External debt is still a major obstacle to development so that debt relief must be a priority.

Transcription

1 External debt is still a major obstacle to development so that debt relief must be a priority. Phil Green Copyright November 2008 Written as part of a MA in Globalisation and International Development at the University of East Anglia (Module: Perspectives on Globalisation)

2 This paper addresses the statement, External debt is still a major obstacle to development so that debt relief must be a priority. It will introduce the problem of debt, highlight the prominence of debt relief in recent years, and consider whether debt relief does facilitate development. Debt relief will then be considered alongside other priorities before three issues are raised that, I consider, require immediate attention. The focus will be on the external debt of low-income countries and the term development will be used to include both poverty reduction and economic growth. The problem of debt In 1970, according to the UNDP, developing countries owed the developed world $72.7 billion. This equated to less that 10% of their combined GDP. However, borrowing money to fund development projects then became fashionable and by 2000 the amount owed had increased to $2,527.5 billion, 37% of their combined GDP. Sub-Saharan Africa owes relatively little in absolute terms, just $206 billion. However, in 1998 this was equivalent to 75% of their GDP. (Pettifor& Greenhill, 2002) Sub-Saharan Africa, according to the Human Development Index (UNDP, 2005), is the least developed region in the world, containing 27 of the 32 lowest ranked countries. A selection of indicative statistics can be found in Table 1. The contrasts can be clearly seen between Sub-Saharan Africa and the United States, one of the many developed countries who receive their share of the $100-million-a-day debt repayments made by the developing world (Jubilee Debt Campaign, 2008). This data, indicating Sub- Saharan Africa s high level of debt and low level of development, certainly begins to point towards debt being an obstacle to development. Many civil society groups say that external debt is a major obstacle to development, arguing that money spent on servicing debt cannot be spent on education and health (Jochnick& Preston, 2006). According to one African civil society group, Angola are currently spending 33% of their GNP on debt service, with only 4.9% being spent on education and 1.4% on health (AFRODAD, 2008). The economists Joseph Stiglitz agrees that making debt payments often requires countries to sacrifice education and health programs, economic growth, and the well-being of their citizens. (Stiglitz, 2006: 212) 2008 Phil Green DEV-M071 (Perspectives on Globalisation) Page 1

3 Table 1: A selection of indicative statistics from Angola, Sub-Saharan Africa and the United States. GDP per capita PPP US$ (2003) Life expectancy at Birth (2003) Adult literacy rate % ages 15 and above (2003) Combined gross enrolment ratio for primary, secondary and tertiary schools (2002/03) Immunisation against measles One-year-olds fully immunised (2003) Births attended by a skilled health personnel ( ) Infant mortality rate Per 1,000 live births (2003) Angola Sub-Saharan Africa United States $2,344 $1,856 $37, years 46.1 years 77.4 years 66.8% 61.3% 99% 30% 50% 93% 62% 62% 93% 45% 41% 99% Source: Human Development Report 2005, United Nations Development Programme. (estimated figure used) Debt relief is being prioritised In 1996, the IMF and World Bank launched the Heavily Indebted Poor Countries (HIPC), but this, like most of its predecessors was quickly deemed ineffective (Pettifor & Greenhill, 2002). Civil society played a key role in promoting the issue of debt relief and by the turn of the millennium the Jubilee 2000 campaign had a petition of 24 million signatures urging world leaders to drop the debt (Pettifor, 2006). As a result the enhanced HIPC was launched pledging to cancel $100 billion worth of debts (Pettifor & Greenhill, 2002). The issue of debt was also included in the Millennium Development Goals (MDGs) with the third target of goal eight (Global Partnership) being, Deal comprehensively with developing countries debt (UNDP, 2005). This ensured that debt relief remained firmly on the development agenda for the foreseeable future. In 2000, Kofi Annan, the then UN Secretary General said: Let us, above all, be clear that, without a convincing programme of debt relief to start the new millennium, our objective of halving world poverty by 2015 will be only a pipe dream. (Annan, 2000) Since then, debt relief continues to be high on the agenda for many civil society organisations. In 2005, debt relief was central to the Make Poverty History campaign that sought to focus the world s 2008 Phil Green DEV-M071 (Perspectives on Globalisation) Page 2

