Dealing Justly with Debt

Christian Barry Christian Barry

On October 27, 2002, former factory worker Luis Inácio Lula da Silva (popularly known as “Lula”) achieved a landslide victory in the Brazilian presidential election. His platform included pledges to lower Brazil’s domestic interest rates (which, at 21%, remain among the highest in the world), revive national industry, invest in public infrastructure, and establish a “zero-hunger” program that will include food stamps for the poor.

It is far from clear, however, that Brazilian voters can get the progressive policies that they asked for. This is due in large part to the country’s looming debt crisis. During the past eight years of the administration of Lula’s predecessor, Fernando Henrique Cardoso, Brazil’s public debt has grown from 29% of the gross domestic product to more than 62%, and in October of 2002, the Brazilian government accepted a $30 billion dollar loan package from the International Monetary Fund (IMF). The loan was conditioned on the Brazilian government maintaining policies such as high interest rates, a strict schedule of debt repayments, and large budget surpluses, all of which make increased investment in infrastructure and basic social services difficult at best.

Brazil strikingly illustrates how debt can lead to increased dependence of developing countries on foreign creditors and international institutions, limiting the capabilities of local citizens to exercise meaningful control over their policies and institutions. Indeed, just as democracy has become widely accepted as the most legitimate form of political decision-making, participation in national politics has become a woefully inadequate means of securing people’s rights to take part in decisions that affect them. It is tempting, perhaps, to think of debt crises as the fault of the debtor countries, and to argue that these countries should bear their own costs. But in the case of Brazil, this is implausible. Indeed, the IMF and the Bush administration justified the loan package by citing Brazil’s “sound” and “courageous” policies.

And even when debt crises arise as the result of unsound policies, the blame for these policies does not belong solely with the debtor countries. As in Brazil, so in Argentina: the latter’s economic policies during the 1990s were broadly endorsed by international financial institutions, the financial community, and most leading economists, all of whom must therefore bear some responsibility for the country’s financial collapse this past year. Yet while outsiders have often shaped the policies of debtor countries, they refuse to share the risks, with creditors insisting on full repayment, and governments and financial institutions demanding an end to “bailouts.”

How can we deal justly with debt? We might begin by looking more closely at the United States, where municipalities with debt problems have access to a neutral court of arbitration, and where creditors are prevented from demanding that municipalities sacrifice basic services even when this is necessary to meet their financial obligations. Developing analogous international institutions, such as the establishment of an independent debt arbitration panel, would help countries to escape and avoid financial crises. More importantly, it would help to protect the political rights that citizens of developing nations have fought so hard to achieve.

Read More: International Debt, Brazil

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