[stop-imf] Debt Cancellation: Historic Victories, New Challenges

[Robert Weissman]

Foreign Policy In Focus
www.fpif.org <http://www.fpif.org/>

FPIF Special Report

May 2005

Debt Cancellation:
Historic Victories, New Challenges

By Mark Engler
/Mark Engler, a writer based in New York City, is an analyst with
Foreign Policy In Focus (www.fpif.org <http://www.fpif.org/>). He can be
reached via his website at www.democracyuprising.com
<http://www.democracyuprising.com/>. Research assistance for this
article provided by Jason Rowe. /

Printable PDF <http://www.fpif.org/pdf/reports/SR0505debt.pdf>


How 100% debt cancellation for poor countries--now being debated by
wealthy nations--was transformed from an implausible demand into a
winning issue, and what barriers lie ahead for the debt relief movement. /

An old maxim in social movements (adapted from Schopenhauer's prickly
take on the history of great ideas) states: =93First they ignore you. Then
they attack you. Then you win.=94 For years, campaigners for debt relief
in the developing world and their international supporters were
dismissed or derided. For 2005, however, a new question has emerged:
Will they finally be able to claim victory?

A decade ago, in 1995, activists pushing for world leaders to cancel the
huge debts that stunt development in the global South were told simply,
=93 debt will not be a major issue.=94

By 1998, these same groups--led by the Jubilee debt coalition--were
warned that they were asking too rudely for too much. =93If you make a
campaign out of it,=94 one columnist wrote, or =93use extreme language...
the very people you want to influence, the ministers and officials of
the rich democracies, stop listening to you.=94

The campaign continued despite these admonitions. Now, observers of the
debt issue have predicted that major advance for cancellation is within
reach, possibly as soon as this summer. Although leaders from the Group
of Seven, or G7 * <http://www.fpif.org/papers/0505debt_body.html#_ftn1>,
wealthy industrialized nations failed to finalize a debt agreement in
Washington, DC in April, they will continue their deliberations when
they come together for their annual meeting on July 6-8 in Perthshire,
Scotland. On the table is a plan to grant up to 100% multilateral debt
relief for many of the world's heavily indebted poor countries.

That the legitimacy of 100% debt cancellation is now widely accepted
represents a dramatic reversal in the debt debate. Many have commented
in recent years that the globalization movement has won the moral
argument about trade and development, but that its positions have not
translated into policy. Yet the issue of debt provides one clear
instance in which a network of international activists has affected
governmental decisionmaking and in so doing has opened real
possibilities for human development.

At the same time, with U.S. Treasury Secretary John Snow presenting
fresh barriers to progress on full cancellation and with advocates
discussing difficulties that will face developing nations even in a
post-debt-relief era, a win long in the making is bringing with it a
series of new challenges.


     The Making of =93a Major Issue=94

In the early 1990s, debt cancellation was far from the mainstream
political agenda. While in the global South a discussion that began in
the 1980s was raging--condemning an emerging debt situation in which
some impoverished countries, especially those in sub-Saharan Africa,
were paying more in debt service to advanced, capitalist nations than
they were receiving from them in aid--the issue had very little traction
in wealthy nations. =93There was almost zero awareness=94 of the debt issue
in the U.S. at the time, says Neil Watkins, National Coordinator of
Jubilee USA. When a small group of social movement activists, along with
government leaders from the developing world, tried to gain a hearing
for the issue at the 1995 UN Copenhagen Social Summit, the U.S. impeded
discussion. President Bill Clinton and British Prime Minister John Major
ultimately avoided attending the summit altogether.