4 attention on the G8 Summit at Gleneagles (Bedell, 2005). At this Summit it was agreed that 100% of debts owed by at least 18 poor countries to the World Bank, IMF and African Development Bank should be cancelled. This initiative, known as the Multilateral Debt Relief Initiative (MDRI), was seen as a clear acknowledgement that debt relief is essential in order to combat extreme poverty (Oxfam, 2005). Although there is much support for the idea that debt relief would facilitate development, this support, as shall be shown later, is no unanimous. Does debt relief work? If it is claimed that debt relief should be a priority, its results need to be evaluated. Currently, the international community s focus for debt relief is debt sustainable. Organisations such as the New Economic Foundation are not calling for the cancellation of over $2 trillion of debt owed by the developing world. Instead, they are calling for is debt relief in the region of 501 billion to ensure that all lower and middle income countries achieve debt sustainability (Mandel, 2008). Debt service is considered sustainable when it doesn t prevent a country providing for the basic human rights of its people (Mandel, 2008). Therefore, the idea of debt sustainability is intrinsically linked to development. This means that two questions must be asked of current initiatives. Is debt sustainability being achieved? And is debt relief enabling development? Since 1996, the main mechanism for debt relief has been the HIPC and the subsequent enhanced HIPC initiative. These initiatives aimed to reduce the debt burden of the world s poorest countries by providing debt sustainability. However due to the number of criteria countries have to fulfil before receiving debt relief (Mandel, 2008), by 2006 only $19 billion of debts had been cancelled (World Bank, 2006). It s also doubtful whether debt relief actually led to debt sustainability, with many countries facing unsustainable debts once again within a few years of receiving debt relief (World Bank, 2006). Then, when it comes to facilitating poverty reduction, it s reported that debt relief has resulted in only modest improvements. (World Bank, 2006: 34). Mozambique for example, only paid 1% less debt service after receiving HIPC debt relief than it did previously; this meant that no additional money was spent on education and health (Pettifor& Greenhill, 2002). Much criticism can be directed at the HIPC initiative Phil Green DEV-M071 (Perspectives on Globalisation) Page 3

5 Whereas the UNDP see debt as a major obstacle to development and see debt relief as crucial to the achievement of the MDGs (Pettifor and Greenhill, 2003) the World Bank and the IMF suggest that aid and trade are more important (IMF/World Bank, 2001). It s true to say that the estimated $50-billion-ayear needed for developing countries to achieve the MDGs is more than the $10-billion-a-year lowincome countries are going save if their debt repayments are reduced by existing initiatives (Pettifor and Greenhill, 2003). Therefore, the $127- billion-a-year (by 2010) of aid pledged by the G8 in 2005 is highly significant (Oxfam, 2005). It s also true that carefully controlled international trade was certainly instrumental in the development of some of the East Asian economies (Stiglitz, 2002). Therefore, countries struggling with debt could certainly benefit. However, past experience has shown that international trade regulations often have detrimental effects on developing countries rather than the promised benefits (Stiglitz, 2002). In considering these opinions, it must also be noted that the IMF and World Banks are major creditors and cannot claim to have a neutral position in this debate. None of this necessarily means that debt relief shouldn t also be a priority. After all, there is indication, that despite the HIPC initiative achieving less than anticipated, there are encouraging signs. A 2002 report by the UNDP, suggested that debt relief was having a positive impact on the ten African countries that received HIPC debt relief by Education spending had increased from only $929 million in 1998, less than the amount spent servicing debt, to $1,306 million in 2002, double the amount being spent on debt service. Spending on health had also grown in the same time period, increasing by 70% (Pettifor& Greenhill, 2002). As the report explains, increased spending doesn t necessarily equate to development, however, there are signs that social spending is having a positive impact (Lopes, 2002). Given this, I would suggest that debt relief can reduce poverty. Therefore, time should be spent questioning the current mechanisms, not whether debt relief itself is necessary. The place of debt relief on the development agenda This paper has shown that external debt is still a major obstacle to development. This idea is supported by statistics and is a belief held by many civil society organisations and world leaders. This paper has also explored how debt relief can aid development, but as of yet the results have been less impressive than they might have been if the mechanisms for debt relief had been more effective. Therefore, I believe debt relief should be a priority. However, that is not to say that is should be the priority. It is one 2008 Phil Green DEV-M071 (Perspectives on Globalisation) Page 4

