However, problems do exist with debt reduction; the main one involving credibility. Money lending on a global level is perfectly healthy, if controlled and on a sensible scale. Under the hands of capable leaders, the capital can be invested and used to develop various aspects of the economy. Debt reduction could set a precedent that could have the effect on richer nations of decreasing the possibility of future bank lending. International Financial Institutions (IFIs) such as the World Bank could become burdened with the task of repaying much of the debt, which could limit its future capacity. U2’s frontman Bono asked Stanley Fischer, the IMF’s Deputy Managing Director whether the IMF could fund 100% HIPC debt forgiveness out of reserves created by re-valuing the fund’s gold holdings. Fischer replied that while there is a ‘little bit of room to do more,’ total debt forgiveness would reduce IMF reserves to an unacceptably low level. However, when you consider the rampant poverty and dire living conditions facing millions of citizens of indebted countries around the world, it is impossible to ignore the problem; Indifference is not a morally justifiable attitude.
Cancelling all Third World debt would certainly, from an economic outlook, give the potential for impoverished countries to build infrastructure and develop. As UNICEF points out, every child born in the Congo ‘begins life encumbered with a debt of $1,872.’ In sub-Saharan African countries, between a quarter and a third of national budgets are used to service debt, and, for example, in Tanzania, nine times as much is spent in paying off debt than is spent on healthcare. All this in a continent where AIDS is spreading at a rate that has reached levels of epidemic such that in the past twenty four hours, five and a half thousand Africans died from it. Development has been stunted by the inability of governments and leaders to invest sufficient amounts of money into improving their nation. Highly indebted countries were, for decades, paying out more money in servicing their debt than they received in foreign aid. ‘Money that could have been used to create schools and health clinics in Third World countries is going to the industrialised nations. As a consequence, fewer babies will survive their first year; those that do will have fewer opportunities to reach their intellectual potential.’
The average growth of GDP of fifteen heavily indebted countries fell from 6.3% in the decade before they borrowed to 1.7% in the decade after. This is particularly significant, as, once the increasing population is taken into account, the growth of 1.7% in GDP actually converts to a net decline in GDP per capita. The interest payments on the capital that the countries had borrowed in order to stimulate growth in their economies gave the opposite effect on the economy; people were worse off. The 1980s came to be known as the ‘lost development decade.’ The figures prove this to be the case; per capita investment in the highly-indebted countries fell by forty per cent between 1980 and 1987, and real income declined in almost every Latin American country; wages in Mexico fell by fifty per cent in eight years.
Many debt-ridden countries have completed their transitions to democracy, but still bear the heavy debt of their predecessors that leaves them unable to invest the money needed to bring themselves out of poverty.
Development in heavily indebted countries is largely dependant on foreign investment. Because it is hard to segregate capital transferred to such countries from the debt recovery process, investors are reluctant to put their money in a country with a high external debt. With the weight of debt removed, global investment programmes can be more evenly distributed, with the poorer countries getting a ‘larger slice of the capitalism pie.’ It is certainly also true to say that the persistence of debt has left governments of heavily indebted countries struggling to offer their citizens a standard of living comparable with that of Western nations. Farmers, in particular have struggled because of the fall in value of many commodities and crops. Growers, given the option, will turn to crops of a higher value; this often means drugs. An acre of coca, the key ingredient in cocaine, will yield up to fifteen times the income of a legal crop such as maize. Leaders find it difficult to stop this; in Bolivia, for example, 40% of the workforce is involved in the production of coca, and its level of cultivation has rocketed since the seventies.
Development can be measured in many ways, and statistical data is often far too limited in defining standards of living. For example, there have been over twenty bloody protests recently, specifically calling for the debt to be dropped. According to Susan George, over three thousand people have been killed in these protests. Political implications are far-reaching; South American nations that have only recently become free democracies have had their democratic governments come under pressure from its citizens. These are countries where political and economic stability, when it is present, must be guarded closely. The debt crisis must be addressed in the context of declining standards of living and political unrest; to ignore this is to encourage revolution and authoritarian regimes.
We can take this a step further, and, in the context of world attitudes since the atrocities of 9/11, ask how far radical extremists are motivated by conditions of poverty. Alan Krueger suggests that the two things are mutually exclusive, arguing that ‘terrorists are not motivated by the prospect of financial gain, or the hopelessness of poverty.’ Evidence to back this up is that the number of suicide bombings in Israel has not taken a dramatic fall since the decline of Sadaam Hussein, who paid the families of Palestinian suicide, or homicide bombers a lump sum of $25 000. President Bush struck a fair compromise when he argued that ‘poverty does not transform poor people into terrorists and murderers, yet poverty, corruption and repression is a toxic combination in many societies, leading to weak governments that are unable to enforce order or patrol their borders and are vulnerable to terrorist networks.’
The Oxford English Dictionary defines development as ‘bringing to maturity.’ Maturity, in terms of global awareness has increasingly come to mean an awareness of, and respect for the environment. Indeed, ecological arguments feature strongly in any debt-related debate, and it is in this context that my case study, namely Brazil, shall be introduced.