Not long after, though, the grassroots work on the issue began to bear
fruit. The formation of the Jubilee network in 1997 united a broad
spectrum of religious, labor, and nongovernmental organizations into a
joint international campaign. In May 1998, Jubilee helped mobilize
50,000 supporters to protest the G7/G8 summit in Birmingham, England.
The protests returned in full force at the following year's summit in
Cologne, Germany, where another 50,000 people formed a human chain
through the city=92s streets to represent the =93chains of debt.=94

During the same period, concerned members of religious congregations, in
particular, witnessed some gratifying developments. The efforts of Roman
Catholics drew notice when, in 1996, the Catholic Bishops of Africa
began publicly denouncing debt payments made =93at the expense of
providing basic healthcare, education, and other social services to the
poor in our countries.=94 Bishops from Latin America came forward with
similar statements. In November 1998, the late Pope John Paul II, who
had shown previous sympathy for the campaign, held up debt relief as =93a
precondition for the poorest countries to make progress in their fight
against poverty.=94 Demanding immediate action, he asserted =93it is the
poor who pay the cost of indecision and delay.=94

Other religious bodies throughout the world came forward to endorse the
Jubilee campaign. In the U.S. alone, these included the Episcopal
Church, the Evangelical Lutheran Church of America, the Mennonite Church
, the Union of American Hebrew Congregations, the Presbyterian Church,
and inter-faith groups like the Inter-Religious Task Force on Central
America , Church World Service, and the Ecumenical Program on Central
America and the Caribbean .

By this time policymakers and pundits could no longer afford to ignore
the call for debt cancellation. But some went on the attack. Following
the Birmingham demonstrations, Andreas Whittam Smith, a columnist with
the London/Independent/, echoed much of elite opinion by calling the
Jubilee campaign's goals =93laudable,=94 but criticizing its political
strategy as =93badly conceived.=94 Cautioning against =93monstrous accusati=
on=94
he defended the laborious negotiations about debt taking place at the
World Bank and IMF, and he charged that the Jubilee coalition's
political action would =93be ineffectual... if not counter-productive.=94


     First Victories

In fact, as grassroots efforts to highlight the issue grew, the G7
responded at each stage by grudgingly expanding its limited proposals
for debt relief. In 1996, the countries controlling the International
Monetary Fund (IMF) and World Bank introduced their first Heavily
Indebted Poor Countries (HIPC) plan, designed to offer 42 of the world's
most indebted poor nations some relief after six probationary years.

Unfortunately, actual cancellation of multilateral debt involved high
levels of =93conditionality. =94 HIPC required poor countries to implement
IMF-advised structural adjustment programs, which often resulted in cuts
to health care and social service spending. Moreover, as HIPC progressed
it soon became clear that debt relief was coming far too slowly to have
any substantial effect.

In 1999, with pressure mounting, the IMF instituted HIPC-2. This plan
accelerated the pace of relief, but it kept debt cancellation contingent
upon structural adjustment. Moreover, the amounts of debt it canceled
still left poor countries with unmanageable burdens. By the end of the
year 2000, 22 countries had received some relief from the HIPC
initiatives, yet the program on average had canceled only one third of
each country's debt--hardly an adequate solution to the crisis,
especially for impoverished nations that had more than paid off their
original loans, but still owed massive debts. As the United Nations
Conference on Trade and Development=92s 2004 report on Africa explained,
=93the continent received some $540 billion in loans and paid back some
$550 billion in principal and interest between 1970 and 2002. Yet Africa
remained with a debt stock of $295 billion.=94 The report concluded that
the continuation of exploitative interest payments constituted =93a
reverse transfer of resources=94 from poor to wealthy countries.

Perhaps a more important victory came in September 1999, when President
Clinton responded to intensive lobbying by announcing that the U.S.
would cancel 100% of the bilateral debts owed it by the HIPC nations.
Two months later, the UK put forward a similar plan for bilateral debt
cancellation; other creditor nations, such as Germany, France, and Japan
soon followed suit. The governments' actions marked a critical
milestone. At the same time, in dollar terms, the total cost of this
U.S. bilateral debt relief was estimated at $330 million, while totals
for debt owed by poor countries to multilateral creditor institutions,
such as the IMF and World Bank, were estimated in the hundreds of billions.

