Papers - DDCI Research

DDCI Research Other Research Conference Papers Briefing Papers Articles

A Debt and Development Coalition Ireland (DDCI) Discussion Paper
Researched and Written by Niamh Gaynor March 2003

Summary

This paper sets out the case for democratisation of debt resolution mechanisms. It begins by outlining the value of democracy, exploring its key principles. The paper then presents the main features of IMF proposals for an alternative debt resolution mechanism, evaluating these against the key principles of a democratic process. The main features of proposals emanating from a range of NGOs are then presented and also evaluated against the key democratic principles. The paper outlines the key elements of a model for a debt resolution mechanism based on a democratically balanced structure and process. The concluding section identifies the links - and missing links - between a fair and independent process to deal with debt and the Irish Debt policy.

"The Jubilee campaign, whilst successful in increasing - albeit insufficiently - the amount of debt cancellation on offer, also successfully exposed the ineffectual system of global governance which left resolution of the crisis in the sole hands of creditors. This creates a situation of 'moral hazard' in decision making where the IFIs are judge and plaintiff. Not alone has this mitigated against resolution of the current crisis, it also means there are no checks and balances against future debt crises. If creditors control the debt relief mechanisms, there is less pressure on them to ensure greater responsibility in future lending. The next step therefore, is to work towards the establishment and ratification of a new fair and independent system for dealing with sovereign debt"

DDCI Programme (2003-2005)

1. Introduction

Political developments in the international debt crisis have spectacularly failed to address the scale, the urgency, and the roots of the crisis which continues its devastating impact on so many peoples lives.

In this context we welcome the publication of the Irish Debt Policy which clarifies the Irish official position on the issue. In particular, we welcome the government's support, in principle, for 'total debt cancellation' , and echo an Taoiseach's call that

"we must do more, much more, to alleviate the debt burden on poor, heavily indebted countries". Ireland supports, in principle, the cancellation fo their debts .

We are in agreement with the government that assessments of debt sustainability must prioritise social need over debt payments.

To this end we further agree with the government that the most recent debt relief initiative, HIPC 2, is failing to deliver on its stated objective of debt sustainability , both on its own terms, and in terms of human development. We share the concerns raised in this regard :

'We are concerned, however, that the HIPC process is not working effectively and is not delivering on its stated objective of debt sustainability' .

However, there is one additional, critical policy issue which we believe is central to the failure of HIPC : the democratic deficit within the process itself, with creditors currently acting as judge and plaintiff, and debtors afforded little or no voice. We are disappointed that the Irish government's 2002 Debt Policy makes no mention of this issue.

It is our belief that, as long as this skewed system, which openly flouts all principles of democratic engagement, is allowed continue, creditors interests will dominate and those of debtors - the development and welfare of their countries and peoples - will remain subservient. Debt sustainability will continue to be based on creditors' criteria (export earnings and economic development) rather than on debtors' needs (social indicators and human development), and the social and economic devastation wrought by the crisis will persist. Furthermore, there will be no acknowledgement of the fact that some of the debt is odious and illegitimate.

This theme is of central concern to DDCI. Only through a democratisation of the debt resolution mechanisms, whereby a balance between creditors and debtors interests and requirements is struck, will a just and sustainable exit from the crisis be achieved.

2. Contribution of Democracy

Nobel laureate Amartya Sen has argued that the most pre-eminent development of the twentieth century is the rise of democracy . However, the concept has been with us for much longer, having been debated and developed since the time of the ancient Greeks. Whilst no universal framework is posited, the concept has been moulded, challenged and developed over time - from Plato's arguments against rule by 'non-experts' , to eighteenth century views on inclusion, participation, rights and institutional arrangements , and on to more recent views on the importance of dialogue in the process .

Today, democracy, meaning rule by the 'demos', the people, is accepted as a system of decision-making and governance which can be ascribed to national, international, regional and local systems alike. Sen has identified three positive contributions democratic processes make:

• they enrich individual lives through more freedom (involving political and civil rights);
  
  
• they provide political incentives to the rulers to respond positively to the needs and the demands of the people;
  
  
• the process of open dialogues and debates that democratic processes allow helps in the formation of values and priorities, and this can be very important for equity and justice.
  

