A Short Primer on
Debt*
1. Why Should the
Debt be cancelled?
Some debt simply cannot be paid Many developing countries are forced to use scarce resources for paying debt rather than for healthcare, education, and other vital social services. For example: in Zambia almost a fifth of the adult population is living with HIV/AIDS. Life expectancy has dropped dramatically to 37 years. At the same time Zambia spends 12% of its resources repaying debt and less than 5% on health and education combined.
2. Which Debt
should not be paid?
Illegitimate and
odious debts should not be paid. A debt is illegitimate when the
projects and policies it has financed have caused social and ecological damage.
An odious debt arises when money is lent to oppressive regimes and these loans
help keep them in power. A new, democratic government taking over from such a
regime should not be liable for these debts. Examples: Debts run up by the
military regime in Argentina or debts incurred by Saddam Hussein in Iraq. www.odiousdebts.org
“Don’t Owe Won’t
Pay.”
Many Southern groups claim that “the external debt of the
countries of the South is illegitimate, unjust, and ethically, legally and
politically unsustainable” (international people’s tribunal on debt, Porto
Alegre, 2002) and have consequently adopted the slogan “Don’t Owe, Won’t Pay”. www.jubileesouth.org
3. Who Makes the
Decisions on how to Tackle the Debt Crisis?
The following international bodies are the main decision makers: International Monetary Fund (IMF) and World Bank The IMF and the World Bank are major players in the debt crisis. The Allies set up these organisations towards the end of the Second World War, to help re-establish world trade and support post war reconstruction. Most countries in the world are members of these bodies.
IMF. The role of the IMF is to facilitate international trade. Countries with balance of payment problems (where the costs of their imports are greater than their earnings from exports) can borrow from the IMF. In return they must implement policies laid down by the IMF.
World Bank. World Bank is the IMF’s sister institution. Its role is to provide loans to developing countries to support their development. In order to receive loans from the World Bank, borrowing countries must fulfil a range of conditions.
The IMF and World Bank are the most significant creditors of the poorest countries. Each country’s voting power at the IMF and World Bank is based on the financial contribution it makes. Inevitably these institutions are dominated by the views of the richest and most powerful countries.
The USA holds by far the greater single share of voting power (approx. 17%), while the combined G8 countries have over 45%. In contrast at the United Nations General Assembly the principle of one country one vote prevails.
G7/8. The G7 is made up of seven of the world’s most powerful economies: Canada, France, Germany, Italy, Japan, UK and USA. When Russia joins the G7 the group becomes known as the G8. The G8 is an informal grouping, with no democratic mandate, and holds a Summit each year. Statements made by the G8 have enormous influence on IMF and World Bank policies.
4. What Caused the
Debt Crisis?
A mixture of unaccountable lending and borrowing in the late 1970’s fuelled by the 1973 oil boom laid the foundations for the debt crisis. Oil prices quadrupled generating billions of dollars for oil producing countries. They deposited much of this surplus in Western banks. Banks were anxious to lend these dollars and developing countries themselves were desperate for loans for economic development. The needs of the banks and those of developing countries appeared neatly matched. Interest rates were low and money was plentiful.
Ø In the l970s many of the borrowing countries were ruled by military governments or dictators.
Ø While some of the loans were used well, significant amounts of money were spent unproductively on inappropriate projects, or disappeared through corruption.
Ø At the end of the l970s, interest rates shot up and oil prices rose again.
Ø Developing countries dependent on exporting e.g. coffee, copper, cotton and bananas to earn the dollars to repay debt saw their commodity prices plummet. In August 1982, Mexico, one of the biggest debtors, announced that it could not continue to repay its debt.
Ø
Fearing the collapse of their banks, Northern
governments moved swiftly to contain the crisis. The crisis was defined
as a problem of individual countries, which had borrowed too much rather than
also being a result of how the international community had handled the oil
crisis.
Ø A cycle of further lending in order to enable countries to continue to repay debt set the debt treadmill in motion.
Missing from the picture are the people carrying the debt burden, who struggle to pay it at the expense of their health, their welfare and their children’s future.
*Taken from the UK Jubilee Call
OMI JPIC (Rome, Italy) [email protected]