In 2000, Jubilee activists were also instrumental in pressuring Congress
to pass legislation requiring U.S. representatives to the World Bank and
IMF to oppose any project that charges end-user fees for basic
healthcare and education services. Because of the influence the U.S.
wields within these institutions, this measure dramatically curtailed
the use of user fees, especially in education. As Robert Weissman wrote
in a September 2003 /Washington Post/ op-ed, 1.5 million more Tanzanian
children were able to start school as a result of the 2000 victory.

HIPC itself, with all its limitations, also had an important impact.
Because the program did provide some debt relief, it began establishing
a track record for what cancellation could accomplish. Critics had
regularly charged (and some continue to believe) that money from debt
cancellation would be mismanaged and would not be used to reduce
poverty. In fact, HIPC demonstrated that cancellation could be a most
effective form of foreign aid, allowing developing countries to retain
and make use of their own resources. By 2004, HIPC had advanced some
measure of relief to 27 countries. A 2004 report from the World Bank
showed that together these countries nearly doubled their total spending
on poverty reduction--including education, healthcare, and clean
water--in the period from 1999 to 2004.


     Iraq's =93Unjust Burden=94

A final turn in U.S. policy came in the aftermath of the invasion of
Iraq, when the Bush administration appealed to creditor nations to
forgive Iraq's estimated $120 billion debt. Long-time advocates of debt
cancellation unexpectedly heard their arguments adopted by the
president. In December 2003, as he was sending former Secretary of State
James Baker on a special mission to lobby allies to cancel Iraq's debt,
George W. Bush argued that such debt endangered the country's =93
long-term prospects for political health and economic prosperity,=94 and
that the world must not allow the financial obligations to =93unjustly
burden a struggling nation at its moment of hope and promise.=94

By extension, the administration's stance on Iraq's debt put the U.S. on
the record in favor of debt relief for a wide range of struggling
countries. Yet even before this shift, calls for cancellation had become
increasingly mainstream. A most visible example of the issue's
popularity was then-U.S. Treasury Secretary Paul O'Neill's highly
publicized May 2002 tour of debt-stricken African nations with Bono, the
rock star turned humanitarian. A notable bloc of conservatives, led by
economist Allan Meltzer, also defended the economic soundness of debt
cancellation, arguing that a scaled-back World Bank should extract
itself from the hopeless cycle of debt re-loaning and refinancing.
Meltzer=92s position has been influential within the Bush administration.

With even the U.S. government on board, the moral legitimacy of debt
cancellation had been almost universally acknowledged; what remained was
for policy to catch up. Observers were hopeful this would happen at an
October 2004 meeting of G7 finance ministers in Washington, DC.
Disagreements over details of a debt plan kept anything concrete from
being completed at that time, however. G7 ministers came closer to an
agreement when they met again in early February in London. In the wake
of the tsunami disaster in Asia, the wealthy countries issued a
statement agreeing in principle to =93as much as 100% multilateral debt
relief=94 for the 42 HIPC nations. Their stance in support of full
cancellation marked another milestone for the Jubilee movement, but it
left many practical questions unanswered.


     The G7's Current Debate

Currently, there remain several key disagreements between U.S. and the
European countries, led by the UK, about how a new debt plan should go
forward. These issues will be on the table at July's G7/G8 summit in
Scotland.

A first issue concerns how many countries will receive cancellation. The
UK proposal, while theoretically open to all HIPC nations, would only
offer immediate relief to the 15 countries that have completed a
mandated program of economic reforms, along with five or six other
non-HIPC countries who receive poverty-reduction support from the World
Bank. The U.S. plan, while less concrete, would likely grant relief to
27 HIPC countries, but not to poor nations outside of HIPC's purview.

Activists have criticized the fact that not all the leading proposals
actually cancel these countries' debts. The UK proposal would make debt
service payments on behalf of poor countries over a period of ten years,
after which developing countries would still be responsible for the
original debt stock.

