Debt of Developing Countries - Debt Abolition

Debt Abolition

There is much debate about whether the richer countries should be asked for money which has to be repaid. The Jubilee Debt Campaign gives six reasons why the third world debts should be cancelled. Firstly, several governments want to spend more money on poverty reduction but they lose that money in paying off their debts. Secondly, the lenders knew that they gave to dictators or oppressive regimes and thus, they are responsible for their actions, not the people living in the countries of those regimes. For example, South Africa has been paying off $22 billion which was lent to stimulate the apartheid regime. Also, many lenders knew that a great proportion of the money would sometime be stolen through corruption. Next, the developing projects that some loans would support were often unwisely led and failed because of the lender's incompetence. Also, many of the debts were signed with unfair terms, several of the loan takers have to pay the debts in foreign currency such as dollars, which make them vulnerable to world market changes. The unfair terms can make a loan extremely expensive, many of the loan takers have already paid the sum they loaned several times, but the debt grows faster than they can repay it. Finally, many of the loans were contracted illegally, not following proper processes.

A seventh reason for cancelling some debts is that the money loaned by banks is generally created out of thin air, sometimes subject to a small capital adequacy requirement imposed by such institutions as the Bank of International Settlements. Maurice Félix Charles Allais (born 31 May 1911), 1988 winner of the Nobel Memorial Prize in Economics commented on this by stating “The ‘miracles’ performed by credit are fundamentally comparable to the ‘miracles’ an association of counterfeiters could perform for its benefit by lending its forged banknotes in return for interest. In both cases, the stimulus to the economy would be the same, and the only difference is who benefits.”

Critics of the practical point in this argument might question whether or not unpayable debt truly exists, since governments can refinance their debt via the International Monetary Fund (IMF) or World Bank, or come to a negotiated settlement with their creditors. However, this is not an argument that can withstand a glance at the state of the essential services supposedly being provided by many of the heavily indebted countries. There is evidence that governments have financed their debts through instigation of austerity policies directed at essential services and subsidies for essential goods. The history of Mali, for example, from 1968 onwards, provides a clear illustration of this. In fact, the requirement that governments should service debts at the expense of their populations is integral to the strategies adopted by the Washington institutions in 1982 to solve the banking crisis triggered by the Mexican Weekend in August that year. Austerity was one of the ways in which interest payments could continue to be serviced, preventing liquidity problems in the US money-centre banks. The same principle is evident in the design of the Heavily Indebted Poor Countries Initiative. While refinancing has taken place (particularly to lessen private creditor exposure subsequent to 1982) this has come with conditions which have caused a crisis of development. London School of Economics professor Stuart Corbridge has described the 1982 debt crisis as a banking crisis which was transformed into a development crisis, brokered by the Washington Institutions. Susan George (Political Scientist) has also written extensively on this subject and her 1988 book 'A Fate Worse Than Debt' remains worth reading because, while a lot has changed since then, the fundamentals of debt remain much the same.