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TWN Info Service on Finance and Development (Feb20/02)
25 February 2020
Third World Network  

Private debt both a cause and consequence of rights violations
Published in SUNS #9074 dated 24 February 2020

Geneva, 21 Feb (Kanaga Raja) -- High individual and household debt, which accounts for a significant portion of private debt in most countries, has been associated with inequality, macroeconomic instability, unsustainable sovereign debt and financial crises.

This is one of the main conclusions highlighted by Mr Juan Pablo Bohoslavsky, the Independent Expert on the effects of foreign debt and other related international financial obligations of States on the full enjoyment of human rights, in his report to the UN Human Rights Council.

The Human Rights Council is holding its forty-third regular session from 24 February to 20 March 2020.

In his report (A/HRC/43/45), the Independent Expert said that he has considered the negative implications for human rights of micro-credit, health-, education- and housing-related debt, abusive collection practices, including the criminalization of debtors, consumer debt, migration-related debt and debt bondage.

Bearing in mind the reasons encouraging people to borrow under these typologies, it can be concluded that private debt can be both a cause and a consequence of human rights violations, he pointed out.

According to the rights expert, low wages, poverty and inequality, exacerbated by such policies as privatization, austerity measures and labour market flexibilization, have pushed millions of people into debt, which in turn has pushed millions of people into poverty and informality, making them vulnerable to all kinds of abuse.

At the core of this phenomenon lies so-called "financial inclusion", the colossal failure of States to ensure the realization of economic, social and cultural rights for all.

The rights expert noted that the explosive increase in private debt is what has sustained aggregate demand and economic growth over the past decades, often at the expense of indebted households.

Millions of people around the world transfer a significant part of their wealth and well-being to the financial sector, whose links to the real economy continue to erode, compromising shared prosperity and financial stability and security, and reinforcing inequality.

Private debt should not be contracted by individuals and households as a way to compensate for the State's obligations to protect, promote and fulfil human rights, said Mr Bohoslavsky.

"Personal or household financial and other costs associated with the repayment of debt should be at such a level that the attainment and satisfaction of human rights are not threatened or compromised. Contracting and repaying debt or defaulting on repayment should not entail human rights violations."

According to the rights expert, there are two drivers of the increase in private indebtedness: first, the flourishing supply side of finance, with deregulation and increasing financialization being its facilitating instruments, which also includes the commodification and financialization of essential components to the realization of economic, social and cultural rights.

Second, is the re-configuration of many human needs for social reproduction that become unmet financial needs.

While the past century has witnessed the establishment and expansion of social safety nets, the gaps that remain provide fertile ground for private debt to flourish.

Paradoxically, the social protection measures taken by States, via cash transfers, have been identified as a form of potential lending collateral, guaranteeing creditor's loans or allowing for lower interests instead of serving their original purpose, said the Independent Expert.

MOUNTING LEVELS OF PRIVATE DEBT

According to the rights expert, the mounting levels of private debt are largely made out of corporate debt, and to some extent of household debt, loans and debt securities, with deep and direct implications for global economic and financial systems and for the ability of States to comply with their human rights obligations.

According to the United Nations Conference on Trade and Development (UNCTAD), at the end of 2017, global debt stocks amounted to $213 trillion or 262 per cent of global GDP; a considerable increase in comparison to 2008 (240 per cent) and 1980 (140 per cent).

The most direct and egregious violations of human rights suffered by private borrowers are committed in the context of individual and household debts, particularly in the case of persons and households living in poverty or marginalized, or those who are forced into a "debt trap", said the Independent Expert.

Household debt is not a problem per se. The ability to borrow within the limits of one's own financial capacity may improve people's living standards, allowing access to services that would otherwise be out of reach; and it may play a role in activating and supporting the economy.

Household or individual debt may, at times, also facilitate social mobility or integration, and it can be a determinant factor in ensuring social inclusion.

However, over-indebtedness (understood for the purposes of the present report as a debt the repayment - and cost associated - of which would entail the deprivation of resources needed to sustainably enjoy the debtor's human rights), abusive contractual terms and collection practices become a burden and a threat for individuals or households, potentially quickly turning into a trap for many, putting the realization of human rights in jeopardy.