Finally, perhaps the most contentious question that finance ministers
are now debating pertains to how the program, whatever its scope, will
be financed. The UK has proposed that debt relief be financed primarily
through a sale of the IMF's gold reserves. The reserves are widely
acknowledged to be undervalued, and a simple revaluation could allow
relief to be granted swiftly and painlessly. But the political will
required for such a move is not necessarily easy to come by. One reason
the White House opposes this approach is that existing laws would
require it to gain congressional authorization for such an action,
something it is not eager to do.

Instead, the White House contends that funds for debt relief should come
out of the budgets for the IMF's and World Bank's poverty reduction
initiatives. Its plan would attempt to avoid any major gold revaluation
that would require congressional approval. European representatives are
opposed to this idea. They argue that a new debt program should include
additional aid for poorer nations, and should not simply substitute debt
relief for other aid that the countries are now receiving. To finance
supplemental aid the British plan calls for increased contributions to
the World Bank from its member states.

European complaints about U.S. financing proposals are rooted in a
broader political opposition to American unilateralism. In economic
foreign policy as in its push for =93regime change=94 in Iraq, the Bush
administration has shown a willingness to sidestep international bodies
and act alone. In contrast to the Clinton administration, which relied
heavily on International Financial Institutions (IFIs) to enact its
trade and development agenda, Bush's officers have largely shifted
toward using direct aid payments as incentives for poorer countries to
comply with U.S. desires and also toward initiating bilateral trade
negotiations with nations that they consider strategically important.

In this context, European nations are interested in maintaining the
World Bank and other Bretton Woods institutions as multilateral checks
on U.S. prerogatives. With regard to debt relief, they are distressed
that the U.S. plan will reduce the power of the Bank. They are opposed
to suggestions made by Allan Meltzer, and increasingly forwarded by the
White House itself, that the World Bank phase out loan-making in favor
of giving grants. Absent large loans in its portfolio, the Bank's
standing as a major creditor--and thus its influence on development
policy--would be significantly diminished.

While European governments are convinced that this would be a bad thing,
many critics from across the political spectrum would disagree.
Interestingly, this debate has united unilateralist conservatives and
long-standing progressive opponents of the IMF and World Bank. Each
group favors decreasing the power of the existing IFIs, although for
different reasons.

Erecting a new roadblock, Treasury Secretary John Snow announced in late
April that the U.S. is unwilling to compromise on the issue of IMF gold
sales, removing this option from the negotiating table. This has led to
increasing skepticism that the G7 will reach a deal on this
institution's debt stock in time for their July meetings in Scotland,
and it represents a step backward from previous statements supporting
broad relief in the near future. At the same time, an agreement on World
Bank debt may still go forward; this step would create a landmark
precedent for full cancellation.


     A Movement Looks Forward

=93As we celebrate our victory, we should remember that we have our work
cut out for us,=94 wrote Watkins to Jubilee USA supporters after the G7's
nod toward 100% relief. In the build-up to and aftermath of the July
talks, Jubilee and other advocates of debt cancellation will closely
monitor negotiations and will push for several key demands.

First, they will lobby to ensure that the plans adopted actually reach
the 100% target. The formulas created in upcoming meetings will
determine whether full cancellation becomes a reality for many countries
or whether it will remain rhetoric for all but a few of the very poorest
debtors.

Second, advocates will continue to push for non-HIPC countries to
receive cancellation. A number of very poor countries, such as Nigeria,
Sri Lanka, Bangladesh, Jamaica, and Haiti, are not included in the HIPC
process. Some =93middle income=94 countries, such as Brazil and Mexico, hav=
e
large populations living in desperate poverty, yet are too prosperous to
qualify for debt cancellation under the HIPC guidelines. These countries
require a new process that would allow them to spend their resources on
poverty reduction and human development rather than debt service.

