Developing countries' debt
Encyclopedia
The debt of developing countries is external debt
incurred by governments of developing countries
, generally in quantities beyond the governments' political ability to repay. "Unpayable debt" is a term used to describe external debt when the interest on the debt exceeds what the country's politicians think they can collect from taxpayers, based on the nation's gross domestic product
, thus preventing the debt from ever being repaid.
The causes of debt are a result of many factors, including:
Some of the current levels of debt were amassed following the 1973 oil crisis
. Increases in oil prices forced many poorer nations' governments to borrow heavily to purchase politically essential supplies. At the same time, OPEC
funds deposited in western banks provided a ready source of funds for loans. While a proportion of borrowed funds went towards infrastructure
and economic development financed by central governments, a proportion was lost to corruption
and about one-fifth was spent on arms.
A seventh reason for cancelling some debts is that the money loaned by banks is generally created out of thin air, sometimes subject to a small capital adequacy requirement imposed by such institutions as the Bank of International Settlements. Maurice Félix Charles Allais (born 31 May 1911), 1988 winner of the Nobel Memorial Prize in Economics commented on this by stating “The ‘miracles’ performed by credit are fundamentally comparable to the ‘miracles’ an association of counterfeiters could perform for its benefit by lending its forged banknotes in return for interest. In both cases, the stimulus to the economy would be the same, and the only difference is who benefits.”
Critics of the practical point in this argument might question whether or not unpayable debt truly exists, since governments can refinance their debt via the International Monetary Fund
(IMF) or World Bank
, or come to a negotiated settlement with their creditors. However, this is not an argument that can withstand a glance at the state of the essential services supposedly being provided by many of the heavily indebted countries. There is evidence that governments have financed their debts through instigation of austerity policies directed at essential services and subsidies for essential goods. The history of Mali
, for example, from 1968 onwards, provides a clear illustration of this. In fact, the requirement that governments should service debts at the expense of their populations is integral to the strategies adopted by the Washington institutions in 1982 to solve the banking crisis triggered by the Mexican Weekend
in August that year. Austerity was one of the ways in which interest payments could continue to be serviced, preventing liquidity problems in the US money-centre banks. The same principle is evident in the design of the Heavily Indebted Poor Countries
Initiative. While refinancing has taken place (particularly to lessen private creditor exposure subsequent to 1982) this has come with conditions which have caused a crisis of development. London School of Economics
professor Stuart Corbridge has described the 1982 debt crisis as a banking crisis which was transformed into a development crisis, brokered by the Washington Institutions.
.
. As a part of the process put in place to bring inflation under control, a fixed exchange rate
was put into place between Argentina
's new currency and the US dollar. This guaranteed that inflation would not restart, since for every new unit of currency issued by the Argentine Central Bank, the Central Bank had to hold a US dollar against this – therefore in order to print more Argentine currency, the government required additional US dollars. Before this currency regime was in place, if the government had needed money to finance a budget deficit, it could simply print more money (thus creating inflation
). Under the new system, if the government spent more than it earned through taxation in a given year, it needed to cover the gap with US dollars, rather than by simply printing more money. The only way the government could get these US dollars to finance the gap was through higher tax of exporters' earnings or through borrowing the needed US dollars. Of course a fixed exchange rate was incompatible with a structural (i.e., recurrent) budget deficit, as the government needed to borrow more US Dollars every year to finance its budget deficit; eventually leading to an unsustainable amount of US dollar debt.
Argentina's debt grew continuously during the 1990s, climbing above $120 billion USD. As a structural budget deficit continued, the government kept borrowing more, creditors continued to lend money, while the IMF suggested less state spending to stop the government's ongoing need to keep borrowing more and more. As the debt pile grew, it became increasingly obvious the government's structural budget deficit was simply not compatible with a low inflation fixed exchange rate – either the government had to start earning as much as it spent, or it had to start (inflationary) printing of money (and thus abandoning the fixed exchange rate as it would not be able to borrow the needed amounts of US dollars to keep the exchange rate stable). Investors started to speculate that the government would never stop spending more than it earned, and so there was only one path for the government – inflation and the abandonment of the fixed exchange rate. In a similar fashion to Black Wednesday
, investors began to sell the Argentine currency, betting it would become worthless against the US dollar when the inevitable inflation started. This became a self-fulfilling prophecy, quickly leading to the government's US dollar reserves being exhausted. The crisis exploded in December 2001
. In 2002, a default on about $93 billion of the debt was declared. Investment fled the country, and capital flow towards Argentina ceased almost completely.
