Global Trends by Martin Khor

Monday 20 June 2005

Cheers and boos for G7 debt relief deal

BLURB:     The Group of 7 rich countries decided on 10 June to cancel debts initially for 18 poor countries, wit more debt relief in the pipeline.  It was welcomed by debt campaigners worldwide, but there were also many voices of concern that too few countries were covered, and to be eligible, other countries must agree to conditions that are devastating.

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Last week saw cheers around the world for the decision by the Group of 7 rich countries to cancel the debts of 18 poorest countries.  These were mixed with voices of concern that the action achieved too little and more needs to be done.

The G7 decision was a response to a big campaign for debt cancellation by citizen groups worldwide over many years.

It started two decades ago, when developing countries were falling into the debt trap. It  picked up steam through the Jubilee Debt Campaign of 1999-2002 and was boosted most recently by the 2005 Global Year of Action campaign.

Millions of citizens in the United Kingdom are wearing thick and white rubber bands on their wrists, carrying the campaign slogan “Make Poverty History.” The campaign wants to cancel debt, increase aid and bring about better trade terms for developing countries.

The G7 finance ministers’ decision, made in London on 10 June, shows again that a well-organised and determined global campaign by citizens, can make a difference.

For decades now, poor and middle-income developing countries have been suffering from foreign debt.  Many fell into debt arrears not because of their own doing, but due to the fall in their commodity prices, depreciation of their currencies, or a rise in interest rates (which meant having to foot out more payment).

There were of course also the borrowings for unviable projects, and the corruption of leaders (like that of former Philippines President, F. Marcos, who received kickbacks from an American company for its inflated contract to build a US$2.5 billion nuclear power plant, that up to now is unable to operate).

The effects of debt have been devastating.  Poor countries have channelled more of their budget to debt repayment than to education, health and economic development.

Just as bad, the rescheduling of debt that cannot be repaid has come with policy conditions imposed by the International Monetary Fund and the World Bank that have been onerous, often inappropriate and damaging.  As the Asian financial crisis showed, the IMF medicine can make the patient more sick.

So long as the poorer countries remain enmeshed in foreign debt, there is little hope that they can develop.

Thus, the G7 deal is a good step forward.  The G7 finance ministers agreed to cancel the debts (worth US$40 billion) of 18 poor countries (15 from Africa and 3 from Central America). 

Within 12-18 months, debts worth $11 billion of another 9 countries could also be written off.  And another 11 countries (with debts of $4 billion) could also become eligible.  These 20 countries would however have to fulfil certain policy conditions before their debts are cancelled.

The first two sets of countries (totaling 27) belong to the group known as the heavily indebted poor countries (HIPCs).  And all the debts that are being cancelled are multilateral debts (owed to the IMF, World Bank and African Development Bank).

Debts owed to the private sector such as banks are not covered, so these countries may still have some more loans to pay off.   Debts owed bilaterally by some of the countries to other governments have to some extent already been written off earlier.

The London meeting was chaired by the UK Chancellor, Gordon Brown, who has led the drive for debt relief among the finance ministers.

To meet the cost of debt cancellation, the G7 countries will pay about US$1-2 billion a year to the World Bank and African Development Bank. The IMF would mainly pay out of its own resources, augmented by some cash from the G7.

Despite the euphoria in the media and among many of the campaigning NGOs and celebrities such as the pop star Bob Geldof (who is a leading figure in the campaign), others are saying either that it is too early to cheer, or there is no reason to cheer at all.

The first criticism is that the debt cancellation covers too few countries, only the HIPCs.  Many more countries are deserving of debt relief, if not full cancellation.

The second criticism is that to qualify for debt cancellation, the countries must have followed the policy conditions of the IMF and World Bank. Countries that are not given a “passing mark” by the IMF and World Bank will not be eligible.  But to be eligible, the countries must implement policies that are devastating.

The debt campaign group, Jubilee USA Network, said the G7 move was “an important first step, but the deal must be expanded to include all impoverished countries and debt cancellation must come without subjecting these countries to devastating economic conditions.”

It added that 62 low-income countries need immediate debt cancellation, so the 18 covered by the G7 deal is inadequate.  Using the HIPC Initiative criteria to determine which countries beyond the initial 18 receive debt cancellation is misguided as it requires countries to implement devastating economic policies, that have not been proven to increase per capita income growth or reduce poverty.  

It called for the HIPC Initiative and harmful economic conditions attached to debt cancellation to be abandoned and all impoverished nations to receive 100% debt cancellation.

Columnist George Monbiot, writing in The Guardian (London) was more caustic, calling the G7 deal a “truckload of nonsense.”   He finds the policy conditions attached to debt relief obnoxious.

“When the finance ministers say good governance and eliminating impediments to private investment, they mean commercialisation, privatization and liberalization of trade and capital flows, which means new opportunities for western money.”

He says the G8 want to ensure their companies can grab the developing countries’ public services and obtain their commodities at rock bottom prices.  “The conditionalities we impose on the poor nations keep them on a short leash. Attaching conditions to debt relief is saying:  We will stop punching you in the face if you give us the crown jewels.”

Perhaps the best way to view the G7 debt decision of 10 June is that it is a good start, something that should have started long ago but nevertheless welcome.  For the 18 countries for which debts are to be cancelled now, it is a great relief.

But also that the deal as it is now is simply not good enough.  It should be developed further, to cover more indebted countries. And it should not be offered only if countries take on policies that harm them or that are self-serving to the corporate interests of the rich countries.