In this regard, the role of the State (and of private actors) is vital to level off the inherent power imbalance between contractual parties for an effective human rights protection effort, said the Independent Expert.

Heavily privatized credit creation and financial intermediation have been the main driving forces of the steep increase in private debt in developing economies since the 1980s.

After the 2008 financial crisis, shadow banking and a range of other credit activities have continued to expand, despite efforts made in regulations. According to UNCTAD, since then, non-bank financial intermediation has grown twice as rapidly as conventional and public banking, its share accounting for 48.2 per cent of all global financial assets, surpassing that (43.9 per cent) held by commercial banks and public financial institutions.

Even though public indebtedness in developing countries rose to 51 per cent in 2017, the unprecedented explosion of private debt should clearly raise the loudest alarm bells, said Mr Bohoslavsky.

While a large portion of this private debt can be attributed to the access of high-income developing countries to deeper domestic financial and banking systems and easier access to international financial markets, upward trends in overall indebtedness have also been observed in both middle- and low-income developing countries since 2012.

For example, the ratio of public debt to GDP of high-income countries went from 34 per cent in 2008 to 50 per cent in 2017, their overall indebtedness reaching 215 per cent of GDP, largely due to the sharp increase in private debt in the aftermath of the global financial crisis.

Despite the growing trend in household debt witnessed in emerging economies, rising from 25.4 per cent in 2011 to 40 per cent in 2018, lending to non-financial corporations also played a major role in the overall increase in private non-financial debt.

According to the rights expert, a number of studies have pointed to a close relationship between the accumulation of private debt, macroeconomic instability and sovereign debt crises: private debt booms in some countries have been associated with economic downturns and often serve as an accurate indicator of financial instability.

In the same vein, increasing inequality may lead to private over-borrowing and over-lending, which can in turn have an impact on financial stability, potentially resulting in a debt crisis over time.

"Individual and household debt accounts for a significant portion of private debt in most countries, and may be the result of a series of economic measures, such as privatization or austerity measures, or labour market flexibilization, which drive down the wages of unskilled workers and fuel inequality."

As the gap between nominal income and cash needs has widened, households have increasingly turned to debt to fulfil their consumption needs.

Similar problems were faced by developing countries, where the expansion of consumer credit has significantly contributed to GDP growth while many consumers have fallen into a cycle of over-indebtedness and poverty due to those loans.

Even the International Monetary Fund (IMF) has acknowledged that growing household debt may hold back economic recovery, which is already weak, prolonging the current phase of low growth.

A common policy response in a financial crisis has been to protect financial institutions and large corporations, which, by default, shields the wealthier households owning their assets, rather than middle- and low-income households.

Moreover, the majority of countries resort to austerity to deal with a financial crisis, and drastic cuts in social protection and public sector jobs exacerbate the inequality gap, said Mr Bohoslavsky.

HOUSEHOLD DEBT AND IMPACT ON HUMAN RIGHTS

According to the Independent Expert, the explosion of private household debt in many countries is the direct result of two parallel phenomena: of the State failing to abide by its human rights obligations, in particular in the field of economic, social and cultural rights, and social services being increasingly "financialized" or reduced to commodities.

The human rights framework is fundamentally based on the notion that States (and to some extent private actors) have obligations to respect, protect and fulfil human rights, ensuring equality and combating discrimination.

All human beings are equal in dignity and rights is the flagship provision of the Universal Declaration of Human Rights.

According to the rights expert, financialization can in practice work as the anti-thesis of such a framework, as it rests on the idea of the individual's responsibility to take appropriate steps to ensure an adequate standard of living and access to essential goods and services for themselves.

Greater access to credit for all, understood as "financial inclusion", is increasingly seen as a solution to many human rights problems - whether to start a business, to earn a living, to obtain appropriate health care or to have access to employment opportunities.

"Financialization highlights the power of financial markets and the notion of self-management in improving one's own living conditions, obfuscating States' obligations to take appropriate steps to progressively realize economic, social and cultural rights."

Debt is not per se a human rights problem, even less a violation. What raises concerns is when indebtedness is either caused by or causes human rights violations, affecting in particular those in a situation of marginalization or vulnerability, said the Independent Expert.

Household debt can both be caused by and result in human rights violations. Too often, private lenders benefit from (and promote) this scheme, even at the expense of borrowers' human rights.