Brazil, although heavily indebted to the tune of some $250bn, is not a poor nation. Each person earns an average of $4000 a year; although this figure is slightly distorted by the fact that Brazil has one of the highest divides between rich and poor in the world. In 1982, Brazil, following on from the precedent set by Mexico, found that she was unable to meet her debt obligations, and sought help from the IMF. Help was obtained in the form of re-financing, and additional borrowing from private banks. All this did, in effect, was spread repayment, and her level of indebtedness almost doubled in the first five years of the eighties. Her economy experienced a boom that saw GDP growth rise to 8.3% in 1985. However, in the same time period, the number of poor people doubled, and the level of investment collapsed from 22.5% in 1980 to 16.3% in 1985. This stunted the growth that the IMF had hoped that the debt relief measures would bring.Since the eighties, Brazil’s debt has been one of, if not the most important factor in her development strategies.
During the eighties, the Brazilian government, encouraged by the IMF and World Bank, sought assets to help pay its debt interest, and found it in the form of the ecosystem that comprises a tenth of the world’s species of plants and animals, the Amazon. Multinational mining and timber corporations were brought in to ‘harvest’ the Amazon. As it turned out, many of the loans that were taken out in order to finance these projects actually worsened Brazil’s debt problem. Needless to say, rapid deforestation and environmental damage was wreaked. During the 1990s, Western countries realised that a unique opportunity existed; part of Brazil’s debts could be used for investment in the protection of the rainforest. The goals of this scheme, known as a ‘debt-for-nature’ swap, would try to stop nature being sacrificed in order to service debt repayments, as well as stopping leaders concerned more with money than stopping the destruction of our planet, such as the ex-governor of the Amazon state in Brazil, Gilberto Mestrinho, who was responsible deforestation totalling over one and a half million square kilometres during his term in office.
The Brazilians had differing opinions on this offer. While many saw it as an opportunity to shelter from harm an area of the world that the Brazilians had historically been incredibly proud, some saw it as an imperialistic colonial move. A Canadian journalist noted that Brazilians were initially ‘suspicious that foreigners are planning to grab the Amazon’s riches from under a sleeping nation’s nose. No matter how you dress up the debt-for nature swaps, the scheme, to Brazilians, still looks like foreigners buying a piece of Brazil… (and this applies as well to) recent proposals for the supervision of Amazon preservation measures by an international body.’ The power that the creditor nations have on the ability to regulate environmental development is immense, and it is accepted that debt relief of some sort is the crucial controlling factor in this development.
Recent developments really illustrate the fact that the issue of debt really is the key to meaningful development in Brazil. The 1992 Earth Summit in Rio de Janeiro saw rich nations agreeing to donate 90% of the cost of a $250 million dollar scheme to survey the Amazon jungle. However, in 1999, Brazil was forced to withdraw its measly 10% contribution to the plan as part of IMF cuts in debt aid. Stephan Schwartzman, a senior scientist at the (American) Environment Defence Fund, said in The Guardian newspaper that ‘it is a far more irrational and perverse consequence of the IMF agreement than ever the harshest critics of the IMF could have imagined.’
In the autumn of 1999, the USA offered to cancel $650m in debt if the money was instead invested in the protection of the Amazon. This announcement followed a restructuring of the original debt-for-nature programme. Whilst the benefits would be seen in Brazil, the donor countries, mainly European, would be responsible for monitoring the way that the money was invested. This is a case where the key to development lies in debt relief, rather than cancellation, as complete debt write-off would arguably not have seen such a large quantity of money invested in a project that yields little financial benefit.
Following the defeat of Germany in the First World War, the Allied Powers decided that imposing vast reparations was a suitable and just punishment for the cataclysmic war. Critics of the reparations included John Maynard Keynes, who, in 1919 conveyed the following:
The policy of reducing Germany to servitude for a generation, of degrading the lives of millions of human beings, and of depriving a whole nation of happiness should be abhorrent and detestable - abhorrent and detestable, even if it were possible, even if it enriched ourselves, even if it did not show the decay of the whole civilised life of Europe. Some preach it in the name of justice. In the great events of man’s history, in the unwinding of the complex fates of nations, justice is not so simple. And if it were, nations are not authorised, by religion or by natural moral, to visit on the children of their enemies the misdoings of parents or of rulers.
In a contemporary context, justice has been served. The debt owed by the Third World to the West has been repaid many times over, but yet it still enslaves nations hardest hit by it. The citizens of South America, Africa and Eastern Europe have to suffer as a result of the spendthrift nature of previous regimes; this can’t be justice.
The West holds in its hands the key to the future of billions of impoverished human beings. From a humanitarian point of view, it is clear that the industrialised nations need to invest and transfer money to poor nations, and although the means by which they do it is almost arbitrary, the tool that is currently in use involved a system of debt repayments. In some cases, such as the very poorest famine and AIDS-stricken African countries complete debt relief is surely inevitable, and righteous; in others such as Brazil where starvation isn’t an immediate concern, debt relief in the form of conditional cancellation or schemes such as debt-for-nature is the key.
Either way, decades of lost development, under-investment and impoverishment in the world most deprived countries is due, in part, to the actions of the richest nations. For this reason alone, the governments and International Financial Institutions must put self-interest aside to make space for finding the best solution that is genuinely supportive for the Global South.
It’s the just and decent way.
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Gross Domestic Product; a measure of income
Algeria, Argentina, Bolivia, Brazil, Bulgaria, Congo, Cote d’Ivoire, Ecuador, Mexico, Morocco, Nicaragua, Peru, Poland, Syria and Venezuela
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