Name:	Elaine Baker
Student Number:	97591521

Course:	EC3111 Applied Public Policy: Decision Analysis
Lecturer:	Martin Kenneally

Assignment:	Discuss the Jubilee 2000 debt proposals
Due date:	21 March 2000

A main focus of the discipline of economics is the allocation of resources in the most efficient way in order to satisfy needs and wants.  Debt is one mechanism used to do this.  The owner of a resource lends it to a borrower.  The borrower benefits from the resource and pays it back after a period of time, together with interest, which is the fee for the use of the resource over this time. The interest obtained by the lender is greater than what he would have gained through using the resource himself.  The use of the resource benefits the borrower more than the interest he has had to pay, either through his time preference for the present or through investment which is productive financially, personally or socially. Therefore it is a trade across time with mutual gains.  Through this mechanism, the resource is put to its most efficient use.

There are mutual gains only if firstly, there is an expectation that the resource will benefit the borrower and secondly, the expectation that the resource will benefit the borrower is fulfilled.  At the time of the lending, it is not definitely known who will make the best use of the resource.  There is a risk that the borrower might not benefit by more than the interest agreed.  In this case, depending on who bears the costs, either the borrower, the lender, or both, would have been better off if the loan had never taken place.

If the decision to borrow and lend is to have a good chance of being efficient, both the borrower and the lender must weigh this risk into their decision, and must bear some of the cost if expectations are not fulfilled.

Principles of risk bearing in debt have developed in many contexts which promote this efficiency of decision.  The borrower bears most of the risk if he has a contract which obliges him to pay the principal and interest even if he does not gain by the loan.  However, if he loses out to the extent that he cannot repay, he defaults and the debt is canceled.  For example companies with limited liability can be liquidated without the owners of the company losing their personal assets.  A person can declare bankruptcy before he reaches a state of starvation or death if he cannot repay his debts.  The risk that the loan will not be repaid is the risk involved in lending and it provides an incentive to the lender to lend in a responsible way.  I define irresponsible lending in this essay to mean lending when it is definite that, or when there is a large risk that, the loan will not benefit the borrower to a degree adequate to enable him to repay and enjoy a net benefit.

This essay will address the proposals of the Jubilee 2000 movement within this framework.  These proposals relate to the external debt of poorest and most highly indebted developing countries. 92 countries are classified by the World Bank as being highly indebted or of low or middle income or both.  Jubilee 2000 estimates that 52 of these are in urgent need of debt relief.1  The scale of debt of these countries is set out in the attached tables.

Jubilee 2000 is an international movement calling for: 
•	cancellation of the unpayable debt 
•	of the world's poorest countries 
•	by the year 2000 
•	under a fair and transparent process 2

I wish to support these proposals on the following grounds:

i)	In all cases the framework under which lending took place did not incorporate disincentives to irresponsible lending.  Lenders made inefficient decisions sometimes through bad judgement, and sometimes knowingly in the assumption that borrowers rather than lenders would bear the cost;

ii)	In many cases the repayers are not the same entity as the borrowers, i.e. those who made borrowing decisions and who benefited from the loans did not do so as representatives of their people but for their own gain.  The vast majority of the people of the country did not have any input into the decision to borrow.  The repayers are the people of the country.  Therefore the borrowers did not factor repayment costs into their decision;

iii)	In many cases the debt is essentially unrepayable, i.e., the borrowers did not benefit by the loans and are now unable to repay without eroding minimum standards of welfare.  Under a bankruptcy system they are entitled to have their liabilities cancelled;

and I finish by discussing poverty reduction and conditionality.

i)	Irresponsible lending

During the 1970s oil crises, western banks had an oversupply of deposits from OPEC countries, with few productive lending opportunities in western countries.  They made many irresponsible lending decisions, i.e. lent where there was little or no chance that the money would be used in such a way as to enable the borrower to repay.   In many cases, borrowing countries did not benefit from the loans. They have been bearing the large costs of repayment in terms of basic standards of welfare for their people and are unable to repay without eroding these standards further.

In 1973, the US Federal Reserve Governor, Andrew Brimmer, noted that “the main explanation” for the sharp rise in lending to less developed countries is the “failure of demand for loans from borrowers in developed countries to keep pace with the expansion of credit availability.” Even the IMF admits to an `irrational exuberance’ that led investors and banks to underestimate the risks in emerging market countries.” 3.  Most of the long term external debt of the Jubilee 2000 countries is now held by World Bank, Western governments, and the International Monetary Fund, who were either the original lenders or who bought it from commercial banks in order to prevent a financial crises when the debts were acknowledged as bad.