This last contribution illustrates that democracy is seen as a process, a means to an end, rather than an end in itself. In recent years the move towards a process of democracy known as 'Democratic Deliberation' sets out to re-invigorate the understanding and practice of democracy in a pluralist and complicated world through emphasising democracy as a process that requires ongoing deliberation and dialogue. Key to this process is the full and equal participation of all stakeholders.

3. Democratic Principles which DDCI has Identified as Key to a Democratic Debt Resolution Mechanism

Whilst democratic theory is constantly evolving, and democratic structures and processes vary with stakeholder requirements, the democratic process nonetheless can be seen to embody two core principles; popular control and political equality .

It is by examining these two core underlying principles, and the elements thereof, that we can assess how far a given institution or structure is democratic in practice, and what else might be required to make it so. These principles are outlined below:

3.1 Popular Control

A system of collective decision-making can be said to be democratic to the extent that it is subject to control, (either directly or indirectly - through representation), by all those under its authority. There are a number of elements to this principle:

3.1.1 Inclusion and participation
Inclusion and participation are fundamental to the democratic process. Many commentators point out that it is the practice of democracy, as demonstrated in the scope for voice and by the openness and transparency of the system, that is most critical to the long-term sustainability of resultant decisions. Such decisions are only legitimate if all who are significantly affected by their outcome are included in the decision-making process, and if this process is fully open and transparent. A truly democratic process includes previously politically excluded groups and challenges the restricted frameworks that serve the interests of the elite. From Rousseau on, many political philosophers have argued that only when we are actively involved in making the decisions which structure our lives in all spheres are we really free.

3.1.2 Respect
A core aspect of a democratic process is the agreement that dialogue can only occur where there is respect for difference and a recognition of the right to hold different views and opinions. Participants must be prepared to listen as well as to speak, and to be prepared to learn as well as to teach. All participants in the dialogue must be open and transparent, and genuinely interested in resolving difficulties .

3.2 Political Equality

The idea of popular control over decision-making has often been advanced in modern times, but with a highly restrictive concept of 'the people', excluding different groups or else advocating more votes for some groups than for others. The principle of political equality is therefore required in addition to that of popular control if the latter is to be properly inclusive. A number of elements of this principle may be identified :

3.2.1 Equality at all levels
An intrinsic value of the democratic process derives from commitments to values such as egalitarianism and equality, and from a rejection of elitism and paternalism. It is not simply sufficient for all those affected by the decisions to be included in the process, but it is necessary for them to be included on equal terms. This means inclusion at all stages of the process, including the agenda setting, framework development, and interpretation and identification of priorities and needs. Often the most powerful group is not the one that decides yes or no, but the group who puts the question in the first place.

It can be argued that inequalities often exist in different peoples' capacities to engage in debate. An equitable democratic system is one in which participants express themselves in ways that are comprehensible to others.

3.2.2 Rights
Whilst many commentators focus on the civil and political rights afforded under democratic structures and processes, many stakeholders find that their right to participate in different decision-making fora, is undermined or indeed denied outright. For example, in current debt negotiation mechanisms, debtors' rights to make the case for cancellation of odious debts are denied. Democratic processes should seek to incorporate these voices and include due consideration of their rights.

3.3 Democratic Institutional Arrangements : Checks and Balances - The Separation of Powers

Proposed by the Federalists in the 1780's, after Locke, in an effort to convince New York state voters to ratify the new Constitution of the United States, the proposed separation of powers whereby the legislative, executive and judicial functions of government should be placed in independent hands, was an effort to safeguard democracy from falling into an elected tyranny. The principle of checks and balances has now become an accepted principle in democratic institutional arrangements. The danger of an elected tyranny is as much with us today as it was then, indeed some might argue even more so given the growing disparities of wealth and economic power, fuel to such regimes.

4. Tackling the Democratic Deficit within Debt Resolution Mechanisms

As outlined in the Introduction, it is DDCI's contention that the absence of a democratic process within current debt mechanisms is key to the chronic damaging persistence of the debt crisis. A number of proposals are now on the table for alternative debt resolution procedures, some from NGOs and campaigning groups, and one from the IMF.

The remainder of this paper focuses on highlighting the key features of these proposals, and measuring these features against the key principles of democracy as we have discussed above. The paper describes with the principle features of a framework we envisage as the closest to the democratic principles espoused. The concluding section identifies the links - and missing links - between a fair and independent process to deal with debt and the Irish Debt policy.

