Envío Digital
Central American University - UCA  
  Number 218 | Septiembre 1999



Several Key Questions

Debt cancellation strategies should grow out of a more participatory process. In this context, we need to ask ourselves some questions about the cancellation of the foreign debt, and begin to think about the answers.

Jesuit of Latin America

Many different strategies have been developed in an attempt to resolve the foreign debt crisis since the problem first emerged in the early 1980s. From that moment on, debtor nations have found themselves periodically involved in negotiations with commercial banks and with bilateral and multilateral creditors.

But despite certain improvements, the debt problem still exists and none of the strategies have proved capable of definitively resolving it. The reason is that all of the strategies have been exclusively designed by the creditors with a view to maximizing their income by canceling bad debts and thus assure payment on the balance. Furthermore, the creditor institutions and governments have dictated the terms and conditions of these proposals. In many cases, the debtor nations have sacrificed much of their political and economic autonomy to obtain certain concessions. More significantly, no effort has been made to recognize that the real roots of the problem can be found in the unjust international economic relations, which exacerbate the situation and threaten future crises. The Jesuit Network maintains that debt cancellation strategies should grow out of a more participatory process. This demands greater responsibility from elected representatives, who in turn should allow civil society full and significant participation in the decision-making.

In this context, we need to ask ourselves some questions about the cancellation of the foreign debt, and begin to think about answers.

Shouldn't debts be paid?

Q. Shouldn't everyone pay their bills? Why should certain countries have their debts pardoned?
Normally everyone should pay their debts, but there are several reasons why certain countries should have their debts pardoned:
According to Christian tradition, a legal contract in conditions of unequal power and dire necessity could be seen as fundamentally unjust, even when it has been “freely” contracted. In any case, just how real is that “freedom” when the circumstances offer little or no alternative, as was often the case with the indebted countries that are now in crisis? Their need was as evident as their lack of resources, and as debtors that assumed contracts based on fundamentally unjust relations, they are under no ethical obligation whatever to honor those commitments.

Debt payments should not be made at the cost of survival and human dignity. One of the main rights of debtors is the principle that in conditions of extreme necessity, such as the risk of starving to death, one is entitled to the wealth of others. As Christians, this derives from our belief that at the most fundamental level God bequeathed the earth's wealth to us all long before the appearance of any property rights. It is immoral to impose debt payments on the poorest countries, where people are dying from lack of basic medicines and equipment and from malnutrition. Equally immoral is the decision of the local elite to transfer the burden of debt payments onto the poor, instead of bearing it themselves.

Circumstances have changed dramatically since the original loans were made and the debt owed has continued to grow so that it is now far greater. This is due to unexpected rises in interest rates at the end of the 1970s, the deterioration of export prices, corrupt domestic policies, the compounding of interest on interest when payments were not made and to new loan requests made in order to keep up with the original debt service payments.

Last, but by no means least, the debt cancellation strategies implemented so far have failed to end the suffering of the poor. It is morally wrong to expect people from poor countries to pay for the past irresponsibility of their governors, many of whom were not even freely elected.

Should we pardon corrupt governments?

Q. If the debts are canceled, won't corrupt leaders just channel the benefits towards themselves rather than helping their people?
This is a real danger, and it is therefore imperative that debt cancellation be accompanied by concrete and practical mechanisms designed to allow significant participation by civil society in determining and monitoring both the reorientation of the canceled funds and future loan arrangements. It is important that each debtor country reclaim the responsibility for its own internal affairs, including the actions taken by its leaders.

Q. But if a country's debts are canceled, won't this encourage it to acquire more debts under the assumption that these, too, will be canceled?
This is what is known as the “moral risk” argument. Nobody knows if freeing these countries from debt will have negative results. This another reason why it is imperative that civil society be fully involved in administrating the national economy.

But the moral risk argument can also be turned around: by obliging the poorest, most indebted countries to pay off debts that were contracted under severely unequal conditions, we would be encouraging creditor countries to lend irresponsibly in the future to further their own interests, under the assumption that the debtor will always be forced to pay.

The debtor countries have already paid an enormous price for their debts. They have lost their economic sovereignty and have suffered austerity programs imposed by the international financial organizations as a condition for the cancellation of their debts and their eligibility for new foreign investment loans. The people have suffered a constantly falling standard of living and cuts in basic social services. Furthermore, experience shows us that in bankruptcy situations, the debtors are in no hurry to run up new debts.