The Argentine government met severe challenges trying to refinance the debt. Some creditors denounced the default as sheer robbery. Vulture fund
s who had acquired debt bonds during the crisis, at very low prices, asked to be repaid immediately. For four years, Argentina was effectively shut out of the international financial markets.
Argentina finally got a deal by which 77% of the defaulted bonds were exchanged by others, of a much lower nominal value and at longer terms. The exchange was not accepted by the rest of the private debt holders, who continue to challenge the government to repay them a greater percentage of the money which they originally loaned. The holdouts have formed groups such as American Task Force Argentina to lobby the Argentine government, in addition to seeking redress by attempting to seize Argentine foreign reserves.
Under the Jubilee 2000
banner, a diverse coalition of groups joined together to demand debt cancellation at the G7 meeting in Cologne, Germany
. As a result, finance ministers of the world's wealthiest nations agreed to debt relief on loans owed by qualifying countries.
A 2004 World Bank/IMF study found that in countries receiving debt relief, poverty reduction initiatives doubled between 1999 and 2004. Tanzania
used savings to eliminate school fees, hire more teachers, and build more schools. Burkina Faso
drastically reduced the cost of life-saving drugs and increased access to clean water. Uganda
more than doubled school enrollment.
In 2005, the Make Poverty History
campaign, mounted in the run-up to the G8 Summit in Scotland, brought the issue of debt once again to the attention of the media and world leaders. Some have claimed that it was the Live 8
concerts which were instrumental in raising the profile of the debt issue at the G8, but these were announced after the Summit pre-negotiations had essentially agreed the terms of the debt announcement made at the Summit, and so can only have been of marginal utility. Make Poverty History, in contrast, had been running for five months prior to the Live 8 announcement and, in form of the Jubilee 2000
campaign (of which Make Poverty History was essentially a re-branding) for ten years. Debt cancellation for the 18 countries qualifying under this new initiative has also brought impressive results on paper. For example, it has been reported that Zambia used savings to drastically increase its investment in health, education, and rural infrastructure. The fungibility of savings from debt service makes such claims difficult to establish. Under the terms of the G8 debt proposal, the funding sources available to HIPC countries are also curtailed; some researchers have argued that the net financial benefit of the G8 proposals is negligible, even though on paper the debt burden seems temporarily alleviated.
The 2005 HIPC agreement did not wipe all debt from HIPC countries, as is stated in the article. The total debt has been reduced by two-thirds, so that their debt service obligations fall to less than 2 million in one year.
While celebrating the successes of these individual countries, debt campaigners continue to advocate for the extension of the benefits of debt cancellation to all countries that require cancellation to meet basic human needs and as a matter of justice.
To assist in the reinvestment of released capital, most International Financial Institutions
provide guidelines indicating probable shocks, programs to reduce a country’s vulnerability through export diversification, food buffer stocks, enhanced climate prediction methods, more flexible and reliable aid disbursement mechanisms by donors, and much higher and more rapid contingency financing. Sometimes outside experts are brought to control the country's financial institutions.
and tsunami hit, the G7 announced a moratorium on debts of twelve affected nations and the Paris Club
suspended loan payments of three more. By the time the Paris Club met in January 2005, its 19 member-countries had pledged a total of $3.4 billion in aid to the countries affected by the tsunami.
The debt relief for tsunami-affected nations was not universal. Sri Lanka was left with a debt of more than $8 billion and an annual debt service bill of $493 million. Indonesia retained a foreign debt of more than $132 billion and debt service payments to the World Bank amounted to $1.9 billion in 2006.
on 10 and 11 June 2005, hosted by then-Chancellor
Gordon Brown
. On 11 June, agreement was reached to write off the entire US$40 billion debt owed by 18 Highly Indebted Poor Countries to the World Bank
, the International Monetary Fund
and the African Development Fund. The annual saving in debt payments amounts to just over US$1 billion. War on Want
estimates that US$45.7 billion would be required for 62 countries to meet the Millennium Development Goals
. The ministers stated that twenty more countries, with an additional US$15 billion in debt, would be eligible for debt relief
if they met targets on fighting corruption
and continue to fulfill structural adjustment
conditionalities that eliminate impediments to investment
and calls for countries to privatize industries, liberalize their economies, eliminate subsidies, and reduce budgetary expenditures. The agreement came into force in July 2006 and has been called the "Multilateral Debt Reduction Initiative", MDRI. It can be thought of as an extension of the Heavily Indebted Poor Countries
(HIPC) initiative.
