With rock concerts, public rallies and white bracelets alike petitioning world leaders to “make poverty history,” 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 “100 percent” 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’s 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’s foreign debt is equivalent to 38 percent of the continent’s GDP. The debt has represented a significant drain on development in Latin America since the region’s 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’s 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’s debt burden—not to mention the relative lack of progress on the issue—it is no wonder that the G8’s announcement of “100 percent” debt cancellation caused hopes to soar throughout Latin America, as well as among debt relief activists. Britain’s financial chief Gordon Brown dubbed the deal “the biggest debt settlement the world has ever seen,” 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’ debt is owed to the institutions inscribed in the debt cancellation plan—primarily, 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 “100 percent” 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’ needs.
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’s 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’s 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’s 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’s 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’s 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 “fighting those conditions is becoming the most important thing” in the debt relief movement, for they have proved harmful to the continent. Bolivia and Guyana, for example, both cite an erosion of workers’ 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 “completion point” 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, “Countries should not have to be invaded in order to have their debts forgiven.”
The Power of Precedence
The news about debt relief—including that from the most recent G8 proposal—is not all doom and gloom. Martin Luther King Jr. once said, “[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: ‘This is not just’.” 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 “morally just and politically feasible,” 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’s 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’s 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 “kicking and screaming compromises,” 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’s 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’s annual GDP. Although Nicaragua was included in the recent “100 percent” 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 “one size fits all” 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, “It’s really a question of allowing countries to experiment and create their own path to development, for no other model has been allowed to develop.” Approaching debt relief and development from this perspective would probably do a lot more for Latin America’s poor than misleading labels.