Introduction: Dealing Justly with Debt [Full Text]

Ethics & International Affairs, Volume 17.2 (Fall 2003)

September 4, 2003

This past year has seen the economic collapse of Argentina, crises in Brazil and Turkey, and the continued suffering of poor countries, all partly as a result of high indebtedness. Sovereign debt can contribute to problems of many kinds. It can limit countries’ capabilities to provide the basic social services that are required to secure minimally decent living conditions for their citizens, and can make it difficult for countries to pursue policies that are likely to contribute to their long-term development. In addition, ineffective and unfair mechanisms for managing the restructuring of debt can lead to defaults that may also significantly harm creditors’ and investors’ interests, and can create disincentives for lending and investment that can be crucial to the prospects of wealthy and poor countries alike. An often overlooked but very important effect of financial crises and the debts they often engender is that they can lead to increased dependence of developing countries on foreign creditors and international institutions, limiting the capabilities of their citizens to exercise meaningful control over their policies and institutions.

There has been growing public recognition of these problems, and increasingly potent popular movements have pressured governments, financial institutions, and the financial community to explore creative new ways of addressing severe indebtedness. Some of these, including the Highly Indebted Poor Countries initiative, have focused on securing debt relief for very poor countries. Others, such as proposals for institutional arrangements that would identify odious debts, have sought means of distinguishing debts to which creditors have a valid claim from debts to which they have no entitlement. However, the increasing incidence of middle-income countries experiencing debt crises suggests that the problem of sovereign debt needs to be evaluated beyond these two categories, taking into account the structure of the international financial system and the roles of its various participants.

The contributors to this roundtable investigate the broader question of how to structure sovereign debt negotiations in a way that will help to prevent countries from falling into financial crises and indebtedness, and to enable those that do to escape more easily without imposing unacceptable costs on other parties. The contributors differ sharply in their diagnoses of the causes of severe debt, the agents who are primarily responsible for bringing it about, and the extent to which remedying this problem will require deep reforms to the global financial system. But each advances concrete and feasible proposals concerning the design of institutional arrangements that, they argue, can improve the fairness of processes for dealing with sovereign debt even in the short term.