Opponents of debt cancellation suggested that structural adjustment
policies should be continued. Structural adjustments had been criticized for years for devastating poor countries. For example, in Zambia, structural adjustment reforms of the 1980s and early 1990s included massive cuts to health and education budgets, the introduction of user fees for many basic health services and for primary education, and the cutting of crucial programs such as child immunization initiatives.
. Between 2006 and 2010 this amounts to $1.4 billion (USD) for the qualifying Latin American countries of Bolivia, Guyana, Honduras and Nicaragua.
External debt
External debt is that part of the total debt in a country that is owed to creditors outside the country. The debtors can be the government, corporations or private households. The debt includes money owed to private commercial banks, other governments, or international financial institutions such...
incurred by governments of developing countries
Developing country
A developing country, also known as a less-developed country, is a nation with a low level of material well-being. Since no single definition of the term developing country is recognized internationally, the levels of development may vary widely within so-called developing countries...
, generally in quantities beyond the governments' political ability to repay. "Unpayable debt" is a term used to describe external debt when the interest on the debt exceeds what the country's politicians think they can collect from taxpayers, based on the nation's gross domestic product
Gross domestic product
Gross domestic product refers to the market value of all final goods and services produced within a country in a given period. GDP per capita is often considered an indicator of a country's standard of living....
, thus preventing the debt from ever being repaid.
The causes of debt are a result of many factors, including:
- Legacy of colonialism — for example, the developing countries’ debt is partly the result of the transfer to them of the debts of the colonizing states, in billions of dollars, at very high interest rates.
- Odious debtOdious debtIn international law, odious debt is a legal theory that holds that the national debt incurred by a regime for purposes that do not serve the best interests of the nation, should not be enforceable. Such debts are, thus, considered by this doctrine to be personal debts of the regime that incurred...
, whereby debt is incurred as developed countries loaned money to dictators or other corrupt leaders when it was known that the money would be wasted. South Africa, for example shortly after freedom from apartheid had to pay debts incurred by the apartheid regime. - Mismanaged spending and lending by the West in the 1960s and 70s.
Some of the current levels of debt were amassed following the 1973 oil crisis
1973 oil crisis
The 1973 oil crisis started in October 1973, when the members of Organization of Arab Petroleum Exporting Countries or the OAPEC proclaimed an oil embargo. This was "in response to the U.S. decision to re-supply the Israeli military" during the Yom Kippur war. It lasted until March 1974. With the...
. Increases in oil prices forced many poorer nations' governments to borrow heavily to purchase politically essential supplies. At the same time, OPEC
OPEC
OPEC is an intergovernmental organization of twelve developing countries made up of Algeria, Angola, Ecuador, Iran, Iraq, Kuwait, Libya, Nigeria, Qatar, Saudi Arabia, the United Arab Emirates, and Venezuela. OPEC has maintained its headquarters in Vienna since 1965, and hosts regular meetings...
funds deposited in western banks provided a ready source of funds for loans. While a proportion of borrowed funds went towards infrastructure
Infrastructure
Infrastructure is basic physical and organizational structures needed for the operation of a society or enterprise, or the services and facilities necessary for an economy to function...
and economic development financed by central governments, a proportion was lost to corruption
Political corruption
Political corruption is the use of legislated powers by government officials for illegitimate private gain. Misuse of government power for other purposes, such as repression of political opponents and general police brutality, is not considered political corruption. Neither are illegal acts by...
and about one-fifth was spent on arms.
Debt abolition
There is much debate about whether the richer countries should be asked for money which has to be repaid. The Jubilee Debt Campaign gives six reasons why the third world debts should be cancelled. Firstly, several governments want to spend more money on poverty reduction but they lose that money in paying off their debts. Secondly, the lenders knew that they gave to dictators or oppressive regimes and thus, they are responsible for their actions, not the people living in the countries of those regimes. For example, South Africa has been paying off $22 billion which was lent to stimulate the apartheid regime. Also, many lenders knew that a great proportion of the money would sometime be stolen through corruption. Next, the developing projects that some loans would support were often unwisely led and failed because of the lender's incompetence. Also, many of the debts were signed with unfair terms, several of the loan takers have to pay the debts in foreign currency such as dollars, which make them vulnerable to world market changes. The unfair terms can make a loan extremely expensive, many of the loan takers have already paid the sum they loaned several times, but the debt grows faster than they can repay it. Finally, many of the loans were contracted illegally, not following proper processes.A seventh reason for cancelling some debts is that the money loaned by banks is generally created out of thin air, sometimes subject to a small capital adequacy requirement imposed by such institutions as the Bank of International Settlements. Maurice Félix Charles Allais (born 31 May 1911), 1988 winner of the Nobel Memorial Prize in Economics commented on this by stating “The ‘miracles’ performed by credit are fundamentally comparable to the ‘miracles’ an association of counterfeiters could perform for its benefit by lending its forged banknotes in return for interest. In both cases, the stimulus to the economy would be the same, and the only difference is who benefits.”