5. The IMF's Proposal for a Sovereign Debt Restructuring Mechanism

5.1 Introduction

The IMF's bailouts of Mexico, Russia and the Asian tigers during the financial crises of the l990s were heavily criticised because these benefitted private investors who carried a major responsibility for the crises. The country which was 'bailed out' was left carrying the debt which resulted. When the IMF announced in November 2001 that it would back an international insolvency scheme which would involve the private sector in reducing their debt, this was welcomed. At their annual meeting in September 2002, the IMF agreed to develop a concrete SDRM proposal for consideration at the organisation's meeting on April 12th, 2003 .

5.2 The Principal Objective of the IMF's proposed SDRM

The stated objective of the proposed SDRM is to restructure unsustainable debt quickly with a view to minimising creditor losses and reducing the costs to debtors.

"…the objective of the sovereign debt restructuring mechanism is to provide a framework that strengthens incentives for a sovereign and its creditors to reach a rapid and collaborative agreement on a restructuring of unsustainable debt in a manner that preserves the economic value of assets and facilitates a return to medium-term viability"

5.3 The Proposed SDRM - Its Principal Features

• The debtor country alone would have the right to invoke an SDRM by declaring its debt to be unsustainable.
  
  
• The Fund is considering whether there should be independent confirmation of the country's claim.
  
  
• Only foreign debt would be covered by the SDRM.
  
  
• Claims by the IMF, World Bank and other regional banks are not included. Bilateral creditor claims may also be excluded. The proposed mechanism would therefore cover only debt to the private sector.
  
  
• The decision about the terms of the debt restructuring should be in the hands of a qualified majority (75%) of creditors.
  
  
• There would be no legal protection for the debtor
  
  
• Greater transparency would be provided to creditors in the process - they would have access to information regarding the debtor's general situation including its debts not included under the mechanism.
  
  
• Creditors would have the right to declare that the debtors were not acting in good faith, which would terminate the SDRM.
  
  
• Debtors may have to bear the costs of creditor committees which would be set up as part of the process.

5.4 The Proposed SDRM - How it would Work

This is still under discussion at the Fund. Some aspects, for example the Fund's role in debt sustainability analyses, are still undecided. Most Directors, however, support the idea of the establishment, through an amendment of the Articles of Agreement, an independent dispute resolution body entitled the Sovereign Debt Dispute Resolution Forum, (SDDRF). The IMF would appoint members of the selection panel on the advice of outside professional associations, such as the United Nations Commission on International Trade Law, (UNCITRAL), and insolvency and debt restructuring experts and public or private international organisations with expertise in insolvency and debt. The selection panel would identify potential candidates to the SDDRF, to be approved by the IMF.

5.5 Evaluation of the IMF's proposed SDRM against Democratic Principles

5.5.1. Popular Control

Inclusion and Participation
The proposed SDRM represents a step back from the HIPC initiative (which in theory deals with all the debt owed by the debtor country) as international financial institutions' claims are to be excluded. The system is currently designed to cover only private creditors and therefore it would apply mainly to emerging market economies. A wealth of empirical evidence exists to demonstrate that the poorest countries are most severely affected by the debt crisis. Yet the design of the SDRM effectively excludes them from the process, denying the democratic principle of inclusion of all affected parties. The failure of HIPC as outlined in the Introduction demonstrates the need for a fair and independent process to deal with debt of all countries
A positive feature is that the debtor would have the right to invoke the procedure.
The satisfaction of basic needs is a pre-requisite to participation in political processes. The acknowledgement by the IMF of the need for a new debt mechanism ending lengthy and arduous debt rescheduling negotiations which have retarded social and economic development in debtor nations, is therefore welcome. However the criteria whereby debt sustainability is assessed and by whom is critical in this regard. While the IMF states that it is

'trying to create a framework for an equitable debt restructuring that restores sustainability and growth''
no consideration is given to prioritising resources for human development or to achieve the Millennium Development Goals in assessing debt reduction. On the contrary a major concern of the IMF's SDRM proposal appears to be to restructure debt in order to minimise creditor losses.