Badly planned projects, bad investment decisions

Firstly, lenders made errors of judgment by investing in projects without regard for their environmental and social effects.  The environmental and social problems caused by many ill-thought-out “development” projects meant that they had a negative rather than a positive effect on development.  

The evidence for this is great.  For example, in Ethiopia’s Awash River valley, lending for irrigation systems for large-scale plantations destroyed the valley’s rich floodplains and involved displacing 20,000 people from their lands who then crowded onto lands held by other tribes.  The result was degradation of land rather than an improvement in agricultural productivity, and conflict due to the displacement.4   In the Philippines investment in forestry equipment without regard for sustainable forest management caused forests to be wiped out before the equipment could be paid for.5  $2.9 billion of the Philippines debt is accounted for by a single project – a nuclear reactor built by the US company Westinghouse.   

During the 1970s, developing countries undertook an estimated 1,614 large scale projects with a total cost of more than $1 trillion.  The average size of each project was $620 million.6 Large scale badly planned infrastructural projects were implemented rather than basic investment in education, health and micro-credit schemes. 

The purpose of the World Bank is to invest in development.  Officials in developing  countries were given to believe that the World Bank had more expertise in development than they had. The World Bank drew up investment plans for governments, arranged financing packages for major capital projects and offered financial guarantees to private lenders.  As a result, for every $1 lent by World Bank another $2 or $3 was drawn from other sources, both public and private. 7  The World Bank employed foreign experts to train local elites.  There would be no place for wide popular participation in development decisions.  In the majority of cases, the World Bank, as entrepreneur of these projects, has been proved an unsuccessful entrepreneur.  Yet it is the poorest people in developing countries rather than either the elites or the World Bank, who are bearing the cost of these projects.

The unsoundness of the investment follows from growth theory.  Growth theory predicts that the higher the investment rate and the poorer the country, the faster the country should grow.  The Investment/GDP ratio for Africa as a whole has matched or exceeded that of the United States virtually every year since 1965.9  The fact that African countries have not converged towards United States income levels show that this “investment” must have been unproductive.

Loans of inappropriate exports

A principal reason for the lack of success of the investments was that lending was centred around the needs of the exporters of developed countries rather than the need of developing countries to grow and so repay.  Lending was often tied to western exports.  The type of exports involved did not significantly help the country to develop.  Virtually all poor country debt to Britain is in the form of export credits – money advanced by the British government to allow poor countries to buy British goods.  The goods marketed were often inappropriate for the importing country.  Many countries give export credits to encourage arms sales, for example 18% of British export credits in 1994-97 were for arms.10

In late 1975, President Valery Giscard d’Estaing of France paid a state visit to Zaire’s President Mobutu Sese Seko.  A third of people in Zaire live close to starvation levels, yet $500 million was spent on a new national telecommunications system, complete with TV studios. The company that received most of the contracts to build the microwave system was managed by the French president’s first cousin.  The state-owned export credit agency, Banque Francaise du Commerce Exteriur, provided much of the scheme’s financing, and was managed by another cousin of the French president.  Mobutu’s motivation was probably to sustain the French military support that kept him in power.11

In Ivory Coast, a $60 million sugar plantation and mill was financed along with five other complexes by the export credit agencies of Belgium, Canada, Holland, the US and France for an overall cost exceeding $1 billion.  When the plants started producing sugar in the late 1970s, production costs for a pound of sugar averaged nearly 300% of the world price, so the mill made a huge loss. 12

ii)	Those repaying did not decide to borrow

Money was often lent in the full knowledge that it would not benefit the vast majority of people.  Lending was often politically motivated.  The “gain” to the lender was primarily the support of a military regime, rather than a sound investment. 

Joseph Hanlon writes:  “There is strong evidence that the IMF and World Bank lent to Mobutu in Zaire on political grounds – so that he would back the US in the Cold War – against their own best fiscal advice. Those lenders may try to collect from the US or from Mobutu's Swiss bank accounts. They should not ask the people of new Democratic Republic of the Congo, already the victims of Mobutu's regime, to pay again for the darkest period in their recent history.”13

Edwin Blumenthal, an IMF official working in the central bank in Zaire, resigned after two years complaining of “sordid and pernicious corruption” that was so serious that “there is no chance, I repeat no chance, that Zaire's numerous creditors will ever recover their loans.”   Despite receiving this report, the IMF gave Zaire the largest ever loan given to an African country. 14 In following six years, the IMF lent Zaire $600 million, the World Bank $650 million and Western governments $3 billion.15 Britain increased its lending to Mobutu in Zaire after 1985, in full knowledge of the corruption; the new Democratic Republic of the Congo still owes £134 million to the UK.