Critics of the practical point in this argument might question whether or not unpayable debt truly exists, since governments can refinance their debt via the International Monetary Fund
International Monetary Fund
The International Monetary Fund is an organization of 187 countries, working to foster global monetary cooperation, secure financial stability, facilitate international trade, promote high employment and sustainable economic growth, and reduce poverty around the world...
(IMF) or World Bank
World Bank
The World Bank is an international financial institution that provides loans to developing countries for capital programmes.The World Bank's official goal is the reduction of poverty...
, or come to a negotiated settlement with their creditors. However, this is not an argument that can withstand a glance at the state of the essential services supposedly being provided by many of the heavily indebted countries. There is evidence that governments have financed their debts through instigation of austerity policies directed at essential services and subsidies for essential goods. The history of Mali
Mali
Mali , officially the Republic of Mali , is a landlocked country in Western Africa. Mali borders Algeria on the north, Niger on the east, Burkina Faso and the Côte d'Ivoire on the south, Guinea on the south-west, and Senegal and Mauritania on the west. Its size is just over 1,240,000 km² with...
, for example, from 1968 onwards, provides a clear illustration of this. In fact, the requirement that governments should service debts at the expense of their populations is integral to the strategies adopted by the Washington institutions in 1982 to solve the banking crisis triggered by the Mexican Weekend
Mexican Weekend
The Mexican Weekend marked the beginning of the Latin American debt crisis. In August 1982, Mexican Secretary of Finance Jesús Silva Herzog Flores flew to Washington, D.C., to declare Mexico's foreign debt unmanageable, and announce that his country was in danger of defaulting...
in August that year. Austerity was one of the ways in which interest payments could continue to be serviced, preventing liquidity problems in the US money-centre banks. The same principle is evident in the design of the Heavily Indebted Poor Countries
Heavily Indebted Poor Countries
Heavily Indebted Poor Countries is a group of 40 developing countries with high levels of poverty and debt overhang which are eligible for special assistance from the International Monetary Fund and the World Bank.- History and structure :...
Initiative. While refinancing has taken place (particularly to lessen private creditor exposure subsequent to 1982) this has come with conditions which have caused a crisis of development. London School of Economics
London School of Economics
The London School of Economics and Political Science is a public research university specialised in the social sciences located in London, United Kingdom, and a constituent college of the federal University of London...
professor Stuart Corbridge has described the 1982 debt crisis as a banking crisis which was transformed into a development crisis, brokered by the Washington Institutions.
Consequences of debt abolition
Some people, such as the anti-globalists argue against forgiving debt on the basis that it would motivate countries to default on their debts, or to deliberately borrow more than they can afford, and that it would not prevent a recurrence of the problem. Economists refer to this as a moral hazardMoral hazard
In economic theory, moral hazard refers to a situation in which a party makes a decision about how much risk to take, while another party bears the costs if things go badly, and the party insulated from risk behaves differently from how it would if it were fully exposed to the risk.Moral hazard...
.
Debt as a mechanism in economic crisis
An example of debt playing a role in economic crisis was the Argentine economic crisis. During the 1980s, Argentina, like many Latin American economies, experienced hyperinflationHyperinflation
In economics, hyperinflation is inflation that is very high or out of control. While the real values of the specific economic items generally stay the same in terms of relatively stable foreign currencies, in hyperinflationary conditions the general price level within a specific economy increases...
. As a part of the process put in place to bring inflation under control, a fixed exchange rate
Fixed exchange rate
A fixed exchange rate, sometimes called a pegged exchange rate, is a type of exchange rate regime wherein a currency's value is matched to the value of another single currency or to a basket of other currencies, or to another measure of value, such as gold.A fixed exchange rate is usually used to...
was put into place between Argentina
Argentina
Argentina , officially the Argentine Republic , is the second largest country in South America by land area, after Brazil. It is constituted as a federation of 23 provinces and an autonomous city, Buenos Aires...
