Background to the Debt Crisis
Debt is a major cause of poverty and hardship for millions of people in the developing world.
In the most heavily indebted poor countries (HIPCs) of the world:
- 50% of the population live on less than $1 per day
- 1 in 6 children die before the age of 5
- Almost 50 million children are out of school
A brief History of the Debt Crisis
During the course of the 20th Century, the world became increasingly dependent
on crude oil for industrial development, transport and energy. In the
early 1970s the price of oil increased dramatically. Oil has traditionally
been priced in US dollars and in the 1970s, economic policies in the United
States decreased the value of the dollar, which in turn diminished the
profits made from the sale of oil. In response to this, the oil-producing
countries of the world raised the price of oil and deposited their profits
in commercial banks in the West.
Role of the Banks
These banks sought every opportunity to invest this money profitably.
Essentially they were under pressure to find borrowers, and since most
western countries were going through a recession, in part due to the oil
price rise, the banks turned their attention to developing countries.
These countries were eager to promote their own development and cheap
loans seemed a very reasonable way to achieve their aims.
However, rather than improve life for those in developing countries, the loans spiralled out of control and instead created an enormous debt that has dominated them ever since. Some of the money was spent on badly designed development projects, or on projects that produced very low rates of return, thereby making repayment difficult. However, substantial amounts of money either went to purchase arms, or into the private bank accounts of corrupt dictators. It is important to remember that the banks were eager to lend and therefore, not enough attention was paid to the final destination of the money. With the cold war dominating international politics, Western leaders were keen to befriend right wing dictators like Ferdinand Marcos of the Philippines or Mobutu of Zaire.
Increasing Interest Rates and Declining Terms of Trade
Most of the loans had been borrowed at variable interest rates, pitched
at approximately one per cent above the US prime rate. In 1981 this peaked
at 21.5 per cent. Economic policy makers in the US opted to increase interest
rates in an effort to attract foreign investment so as to fuel growth
in their own economy. An increase in interest rates meant an increase
in costs to developing countries. This proved disastrous as it coincided
with a serious decline in their income. Developing countries exported
commodities like copper, tin, sugar and so on and they were dependent
on the foreign exchange earned from the sales of these goods, to pay their
debts. During the late 1970s and on into the early 1980s, commodity prices
fell continually. Meanwhile, the interest on the loans was mounting and
so the vicious cycle of debt began.
The International Monetary Fund and World Bank Step in
In 1982, Mexico declared that it was unable to repay its debts. Mexico
owed vast sums of money to commercial banks in the west and default posed
a serious threat to the stability of the international financial system.
The commercial banks, in conjunction with the International Monetary Fund
(IMF), worked out a system whereby indebted countries could spread out
or reschedule their debts rather than default. It was during this time
that the IMF and World Bank began to take over much of the debt owed to
commercial banks. The IMF and World Bank offered developing countries
new loans with strict conditions attached.
Since the 1980s the IMF and the World Bank, have been in control of the debt crisis. Indebted countries have to follow policies favoured by the IMF and World Bank (SAPs) to get new loans or even aid money. These policies have directly affected the lives and livelihoods of people in indebted countries.
Heavily Indebted Poor Countries Initiative (HIPC)
In 1996 the creditors introduced the Heavily Indebted Poor Countries Initiative
(HIPC) in an effort to deal with the debt crisis. In 1999 an 'improved'
HIPC was introduced which broadened some of the criteria involved. HIPC
remains the main initiative for dealing with the debt crisis.
The initiative aims:
- to reduce the debt of heavily indebted poor countries to a level where they can pay without falling into arrears or obstructing economic growth.
To be eligible countries must:
- follow IMF/World Bank structural adjustment programmes with all their
negative impacts on people's lives, for up to 6 years.
- develop and start implementing a national poverty reduction strategy with the participation of civil society. This strategy must be endorsed by the IMF and World Bank.
Major problems with HIPC:
- It only cancels small amounts of debt.
- It works very slowly.
- In assessing how much debt reduction a country gets, no account is
taken of the resources needed for poverty reduction/human development.
- Only a small number of developing countries are eligible - 41 heavily
indebted poor countries were originally identified. Many countries desperately
in need of debt cancellation such as Ecuador, Haiti and Jamaica are
excluded.
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What are PRSPs?
PRSPs are national development plans which governments in low-income countries are required to draw up in consultation with civil society in order to receive:
- Debt reduction under the Heavily Indebted Poor Countries Initiative
- Cheap loans from the IMF and World Bank
What is included in a PRSP ?
The plans should cover all areas of development - poverty reduction, health
and education, industry, agriculture, macroeconomics etc.
Although plans are meant to be 'nationally owned', they must first be submitted to the IMF and World Bank for their endorsement. Unless a country's PRSP receives this seal of approval, they will not receive debt reduction. This is a major problem with the PRSP.
According to the IMF and World Bank, their lending programmes to low income countries will be based on Poverty Reduction Strategies. Formerly, the IMF and World Bank's controversial adjustment programmes were written in Washington. These changes appear to respond to many of the criticisms of adjustment programmes, ie:
- That these policies with their emphasis on free markets and rolling
back the state were causing escalating poverty and economic deterioration.
- That the IMF and World Bank were shaping the social and economic policies of countries with democratically elected governments
An end to structural adjustment?
Does the introduction of the PRSP mark the end of adjustment? Many civil
society groups fear that the hidden hand of the IMF and World Bank will
still be seen in their countries' PRSPs. After decades of following IMF
and World Bank adjustment programmes, governments are well aware which
policies are likely to be endorsed by these bodies. Evidence to date shows
that there have been no major shifts in the IMF's programme. Reports issued
by the UN Commission on Human Rights and the World Development Movement
found that the policies contained in PRSPs examined showed little change
from past IMF programmes.
Countries covered by PRSPs
79 countries fall into the World Bank classification of 'low income' ie.
those with an income per head of $755. Only an estimated 38 of these are
likely to qualify for debt reduction under the Heavily Indebted Poor Countries
Initiative but all must adopt a Poverty Reduction Strategy in order to
qualify for cheap loans from the IMF and World Bank. Among the countries
which are implementing PRSPs endorsed by the IMF and World Bank are: Bolivia,
Mozambique, Tanzania and Uganda
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