[stop-imf] Latin American Debt Relief: Less Than Meets the Eye

[Robert Weissman]

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Council On Hemispheric Affairs

Monitoring Political, Economic and Diplomatic Issues Affecting the
Western Hemisphere

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**Tuesday, August 2 2005*
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*_COHA MEMORANDUM TO THE PRESS_*

*Latin American Debt Relief:
There is Less Than Meets the Eye *

*
=95 At the beginning of July, the G8 nations set forth a precedent-setting
=93100 percent=94 debt relief plan for qualifying African and Latin America=
n
countries.
**
=95 However, the majority of Latin American debt is owed to parties not
included in the plan. As a result, no more than a third of the face
value of the foreign debt was actually waived for any of the four
regional countries covered in the agreement, while other needy nations
were completely excluded.

=95 Debt relief is an absolute essential for curing the region=92s social
ills, but in order to qualify, candidate countries are forced to comply
with damaging neoliberal conditionalities.

=95 For debt relief to be successful, a new, more generous, more inclusive
process must be implemented that allows a Latin American nation to
prioritize its socioeconomic needs and dictate the tempo of its own
development.
*

With rock concerts, public rallies and white bracelets alike petitioning
world leaders to =93make poverty history,=94 the issue of debt relief has
recently arrested unprecedented international attention. This
high-energy advocacy coincided with the annual meeting of the club of
rich nations, the G8 Summit, held July 5-8 in Scotland. There, the debt
of the developing world was addressed, with a landmark =93100 percent=94
debt cancellation proposal put on the table for qualifying countries.
Nearly all of the fanfare focused on Africa, whose development has been
all but paralyzed by its crippling external debt of $333 billion (2004),
an alarming 36 percent of the continent=92s total GDP. While 14 of the 18
beneficiary countries included in the G8 plan (devised by financial
ministers from member countries Britain, Japan, Canada, France, Italy,
Russia, Germany and the U.S.) are located in Africa, also of
significance are the four remaining ones from Latin America, a region
which has been similarly beset with unmanageable external debt burdens.

At $720 billion, Latin America=92s foreign debt is equivalent to 38
percent of the continent=92s GDP. The debt has represented a significant
drain on development in Latin America since the region=92s crisis of the
early 1980s, triggered when Mexico defaulted in 1982 on its extreme
obligations. Payments on debt service alone can consume over half of any
given Latin American government=92s annual expenditures, frequently at the
cost of investment in infrastructure and social programs. This
misappropriation results in troubled economies, unsatisfied citizenries
and unstable polities, all which perennially roil the region.

*Too Good to be True*
Given the debilitating impact of Latin America=92s debt burden=97not to
mention the relative lack of progress on the issue=97it is no wonder that
the G8=92s announcement of =93100 percent=94 debt cancellation caused hopes=
 to
soar throughout Latin America, as well as among debt relief activists.
Britain=92s financial chief Gordon Brown dubbed the deal =93the biggest deb=
t
settlement the world has ever seen,=94 and the global media heralded the
plan, which would supposedly waive all foreign debt for qualifying
countries. This agreement, unlike its predecessor the Highly Indebted
Poor Country (HIPC) initiative, was designed to wipe out not only debt
service payments, but also debt principal held by Bolivia, Guyana,
Honduras and Nicaragua, presumably leaving the participating countries
with ample funds for much needed development endeavors.

The devil, however, lurks incontestably in the details. Only 24 percent
of the countries=92 debt is owed to the institutions inscribed in the debt
cancellation plan=97primarily, the International Monetary Fund (IMF) and
the World Bank. The overwhelming majority of debt in the four included
hemispheric countries is owed to bilateral and private institutions and
to the Inter-American Development Bank (IDB), which were not even
included in the original scheme. In reality, the alleged =93100 percent=94
cancellation plan only signifies roughly 23 percent cancellation for
Guyana, 32 percent for Bolivia, 25 percent for Honduras, and a mere 18
percent for Nicaragua, according to 2003 World Bank debt figures. While
partial cancellation, of course, is preferable to none, the figures
involved are less than sufficient to meet the countries=92 needs.

