries also have high international debts. To repay debts they need hard currency from the sale of commodities - like cocoa, whose value has been falling. Meanwhile, cocaine prices have been rising. So countries turn to the drugs trade - to raise foreign currency and to survive.
FACT: Bolivia is one of the poorest countries in Latin America with and the highest child mortality rates on the continent. The country has to spend half of all its (legal) export income on paying its debt. 40% of Bolivia's workforce depend on the drugs trade for a living.
f) Banking on debt
Commercial banks have suffered very little from the accumulation of unpaid debts. This is largely because Western taxpayers (mostly without knowing it), inflation, and currency speculation have cushioned the blow for them.
In most countries banks have been able to write down their unpaid third world debts in the accounts as losses . This means they pay substantially less tax. Yet the debt still remains and The debtor country has to continue repaying it. While the weight of the bank's loss is in part made good by the taxpayer, the burden for the debtor country is enormous.
Another way that banks can gain tax relief on a loan which is not being repaid is through selling the debt. In a bizarre system of exchange, one bank can sell the debts owed to it at a reduced price to another bank which feels confident it will eventually be repaid at a higher rate than that discount price. This is called the secondary market.
The banker who sells the loan can then claim tax relief on the 'loss' he has made by selling the loan at a reduced price. Yet again, the debtor country gains nothing.
British Banks The four main high street banks in the UK - Lloyds, Natwest, Midland and Barclays - have all been involved in lending to the Third World. For these banks, though, the worst of the crisis is over. All of them have sold off large proportions of their debt by one means or another. Lloyds, Midland and Barclays have all made substantial profits from selling, exchanging and making provision for Third World debts.
g) Unjust War
Britain uses export credits to subsidise arms sales to the South. In 1993/4, 50 per cent of all export credits provided by the DTI to exporters were for arms sales. In time, these credits become debts for poor countries. 96 per cent of the debts owed to Britain by poor countries are owed to the Export Credit Department of the DTI. Many Third World countries have become deeply indebted because of high military spending. And as wars escalate, they are less able to repay the money they owe. One estimate suggests that between 1960 and 1987 Third World governments borrowed around $400 billion dollars to fund arms imports from industrial states.
The Third World arms trade has declined after a peak in the late 1980s. Most of the dictators who invested so heavily in arms are no longer in power and today's governments are not buying as many arms as they once did. But the debts are still left to pay.
Debt can also lead to and contribute to war. As countries become poorer because of their debts, one route that people take is violence and protest. As this escalates, it can end in war - and does in many countries of the Third World. As the debt crisis broke in the early 1980s, violence in many indebted countries around the Third World erupted into war or escalated dramatically.