Policy Innovations Digital Magazine (2006-2016): Briefings: Beyond the G8: From Debt Relief to Democracy and Development

Jul 7, 2005

Millions of Reasons to Pay Attention
When the leaders of the G8 convene in Scotland on July 6, debt relief and development in Africa will take center stage for good reason. Mountains of debt, in some cases accrued under past dictatorships, represent a stranglehold on many developing countries. These debts soak up a large percentage of annual country budgets, leaving fewer resources for governments to invest in the key social and productive sectors that are critical to long-term growth. Even more frustrating is the fact that a large portion of repayment goes toward the interest on the loans and so does nothing to help countries escape from the overall burden of being a debtor nation. As such, debt relief—coupled with a renewed public and private investment strategies focused job creation, infrastructure and social development—is critical for creating a new path to economic self-sufficiency, an essential step in reducing developing countries’ long-term dependence on aid from abroad. Debt relief thus not only makes ethical and political sense, but it is also good for growth and development.

Liberating Resources for Development
Some numbers on the debt situation in Africa help put the issue in perspective. At the beginning of 2003, sub-Saharan Africa carried $191 billion in debt, of which $46 billion was due for repayment that year. $191 billion is equivalent to 66 percent of the GDP of sub-Saharan Africa taken as a whole. Imagine owing a significant portion of your annual salary to credit card repayments—for purchases that you never authorized and without the possibility of ever contesting these charges. Forget about ever being able to afford that new home or save enough money to get ahead. You would be stuck in a debt trap with very few options for getting ahead—insurmountable odds for any individual, let alone an entire country with diverse interests and responsibilities.

Building Democracy At Home and Abroad…
The end of indebtedness can be a powerful tool for strengthening democracy abroad. One-size-fits-all economic programs engineered from abroad and reinforced through loan conditionalities have had an extremely poor track record over the last two decades. Freedom of choice in establishing the right mix of institutional, fiscal, monetary, trade and industrial policies is fundamental for building enduring democracies abroad. It is also indispensable for designing policies that actually put people to work by building healthy communities rather than ignoring their needs and aspirations.

Building a sustainable economy that deals justly with debt will require reforms in both the developing countries and in the lending, trade and financial policies of the developed world. This paradigm shift requires a new institutional framework within which global negotiations can take place to address the global economic imbalances that pose a threat to human security throughout the world. This new framework would reflect more appropriately the changing balance of economic and political power that has occurred in the world since the World War II era institutions were founded.

For reaching these goals the G8 may be a woefully inadequate vehicle. In its place, proposals have been made for a more democratic, global economic negotiation and coordination forum. These include calls for the expanding the G8 to a G20—which would include representatives from major developing countries such as China, South Africa and Brazil. They also include proposals for refocusing the mandates of the Bretton Woods Institutions, so as to bring them in line with their original mandate of promoting global financial stability consistent with full employment and human development objectives.

Moreover, as argued in the recent Financial Times editorial (6/29/2005), “A World Economy Living Dangerously,” with public and private debt soaring in both developed and developing countries, a more comprehensive solution is required for dealing with global financial volatility before the global economy careens “towards a brick wall.” For this, the G8 must not only deal justly with Africa, but it must also have a broader vision and mandate, and participation from developing countries, in order to reflect today’s more complex global economy.

Releasing countries from the constraints of debt repayment is thus one way of liberating much-needed internal revenue. Increased revenue would give developing-country governments the freedom needed to invest in human or business capital; including transportation infrastructure, school and hospital revitalization, and industrial or sectoral development assistance. Such policy latitude would give the state the ability to invest, in a broader sense, in jobs and human capital. Both of these resources are important prerequisites for sustained growth.

While increased aid and debt relief alone are not sufficient for ending global poverty, they are important tools for helping countries mobilize domestic resources for generating growth, employment and human development. This year’s G8 session is focused largely on the debt burden faced by the world’s poorest countries, but dealing with debt across the entire international system will require new ways of handling the unsustainable debt overhang in many middle-income developing countries, where a large percentage of the world’s poor continue to live. Positive alternatives for dealing with these challenges have been proposed by a wide range of intellectual and political actors. What is required is the political will necessary for their implementation.

Positive Alternatives

Addressing The Challenge of Global Finance: Lessons post-Monterrey, a report from the New Rules for Global Finance Coalition

Expanding the G8, an initiative of the Center for International Governance Innovation

Dealing with Sovereign Debt, a Task Force of the Initiative for Policy Dialogue

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