*Conspicuous Inadequacy*
Further highlighting the insufficiency of the debt relief scheme, a
number of countries with huge debt burdens were not included in the
original HIPC plans nor in the latest G8 formula, due to the dogmatic
criteria used by the World Bank to determine need. Haiti, for example,
whose debt represents 40 percent of its GDP, spends twice as much on
debt payments as it does on healthcare. The poorest country in the
hemisphere, Haiti=92s debt has more than tripled in the past decade, and
its social conditions have correspondingly deteriorated, with its per
capita income figure now standing at $355. Despite its absurdly high
debt to export ratio of almost 300 percent, Haiti eluded the World Bank
qualification criteria, preventing the country=92s much-needed debt
relief. Though not as dramatic as the Haitian example, severely indebted
countries like Argentina, Brazil, Ecuador, Jamaica and Peru are also
significantly hindered by debt payments without any reform in sight; in
one year Jamaica paid $17.05 for every $1 received in aid grants, and
debt payments constitute a staggering 70 percent of Argentina=92s GDP.
Countries like Brazil and Mexico struggle with debt despite their large
economies and relative prosperity, as debt payments limit their ability
to spend their limited resources on social needs, even as a growing
percentage of each country=92s population may be living in poverty.

The issue is not that these countries have failed to make sincere
attempts to reduce their debt. According to the World Bank, in meeting
its interest payments, Latin America has paid more than the equivalence
of its total debt, shelling out $730 billion between 1982 and 1996
without so much as making a dent in its debt inventory. Countries are
forced to acquire new debt in order to pay off the interest from former
loans, a quicksand-like scenario which leaves no easy exit. In light of
these staggering facts, it is important to hold the G8 nations fully
responsible in the process of debt cancellation; a token 20-30 percent
debt cancellation for four Latin countries, regardless of the
accompanying rhetoric, is not sufficient. To fully cancel these debts is
not an act of charity, but one of fairness and responsibility, as Latin
America=92s debt burden and the resultant bleak social conditions in the
affected nations, are as much the fault of the avaricious lending
practices of financial institutions, as the wanton and often venal
spending records of past Latin American military governments. The G8 is
not fully owning up to this responsibility, spending for every one
dollar in aid about six dollars in agricultural subsidies for their own
economies. This ratio ends up being extremely disadvantageous to the
economies of the developing world.

*The Ifs, Ands and Buts of Debt Relief*
Debt relief in no way is a blank check from the developed world. Rather,
qualifying countries pay a high premium for the coveted relief, as
cancellation accords historically have been garlanded with neoliberal
conditionalities that have proven to be overwhelmingly burdensome to
debtor nations. These terms, often embodied in the notorious Structural
Adjustment Programs (SAPs) that accompany most aid packages, force
countries to privatize valuable state industries (often for pennies on
the dollar), as well as liberalize trade and cut public spending. In a
recent interview with COHA, Morrigan Phillips, a fellow at Jubilee USA,
an advocacy network in the forefront of the debt relief movement,
commented that =93fighting those conditions is becoming the most important
thing=94 in the debt relief movement, for they have proved harmful to the
continent. Bolivia and Guyana, for example, both cite an erosion of
workers=92 income as a result of the SAPs. Further, most countries face
decreases in income equality, employment, literacy and living conditions
for the average citizen as a result of implementing such required reforms.

According to a 2001 estimate by the UN Economic Commission for Latin
America, 45 percent of Latin Americans now live below the poverty line,
as opposed to 41 percent in 1980, before the IMF initiatives began.
Despite such dire results, conditionalities nevertheless remain a
prerequisite for debt relief. Bolivia, Honduras, Nicaragua and Guyana
were required to meet a =93completion point=94 of neoliberal conformity
before they could be considered for debt relief by the G8 countries and
their financial institutions; any nation hoping for relief must go
through the same process.

Candidates seeking debt relief are caught in a classic Catch-22 dilemma:
in order to relieve poverty they must institutionalize the circumstances
that created it in the first place. This compromise does not end when
external debts are finally relieved. Rather, countries must continue to
conform to IMF/World Bank expectations in order to win the good credit
ratings that are the password for attracting foreign investments.
Success in debt relief endeavors must begin by eliminating these
hamstringing conditionalities; as analyst Mark Engler of Foreign Policy
in Focus told COHA, =93Countries should not have to be invaded in order to
have their debts forgiven.=94

