Debt is back - as if it ever went away

The Third World's debt burden is back on the agenda. Paul Vallely in Lusaka looks at the issues - and the impact
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The Independent Online
BILL CLINTON paid lip service to the idea while he was in Africa. Gordon Brown has written to fellow finance ministers demanding it. And the German finance minister, Jurgen Stark, last week held a press conference to insist the problem was not his country's fault.

Suddenly Third World debt - and moves to reduce it - is back in the news. Some 40,000 activists from Britain's churches, trade unions and aid agencies are planning to descend upon Birmingham next weekend, where the heads of government of the world's most powerful nations will gather for the G8 summit.

Their plan is to throw a human chain around the politicians' conference centre to persuade Bill Clinton, Helmut Kohl, Ryutaro Hashimoto and Tony Blair to accept a petition at the cumulation of what is being billed as the biggest public demonstration of support for the Third World since Live Aid.

So why is Third World debt on the agenda again?

The financial crisis in South-East Asia has renewed attention on the whole issue of indebtedness. But for the past four years a coalition of churches and aid agencies under the banner Jubilee 2000 has been pressing for renewed action to mark the new millennium.

But wasn't all this resolved a decade ago? The global financial system was supposed to collapse because of Third World debt, yet it never did.

The threat to the world banking system came about when major Latin American debtors defaulted on huge debts to the West's top banks in the early 1980s. It was averted by complex rescue packages in which the International Monetary Fund, the banks and the US government offered a series of renegotiations of the debt. But less urgent debts to individual governments and multilateral ones to bodies like the IMF and World Bank remained. The burden of repaying them has slowly choked the economies of the poorest nations.

Shouldn't it be easier to get governments to agree than it was to persuade the banks?

In theory. Over the past 15 years there have been various attempts to reduce the debts owed to individual governments in deals struck by the Western nations, meeting as the Paris Club. Deals called the Naples, Lyons, Trinidad and Toronto Terms took salami-thin slices off the debt, with some success in Latin America but without a major impact on the poorest, mainly African, nations.

Then in 1996 came a breakthrough which promised to change all that. The creditor nations, with the IMF and World Bank, finally accepted that some debts could never be repaid. Debt was a major barrier to economic recovery for the poorest nations. A new Highly Indebted Poor Country (HIPC) Initiative would be introduced to write off the debts of the poorest nations, provided they implemented strict IMF economic adjustment measures to cut public spending dramatically and raise all restrictions on the activities of foreign companies in the Third World.

That was three years ago - has it worked?

Not really. First, they decided that a nation's debt was unpayable if it totalled more than two and a half times its annual income from selling exports. The trouble was that this formula was developed from experience with middle-income countries in Latin America. It was inappropriate to Africa with its much weaker infrastructure and greater health and education problems.

Secondly, the economic adjustment focused on stabilising the economy - tackling inflation, cutting budget deficits, lifting restrictions on imports, exchange rates and foreign investment - without taking account of the need to improve education and health if a workforce is to be created capable of sustaining proper economic growth. It did not make sufficient allowance for building roads and other infrastructure or frail infant industries of the weakened continent. And it moved at too fast a pace, causing particular suffering to the weakest and poorest people.

Wasn't there aid to cushion that?

For every pounds 1 in aid sent to Africa, it sent pounds 3 back to the West in debt repayments. Continuing aid without tackling debt is like putting a patient on a plasma drip but not bandaging his wounds.

Is anything likely to come out of the G8 meeting?

Perhaps. Political pressure is mounting. Jubilee 2000 campaigners are at work in the UK, the US, France, Canada, Switzerland, Austria, Portugal, Sweden, Norway, Denmark, Ireland, Australia, New Zealand and Germany.

But is Germany part of the problem? The finance minister complains it has been unfairly targeted by 15,000 Christian Aid campaigners, and says it has forgiven more debt than other nations.

Yes, but Germany has 20 times as much to forgive. And it has been the most intransigent over easing the timetable for poor countries to qualify for HIPC. And it has blocked the idea of selling IMF gold to pay for debt relief, an idea proposed by Kenneth Clarke when he was Britain's Chancellor. The Germans think it might cause inflation.

It is not just Germany. Italy is blocking it too, to help it meet its Maastricht convergence criteria. And Japan also says No on principle: all debt should be honoured, its government says, though that doesn't stop it rolling over the debts of its public railway system.

The alternatives on offer from these intransigent nations are just more cheaper loans to pay off the earlier expensive loans. But shortage of funds has resulted in little progress.

So what's needed?

A change in political will. A different formula for calculating what a country can reasonably repay - one which allows spending on basic health and education services before interest repayments are made. The poorest countries need a 100 per cent write-off if they are to release sufficient funds for education and health. Other heavily indebted nations need faster and more far-reaching relief: Uganda, one of the few countries to qualify so far, has had a mere 10 per cent knocked off its debt.