Certain groups in vulnerable situations are more affected by abusive private lending. In turn, people confronting cumulative and/or intersecting inequalities are usually exposed to multiple forms of discrimination, which, in the field of private debt and human rights, translate into mutually exacerbated negative human rights implications of different kinds of debts.

The Independent Expert noted that micro-credit, which is widespread in many countries, was originally premised on the objective of lifting people out of poverty by enabling financial inclusion and "economic empowerment", particularly in emerging and developing economies.

A central target were populations in rural areas, with women borrowers often being prioritized.

Micro-credit has, however, proved to have, in many cases, effects opposite to those intended, including increasing over-indebtedness and generating a "poverty trap", said Mr Bohoslavsky.

A number of studies have shown that, far from serving to enhance local entrepreneurship or productive undertakings, loans were often used for other expenses, such as for rent payments or guarantees, schooling fees or health-related expenditures.

While some short-run benefits of micro-finance could be found, it has also been associated with spiralling debt that results in deeper impoverishment, family breakdown and even suicide.

Furthermore, evidence was found of "anti-developmental" flaws, blocking other development policies that might have more potential for sustainable impact, and major opportunity costs.

"It is true that, when micro-finance is well targeted, there have been cases in which it has benefited recipients," said the rights expert.

Nevertheless, there have been many cases of over-lending and over-borrowing that led to micro-finance crises in countries such as Bangladesh, Bolivia, Bosnia and Herzegovina and Cambodia.

In general, the lack of safety nets for people living in poverty, once their private debt escalates, and the failure of certain States to regulate micro-finance and lenders are essential concerns.

Noting that use of loans to cover for basic needs and a range of economic, social and cultural rights is common-place, the rights expert said that in Cambodia, as apparently in many other countries, studies suggest that the majority of micro-credit loans were used for non-productive purposes, including consumption, servicing existing debt, and covering unexpected expenses, such as illness and accidents.

The interest rates levied on loans often render borrowers helpless in the face of mounting debt.

In Morocco, where the micro-credit model has been encouraged with public funding, this type of credit may range from $52 to $5,200, with an average interest rate as high as 35 per cent.

Abusive contractual terms and predatory practices by lenders are frequent, such as charging interest rates of 220 per cent and abusive practices from debt collectors, including harassment, pushing them to desperation, even suicide.

"Women are often among the beneficiaries of micro-finance, therefore they are specifically affected by such practices."

HEALTH- AND EDUCATION-RELATED DEBT

According to the rights expert, health-related debt - a growing cause of financial insecurity and impoverishment in many households around the world, be it due to maternity services, unexpected hospitalization, a chronic disease or the need for costly or rare medication or frequent services and facilities - often arises from high out- of-pocket medical expenses that people cannot afford.

Such expenses increasingly expose people to risks of financial hardships. Global estimates suggest that some 33 million people experience financial hardship due to essential surgery that requires out-of-pocket payments, and are pushed into poverty as a result.

The primary factor underlying high out-of-pocket expenses is lack of access to adequate essential health care, services or facilities, said the Independent Expert.

In this context, he noted that more than 50 per cent of the global population has no access to adequate essential health care and, in most countries, the accessibility and affordability of essential health care are limited or not guaranteed.

In many countries, health packages may cover too few interventions, may not cover medicines, or provide insufficient financial protection.

Health insurance does not necessarily protect the insured from medical debt, said Mr Bohoslavsky.

For instance, in the United States of America, an estimated one in three individuals reported having difficulty paying their medical bills, despite the fact that many people with medical debt are insured.

The insured are often required to incur very high costs for deductibles, co-payments and other fees, which they may not be able to afford.

Catastrophic health expenditure is also attributed to the prevalence of unregulated and unorganized private medical practices in some countries.

Putting in place an adequate, universal health-care system and allocating sufficient public funding and resources can be one crucial way to reduce high out-of-pocket medical costs, and therefore health-related poverty and indebtedness, said the Independent Expert.

He also noted that millions of households around the world make hard choices for the education of children and adolescents, often based on economic considerations and their total dependence on access to credit.

Despite the obligation of States to provide for free public education, 262 million young people aged between 6 and 17 were still out of school in 2017, and more than half of children and adolescents do not meet minimum proficiency standards in reading and mathematics.

