Political Responses to the Debt Crisis

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.

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:

• by writing off some of the debt with the help of funds from the IMF and World Bank
• by rescheduling some of the remaining debt by converting it into bonds, which could be sold on the secondary market

In terms of total debt stock this plan has not helped debtor countries. As commercial debts have fallen, multilateral debts have risen. Resources continue to flow out of these countries to pay interest on Brady Bonds. Debt service was lowered to levels which were already being paid, so no actual benefit accrued to the debtor country.

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 Programs to get debt relief and were not exempt from any repayments to the IMF or World Bank.

Heavily Indebted Poor Country Initiative (HIPC 1)
Four years ago, 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. The Initiative proposed 80% debt relief by the key creditor governments only after countries had fulfilled two 3-year stages of structural adjustment conditions. The World Bank announced the establishment of a Trust Fund to finance the Initiative.

In reality, the initiative proved to be completely ineffective. Uganda and Bolivia received debt cancellation in April 1998 and September 1998 respectively - but within a year they were back where they started with unsustainable debt burdens. They had fallen victim to falling commodity prices and impossibly optimistic forecasts (made by World Bank and IMF staff to justify lower levels of debt relief) for their future export and economic growth. Mozambique, after treatment under HIPC 1 ended up only paying 1% less in debt payments than before HIPC. As a result no money was released for spending on health and education.

Growing pressure from debt campaign groups, under the Jubilee 2000 umbrella, forced the creditors to admit that the initiative was failing to deliver. In January 1999, Chancellor Schroeder of Germany, announced that `radical and bold' steps were needed on debt relief, prompting other G7 creditors to support calls for an `enhanced' HIPC Initiative. This was launched at the Cologne G7 Summit, as 50,000 people formed human chains in Germany to call for the `chains of debt' to be broken.

Cologne Debt Initiative/HIPC II
HIPC 2 was launched at the Cologne G8 Summit in June 1999 to great fanfares of publicity and promised to provide "broader, faster and deeper" debt relief, and an improved link with poverty reduction. Creditors talked of a headline figure of $100 billion of debt relief for HIPC countries which included $25 billion of additional relief in the "enhanced" initiative.

By the end of the year 2000, 22 countries had received some relief on debt service payments and a total of $12 billion had been cancelled - but only Uganda has reached completion point, the final stage in the HIPC process. In some countries, debt relief has made a tangible difference. For example in Mozambique, $60 million was released through debt relief into various areas, all vital to sustaining development. The budgets for health, education, agriculture, infrastructure and employment training have all benefited. However overall the level of debt relief has failed to deliver the necessary resources to tackle the HIPC countries' deep-rooted social and economic problems. On average the reduction in debt service has been just over a third. Even after HIPC relief, these countries are still paying over one and a half times more in debt service than they are on health. In Tanzania about a third of the country's children are malnourished, and under half are enrolled in primary school. Yet in Tanzania, the government will be faced with even greater payments than it has currently been paying.

Moreover the initiative still excludes many heavily indebted poor countries. Some have failed so far to fulfill all the conditions laid out by the IMF and World Bank to become eligible for debt relief; others have not even been eligible for debt cancellation under the initiative. Nigeria was discretely removed from the HIPC list in 1998 shortly after it became a democracy. It has received debt rescheduling but no debt cancellation, despite the fact that this is urgently needed to tackle entrenched economic and social problems that threaten to destabilize not only the country but West Africa as a whole. Haiti is also not eligible for debt relief under the initiative even though it is the poorest country in the Western Hemisphere and nearly half of the debt was contracted under the Duvalier dictatorship. It will receive no debt cancellation even though it has 50 per cent adult illiteracy, 70 per cent unemployment and infant mortality is more than double the Latin America & Caribbean average.

The evidence from all these political responses to the debt crisis is that debt relief initiatives designed by creditors and controlled by creditors will never deliver the debt cancellation that is necessary for development. Creditors have maintained the power to define who gets what, and when, and how. This same power means that their own political wrangling, conflicting agendas, lack of consensus and minimizing of cost become the dominant issue, not the delivery of the modest debt relief on offer to those most in need. The result is that the majority of countries in urgent need of cancellation are currently getting nothing at all.

Jubilee USA Network calls for definitive debt cancellation for all impoverished nations with full transparency and participation of civil soceity to assure that funds are used for poverty eradication.