How much will debt cancellation cost?

The British Jubilee 2000 Coalition has estimated that the world's 52 poorest countries owe just under $300 billion. They point out that cancellation of this amount would make a substantial difference to the lives of hundreds of millions of people, while representing only a small amount of money on the international scene, much less than the world's richest countries earn in just three days.

The IMF estimates that in 1994 the very poor and highly indebted countries dedicated almost a third of their public resources to debt service payments. In fact, many countries paid a much higher proportion: that same year, debt servicing payments accounted for 66% of public income in Nicaragua, 74% in Nigeria, 92% in Zambia and 136% in Sierra Leone. The 1997 UN Development Program report calculates that the lives of 21 million African children could be saved in the year 2000 if the funds used to pay debt service charges were redirected to health-care programs. Without investments in infrastructure and without adequate market structures, the indebted nations will never be able to develop their economies.

Q. But isn't the western world already giving enough money to the poor countries in subsidies and aid? Why not use those resources?
In reality, very little of the money transferred from the North to the South stays in the South. The debt payment requirements mean that much of what reaches the South soon returns North to the wealthier economies. In 1996, for example, third world countries asked for the incredible amount of $248 billion in loans, yet almost all of this money later returned to the West. The same year, the African sub-Saharan countries declared that the new loans would not even cover the interest and service payments on their old debts, and they therefore had to use 23% of all aid they received to cover their debt service payments.

Cancel with no commitments?

Q. If the foreign debts the poorest countries owe were canceled, wouldn't this make creditor countries unwilling to give them more loans in the future?
The poorest countries are not going to be worse off than before and could end up better. The vast majority of highly indebted poor countries will never be able to pay off their foreign debts even if they are not written off. In such conditions they cannot attract private investments, but a definitive cancellation of their debts will turn them into better credit subjects, and will probably make them attractive to private sector investment and loans.

Investors and loan makers are attracted to places where they can make money, and investments turn profits where people have the means to buy goods and services. It is clear that debt cancellation would give miserable economies struggling with crushing debts the opportunity to grow and develop. It would also free up government personnel trained for endless renegotiations to concentrate on long-term planning and development-oriented work.

Q. Don't countries have to establish economic reform policies to reduce their fiscal deficits, control inflation, and free up the market in order to benefit from cancellation of the debt? If they don't, won't they just end up in debt again? And shouldn't it be a condition of the debt pardon that they commit themselves to reducing poverty and military costs?
Economic and social policies are vital, but they should be designed with extensive participation by the population and should protect the most vulnerable sectors. Cancellation of the debt should be implemented in a way that extensively benefits the majorities and not just the economic elite, corrupt public officials or military institutions. Debt cancellation should not include conditions that increase the burden on those living in poverty, as is often the case with structural adjustment programs. To achieve these objectives, specific debt cancellation mechanisms should be determined in open and transparent processes with extensive grassroots participation, so that the people most affected by the debt problem can be involved in resolving it. Thus poverty reduction and economic reforms that genuinely contribute to sustained development would be democratically included in the debt cancellation programs, instead of imposed from without.

Why don't they want to cancel?

Q. If writing off the debts this way is obviously the right thing to do, why aren't more governments and financial institutions supporting the idea?
There is currently little or no political backing for such a solution. International aid has dropped so much that it is much easier to concentrate on creating new taxes to guarantee the paying of old debts. Pardoning the foreign debt would cost money and institutions like the World Bank and the International Monetary Fund want to protect their resources, which depend on loan repayments.

These institutions are terrified that, while reducing international aid, governments might also reduce the support provided to them. Meanwhile, the national parliaments of the rich countries have not been sufficiently motivated to become more sensitive to the foreign debt burden affecting poor countries. We should remember that governments are elected to carry out the will of the people they represent, and we as voters can influence government policy. It's up to us to create the political will.

It should also be borne in mind that the debts owed by poor countries make them dependent on the rich countries and the international financial organizations in their search for solvency. The developed countries' economic policies determine this perpetual indebtedness and the need to maintain programmed payments, because it benefits the rich countries, their private investors and international corporations. Debt cancellation would mean that the governments of rich countries would lose control over the debtor countries.

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