6 tool in the development toolbox and should not be focused on at the detriment of others aid, trade and effective policy making are also essential. Aid and trade are required, because as already shown, debt relief itself will not provide the money needed to achieve the MDGs. Effective policy making is also essential because debt relief, aid and trade, will not automatically guarantee development. The money gained needs to be invested efficiently and that requires effective policy making. However, there is something debt relief can offer that aid or trade cannot and that is independence. Aid can be sporadic and lead to dependency, and trade opens countries to the shared vulnerabilities of the global financial market. However, debt relief could provide countries with the opportunity to plan and budget effectively for the future as they seek to develop themselves. I emphasise the word could because the conditionality of the current debt relief mechanisms are certainly not enabling countries to govern themselves (Pearce, 2006). What next? If debt relief is a priority, it has to be effective. In my opinion, three issues need to be urgently addressed. Firstly, effective mechanisms need to be implemented. In the first instance, current initiatives need to be evaluated and modified. However, such is the limitations of the HIPC and MDRI (in terms of the number of countries) and their inherent inequalities (in terms of the role of major creditors such as the IMF and World Bank); it is likely that new mechanisms are needed. Secondly, odious debts, currently not addressed by the current initiatives should be cancelled. These are debts that were occurred by governments that were not necessarily serving the best interests of the people (Mandel, 2006). It is not fair that people suffer now as a result of corrupt governments in the past. The international community should do all it can to support the rebuilding of these countries, not make a profit at their expense. In this case, debt relief should be a priority on moral grounds, not just for economic reasons. Thirdly, in recent months, a troubled world economy has caused big questions to be asked of nonregulated markets and irresponsible lending (Jubilee Debt Campaign, 2008). One of the potential consequences of the current financial crisis is that governments of developed countries, in order to ease 2008 Phil Green DEV-M071 (Perspectives on Globalisation) Page 5

7 their own financial pressures, may reduce the amount of aid given to developing countries and debt relief may be sidelined. Therefore, civil society organisations have a crucial role in to play to ensure that the needs of developing countries are not forgotten within the current turmoil. However, this situation, instead of hindering developing countries, could be used to help them. Stiglitz (2006) suggests that it s the instabilities of the global financial system that exasperate the problems of debt facing developing countries. Therefore, at this juncture, world leaders have the opportunity to create system that works more effectively, not only for themselves, but for the poor also. In doing this they would remove several of the major obstacles to development because, given the nature of globalisation, debt relief, aid, trade and effective policies will only successfully facilitate development within the framework of an equitable global financial system. Therefore, although debt relief should be a priority, it is one priority amongst many Phil Green DEV-M071 (Perspectives on Globalisation) Page 6

8 Bibliography AFRODAD, 2008: Angola. &Itemid=60. (Accessed 17 November 2008). Annan, K. 2000: Secretary-General Press Release 05 April / sgsm7351.doc.html. (Accessed 17 November 2008). Bedell, G. 2005: Make Poverty History. London: Penguin. IMF/The World Bank, 2001: 100 Percent Debt Cancellation? A Response from the IMF and the World Bank. (Accessed 17 November 2008). Jochnick, C. & Preston, F. (eds.) 2006: Sovereign Debt at the Crossroads. New York: Oxford University Press. Jubilee Debt Campaign, 2008: The credit crunch and the debt crisis. London: Jubilee Debt Campaign. Lopes, P. 2002: A comparative Analysis of Government Social Spending Indicators and Their Correlation with Social Outcomes in Sub-Saharan Africa. IMF Working Paper. Mandel, S. 2006: Odious Lending. London: New Economics Foundation. Mandel, 2008: Debt relief as if justice mattered. London: New Economics Foundation. Oxfam, 2005: Gleneagles: what really happened at the G8 summit? Oxfam Briefing Note. Peace, 2006: Cut the strings! London: Jubilee Debt Campaign. Pettifor, A. & Greenhill, R. 2002: Debt Relief and the Millennium Development Goals. UNDP, Background Paper for the Human Development Report Pettifor, A. 2006: The Jubilee 2000 Campaign: A Brief Overview. In Jochnick, C. & Preston, F. (eds.) 2006: Sovereign Debt at the Crossroads. New York: Oxford University Press Stiglitz, J. 2002: Globalization and its discontents. New York, Penguin. Stiglitz, J. 2006: Making Globalization Work. New York, Penguin. UNDP, 2005: Humans Development Report New York: Palgrave Macmillan. World Bank, 2006: Debt Relief for the Poorest: An Evaluation Update of the HIPC Initiative. Washington: World Bank Phil Green DEV-M071 (Perspectives on Globalisation) Page 7