's new currency and the US dollar. This guaranteed that inflation would not restart, since for every new unit of currency issued by the Argentine Central Bank, the Central Bank had to hold a US dollar against this – therefore in order to print more Argentine currency, the government required additional US dollars. Before this currency regime was in place, if the government had needed money to finance a budget deficit, it could simply print more money (thus creating inflation
Inflation
In economics, inflation is a rise in the general level of prices of goods and services in an economy over a period of time.When the general price level rises, each unit of currency buys fewer goods and services. Consequently, inflation also reflects an erosion in the purchasing power of money – a...
). Under the new system, if the government spent more than it earned through taxation in a given year, it needed to cover the gap with US dollars, rather than by simply printing more money. The only way the government could get these US dollars to finance the gap was through higher tax of exporters' earnings or through borrowing the needed US dollars. Of course a fixed exchange rate was incompatible with a structural (i.e., recurrent) budget deficit, as the government needed to borrow more US Dollars every year to finance its budget deficit; eventually leading to an unsustainable amount of US dollar debt.
Argentina's debt grew continuously during the 1990s, climbing above $120 billion USD. As a structural budget deficit continued, the government kept borrowing more, creditors continued to lend money, while the IMF suggested less state spending to stop the government's ongoing need to keep borrowing more and more. As the debt pile grew, it became increasingly obvious the government's structural budget deficit was simply not compatible with a low inflation fixed exchange rate – either the government had to start earning as much as it spent, or it had to start (inflationary) printing of money (and thus abandoning the fixed exchange rate as it would not be able to borrow the needed amounts of US dollars to keep the exchange rate stable). Investors started to speculate that the government would never stop spending more than it earned, and so there was only one path for the government – inflation and the abandonment of the fixed exchange rate. In a similar fashion to Black Wednesday
Black Wednesday
In politics and economics, Black Wednesday refers to the events of 16 September 1992 when the British Conservative government was forced to withdraw the pound sterling from the European Exchange Rate Mechanism after they were unable to keep it above its agreed lower limit...
, investors began to sell the Argentine currency, betting it would become worthless against the US dollar when the inevitable inflation started. This became a self-fulfilling prophecy, quickly leading to the government's US dollar reserves being exhausted. The crisis exploded in December 2001
December 2001 riots (Argentina)
The December 2001 uprising was a period of civil unrest and rioting in Argentina, which took place during December 2001, with the most violent incidents taking place on December 19 and December 20 in the capital, Buenos Aires, Rosario and other large cities around the country.- Background :The...
. In 2002, a default on about $93 billion of the debt was declared. Investment fled the country, and capital flow towards Argentina ceased almost completely.
The Argentine government met severe challenges trying to refinance the debt. Some creditors denounced the default as sheer robbery. Vulture fund
Vulture fund
A vulture fund is a private equity or hedge fund that invests in debt issued by an entity that is considered to be very weak or dying, or whose debt is in imminent default. The name is a metaphor comparing these investors to vultures patiently circling, waiting to pick over the remains of a rapidly...
s who had acquired debt bonds during the crisis, at very low prices, asked to be repaid immediately. For four years, Argentina was effectively shut out of the international financial markets.
Argentina finally got a deal by which 77% of the defaulted bonds were exchanged by others, of a much lower nominal value and at longer terms. The exchange was not accepted by the rest of the private debt holders, who continue to challenge the government to repay them a greater percentage of the money which they originally loaned. The holdouts have formed groups such as American Task Force Argentina to lobby the Argentine government, in addition to seeking redress by attempting to seize Argentine foreign reserves.
Recent debt relief
A number of impoverished countries have recently received partial or full cancellation of loans from foreign governments and international financial institutions, such as the IMF and World Bank.Under the Jubilee 2000
Jubilee 2000
Jubilee 2000 was an international coalition movement in over 40 countries that called for cancellation of third world debt by the year 2000. This movement coincided with the Great Jubilee, the celebration of the year 2000 in the Catholic Church...
banner, a diverse coalition of groups joined together to demand debt cancellation at the G7 meeting in Cologne, Germany
Germany
Germany , officially the Federal Republic of Germany , is a federal parliamentary republic in Europe. The country consists of 16 states while the capital and largest city is Berlin. Germany covers an area of 357,021 km2 and has a largely temperate seasonal climate...
. As a result, finance ministers of the world's wealthiest nations agreed to debt relief on loans owed by qualifying countries.