Many of the debts held by these countries were accumulated by dictators
or other corrupt leaders; these are =93odious=94 debts. Campaigners have
long argued that peoples who overthrow undemocratic governments should
not be saddled with debts accumulated by the deposed leaders. (As
President Bush argued in the case of Iraq, the future of a people =93
should not be mortgaged to the enormous burden of debt incurred to
enrich=94 a despot.) Instead, the international community must create a
mechanism through which debts can be ruled illegitimate.

Third, activists will demand an end to neoliberal conditionality,
working to see that the plan enacted by the G7 does not come with
structural adjustment mandates like those included in the HIPC
initiatives. Campaigners have rightly expressed concern that proposals
such as the UK's only cancel the debts of poor countries that have
completed the HIPC program. In effect, countries would continue to be
required to submit to economic restructuring before being granted relief.

Finally, other advocates are moving beyond =93historic=94 debt and working
to see that, in a post-cancellation era, new debts do not accumulate
anew. In 2004, the IMF and World Bank introduced a Debt Sustainability
Framework to address new lending to developing countries. Civil society
organizations have welcomed discussion of the new initiative, but they
charge that the current proposal would keep negative =93conditionality=94
firmly in place. As proposed, the framework would make the international
institutions responsible for rewarding =93strong policies=94--which in IMF
parlance has too often meant structural adjustment and trade
liberalization. Given these policies' poor record of producing growth in
many developing countries, it is unclear how perpetuating them would
preempt a new debt crisis.

This debate demonstrates that, ultimately, debt is only one aspect of
the system of economic neoliberalism--better known in the U.S. as
=93corporate globalization=94--that in the past 30 years has deepened the
divide between wealthy countries and the nations of the global South.
Even if thoroughgoing debt relief comes to fruition, most developing
countries will still face steep barriers to exercising true
self-determination and pursuing economic models that are not favored by
the U.S. Treasury. Whether through making use of the IMF or directly
leveraging their power as major donors and trading partners, G7
countries have often been zealous in promoting programs of economic
restructuring similar to those forced on HIPC nations--even among
countries that are not heavily indebted.

As neoliberalism falls into increasingly ill repute, and as a greater
number of countries escape the bonds of debt, a globalization movement
that has attracted many new supporters with its call for debt
cancellation will face the task of defending alternative economic
courses that defy Washington orthodoxy. In this respect, debt relief
will not be an end in itself, but a means of confronting the broader
issues that are shaping the course of international development.
Long-term challenges need not detract from historic advances, however.
If 2005's meetings match expectations for progress, campaigners in the
global South and their broad network of allies should be able to savor
an important, if incomplete, victory.

* <http://www.fpif.org/papers/0505debt_body.html#_ftnref1> The G7
includes Canada, the United Kingdom, France
<http://en.wikipedia.org/wiki/France>, Germany
<http://en.wikipedia.org/wiki/Germany>, Italy
<http://en.wikipedia.org/wiki/Italy>, Japan
<http://en.wikipedia.org/wiki/Japan>, and the United States. Since 1998,
the Russian president has also joined the heads of state from the G7
countries at annual summits, creating the G8. However, because Russia is
not considered a major economic power or a leading creditor, finance
ministers from the G7 nations continue to meet as a distinct group.
Decisions about debt cancellation will be determined by the G7
countries, although Russian representatives will be present at meetings
like the July summit in Scotland to discuss other matters.


Published by Foreign Policy In Focus (FPIF), a joint project of the
International Relations Center (IRC, online at www.irc-online.org
<http://www.irc-online.org/>) and the Institute for Policy Studies (IPS,
online at www.ips-dc.org <http://www.ips-dc.org/>). =A92005. All rights
reserved.

*Recommended Citation*
Mark Engler, =93Debt Cancellation: Historic Victories, New Challenges=94
(Silver City, NM & Washington, DC: Foreign Policy In Focus, May 17, 2005).

*Web location*:
http://www.fpif.org/papers/0505debt.html

*Production Information*
Writer: Mark Engler
Editor: Emira Woods, IPS
Layout: Tonya Cannariato, IRC