The offer by the finance ministers of the G8 to cancel the debts of some of the world's poorest countries is a welcome step forward in addressing the global debt problem. Yet, referring to it as 100 percent debt cancellation is misleading since the deal, despite its promise to cancel significant amounts, is far from a comprehensive solution. And while the offer has many important merits, it will necessarily address only the symptoms of the debt problem. Much remains to be done to address its cause—the inequality that underlies relations between poor and rich countries in the global economy.
What Is the G8 Offer?
The G8's proposal would cancel the debts of 18 countries that have reached so-called completion point under the Heavily Indebted Poor Countries (HIPC) Initiative.1 An additional nine HIPC countries may become eligible for cancellation in the next two years if they reach completion points. 2 Significantly, the cancellation will include debts these countries owe to the IMF, World Bank, and the African Development Bank, which constitute an especially burdensome portion. 3 Next, the proposal will be tabled for approval by the shareholders of the IMF and the World Bank — among whom donor countries have the deciding influence — at the annual meetings in September.
The loophole of the deal is in the full-circle transaction that links debt cancellation with aid reduction and conditionality. Under the proposal, all of the debt that a country pays to the International Development Association, the concessional lending arm of the World Bank, will be cancelled —but simultaneously, the donors will "adjust," or reduce, the IDA aid allocations to this country by an equivalent amount. That is, at the time a country's debt is cancelled by $X, its aid allocation will be decreased by $X. Donors will then take the aid decrease of $X and deposit it in the IDA toward the allocations for all IDA qualifying countries. This aid will then be dispersed according to the current Performance Based Allocation system, which is based on the controversial Country Policy and Institutional Assessment.
In other words, to receive new aid money after the debt cancellation, countries will have to conform to governance conditionalities that may potentially harm them. While everyone agrees that all societies should be governed well, there are conflicting views of the kinds of policies that are necessary to achieve this, and how they ought to be chosen. For example, in the past, controversial privatization requirements have been advanced under the good governance rubric of anti-corruption. Moreover, even sound policies are less likely to be effective when they are experienced as imposed rather than chosen by the implementing countries. Indeed, since it is expected that newly appointed president of the World Bank Paul Wolfowitz will strongly favor privatization and deregulation policies, many are justifiably concerned that so-called good governance conditionality will become the vehicle for the promotion of policies that could have adverse impact on the reduction of poverty and inequality.
What Is Left Out?
What has remained fully outside of the scope of consideration at the G8 meeting is the question of what is actually required to deal justly with the debt problem. The debt cancellation proposal is only addressed at those countries selected as HIPCs. The 1996 country selection process for the HIPC has been widely criticized as being based on analytically imprecise and some political criteria. 4 Civil society organizations argue that, in total, 62 countries need full debt cancellation. The HIPC Initiative covers only 38 of those, leaving many countries out — such as Kenya, Angola, Kyrgyzstan, Vietnam, and Haiti. These 62 countries owe a total of $100 billion in debt service through 2015. The G8's offer currently applies to 18 countries, for a total cancellation of $10 billion through 2015. 5 This means that the deal cancels a mere 10 percent of all debts that need to be canceled. 6
The G8's proposal will also do nothing to address a fundamental issue: a major contributing cause of the debt problem is the unequal position of poor and rich countries in the international financial system. A lasting solution to the debt problem must address this inequality — for example, through the creation of a debt resolution mechanism that will consider, through an independent, fair, and transparent process of arbitration, how debts have been accumulated. Feasible proposals for such debt resolution mechanisms have been advanced by Jubilee, the African Forum and Network on Debt and Development, and Erlassjahr.
Dealing justly with debt is impossible without due consideration of the ethical, rather than the merely legal, validity of the accumulated debts. Civil society organizations have vocally complained that many creditors' claims on indebted countries may be ethically invalid — for example, some loans were given to dictatorial regimes and others as further loans to correct crises resulting from bad policy advice by the international financial institutions, such as the World Bank and the IMF. The implication of these complaints is that insofar as some debts are indeed invalid, creditors have no ethical claims to their repayment. With respect to such debts, it seems inappropriate indeed to speak of debt cancellation or relief, as if some favor were being bestowed on the debtor country.