Zaire is only one example.  The following table shows that large proportions of debt were loans for the benefit of dictators rather than the people of the countries.  Many dictators placed their money in foreign bank accounts.  According to Morgan Guarantee Trust company, the flight of capital has been so large that without it Nigeria and the Philippines would have had their external debt halved.16

Country	Dictator	In power 

From	

To	Debt $ billion	Dictators debts	%age of debt incurred by dictator	
Bolivia	Military	1962	1980	5.2	2.7	52%	
Ethiopia	Mariam	1977	1991	10	3.7	37%	
Haiti	Duvalier	1971	1986	0.9	0.7	78%	
Liberia	Doe	1979	1990	2.1	1.3	62%	
Malawi	Banda	1964	1994	2.3	1.9	83%	
Nigeria	Buhari/Abacha	1984	1998	31.4	13.6	43%	
Philippines	Marcos	1965	1986	41.2	26.8	65%	
Somalia	Siad Barre	1969	1991	2.6	2.4	92%	
Zaire/Congo	Mobutu	1965	1997	12.8	12.5	98%	
Kenya	Moi	1979	Present	6.9	4.2	61%	
Sudan	Nimeiry/al-Mahdi	1969	Present	17	16.7	98%	

Compiled by Joseph Hanlon, Dictators & Debt

The concept that a debt undertaken involuntarily by a people is invalid is not new.   When the United States captured Cuba from Spain in 1898, Spain demanded that the US pay Cuba's debts and the US refused, on the grounds that the debt had been “imposed upon the people of Cuba without their consent and by force of arms.”  17

Debt in these circumstances does not have a net benefit and so is economically inefficient.  If such debt is not cancelled, there will be moral hazard problems -  lending will continue to blatantly undemocratic rulers under the assumption that the loans will be repaid by the people, after the dictator is overthrown. 

iii)	Unpayable debt

The Jubilee 2000 countries are among the poorest in the world. At the moment, the debt is a significant impediment to basic welfare and development.  One in every five children in highly indebted poor countries dies before the age of five.  47 million children do not have access to primary school.  Malaria, which is preventable at very low cost, kills a million people every year.  In Sub-Saharan Africa, the World Bank estimates that 23% of primary school age are not in school, 73% of secondary school age have no access to school (Table 2-10) and only 47% of people have access to safe water and sanitation (Table 2-14)18   In the poorest countries, resources such as agricultural land and labour are being diverted towards exports in order to earn foreign exchange for debt payments instead of towards development and growth.  

Countries such as Burkina Faso, Mozambique, Niger and Tanzania are spending $3-$6 per capita a year on their health systems, which is insufficient to finance a package of basic health interventions. Yet each of these countries spends more than double on debt servicing what is spent on primary health care. In Zambia – where infant mortality rates are increasing, over half a million children are out of school, and illiteracy is rising – debt servicing claims more of the national budget than health and education combined.19

The Highly Indebted Poor Countries initiative (HIPC) was proposed by the World Bank and launched by creditor countries in 1996, and deepened at the G8 meeting in Cologne in 1999.  Countries are eligible for this initiative on the basis of having a debt-to-exports ratio of 200 to 250 percent for the (on a Present Value basis) and a ratio of debt service to exports of 20 to 25 percent. At present 40 of the 52 Jubilee 2000 countries meet these criteria. Debt relief is put in place only after compliance for 3 to 6 years with IMF structural adjustment programmes.20

The aim of the HIPC initiative is to reduce debt to sustainable levels, defined as levels at which service can be paid without further debt accumulating.  However, the Jubilee 2000 movement argues that a debt is unpayable if paying involves cutting into fundamental public welfare services and a basic level of development.  In contrast to the above ratios, it advocates that the criteria on which debt is classified as unrepayable, and a country is eligible for debt cancellation, should be related to capacity to provide basic welfare services and standards.  Jubilee 2000 estimates that at least 52 countries (in contrast to 40 in the HIPC initiative) would be eligible on these grounds.  If countries are given relief only to the point at which they can pay steadily while neglecting basic welfare, this will serve only to prevent default and therefore maximise debt service flows from these countries.

