Soren Ambrose In Focus piece on Multilateral Debt (fwd)

[Robert Weissman <rob@essential.org>]

Multilateral Debt By Soren Ambrose, Alliance for Global Justice, 50 Years
is Enough

Key Points o In 1996, sub-Saharan Africa paid $2.5 billion more in debt
servicing than it received in new long-term loans and credits.

o The IMF and the World Bank are "preferred creditors" who gain power over
poor countries as the amounts owed to them increase.

o Structural adjustment programs, which reorient economies to benefit
corporate interests while reducing spending on social programs and locally
oriented production, are imposed by IFIs on severely indebted countries.

Multilateral debt is that portion of a country's external debt burden owed
to international financial institutions (IFIs) such as the International
Monetary Fund (IMF) and the World Bank. For most of the world's poorest
countries, multilateral debt looms larger than other debts because of the
IFIs' status as "preferred creditors," as providers of core development
and balance-of-payment loans. This status means that payments to them must
be given the highest priority, over private and bilateral
(government-to-government) debt. These institutions also maintain that
their bylaws prohibit them from granting debt relief or writing off debts,
as governmental and private creditors often do. Governments have special
incentive to stay current with their multilateral debts, since IFIs
determine the creditworthiness of countries: until the IMF gives its stamp
of approval, which usually requires adherence to the economic policies it
recommends, poor countries generally cannot get credit or capital from
other sources. And until a country has signed onto an IMF program, it
cannot apply for bilateral debt relief from the "Paris Club" of creditor
countries.

Significant growth of multilateral debt began with the Latin American debt
crisis of the early 1980s. Mexico, Argentina, and Brazil all came to the
brink of defaulting on loans that large private banks had freely offered
during the 1970s to developing country governments in Latin America and
elsewhere. The IMF and the World Bank responded with massive loan packages
conditioned on implementation of structural adjustment programs (SAPs),
packages of neoliberal economic reforms designed to restore economic
health to indebted countries. With this move, both institutions were
changing course: the IMF was shifting from short-term, balance-of-payment
loans mainly for industrialized countries to medium-term loans for
developing nations, and the World Bank was adding policy-linked loans to
its infrastructure development projects. Private debts were converted into
multilateral debt as countries used the funds acquired from the IFIs to
pay off the banks that would no longer loan to them.

Multilateral debt is a problem for the entire developing world, but it's
particularly acute for the poorest countries. For low-income countries
(defined by the World Bank as those with per capita GNP below $785),
multilateral debt increased by some 544% between 1980 and 1997, from $24.1
billion to $155.3 billion, and currently constitutes 32.75% of their total
long-term debt burden (versus about 25% in 1980). For the most severely
indebted of those low-income countries, multilateral debt increased by
459%, from $10.6 billion to $59.3 billion, with a corresponding percentage
increase in their long-term debt from 22.3% to 30%. During this same
period, the debt burden of middle-income countries-those with per capita
GNP between $785 and $9600-increased by 481%, amounting to a comparatively
modest 15% of their total long-term obligations (up from 9.4% in 1980). In
1996, sub-Saharan Africa paid $2.5 billion more in debt servicing than it
received in new long-term loans and credits.

The impact of debt is felt in two ways-through the diversion of national
resources to debt servicing and through the effects of SAPs which are
designed to transform economies from production for the local market to a
"globalized" model of production and export of whatever garners the most
hard currency. SAP-linked IFI loans are meant to finance the redesign of
governmental, industrial, and commercial systems, to enable countries to
continue to pay debt servicing. However, SAPs have almost invariably
caused increased poverty, unemployment, and environmental destruction and
have usually led to an increase in the overall size of a country's
multilateral debt. The universal failure of the standard SAP recipe has
meant that debt and structural adjustment simply end up fueling each
other.

A global movement called Jubilee 2000, which calls for the cancellation of
poor countries' unpayable debts by the beginning of the new millennium,
has gained surprising momentum. With national campaigns in some 40
countries (about half of them in the South) and the support of many major
religious figures and celebrities, the movement may even be putting a
scare into the IFIs. A recent flurry of new proposals from G-7 countries
to improve debt relief mechanisms has been widely attributed, by the
Financial Times and the Wall Street Journal among others, to the pressure
mounted by Jubilee 2000.


Problems With Current U.S. Policy

Key Problems o A voting structure determined by financial contributions
means that poor countries have little voice in the IFIs, while the U.S.
government holds nearly decisive power there.

o The IMF/World Bank debt plan is calculated less to provide meaningful
relief than to ensure that countries continue to implement neoliberal
economic policies.

o In determining their policy on debt, U.S. Treasury officials have sought
to maintain leverage over other nations' economic policies.

Voting power at the World Bank and the IMF is apportioned according to the
size of each country's monetary contribution. The U.S. has by far the
largest share (18% of all votes) and can veto policy decisions, since they
require an 85% vote. The IFIs may not be totally controlled by the U.S.,
but it's close: the New York Times recently described the IMF as a "proxy"
of the U.S. government. Any analysis of IFI policies is thus also a
critique of U.S. policies.

