Cologne Debt Initiative, a tiny drop in a mighty ocean

As the G-7 leaders gathered in Cologne for their summit, several thousand NGO activists from all over the world held an alternative economic summit to counter the official one. Linus Atarah reports on the reaction of the participants to the G-7 summit decision on debt relief.

THE German city of Cologne was the centre of a burst of activities this June, bringing colour to a city where people hardly smile. As limousines were ferrying leaders of the G7 countries to their hotels on the eve of their annual economic summit, a group of several thousand NGO activists from different parts of the world had also gathered in the same city for an alternative economic summit to counter the official one.

Thousands of other activists of the International Jubilee 2000 from Europe, Latin America, Africa and North America also began arriving in the same city to mount a demonstration before the G7 leaders that it was time to drop the debt of Third World countries. While the G7 leaders talked about 'getting the world economy on track for sustained growth', calling on nations to 'resist protectionist pressures and to open their markets further', participants at the alternative economic summit debated on the alternatives to the present world order run by large transnational corporations, and finance capital to serve their interests.

The G7 leaders renewed their strong support for the World Trade Organisation (WTO) and called on countries not yet members to join by accepting its principles. The well-known writer on the debt crisis, Susan George told participants at the alternative summit that this was the most clear and present danger. The forces running the international institutions - transnationals, the WTO, the IMF and the World Bank - foisting a neo-liberal economic agenda on people were not fit to run a pizza stand, said Susan George.

However, a central focus - also a prominent item on the agenda of the G7 summit Ð was the debt overhang of the developing countries. It was the single most important issue that had thousands of people around the world converging on Cologne, bringing along with them 17 million signatures petitioning the leaders of the G7 to cancel the debts of heavily indebted poor countries.

So on the second day of the G7 summit, a 50,000-human chain was formed around a part of Cologne, encircling the G7 leaders, a message to them that the Third World countries were entrapped in a debt chain that needed to be broken.

But the proposals put forward as a solution for debt relief in the G7 final communique were an anti-climax. The 'Cologne Debt Initiative', as the G7 leaders called it, does not constitute any radical departure from the previous Heavily Indebted Poor Countries (HIPC) initiative launched by the G7, the IMF and the World Bank three years ago.

The HIPC was widely criticised as an inadequate measure to relieve the poor countries of their debt burden. It provided debt relief to three countries out of a total of 41 potentially eligible countries and in return they had to go through six years of harsh austerity measures. 'That is bad enough,' said Kevin Watkins of Oxfam, 'what is even worse is the case of Mozambique, one of the countries receiving debt relief within the HIPC. It has an annual debt service of $120 million but after going through HIPC this is reduced to $96 million, four times what it spends on primary education and three to six times what it spends on health.'

In the 1996 HIPC framework, debt sustainability is defined by the IMF and the World Bank in terms of the ratio of debt to exports. A country's debt stock is sustainable if it is 200% of export earnings. But Watkins rejected this as a flawed criterion. 'It is perfectly possible that a country can perform well on that indicator and yet still face enormous debt distress. What needs to be looked at is how much of the budget it absorbs, the amount of resources that is taken away from investments in people to transfer to creditors. This is actually a form of taxation, it is a form of income transfer from poor countries to rich countries,' he said.

Expectations that the Cologne summit would produce a better deal for the HIPC countries were largely dashed. Under the new framework, the number of countries now eligible for debt relief has been increased from three to seven. The debt sustainability threshold is now reduced from a debt-export ratio of 200% to 150%. Leaders of the G7 also announced that up to $90 billion of the debt of poor developing countries would be written off.

However, in return for debt relief in the framework of the expanded HIPC initiative, indebted countries will have to fulfil draconian measures, namely aggravated structural adjustment programmes. Other conditions include a strong link between debt relief and continued adjustment, improved governance and poverty alleviation. 'The pursuit of sound social policies should be integrated with structural adjustment programmes that debtor countries are expected to implement,' said the finance ministers of the G7 countries in their final communique.

As expected, the measures on debt relief announced by the G7 leaders were roundly criticised and rejected by debt campaigners as inadequate. They also contested the accuracy of the announced a figure of $90 billion slated for cancellation, saying that it was only a drop in the ocean of poor countries' debt. For instance, according to calculations by Eric Toussaint of the Belgium-based Committee for the Cancellation of Third World Debt, the true amount of the announced cancellation comes up to a mere 1% of the total Third World debt.

For the 41 poorest countries, the measure represents just about 12% of their total debt stock of $205 billion. He also pointed out that the majority of the world's poor people are in India, Indonesia, Bangladesh and Mexico, countries which do not fall under the HIPC scheme.

Other factors that will erase the significance of the debt relief measures are falling prices of Third World export commodities and rising interest rates on debt servicing. The two things combined mean that Third World countries are earning less and paying more, while the leading industrialised countries are making savings on the cost of importing raw materials. Therefore, in spite of the announced measures, there is a continuing siphoning off of funds from the South to the North, a phenomenon that has long been in existence and is not likely to be eradicated by the announced debt relief measures.

For instance, in 1997 the Northern countries lent a total of $8 billion to the South while getting $8.2 billion in debt payments in return. Official development aid has been in decline and in 1998 amounted to a total of $30 billion while theThird World taken as a whole paid back $250 billion. In the light of these facts, Toussaint says, 'the Third World populations have paid more than enough'.