A 2004 World Bank/IMF study found that in countries receiving debt relief, poverty reduction initiatives doubled between 1999 and 2004. Tanzania
Tanzania
The United Republic of Tanzania is a country in East Africa bordered by Kenya and Uganda to the north, Rwanda, Burundi, and the Democratic Republic of the Congo to the west, and Zambia, Malawi, and Mozambique to the south. The country's eastern borders lie on the Indian Ocean.Tanzania is a state...
used savings to eliminate school fees, hire more teachers, and build more schools. Burkina Faso
Burkina Faso
Burkina Faso – also known by its short-form name Burkina – is a landlocked country in west Africa. It is surrounded by six countries: Mali to the north, Niger to the east, Benin to the southeast, Togo and Ghana to the south, and Côte d'Ivoire to the southwest.Its size is with an estimated...
drastically reduced the cost of life-saving drugs and increased access to clean water. Uganda
Uganda
Uganda , officially the Republic of Uganda, is a landlocked country in East Africa. Uganda is also known as the "Pearl of Africa". It is bordered on the east by Kenya, on the north by South Sudan, on the west by the Democratic Republic of the Congo, on the southwest by Rwanda, and on the south by...
more than doubled school enrollment.
In 2005, the Make Poverty History
Make Poverty History
Make Poverty History is the name of a campaign that exists in a number of countries, including Australia, Canada, Denmark , Finland, New Zealand, Nigeria, Norway, Romania, the United Arab Emirates, Great Britain and Ireland...
campaign, mounted in the run-up to the G8 Summit in Scotland, brought the issue of debt once again to the attention of the media and world leaders. Some have claimed that it was the Live 8
Live 8
Live 8 was a string of benefit concerts that took place on 2 July 2005, in the G8 states and in South Africa. They were timed to precede the G8 Conference and summit held at the Gleneagles Hotel in Auchterarder, Scotland from 6–8 July 2005; they also coincided with the 20th anniversary of Live Aid...
concerts which were instrumental in raising the profile of the debt issue at the G8, but these were announced after the Summit pre-negotiations had essentially agreed the terms of the debt announcement made at the Summit, and so can only have been of marginal utility. Make Poverty History, in contrast, had been running for five months prior to the Live 8 announcement and, in form of the Jubilee 2000
Jubilee 2000
Jubilee 2000 was an international coalition movement in over 40 countries that called for cancellation of third world debt by the year 2000. This movement coincided with the Great Jubilee, the celebration of the year 2000 in the Catholic Church...
campaign (of which Make Poverty History was essentially a re-branding) for ten years. Debt cancellation for the 18 countries qualifying under this new initiative has also brought impressive results on paper. For example, it has been reported that Zambia used savings to drastically increase its investment in health, education, and rural infrastructure. The fungibility of savings from debt service makes such claims difficult to establish. Under the terms of the G8 debt proposal, the funding sources available to HIPC countries are also curtailed; some researchers have argued that the net financial benefit of the G8 proposals is negligible, even though on paper the debt burden seems temporarily alleviated.
The 2005 HIPC agreement did not wipe all debt from HIPC countries, as is stated in the article. The total debt has been reduced by two-thirds, so that their debt service obligations fall to less than 2 million in one year.
While celebrating the successes of these individual countries, debt campaigners continue to advocate for the extension of the benefits of debt cancellation to all countries that require cancellation to meet basic human needs and as a matter of justice.
To assist in the reinvestment of released capital, most International Financial Institutions
International financial institutions
International financial institutions are financial institutions that have been established by more than one country, and hence are subjects of international law. Their owners or shareholders are generally national governments, although other international institutions and other organisations...
provide guidelines indicating probable shocks, programs to reduce a country’s vulnerability through export diversification, food buffer stocks, enhanced climate prediction methods, more flexible and reliable aid disbursement mechanisms by donors, and much higher and more rapid contingency financing. Sometimes outside experts are brought to control the country's financial institutions.
The 2004 Indian Ocean earthquake
When the 2004 Indian Ocean earthquake2004 Indian Ocean earthquake
The 2004 Indian Ocean earthquake was an undersea megathrust earthquake that occurred at 00:58:53 UTC on Sunday, December 26, 2004, with an epicentre off the west coast of Sumatra, Indonesia. The quake itself is known by the scientific community as the Sumatra-Andaman earthquake...
and tsunami hit, the G7 announced a moratorium on debts of twelve affected nations and the Paris Club
Paris Club
The Paris Club is an informal group of financial officials from 19 of some of the world's biggest economies, which provides financial services such as war funding, debt restructuring, debt relief, and debt cancellation to indebted countries and their creditors...
suspended loan payments of three more. By the time the Paris Club met in January 2005, its 19 member-countries had pledged a total of $3.4 billion in aid to the countries affected by the tsunami.