The claim for justice is an important reason behind debtor countries' demand for unconditional cancellation. This is not to say that donors may not require that aid be used for poverty-alleviation purposes. However, it does mean that donors ought to be extremely careful about the kinds of conditions they impose on poor countries — especially since their previous well-intentioned interventionism may have contributed to the debt problem in the first place. Indeed, if this is the case, donors first ought to provide solid evidence that the good governance conditions they demand will help to reduce poverty before asking countries to follow them. The G8 deal does not take this into account.
The Road Ahead
In order to deal justly and effectively with the severe indebtedness of poor countries, creditors and debtors must be able to participate on an equal footing in the process of debt resolution. For example, if debtors, not just creditors, had a say in defining debt sustainability levels that are used to calculate debt relief, 62 countries would be viable candidates for debt relief, and not just the current 38 HIPCs.
It is also important that all multilateral creditors participate fully in policies on debt — the debt crisis is a global problem that requires global effort to be resolved. Currently, seven of them are not party to the HIPC Initiative, and many of those who are part to it provide relief on a case-by-case basis, and have yet to agree to participation in the entire HIPC Initiative. Given that the G8 deal would result in improved solvency positions for 18 debtors, there may be even fewer incentives to participate.
Although at present the debt crises of the poorest countries are of the greatest urgency and the focus is rightly on them, it would be a mistake to overlook the debt problems of many middle-income countries. They are already of serious concern for their economies and have significant social consequences. If left unaddressed, they may result in crises and perhaps defaults akin to that which occurred in Argentina in 2001.
An immediate possibility is to expand the list of HIPC countries. The World Bank may have plans to consider such expansion with potential candidates such as Tajikistan, Eritrea, and Haiti. Another is for the IMF to generate financing for debt relief through selling part of its vast gold reserves, which at the current market price of gold are undervalued by approximately $35 billion. This option would ensure fairness among creditors (most of the debt cancellation to date has come from bilateral, not multilateral donors) and will not require that funding for cancellation come from national budgets. For this, however, it would be necessary to challenge the resistance of the gold industry to such a sale, led by Newmont Mining Corporation, particularly in its lobbying efforts in the U.S. Congress.
The G8 proposal is significant in one other important respect: it shows that political consensus on feasible steps to address the debt problem is achievable. Governments should be certain that many people will be watching what they deliver on debt at the annual meetings of the World Bank and the IMF in September.
1. These countries are Benin, Bolivia, Burkina Faso, Ethiopia, Ghana, Guyana, Honduras, Madagascar, Mali, Mauritania, Mozambique, Nicaragua, Niger, Rwanda, Senegal, Tanzania, Uganda, and Zambia.
2. These countries are Cameroon, Chad, Democratic Republic of Congo, Gambia, Guinea, Guinea Bissau, Malawi, Sao Tome Principe, and Sierra Leone.
3. Although the debts to other multilateral banks, such as the Inter-American Development Bank and the Asian Development Bank, are not included, and they are significant as well. For example, in 2005 the four qualifying countries in Latin America will pay debt service of $216 million to the Inter-American Development Bank. See Jubilee Debt Campaign, "Campaigners force step forward on debt," June 11, 2005; available at www.jubileedebtcampaign.org.uk/?lid=772.
4. For an analysis of the criteria, see UNCTAD, "Debt Sustainability: Oasis or Mirage?" ch. 2, UNCTAD/GDS/AFRICA/2004/1; available at www.unctad.org/en/docs/gdsafrica20041_en.pdf.
5. The total amount of the cancellation is $40 billion over the next 40 years. The net present value of this deal is $17 billion. See Eurodad, "Devilish Details: Implications of the G7 Debt Deal," NGO Briefing, June 14, 2005; available at www.eurodad.org/uploadstore/cms/docs/Overview_G7_debt_deal.pdf.
6. As reported by Eurodad, in "Devilish Details," p. 2. See also "In the Balance: Why Debts Must be Cancelled Now to Meet the Millennium Development Goals," joint NGO briefing by Jubilee Debt Campaign, Action Aid, and Christian Aid.