Respect
The SDRM proposal does not give due recognition to the fact that there are two principal bodies involved (creditor and debtor). Whilst the proposal suggests that greater transparency be provided to the creditor in the process whereby they would have access to information regarding the debtor's general situation including debts not included under the mechanism, this transparency is not extended to the debtor, nor is any mention made of opening up the process to the public in both countries. The proposal appears to give priority to dealing with the concerns of the most powerful party, the private sector creditors. A major private sector concern has been to safeguard its contractual rights. The IMF proposal responds stating:
'Any interference with contractual relations should be limited to those measures that are needed to resolve the most important collective action problems'

5.5.2 Political Equality

Within a democratic process design and implementation as well as final decision making on the process should include equal participation from all parties. Consultation on the design and implementation of the proposed SDRM, whilst involving a wide array of bankers, lawyers, judges, academics and some NGOs, appears to have involved very little official or civil representation from debtor countries. Nor is there any provision for input from the people of the debtor country in the operation of the mechanism.

Rights
The rights of the people of a debtor country are infringed by the IMF's refusal to recognise odious debt i.e. debt which was incurred by a despotic regime, and which the population should have no obligation to repay. According to the IMF

'disqualifying odious debt would involve a radical change in the validity of creditor claims and the sanctity of contracts which would have adverse implications for the operation of capital markets' ,
a clear prioritisation of the rights of capital over the rights of people.

5.5.3. Institutional Arrangements : Separation of Powers

This, of all the elements of a democratic process, has arguably been the most blatantly flouted by all debt mechanisms to date. The proposed SDRM fails to remedy this. The final decision will again be taken by the creditors. As regards the IMF, while Fund representatives claim that the SDRM will give the organisation no new power, they also believe that the IMF will make a final judgement on any deal agreed through an SDRM.

'It will be the IMF's willingness to commit resources to continue to assist the country in the context of its negotiated agreement with its creditors that will signal the acceptability of that agreement to the official community. This is consistent with the fundamental role of the IMF envisioned under all of the proposals'

Speeches given by the IMF's chief spokesperson on the SDRM have also made it clear that the debtor will be expected to follow IMF policy advice.
By amending its Articles of Agreement to enshrine the SDRM, as the IMF is proposing, it would legalise and strengthen its current practice - but legally rather than de facto as heretofore.
On first reading, the inclusion of an SDDRF in the IMF's proposal suggests a separation of powers and a consequent diminution in that institution's hegemony. However the SDDRF has no powers to challenge the decisions of the creditors, in particular decisions about the amount of debt reduction needed to resolve the crisis.

6. NGO Proposals for a Fair and Transparent Arbitration Procedure (FTAP)

6.1 Introduction

From the late 1990's a number of NGOs, (see for example papers by Afrodad, CIDSE/Caritas, Erlassjahr.de, JDRAD, Jubilee Plus/New Economics Foundation), have been reflecting upon and campaigning for an independent Fair and Transparent Arbitration Procedure, (FTAP).

6.2 The Proposed FTAP - its principal features

Whilst there are some differences between these different proposals, commonalties include the following :

• Box 2

  Arbitration "Arbitration is the procedure whereby parties to a dispute refer that dispute to a third party for a final decision." Pg. 4 "The main advantages of arbitration include choice of Arbiters by the Parties, choice of procedure, (politically non-adversarial), neutrality of the arbitrator and enforceability of award at International law" Pg. 6 Afrodad, 2002, "Fair and Transparent Arbitration on Debt", Issues Paper No. 1/2002

  The process should be open to all debtors.
  
  
• The process should cover debts owed to private, bilateral and multilateral creditors alike.
  
  
• The process should be governed by arbitration rather than negotiation. An independent arbitration panel should be chosen by creditors and debtors (groups propose an uneven number, eg 3 or 5 with equal numbers selected by creditor and debtors and agreement between the two parties on the final member).
  
  
• Debt sustainability should be decided by this panel. This would make it possible to base such considerations upon development indicators and the path towards attainment of the millennium goals.
  
  
• The panel should also define and identify debt which is odious or illegal, and so to be cancelled outright.
  
  
• Debtors should be afforded legal protection to secure their capacity to meet the basic needs of their citizens before creditor claims.
  
  
• The panel should hear cases from both the creditors and the debtors. The population of the debtor country would present its case through its representatives (parliament, trade unions, NGOs, CSOs, chambers of commerce etc).
  
  
• The role of the IMF should be restricted to the provision of essential foreign exchange and of technical advice. Thus the IMF should not intrude upon domestic sovereignty through the use of fiscal, monetary, exchange rate and other conditions.