The debt relief for tsunami-affected nations was not universal. Sri Lanka was left with a debt of more than $8 billion and an annual debt service bill of $493 million. Indonesia retained a foreign debt of more than $132 billion and debt service payments to the World Bank amounted to $1.9 billion in 2006.
G8 Summit 2005: aid to Africa and debt cancellation
The traditional meeting of G8 finance ministers before the summit took place in LondonLondon
London is the capital city of :England and the :United Kingdom, the largest metropolitan area in the United Kingdom, and the largest urban zone in the European Union by most measures. Located on the River Thames, London has been a major settlement for two millennia, its history going back to its...
on 10 and 11 June 2005, hosted by then-Chancellor
Chancellor of the Exchequer
The Chancellor of the Exchequer is the title held by the British Cabinet minister who is responsible for all economic and financial matters. Often simply called the Chancellor, the office-holder controls HM Treasury and plays a role akin to the posts of Minister of Finance or Secretary of the...
Gordon Brown
Gordon Brown
James Gordon Brown is a British Labour Party politician who was the Prime Minister of the United Kingdom and Leader of the Labour Party from 2007 until 2010. He previously served as Chancellor of the Exchequer in the Labour Government from 1997 to 2007...
. On 11 June, agreement was reached to write off the entire US$40 billion debt owed by 18 Highly Indebted Poor Countries to the World Bank
World Bank
The World Bank is an international financial institution that provides loans to developing countries for capital programmes.The World Bank's official goal is the reduction of poverty...
, the International Monetary Fund
International Monetary Fund
The International Monetary Fund is an organization of 187 countries, working to foster global monetary cooperation, secure financial stability, facilitate international trade, promote high employment and sustainable economic growth, and reduce poverty around the world...
and the African Development Fund. The annual saving in debt payments amounts to just over US$1 billion. War on Want
War on Want
War on Want is an anti-poverty charity based in London, England. It seeks to highlight the needs of poverty-stricken areas around the world and lobbies governments and international agencies to tackle problems as well as raising public awareness of the concerns of developing nations while...
estimates that US$45.7 billion would be required for 62 countries to meet the Millennium Development Goals
Millennium Development Goals
The Millennium Development Goals are eight international development goals that all 193 United Nations member states and at least 23 international organizations have agreed to achieve by the year 2015...
. The ministers stated that twenty more countries, with an additional US$15 billion in debt, would be eligible for debt relief
Debt relief
Debt relief is the partial or total forgiveness of debt, or the slowing or stopping of debt growth, owed by individuals, corporations, or nations. From antiquity through the 19th century, it refers to domestic debts, in particular agricultural debts and freeing of debt slaves...
if they met targets on fighting corruption
Political corruption
Political corruption is the use of legislated powers by government officials for illegitimate private gain. Misuse of government power for other purposes, such as repression of political opponents and general police brutality, is not considered political corruption. Neither are illegal acts by...
and continue to fulfill structural adjustment
Structural adjustment
Structural adjustments are the policies implemented by the International Monetary Fund and the World Bank in developing countries. These policy changes are conditions for getting new loans from the International Monetary Fund or World Bank, or for obtaining lower interest rates on existing loans...
conditionalities that eliminate impediments to investment
Investment
Investment has different meanings in finance and economics. Finance investment is putting money into something with the expectation of gain, that upon thorough analysis, has a high degree of security for the principal amount, as well as security of return, within an expected period of time...
and calls for countries to privatize industries, liberalize their economies, eliminate subsidies, and reduce budgetary expenditures. The agreement came into force in July 2006 and has been called the "Multilateral Debt Reduction Initiative", MDRI. It can be thought of as an extension of the Heavily Indebted Poor Countries
Heavily Indebted Poor Countries
Heavily Indebted Poor Countries is a group of 40 developing countries with high levels of poverty and debt overhang which are eligible for special assistance from the International Monetary Fund and the World Bank.- History and structure :...
(HIPC) initiative.
Opponents of debt cancellation suggested that structural adjustment
Structural adjustment
Structural adjustments are the policies implemented by the International Monetary Fund and the World Bank in developing countries. These policy changes are conditions for getting new loans from the International Monetary Fund or World Bank, or for obtaining lower interest rates on existing loans...
policies should be continued. Structural adjustments had been criticized for years for devastating poor countries. For example, in Zambia, structural adjustment reforms of the 1980s and early 1990s included massive cuts to health and education budgets, the introduction of user fees for many basic health services and for primary education, and the cutting of crucial programs such as child immunization initiatives.
