The suggestion that rich nations should freeze debt repayments for hard-pressed countries has focussed attention on the ethics of international money lending.
Listener 5 February, 2004
Keywords: Globalisation & Trade;
As the world seeks to give a hand-up to the countries devastated by the Asian tsunami, and the finance ministers of the world’s seven most powerful economies (the G7) come together in London this week, debt is firmly back on the political agenda.
Among the proposals to deal with the tsunami destruction was the offer by the Paris Club – the informal group of 19 major lenders to the World’s poor countries (see below) – to freeze debt repayments of the most afflicted, rolling over their $US5 billion or so of debt repayments for this year. The biggest beneficiary would have been Indonesia with around $US3 billion of debts due. But Thailand, a moderately indebted country, according to the World Bank, was cautious. It did not want to be seen unable to repay its debts. After all, the offer will not reduce any country’s debt, just delay its repayment.
The club had already made a more generous offer by pledging $US3.64 billion for aid. In hindsight the temporary debt-freeze offer looks more like a knee-jerk reaction to the agony wrought by the tsunami.
Sceptics point out there would be no guarantee any savings would be go to relief and reconstruction. They could be diverted, doubters hinted, to the armed forces. Heavily indebted governments tend to be bad governments. If they have not borrowed prudently in the past, why should they be trusted to use any debt relief well this time?
In its more sober moments the Paris Club has agreed. Its strategy since 1996 has been to offer debt relief to ‘highly indebted poor countries’ that establish a track record of sound policies and a viable strategy for fighting poverty. In the six months before the tsunami, the Congo, Ethiopia, Georgia, Ghana, Iraq, and Madagascar all experienced reductions, rescheduling and/or restructuring of their debt.
The debt relief reflects the recognition that some of the poorest countries in the world are trapped under a burden of foreign-owned debt as destructive as a tsunami. Every month, more people die from poverty in Africa alone than the tsunami drowned. It also recognises that some countries are so deeply buried they are not ever going to be able to repay it. Liberia’s debt exceeds 5.3 times its Gross National Income (GNI); for the little islands of São Tomé and Principe off the coast of Western Africa the excess is 7.5 times. In the same year, the tsunami-hit countries of Indonesia, Sri Lanka, Thailand and India paid $US550b between themto creditors. For Indonesia that meant almost half its governments’ revenues.
But the relief offered and the calls for more are also an implicit admission that much of the lending of the past was of little benefit. Some of the money got recycled by the political leaders to their offshore personal bank accounts, some went in excessive charges by the Western contractors who built the projects the debts were meant to finance, and in many cases the projects themselves were of little value. The World Bank-funded Chixoy Dam in Guatemala, for example, was hugely expensive, displaced whole villages and failed to increase the electricity access to most Guatemalans. However, those who received no benefit from the lending, many born after its proceeds were syphoned off, must pay taxes to service the debt. That means less schooling, less health care, and an ongoing cycle of deprivation.
So it is not just generosity which drives the Paris Club, but embarrassment and political calculation. Consider the moral pressures from groups ranging from pop singers like Bono to the Jubilee Campaign, a Christian Coalition citing the Mosaic prescriptions of debt forgiveness, and how the US benefits from cutting Iraqi debt.
The reason New Zealand is not a member of the Paris Club is that all our bilateral aid is in grants not loans, so no poor country owes us anything. Our .22 percent of National Income on aid in 2002 put us 18th out of 22 rich countries. Still, it is good quality aid: no loans, no armaments, and a minimum of corruption. The $68m the government has added for tsunami relief this year will bump us up a few steps if the amount is maintained in the future. And already New Zealand household donations put us in the top half of the OECD in our private aid efforts.
We have advanced some debt to the poorest countries via multilateral institutions like the World Bank. Gordon Brown, the UK Chancellor of the Exchequer, has said says Britain will cancel its share of that debt as it comes up for repayment, and challenged other countries to do the same. It seems very likely that New Zealand will.
The article then goes on to a map to show a map of the world, in which 47 countries are marked as severely indebted, some of them among the poorest in the world. Another 47 are moderately indebted. It is not shown here.
MEMBERS OF THE PARIS CLUB (The major lenders to the world’s poor)
* Member of G7.
* United Kingdom
* United States of America
(The Paris club does not publish statistics on the debt owned by its members).