[CL1]Introduction
When considering the international debt crisis, the thoughts of most people would tend to turn to imagery. Many of the images seen in the media demonstrate some of the causative and compounding factors in debt. Such images are highly emotive and no doubt contribute greatly to charity campaigns, but they also have the effect of bypassing the core economic issues of the debt crisis.
In examining the different approaches to the debt crisis of creditor and debtor nations, it is necessary to address a number of topics. Firstly we must examine the background to the debt and discuss how debt is accumulated. The next area that should be examined is the structure of debt; who lends the money and who determines the conditions of when and how money is lent and repaid. Part of this is the discussion of types of debt, whether or not it is possible to regard some forms of debt as less hazardous than others. The debt situation entails one of the most common features in political relationships; a North/South Divide. Discussion of this area will address the central issue of whether or not the debt crisis is cynically utilised by the developed world.
International debt differs greatly from what we would recognise as personal debt. External debt is the result of a country having higher levels of imports than of exports or when thy have to borrow money abroad. Added to this is the fact that most developing countries are not industrial, or are in the process of trying to change to an industrial economy, meaning that what exports they have are usually in the form of primary products such as timber, coffee and cocoa. These primary products are low cost and are exported to parts of the developed world where the processing that adds to the value of these products takes place.
Debt can also be incurred in other ways. In some cases debt is an inheritance from corrupt regimes, in a number of cases, debt is the legacy of the end of the colonial era and in other cases debt can be imposed as punishment.
One of the most interesting cases of this latter situation was the position Germany was placed in at the end of the First World War. This example is important because it demonstrates the consideration, or lack thereof, involved in debt and can be used to highlight one of the reasons why the debt situation for developed countries has differed from that of developing countries.
At the end of the First World War, the victorious nations united to discuss the punishment of the vanquished. The Treaty of Versailles imposed reparations payments on Germany that were crippling. If the terms of repayment had not been changed by subsequent history, these reparations payments would have finished around about the end of the 20th century. The imposition of this debt meant that Germany would have to pay not only for the redevelopment of their own economy but also the rebuilding of countries that had been damaged by their actions in the course of the War. Following the Second World War much of this debt was written off and an economic package was put in place to help Germany’s economy recover. The ensuing recovery in Germany was attributable to more than just this package and it is here that the comparison can be made between the situations for developing countries and developed countries. The essential difference is infrastructure; Germany already had a history of industry, trade and education, indeed, the German state only came about as a result of a trade agreement. Compare this to the countries of sub-Saharan Africa, which have less advanced industry and far more fragile institutional framework. The belief that poor countries can escape from poverty through economic growth rest on the need to alter the internal structures of the countries to enable then to repay their external debt.
As debt is an international issue, international bodies are required to help structure loans and repayment. The two main organisations involved in this are the International Monetary Fund (IMF) and the World Bank. The IMF is an agency of the United Nations while the World Bank is an affiliated organisation. These institutions were one of the creations of the 1944 Bretton Woods conference, aimed at agreeing a post-war economic settlement package.
The IMF was originally founded with the aims of securing international monetary cooperation, stabilise exchange rates and expand international liquidity, that is to lead a move away from gold as the currency for international transactions. The dominance of the dollar in international trade was the result of this aim, although at the original conference some economists, most notably John Maynard Keynes, had argued that a neutral currency should be introduced. This currency was to be known as the bancor and its use would allow for the balance of international trade credits and debits through an International Clearing Union (Buckley, 2000).
The World Bank is made up of three constituent parts, each having a different role and responsibilities. The largest and most important part is the International Bank for Reconstruction and Development (IBRD), which gives loans to developing countries. The other two parts are the International Development Association (IDA) and the International Finance Corporation (IFC). The IDA does not give loans but rather gives credits and does not charge interest on what it gives out but does impose a relatively small one off fee. The IFC is the part of the bank concerned in dealing with private sector lending to help business enterprises in developing countries.
Unlike the United Nations where each country gets an equal vote, the voting structure in the IMF and the World Bank is ranked, according to the funds that each member state contributes. Obviously this means that the G7/8 countries have a far greater say in how financial aid is given than the countries seeking assistance. In terms of percentages this means that the United States has 17.33% of the vote far and away the largest share, with Japan ranking second with 6.22% and the other G7/8 members combining with them to give a total vote share of 46% in an organisation of over 180 members. (Buckley, 2000:16) IMF proposals can be vetoed by 15% of the vote, although in reality, most decisions are reached by consensus and do not require a vote. In addition to this it is less likely that thee smaller, more indebted countries would cooperate in the same way as the larger industrialised nations, as their greatest concern is with the survival of their own nation.
At this point of the discussion, it is important to elucidate further on a point that should already be clear, the geography of debt. When discussing Third World debt, the term ‘Third World’ becomes an umbrella description for the debtor countries of Africa, Asia, Latin America and eastern Europe. By comparison, the creditors are mostly to be found in North America, western Europe and Japan. This division is the North-South divide.