The response of the World Bank and the IMF to the crisis of unpayable debt
has been the Heavily Indebted Poor Countries (HIPC) Initiative of 1996.
The ostensible aim of the program is to determine which countries have
unsustainable debt burdens, then to caucus with each country's creditors
to reduce that burden across the board until it is sustainable. The
program seeks to ensure that countries do not run up unsustainable debts
again by insisting that beneficiaries demonstrate a proven commitment to
"sound economic policies"-the IFIs' usual euphemism for SAPs.

To qualify for HIPC, a country must complete three years under an
IMF-designed SAP. Even after that hurdle, the country must fulfill a
further three years bound by another SAP before relief on multilateral
debt is granted. At that time, all creditors will give matching relief to
reduce the country's debt to a "sustainable" level. The June 1999 G-7
summit proposed moving up the granting of relief to the point after
completion of the first SAP, though the debt could be reinstated if the
second SAP was not fulfilled to the IMF's satisfaction. The cruel paradox
here is that countries in desperate need of debt relief so they can begin
to direct resources to social sectors are required to first demonstrate
their willingness to make things worse by starving their people of health
care, food subsidies, and education.

There are other problems with HIPC's complex formulas. "Debt
sustainability" basically means how much a country can repay without going
broke. In many cases, countries are not paying all their debt servicing
bills because they simply haven't got the money. But the definition of
"sustainability" is a harsh one: a debt-to-export ratio of 200 to 250%,
meaning a debtor country must pay between 20 and 25% of its income from
exports just to service (pay the interest on) its debt.

The June 1999 G-7 summit proposed lowering debt servicing to 15%.Since the
HIPC Initiative was adopted in 1996, only five countries-Uganda, Bolivia,
Guyana, Mozambique, and Mali-have received or are in a position to receive
any relief before 2000. And these countries have found HIPC relief to be
worth relatively little. Uganda began to receive debt relief worth $350
million in April 1998, but as a consequence lost access to other debt
relief funding mechanisms. With a drop in the international price of
coffee, its chief export, Uganda found itself by April 1999 once again
saddled with an officially "unsustainable" debt burden. An internal World
Bank/IMF report indicates that Mali and Burkina Faso (slated for HIPC
relief in early 2000) will actually pay more on their debt after
graduating from HIPC.

The meager results of the HIPC program suggest that its promises are
hollow ones, made solely to ensure that countries remain on the
debt-and-structural-adjustment treadmill when they might be tempted to
default and opt out of the global financial system despite the prospect of
losing access to markets and capital.

The IFIs and the U.S. government also have incentives to avert defaults:
any gaps in the globalized economy represent a loss of control and
potential markets and may even end up offering an alternative model for
economic development independent of U.S. influence.

Outright debt cancellation-the only humane solution to the poorest
countries' debt crises-would result in the same loss of leverage for the
IFIs as default, since the absence of debt burdens would make countries
more creditworthy and thus less dependent on the IFIs' conditioned loans.
In the wake of Hurricane Mitch's devastation in Central America, Treasury
Department officials gave "loss of leverage" as their reason for refusing
to consider debt cancellation for Nicaragua and Honduras.

The revisions in the HIPC initiative proposed at the 1999 G-7 summit rely
on sales of part of the IMF's gold stocks to finance additional relief.
However, Treasury Department figures suggest that only about 40% of the
proceeds of gold sales would go to the HIPC Trust Funds, with the
majority, some 60%, actually going to the IMF's long-term, low-interest
loan fund, the Enhanced Structural Adjustment Facility (ESAF). This would,
of course, not be a productive way to pursue debt relief, and it would
also have the effect of making ESAF, which expects a rush of repayments on
old loans starting in 2004, forever self-financing: a perpetual structural
adjustment machine that need never again apply to Congress or anyone else
for funds.


Toward a New Foreign Policy

Key Recommendations o Immediate and comprehensive debt cancellation is
necessary for poor countries to reenter the global economy on equitable
terms.

o An international body-with strict requirements of fair representation,
with an orientation to sustainable and equitable development, and with
authority over the IMF and the World Bank-should be created for the
adjudication of debt cancellation and reduction.

o Debts incurred for failed economic programs and nonperforming
infrastructure projects should be annulled.

For countries that have endured decades of severe indebtedness, poverty,
and subordination to the IFIs' economic policies, cancellation of
substantial portions, if not all, of their outstanding debt, as urged by
Jubilee 2000, is necessary if their resources are ever to become available
for development and if their people are ever to gain a sense of ownership
of their economic destiny.

The U.S. government should ideally take the lead in such a program of
cancellation, first by canceling its bilateral debt with the poorest
countries, and then by using its position at the IFIs to urge cancellation
of multilateral debt. Even if that were to occur, a system for treating
national debts independent of the IFIs is still necessary. With such
cancellation not forthcoming, such a mechanism is all the more necessary.