The US, the UK and Canada set precedents for 100% cancellation of bilateral debt of some countries during 1999.  The US cancellation applies to 36 countries, the UK to 25 countries and Canada to 19 countries.  These cancellations will happen when the countries involved complete the HIPC adjustment programme (by the end of 2000 for some countries, after three years for others).  Canada decided to cancel the debt of one non-HIPC country, Bangladesh.  However, most of the debt of the Jubilee 2000 countries is owed to the IMF and the World Bank, rather than bilaterally.21

Poverty reduction and conditionality
 
The World Bank is not a commercial venture and states poverty reduction as it’s principal goal. A core set of international development goals proposed in Shaping the 21st Century (OECD)22 have been adopted by many organizations, including the World Bank.

Development targets of the OECD are as follows:
•	a reduction by one-half of the proportion of people living in extreme poverty by 2015 
•	universal primary education in all countries by 2015 
•	demonstrated progress towards gender equality and the empowerment of women by eliminating gender disparity in primary and secondary education by 2005 
•	a reduction by two-thirds of the mortality rates for infants and children under five and a reduction by three quarters of maternal mortality, all by 2015 
•	access through the primary health-care system to reproductive health services for all individuals of appropriate ages as soon as possible and no later than the year 2015 
•	the implementation of national strategies for sustainable development in all countries by 2005 

These cannot be achieved unless the debt of the Jubilee 2000 countries is canceled and in addition, significant amounts of aid channeled towards viable projects focusing on human development.  For the reasons given above, I believe that cancellation should be a given, and then aid allocation determined independently according to criterion such as policy effectiveness and levels of poverty as suggested by Collier & Dollar.23  It is important that aid is not diminished through diversion towards debt cancellation, but increased, if development targets are to be reached.

Jubilee 2000 and other NGOs agree that conditionality is important in order to ensure that the gains of debt cancellation are effective in bringing about human development.  It is evident that larger resources in the hands of military dictators, or used by governments without decision-making by a broad base of society, will only serve to repeat the mistakes of the past.   Up to now, conditionality has been in the form of compliance with IMF structural adjustment programmes. These had disproportionate negative effects on the welfare of the poorest.  They were designed solely by the IMF, with the aim of maximising the capacity of a country to repay its debt.   If economic efficiency is the allocation of resources so as to maximise welfare, the aim of debt cancellation should instead be to maximise human development.  Considerable resources will be freed-up by debt cancellation.  The use of freed-up resources must be controlled by those with direct incentives to fulfill this aim, i.e. the poorest in developing countries.  

The conditionality advocated by Jubilee 2000 is that the civil society and citizens, especially the poorest, decide the goals for the reallocation of freed-up resources, and that governments are accountable both to these people and to international organisations in realising these goals.  The strength of civil society organisations in countries such as Malawi and Mozambique is growing quickly.  The Ugandan Debt Network, a Ugandan NGO, has successfully helped set up local Social Watch committees to monitor use of freed-up resources, and lobbied the government on consultation mechanisms for any new loan agreements.  The Ugandan Poverty Action Fund from freed-up resources from HIPC has had significant benefits24.   However in other countries such as Kenya, Sudan and Nigeria democratic accountability structures are lacking and civil society has little voice in government.  Under the Jubilee 2000 debt cancellation framework the governments of these countries will have large incentives to become more democratic and accountable in order to qualify for debt cancellation, and civil society will be strengthened.

During late 1999 and early 2000, the IMF, World Bank and creditor governments have moved towards the Jubilee 2000 proposals as regards conditionality.  The IMF’s “Enhanced Structural Adjustment Facility” (ESAF) has been renamed the “Poverty Reduction and Growth Facility”.  According to the IMF, the main change will be that policies will be derived from new participatory poverty reduction programmes designed in the country itself.  These plans will cover the current poverty situation, targets for poverty reduction and the action to achieve these, how the plan will be monitored, the role of civil society and a summary of the consultation process.25  However, these poverty alleviation and consultation conditions will be added to, rather that substituted for, compliance with IMF structural adjustment.21