6.3 Evaluation of the proposed FTAP against Democratic Principles

6.3.1 Popular Control and |Political Equality

Inclusion and Participation, Equality and Respect
The proposed FTAP would assure the rights of all debtors to participate should they so choose thereby offering a space to the most marginalised, those most in need of debt cancellation. The FTAP would furthermore, through the proposed arbitration panel, afford equal participation and decision-making rights to each party.

Rights and Freedoms
Civil society proposals, in suggesting that debt sustainability levels be decided by an independent panel leaves room for consideration to be based upon development indicators as a path towards the attainment of the millennium development goals. Indeed a number of civil society proposals explicitly call for such considerations. As pointed out by Afrodad , arbitration agreements may allow for a settlement to be made on grounds other than purely legal principles, such as considerations of justice, equality and human rights.
In addition the civil society proposals suggest that debtors should be afforded legal protection to secure their capacity to meet the basic needs of the populace before creditor claims, a proposal which goes to concrete lengths to maximise the environment for the development and expression of individual freedoms.
NGOs also argue that debt which was used to undermine rather than enhance the rights of the people of a debtor country, odious debt, should be cancelled.

6.3.2 Institutional Arrangements - Separation of Powers

Civil society proposals, particularly those exploring the rationale and modalities for an independent arbitration panel, satisfy the principle of a separation of powers. The two parties, (creditor and debtor), would refer to an independent third party for a final decision.

7. Key Features of a Democratic Debt Resolution Procedure

Extrapolating from the key democratic principles outlined in Section 3, and building on proposals currently on the table, we argue that a truly democratic debt resolution mechanism should incorporate the following features:

7.1 Inclusion and Participation

• All creditor claims and debtor burden should be eligible for the new mechanism.
  
  
• Debtors should be fully included in both the design and the implementation of the mechanism with space afforded for an equal input to that of the creditors.
  
  
• Debt sustainability analyses within the new mechanism should be based on social indicators, targeted towards meeting the basic needs of the debtor country populace.

7.2 Respect

• The new mechanism should acknowledge that there are two principal parties with differing priorities. The mechanism should afford each an equal hearing.
  
  
• Transcripts and final outcomes of the mechanism should be made public.

7.3 Equality

• Debtor governments and civil society groups should be invited to consultations on the design, as well as in the implementation, of a new mechanism. Their active input at these sessions should be encouraged and supported.
  
  
• The methodologies, dialogue and communication within the new mechanism should be comprehensible to all parties.

7.4 Rights

• The mechanism should uphold the rights of all parties, (debtor and creditor), to full and equal participation.
  
  
• The mechanism should seek to uphold the rights of all marginalised groups.
  
  
• Odious debt should be cancelled

7.5 Separation of Powers

• The new mechanism should be independent from the interests of both creditors and debtors.
  
  
• The role of the IMF therein should be restricted to the provision of foreign exchange and technical advice.

8. Conclusion

At a time when countries are being encouraged to embrace democratic principles, practices and structures, the democratic deficit within our international financial system urgently needs to be addressed.

The reality that debt resolution mechanisms to date have dismally failed, in both financial and in human terms, is no longer contestable. The democratic deficit at the heart of these mechanisms is a key factor in this failure.

While the Irish Debt Policy fails to explicitly address the issue of a fair and transparent procedure to deal with the debt crisis, it does, nonetheless raise a number of relevant points in this regard :

• Debt sustainability must take human development into account: This is a fundamental requirement for the satisfaction of the Principle of Popular Control.
  
  
• Civil society organisations must be able to play their full role in advocating and monitoring debt reduction: This accords with the Principle of Political Equality.
  
  
• There must be greater transparency in how the international financial institutions operate: This is necessary to fulfil the Principle of Political Equality.

However, missing from the Irish Debt Policy is any reference to conditions required to satisfy the Principle of the Checks and Balances / Separation of Powers in the institutional arrangements. Yet this, as argued previously, has been the principle most blatantly flouted by all debt mechanisms, including the failed HIPC mechanism, to date. The other missing element from the debt policy is a recognition of the existence of odious debt.

The debt crisis, with its attendant violations of peoples' democratic rights and entitlements, has been allowed roll on for far too long. The government will have an opportunity at the Spring Meeting to take a proactive stance in promoting key elements in the debt policy and addressing the root of HIPC's failure by supporting the practical and effective application of the democratic principles outlined in this paper.

Print Version