The Jubilee 2000 South also rejected the expanded HIPC, saying that it is essentially a promise for debt relief that is used to bribe governments to adhere to rigid structural programmes that they might otherwise not agree to or abandon without compunction. Structural adjustment is the most damaging and systematic economic torture designed in the 20th century and it is still the name of the game in town, said Jubilee South in their statement.

IMF and World Bank powers strengthened

After the barrage of criticisms it received after the Asian financial crisis, the IMF was in retreat but the events of Cologne have placed it firmly back in the driver's seat. The relentless campaign of Jubilee 2000 has caused a political division among the G7 leaders on the debt issue and all powers have now been surrendered to the IMF as the sole player to supervise the debt relief of the highly indebted poor countries. This is reflected in the final communique of the G7 leaders in Cologne, which says, 'the new HIPC initiative should be built on an enhanced framework for poverty reduction, developed by the International Financial Institutions (IFIs). This is critical to ensure that more resources are invested in health, education and other social needs which are essential for development'.

In this statement, no reference is made to governments of the indebted countries; instead, it states that poverty reduction and social spending should be designed by the IFIs and handed down to them. It is the IMF that is to certify the extent to which the indebted countries have accomplished structural adjustment before they receive debt relief. As one participant observed, 'it is as if it is the duty of the IMF to oversee poverty reduction in the developing countries or else they will not do it'.

Adding further social policy conditionalities to macroeconomic performance places more hurdles for the poor developing countries to overcome. The current approach, as noted by Jeffrey Sachs, 'puts the IMF at the centre of the process, essentially deciding on the level of necessary relief, and on the conditions that should attach to the relief'.

Tellingly, Sachs, a world-renowned free-market economist, argues that the current procedure for debt relief that places the IMF at the top as the sole arbiter has been a complete failure because the IMF is ill-prepared to lead a long-term development effort and to make core decisions regarding long-term development strategy. 'The current process gives very little motivation to individual countries to prepare their own strategies'. The upshot is that 'the IMF intervenes relentlessly into the most nitty-gritty details of governance, with a severe loss of legitimacy of local politics; and the IMF misjudges the real priority issues facing the country'.

Therefore Sachs pointedly tells the IMF to make a silent exit from meddling with developing countries' affairs. 'The IMF should be taken out of the lead of the debt reduction process in the poorest countries and largely get out of the business of long-term development finance and return to its core role as a monetary institution,' he said.

Hypocrisy of Western governments exposed

All along the rich countries have argued that they do not have the financial wherewithal to fund debt relief, but Sachs has given the lie to that claim. In a written testimony to the US House Banking Committee days before the Cologne summit, he said it was entirely feasible to cancel the debts of the poor countries without any additional costs to the creditor countries and institutions.

'The cruellest joke in the whole debate on debt relief is the claim of the rich countries that they are 'too poor' to heed the call of deep debt cancellation,' Sachs said, adding that 'there are no technical or political obstacles to facing reality in this case'. He went on to systematically demonstrate how the rich countries and international financial institutions could write off the entire debts of the poor countries from their own resources without incurring any costs.

According to him, the HIPCs owe about US$128.75 billion to the IMF, the World Bank and other international financial institutions and rich-country governments. By selling a third of its gold reserves, the IMF could realise US$7.8 billion needed to write off the entire debt of the HIPCs 'without even touching the remaining balance sheet'.

However, NGOs suspect that IMF gold sales might not be used for debt relief but go instead into replenishing its Enhanced Structural Adjustment Facility (ESAF), something that they strongly oppose. Two senators of the United States Congress have also announced that they will oppose the IMF selling gold to pay for debt relief when it comes for congressional approval. Senator Jesse Helms, chairman of the powerful Foreign Relations Committee, and Senator Chuck Hagel, chairman of the subcommittee on international economic policy, said gold sales would hurt the indebted countries and also the US gold industry.

Sachs argues that the World Bank too could easily write off the entire debt of the poor countries owed to it from its own resources, by using special funds set aside for loan losses, and also slightly dipping into its capital base. Similarly, commercial banks' claims on the indebted countries could easily be written off because most of the US$19 billion owed to them have already been written off in their balance sheets anyway.

But the easiest solution would be with regard to money owed to governments of the rich countries. 'The US Government isn't so foolish as to count its US$6 billion claim on the HIPCs at face value,' said Sachs. These loans are now worth only about 10% of their face value, thus requiring a budget outlay of only US$600 million that the US Government can easily absorb. The same goes for the other rich countries.

Keep the issue burning

Even though Cologne delivered disappointing results on debt relief, campaigners agreed that they had nevertheless won a significant victory. Three years of relentless campaigning by Jubilee 2000 have succeeded in mobilising mass international support not seen in recent years in the Western countries for debt cancellation and forced the issue onto the agenda of the major creditor countries. The task is to keep the issue alive in the media and public discussions, thereby compelling politicians and policy makers to constantly reflect on it.

Joe Hanlon of the Jubilee campaign in England urged campaigners to step up the momentum because the debt issue is now firmly in the public domain and should never be allowed to fade away. (Third World Resurgence No. 107, July 1999)

Linus Atarah is a journalist based in Helsinki, Finland.