The imbalance between the North and South can be demonstrated in both social and economic terms. James Wolfensohn, World Bank president has stated that “Of the world’s 6 billion people, 2.8 billion live on less than $2 a day and 1.2 billion on less than $1 a day.” (quoted in Buckley, 2000) It is very difficult to fully comprehend poverty this abject, and to describe it in statistical terms cannot depict the human cost of this poverty but it is probably the best means afforded here.
It should be remembered that in talking about GDPs, the figures are averages for an entire nation and do not demonstrate the relative inequalities in the distribution of wealth, inequalities that are as applicable in the creditor nations as the debtor nations. The gap between the rich and the poor is increasing steadily in countries like the UK and the US, in the case of the latter, from 1969 to 1996, the richest 5% of families have increased their share of the nation wealth by 5% from 15.6% to 20.6%. Other GDP figures can skew the global statistics, for example, China and India both saw great strides in the growth of their GDP in the last decade, but these two cases can seriously effect global averages as between them they constitute approximately 33% of the world’s entire population, that is to say 2 billion out of 6.
An important link to make is that of colonialism and debt. During the generations of foreign rule, the majority of colonial rulers having been from western Europe, the natural resources of the colonies were plundered, and the funds these resources brought to the rulers were not repatriated and payment was not made to those who had laboured to extract the resources. The resources of these countries were not the simple coal and oil that the colonisers had in their own nations but the more valuable mineral resources such as gold, silver and precious stones.
In 1996 the IMF agreed that some form of debt cancellation was required and the Heavily Indebted Poor Countries (HIPC) initiative was launched, aimed at reducing the debt burden on the lowest-income countries, most of which are in sub-Saharan Africa. However, the initiative is only applicable to countries that are seen to demonstrate a “sustained commitment to economic reform.” (Chazan et al, 1999:346). Following the launch of this initiative, there was a tremendous reaction from various pressure groups who felt that it did not go far enough. A new, enhanced program was launched in 1999, following a G7 conference in Cologne. This HIPC II initiative received approval by the IMF and World Bank in September of that year.
However, this initiative has also been criticised due to the large degree of conditionality attached to it. This conditionality comes in the form of Structural Adjustment Plans (SAPs), which are intended to bring about structural and social reforms as well as a set of orthodox economic policies, known as the Washington consensus, which bring developing countries more into line with the developed world. The conditions of these SAPs are as follows;
The aims of these conditions are to promote exports and foreign direct investment, replace restrictions with tariffs, encourage fiscal discipline, to redirect public spending toward education, health and infrastructure investment aimed at raising living standards, improve efficiency and allow private citizens easier access to credit.
Criticism of this program has continued, due to it’s being “excessively rigorous and complex, since it requires a six-year process of policy reform and certification before debt relief comes into effect”. (Chazan et al, 1999:346)
Organisations such as Oxfam have also criticised the initiative for failing to take into account those people who actually suffer as a result of debt, with the reforms designed to favour mechanisms rather than people. In the Oxfam International article ‘Drop the debt – go back to the first principles: a challenge to the G7’, the point is raised that “there is no debate around pro-poor design of reforms, or the trade-offs between one reform or another with respect to their impact on poverty reduction efforts. There is also no serious effort to re-design, or adjust the sequence of reforms, if the poor are adversely affected.” (Oxfam International, 2000:2)
In conclusion it would seem fair to say that the issue of debt has been cynically utilised, by both bilateral and multilateral creditors, in the developed world as a means of disciplining debtor nations. The HIPC initiative, although designed to reduce the debt burden of the poorest countries, does so only after a period of some years, in which time further burdens are added in the form of SAPs, a view that is supported by Oxfam and other pressure groups such as the Jubilee 2000 coalition. The very name of the economic policies, ‘Washington consensus’ seems a fair indication of the degree to which the position of those actually living in poverty is not taken into account in the implementation of said policies, however humanistic the initial idea or end result may be.
Individual governments may take steps to redress this balance, most noticeably the UK government’s fiscal policy that, under Chancellor Gordon Brown, proposed to increase the speed of debt relief to countries currently in conflict that resolve the war. However, this again is more complicated as the principle is sound but would seem to fail to take into account how deep seated these conflicts are.
Essentially, the failure of the IFIs and international governments is the failure to take into account the fact that although they may lend to countries or organisations, the primary concern in debt relief should be the alleviation of poverty for those who live it as part of their every day life.
Bibliography
Buckley, R., The Debt Burden: Crushing the World’s Poor, Cheltenham, UGI, 2000.
Chazan, N. et al, Politics and Society in Contemporary Africa 3rd Edn, Colorado, Rienner, 1999.
Oxfam International, Drop the debt – go back to the first principles: a challenge to the G7, Oxford, 2000.
[CL1]Critically consider the view that the international debt crisis has been cynically utilised by the developed world to discipline poor countries.