*The Power of Precedence*
The news about debt relief=97including that from the most recent G8
proposal=97is not all doom and gloom. Martin Luther King Jr. once said,
=93[A true revolution of values] will look across the seas and see
individual capitalists in the West investing huge sums of money in Asia,
Africa, and South America only to take profits out with no concern for
the social betterment of the countries, and say: =91This is not just=92.=94
Perhaps such a revolution of values is now beginning to take place, even
if debt relief efforts have thus far been unable to solve the needs of
the developing world. According to Engler, G8 leaders have, in essence,
established that full debt cancellation is =93morally just and politically
feasible,=94 acknowledging that relief is both necessary for growth and
possible to bring about. Those involved in the anti-debt movement are in
a position to apply further pressure and continue to make demands on G8
leaders, who will find it increasingly difficult to argue against the
precedents that they themselves have established. Continuing on this
trajectory, it is not overly idealistic to foresee the cancellation of
IDB debts or even private debts, which would further pave the road to
true full debt cancellation.

Though partial debt relief has not provided final solutions, it has
provided some tangible benefits. According to the World Bank, between
1999 and 2004, countries receiving debt relief have been able to almost
double their spending on poverty reduction programs and institute social
reforms such as in the areas of education, health care and water
purification; the United Nations Development Program estimates that the
lives of several million children could be saved annually if the debt of
the world=92s 20 poorest countries were cancelled and the money instead
invested in health care. Debt cancellation clearly has been found to be
a powerful tool for promoting growth and social investment, and as such,
it deserves higher prioritization in any dialogue involving G8 leaders
as well as those from the developing world.

*A Little Initiative, Anyone?*
In spite of debt relief=92s powerful potential good in the development
process, the G8 has shirked from the full leadership its members should
be taking on the issue. Engler described the HIPC debt relief
initiatives leading up to the July agreement as =93kicking and screaming
compromises,=94 conceded to by the G8 only after years of relentless
pressure by those involved in the Jubilee debt relief movement and
others. As a result, some countries have chosen to take their own course
of action instead of waiting for G8 debt relief to kick in.

In December 2001, Argentina defaulted on a portion of its bonds worth
$81 billion, a move that eventually, if reluctantly, was accepted by
70-75 percent of the country=92s bondholders and subsequently forced the
IMF into a bruising renegotiation process. In June 2005, Ecuador
announced that it would divert resources traditionally used to pay off
its debt into capitol infrastructure and social investment, a decision
which initially caused creditors to raise an uproar, but eventually they
resigned themselves to accept the proposal. The IMF is only as strong as
countries allow it to be, and when debtor nations like Argentina and
Ecuador come forth with their own initiatives, pressure mounts, and the
IMF is forced to enter into the negotiation process if it wants to
maintain some degree of control over its outcome. This type of
self-determination is relatively rare in a region that usually succumbs
to IMF neoliberal mandates, but it may be necessary if debtor nations
are to ever rid themselves of crushing debt burdens and the social
ramifications that normally accompany them.

Still, prospects of greater self-determination do not obliterate the
considerable significance that further G8-initiated relief could
represent. Argentina, in spite of its monumental default, still owes
$13.8 billion to the IMF and over $15 billion to other multilateral
institutions; its debt payments continue to claim upwards of 75 percent
of the country=92s annual GDP. Although Nicaragua was included in the
recent =93100 percent=94 deal, remaining debt payments represent two and a
half times what is spent on health and education combined, and 11 times
its primary health care spending. The evidence is clear that further
relief is needed to solve the residual debt-related woes of Latin America.

*Breaking Outside the Mold*
If debt cancellation initiatives are to be successful, they must be
fundamentally altered, allowing countries to dictate their own
development. Instead of imposing a =93one size fits all=94 mandate on
affected nations, relief-granting institutions must acknowledge the
wide-ranging diversity of individual Latin American nations in their
reform plannings. Implementing economic policy should be expected to
proceed very differently in Haiti than in places like Brazil and Mexico,
which have much larger economies but nonetheless struggle with immense
poverty. As Engler told COHA, =93It=92s really a question of allowing
countries to experiment and create their own path to development, for no
other model has been allowed to develop.=94 Approaching debt relief and
development from this perspective would probably do a lot more for Latin
America=92s poor than misleading labels.

/*This analysis was prepared by COHA Research Associate Alicia Asper.
*/

*/August 2, 2005/*

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*Memorandum to the Press 05.84*

**Word Count: 2350**


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