The costs of cancellation of debt, relative to the status quo, are not hugely significant in terms of welfare to creditors.  The total external debt of the 52 countries amounts to $353,833 million.  The net present value amounts to $292,133 million. $22,008 million in debt service was paid by these 52 countries in 1997, which is highly significant to debtors but relatively insignificant when compared to sums spent on defence, smoking or even cosmetics in developed countries.  The UNDP, in its Human Development Report 1998, stresses that on a global scale, the amount of money needed is small. In an article which says that “debt is one of the biggest obstacles to human development,” the report points out that when the Asian crisis loomed, “$100 billion [was] raised in a few months”.26

Finally, the Jubilee 2000 movement is at present engaged in debate about how problems of irresponsible investment and unrepayable international debt can be prevented from recurring.   It is important that there is a legal framework ensuring that lenders accept a share of risk and that debts of countries are considered invalid if forced upon them by dictatorial governments.  This will provide incentives to lenders in the future to lend in a responsible way, and will lead to decisions about cancellation of debt to be made according to whether it is irresponsibly lent or unrepayable rather than according to the political will of creditors. 27  Such rules would also promote responsible investment entered into by representative governments and used in such a way as to be productive financially or socially, as the rules would oblige the repayment of such loans.

If such rules had been in place, many of the loans to developing countries would not have taken place, and investors who did invest in unproductive projects would not have been entitled to demand repayment entailing the erosion of basic welfare in developing countries.    

In order to set the stage for the introduction of such rules, I recommend a cancellation of all the following debts of developing countries:
•	debt built up through investment in socially and financially unproductive projects
•	debt built up through lending tied to western exports
•	debt built up through lending to undemocratic and unaccountable governments
•	debt which is unrepayable without eroding basic welfare, education and health standards

Reference List

1	Joseph Hanlon , 1999.  Jubilee 2000 basic data on 92 poorest countries, notes and explanations http://www.jubilee2000uk.org/policy_papers/figureitout.html

2  	http://www.jubilee2000uk.org/policy_papers/research.html

3 	International Monetary Fund, “World Economic Outlook”, May 1998, cited in Joseph Hanlon Dictators and Debt, November 1998 

	Patricia Adams, 1991. Odius Debts Prober International
4	p.21
5	p.36
6	p.52
7	p.68
8	p.69
9	p.108

10	World Development Movement, 1998. “WDM calls for unilateral debt cancellation”, London

	Patricia Adams, 1991. Odius Debts Prober International
11	p.142
12	p.117

13	Joseph Hanlon, 1998. Dictators and Debt   http://www.jubilee2000uk.org/news/dictators2711.html

14 	Cheryl Payer, 1991 “Lent and Lost”, Zed, London; p 110, cited in Joseph Hanlon, 1998. Dictators and Debt   http://www.jubilee2000uk.org/news/dictators2711.html

15	Joseph Hanlon, 1998. Dictators and Debt   http://www.jubilee2000uk.org/news/dictators2711.html

	Patricia Adams, 1991. Odius Debts Prober International
16	p.145
17	p.163

18	World Bank, 1998. World Development Report, http://www.worldbank.org/data/wdi/people.html

19 	Unicef/Oxfam International Position Paper, 1999  Debt relief and poverty reduction: Meeting the Challenge http://www.oxfam.org/advocacy/papers/debtchallenge.htm

20 	World Bank, The HIPC Debt initiative  http://www.worldbank.org/hipc/about/hipcbr/hipcbr.htm

21	Jubilee 2000 UK “Who's dropped what?” http://www.jubilee2000uk.org/reports/dropped.html

22 	Shaping the 21st Century (OECD, 1996) http://www.oecd.org//dac/htm/stc/intro.htm
	and World Bank http://www.worldbank.org/poverty/mission/up4.htm

23	Paul Collier and David Dollar, 1998 Aid allocation and poverty reduction World Bank, Development Research Group. Washington DC

24 	Republic of Uganda, Report on the Poverty Action Fund July 1998 to March 1999  http://www.worldbank.org/hipc/related-papers/addis-related_papers/UGANDA2.pdf

25	Debt and Development Coalition Ireland, 2000 A Coalition Briefing

26 	Joseph Hanlon, 1999. What will it cost to cancel unpayable debt? http://www.jubilee2000uk.org/policy_papers/hanlon2303.html

27 	A JDRAD Discussion Paper The case for an international insolvency court http://www.jubilee2000uk.org/policy_papers/jdrad.html

Debt tables	Jospeh Hanlon  http://www.jubilee2000uk.org/policy_papers/research.html
	World Bank, 1999. Global Development Finance http://www.worldbank.org/prospects/gdf99/vol1.htm