The call to prevent the risk of over-indebtedness reflects a mounting situation around the world, and may often refer to debt for secondary education too.

Student loans have also been on the rise, as the public education systems in many countries have faced austerity, private schools have expanded and the cost of education has grown rapidly.

Student loans for tertiary education are usually perceived as a positive investment and "good debt", as they could go a long way towards better educational qualifications and employment opportunities, and may provide financial stability for the individual and the entire household.

Evidence suggests, however, that student loans no longer guarantee social mobility and financial stability. The increasingly concentrated labour market and stagnant wage growth mean that graduates often have difficulties finding employment that enables them to pay off debt.

FINANCIALIZATION OF HOUSING

According to the Independent Expert, housing financialization, predatory lending and unpayable household mortgage debt, at the root of the 2008 financial crisis, illustrate the links between household debt and the deregulation of financial markets, to the detriment of people, with devastating consequences in terms of thousands of foreclosures, widespread cases of eviction, displacement and homelessness, across countries in the North and increasingly also in the global South.

He said mortgages taken on in a foreign currency, sometimes to the detriment of the debtors or of refinancing "opportunities", for those already struggling to secure payments - both of which are often aggressively promoted by lenders - are also of specific concern.

Changes in the housing market can have dire consequences for debtors. In Norway, the expansion of the housing market played a role in household indebtedness between 1997 and 2017.

"Furthermore, the role of vulture funds acquiring lenders' debts and sometimes debtors' homes in addition to enjoying advantageous tax conditions should not be left out of the right to adequate housing equation."

Over-indebtedness can not only deprive indebted persons of their economic, social and cultural rights, but also their civil and political rights by penalizing and punishing them in the criminal justice system.

Such an occurrence has been observed in various regions across the world.

For instance, in 2014, in Yemen, dozens of individuals were reportedly imprisoned as a result of their inability to pay their private debt.

In Sierra Leone, informal borrowing and lending for the purpose of petty trading may often end up in the criminal justice system, resulting in the arrest and detention of the debtors.

The Independent Expert noted that access to credit through formal channels remains an important challenge for many, in particular for specific groups in vulnerable or marginalized situations.

In some countries, the constant exposure of consumers to new lending "opportunities", pressures and practices, such as unsolicited-credit cards or financial advertisements through mobile applications, may also contribute to household debt and over-indebtedness.

For example, in Argentina, more than 7.7 million pensioners and other persons entitled to a universal child grant owe approximately $3,000 million to the national social security administration.

The economic downturn, characterized by massive public debt and decreasing wage levels, has also led to a large number of cases of bankruptcy of social security beneficiaries in the past four years, millions of whom were forced to request credit from the social security administration to pay for basic goods and services.

The number of those with social security debt is as high as 30 per cent of all pensioners (over 2.1 million people) of 95 per cent of grant beneficiaries.

It is estimated that about 80 per cent of grant beneficiaries would not be able to afford the basic canasta - basic living/food expenses once the 30 per cent deduction from income is taken into account.

The rights expert said that the impact of consumer over-indebtedness can translate into a range of human rights consequences.

For instance, in a series of interviews conducted in France, Germany, Hungary, Slovenia, Spain and the United Kingdom on the effect of over-indebtedness, a lower standard of living and a deterioration in well-being and/or mental health were indicated as the most common consequences.

Mr Bohoslavsky also pointed out that "in parallel to more traditional forms of credit, the digital lending industry is fast evolving, providing services to a growing number of borrowers," and that personal information gathered by the "fintech" industry, including via payments and loans applications, is also a matter of concern.

As lenders believe that all data are "credit data", they set in motion complex big data algorithms that process the social media activity of millions of people trying to assess creditworthiness.

The use of such practices can also affect individuals in particular ways, beyond economic considerations, said Mr Bohoslavsky.

Furthermore, financial industry technology increasingly (and aggressively) facilitates credit through digital means, including mobile applications, leading to over-borrowing.

This is a highly unregulated sector. In several African countries, payday loans have been granted with interest rates at several hundred per cent.

In this context, policies and entities aiming at protecting consumers' rights and provide "financial literacy" is seen as playing a key role in mitigating the potential impact on human rights of over-indebtedness and abusive lending practices, said the Independent Expert. +

 


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