University of Vienna economist Kunibert Raffer has suggested a process for
according partial insolvency to national governments. Raffer cites
provisions in U.S. law permitting debts of local governments to be treated
like those of a company or an individual who has gone bankrupt, but
essential services provided by the municipality are not affected. Although
Raffer maintains that this process could occur without the creation of a
new international agency-he suggests a panel of arbitrators with equal
creditor/debtor representation-it is hard to imagine that the World Bank
and the IMF would have adequate incentive to participate without the
creation of some new regimen. This would require that the United Nations
or the G-7 establish a body with authority over both the IFIs and debtor
governments.

Once constituted, the new international bankruptcy body would function
much like courts in the U.S. adjudicating cases of insolvency or
bankruptcy. It would be empowered to instruct creditors to accept a
portion of their claims and demand no more, and it would establish a
process for cleansing a country's credit record, so that nation could
reenter the global economy on its own terms. This new entity would not
have the power to insist on particular economic programs as a condition
for debt reduction.

Objections to such a body are easy to imagine: the IFIs would fret that
their status as preferred creditors would be threatened if decisions on
debt relief were removed from their control. Such concerns should be met
with the insistence-more easily imaginable, now, in the wake of the
criticism IFI policies have received since the East Asian financial
meltdown-that the IFIs must take some responsibility for the effects of
the policies they have imposed around the world. If the lower interest
rates charged by the IFIs have entitled them to special status, the harm
done by the policies imposed with those rates must also be considered. In
a similar vein, the World Bank should be pressured to annul debts owed to
it for projects its own analyses show to be failures. (A 1992 World Bank
report, Effective Implementation, estimated 37.5% of World Bank projects
should be so classified.)

The IFIs should also be forced to accept-through a change in their bylaws,
if necessary-the option of writing off debts. Private banks do this
routinely with loans they can never expect to be repaid, and many took
some losses in resolving the Latin American debt crisis in the early
1980s.

If IMF gold is sold for debt relief, it should go directly to a fund to
buy out the debt owed to the IFIs by the most indebted and poorest
countries. Such a move would not obviate the need for the insolvency
process described above; indeed, the proposed bankruptcy body should
perform an assessment of which IFI claims are legitimate in light of their
poor policy advice and failed projects. The bottom line is that the
world's poorest countries need debt cancellation if they are to function
as sovereign components of a globalized economy.

Soren Ambrose is a policy analyst with the Alliance for Global Justice and
with 50 Years is Enough: U.S. Network for Global Economic Justice.


Sources for More Information

Organizations

Alliance for Global Justice 1247 E St. SE Washington, DC 20003 Voice:
(202) 544-9355 Fax: (202) 544-9359 Email: soren@igc.org Contact: Soren
Ambrose

European Network on Debt and Development (EURODAD)
Rue Dejoncker 46
B-1060 Brussels
BELGIUM
Voice: +32-2-543-9060
Fax: +32-2-544-0559
Email: eurodad@agoranet.be
Website: http://www.oneworld.org/eurodad

50 Years is Enough: U.S. Network for Global Economic Justice
1247 E St. SE
Washington, DC 20003
Voice: (202) 463-2265
Fax: (202) 544-9359
Email: wb50years@igc.org
Website: http://www.50years.org
Contact: Njoki Njehu

Friends of the Earth-U.S.
1025 Vermont Ave. NW, 3rd Floor
Washington, DC 20005-6303
Voice: (202) 783-7400
Fax: (202) 783-0444
Email: foedc@igc.org
Website: http://www.foe.org
Contact: Andrea Durbin

Jubilee 2000 International Coalition
1 Rivington Street
London EC2A 3DT
UK
Voice: +44 (0) 171 739 1000
Fax: +44 (0) 171 739 2300
Email: mail@jubilee20000uk.org
Website: http://www.oneworld.org/jubilee2000/
	(Their website now includes a new proposal for
	debt arbitration "concordats" by Ann Pettifor, 
	building on the work of Kunibert Raffer.)

Jubilee 2000/USA
222 E. Capitol St. NE
Washington, DC 20003-1036
Voice: (202) 783-3566
Fax: (202) 546-4468
Email: coord@j2000usa.org
Website: http://www.j2000usa.org
Contact: David Bryden

Publications

Susan George, A Fate Worse Than Debt: The World Financial Crisis and the
Poor (New York: Grove Weidenfeld, 1990).

Karen Hansen-Kuhn and Doug Hellinger, Conditioning Debt Relief on
Adjustment: Creating the Conditions for More Indebtedness (Washington: The
Development GAP, April 1999).

Cheryl Payer, Lent and Lost: Foreign Credit and Third World Development
(Atlantic Highlands, NJ: Zed, 1991).

World Bank, Effective Implementation: Key to Development Impact, Report of
the World Bank's Portfolio Management Task Force (Washington: World Bank,
1992).

World Wide Web

International Monetary Fund http://www.imf.org

Oxfam http://www.oxfamamerica.org/INFO.HTML

Kunibert Raffer (personal web page of this expert on insolvency and
governmental debt) http://mailbox.univie.ac.at/~a4411maj/

U.S. Treasury Department
http://www.treas.gov

World Bank
http://www.worldbank.org