Criticism of G8 debt exceptions
Countries that qualify for the HIPC process will only have debts to the World Bank, IMF and African Development Bank canceled. Criticism was raised over the exceptions to this agreement as Asian countries will still have to repay debt to the Asian Development Bank and Latin American countries will still have to repay debt to the Inter-American Development BankInter-American Development Bank
The Inter-American Development Bank is the largest source of development financing for Latin America and the Caribbean...
. Between 2006 and 2010 this amounts to $1.4 billion (USD) for the qualifying Latin American countries of Bolivia, Guyana, Honduras and Nicaragua.
See also
- Confessions of an Economic Hit Man, a former World BankWorld BankThe World Bank is an international financial institution that provides loans to developing countries for capital programmes.The World Bank's official goal is the reduction of poverty...
consultant alleges that the debt burden was intentionally created as a means of exerting political power. - Domestic Liability DollarizationDomestic liability dollarizationDomestic liability dollarization refers to the denomination of banking system deposits and lending in a currency other than that of the country in which they are held...
- EurodadEurodadEurodad is a network of 58 non-governmental organisations from 19 European countries. Eurodad and its members make up a network, this network researches and works on issues that are related to debt, development finance and poverty reduction.Recently this network has focussed on issues such as...
European Network on Debt & Development - Susan George (political scientist)Susan George (political scientist)Susan George is a well-known Franco-American political and social scientist, activist and writer on global social justice, Third World poverty, underdevelopment and debt. She is a fellow and president of the board of the Transnational Institute in Amsterdam...
- Government budget deficit
- Haiti's external debtHaiti's external debtHaiti’s legacy of debt began shortly after gaining independence from France in 1804. In 1825, France, with warships at the ready, demanded Haiti compensate France for its loss of men and slave colony. In exchange for French recognition of Haiti as a sovereign republic, France demanded payment of...
- Heavily Indebted Poor CountriesHeavily Indebted Poor CountriesHeavily Indebted Poor Countries is a group of 40 developing countries with high levels of poverty and debt overhang which are eligible for special assistance from the International Monetary Fund and the World Bank.- History and structure :...
- Jubilee 2000Jubilee 2000Jubilee 2000 was an international coalition movement in over 40 countries that called for cancellation of third world debt by the year 2000. This movement coincided with the Great Jubilee, the celebration of the year 2000 in the Catholic Church...
- Jubilee USA Network
- Money-laundering
- Odious debtOdious debtIn international law, odious debt is a legal theory that holds that the national debt incurred by a regime for purposes that do not serve the best interests of the nation, should not be enforceable. Such debts are, thus, considered by this doctrine to be personal debts of the regime that incurred...
- Original Sin (economics)Original Sin (economics)Original sin is a commonly used metaphor in economics literature. It was proposed by Barry Eichengreen, Ricardo Hausmann, and in a series of papers to refer a situation in which "most countries are not able to borrow abroad in their domestic currency."...
- Sovereign debt
- U.S. public debt, but Corporate and Consumer debt is ignored
- Underground economyUnderground economyA black market or underground economy is a market in goods or services which operates outside the formal one supported by established state power. Typically the totality of such activity is referred to with the definite article as a complement to the official economies, by market for such goods and...
- US total cumulative debt per personUS total cumulative debt per personThe overall financial position of the United States as of 2009 includes $50.7 trillion of debt owed by US households, businesses, and governments, representing more than 3.5 times the annual gross domestic product of the United States. As of the first quarter of 2010, domestic financial assets...
, all US debt is considered
External links
- Bank Information Center
- Jubilee Debt Campaign
- Jubilee USA Network
- Week of Global Action against Debt
- International Debt Crisis – curriculum materials from a Latin Americanist geographer
- "The Debt Threat: How Debt is Destroying the Developing World" – Author Noreena Hertz talks to Democracy Now!Democracy Now!Democracy Now! and its staff have received several journalism awards, including the Gracie Award from American Women in Radio & Television; the George Polk Award for its 1998 radio documentary Drilling and Killing: Chevron and Nigeria's Oil Dictatorship, on the Chevron Corporation and the deaths of...
on January 13, 2005. - 'Debt relief hopes bring out the critics – BBC
- Big Picture TV
- I want the earth plus 5%
- European Network on Debt and Development
- International Debt Observatory