On October 5th, Jubilee Scotland  hosted a People’s Debt Tribunal at the Scottish Parliament, which saw Lidy Nacpil, representing Freedom from Debt Coalition Philippines and Jubilee South make the case for the cancellation of debt owed by the Philippines to the World Bank. Here an attendee of the Tribunal shares her thoughts.

‘Debt cancellation is a call not for charity but for justice’ – Lidy Nacpil.

By Olga Bloemen

‘We have a very fruitful partnership with the Philippines’, says the World bank ‘The World bank owes us for its damaging loans’, counters Filipino campaigner Lidy Nacpil. Jubilee Scotland is campaigning for the Scottish government to set up an international debt arbitration tribunal where creditors and debtors can meet. Thorough debt audits could help solve the debt crisis that is currently keeping developing countries in a poverty trap.

Third world debt seems to have disappeared from the public mind along with Jubilee 2000, Bono and Geldof. In 1998 and 2005, two initiatives pledged the one-off cancellation of the debts of 40 of the poorest countries. But, according to Jubilee Scotland, this remedy is ‘in many ways merely a sticking plaster’, offering too little too slowly: Many countries, like the Philippines, are excluded and debt is only cancelled to what is considered a ‘sustainable’ level, based on the country’s export earnings, while ignoring its domestic spending needs. Besides, the International Monetary Fund (IMF) and the World Bank demanded austerity measures in turn for debt cancellation like cuts on public spending and the privatisation of basic services, which many of the 40 countries have as yet not been able to meet.

This means that in 2008, the world’s poorest 48 countries still had debts totalling US$168 billion, and the 128 poorest together owed a dazzling total of US $3.7 trillion to multilateral bodies, individual countries, private companies, banks and individuals. Over the course of 2008 alone, the developing countries paid $602 billion towards servicing these debts. This year’s figures will be even higher, as the economic crisis has led developing countries to take up more loans. As a result, despite the aid rhetoric and the Millennium Development Goals, money keeps flowing from the Global South to the North instead of vice versa.

Many of the debts still stem from the 1960s and 1970s, when banks and governments in the North were eager to lend the huge amounts of money made from the rising oil prices to developing countries. Looking for Cold War allies, lending parties closed their eyes on corrupt or oppressive regimes and most of the money did not go into responsible hands and into development. In the 1970s and 1980s, the oil crisis led interest rates on the loans to soar. Additionally, falling commodity prices left countries with less hard currency to service the debts. The knock-on impact on exchange rates means that debts, which are most often counted in foreign currency, have skyrocketed in real terms for the affected countries. The debt total of US$3.7 trillion is the result.

Historical debts from the 1960s and 1970s, tied to lending by Northern banks and governments during the oil boom, continue to burden many developing nations. These loans, initially aimed at fostering alliances during the Cold War, often ended up in the wrong hands, hampering genuine development. In the 1970s and 1980s, the oil crisis led to soaring interest rates on these debts, and falling commodity prices further strained debtor countries’ ability to pay. Exchange rate fluctuations compounded the issue since most debts were denominated in foreign currencies, resulting in a massive total debt of $3.7 trillion for these nations.

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Already since the early 1990s, campaigning organisations have called for an arbitration forum of some sort where historical cases of illegitimate or unfair debt can be lodged and solved, as well as unpayable debt relieved. With the 2010 Arbitration (Scotland) Act and the newly set up Scottish Arbitration Centre, Scotland would be a suitable host for such a tribunal. To demonstrate this, Jubilee Scotland organised a mock debt tribunal in Holyrood on the 5th of October. Here, the Philippines and the World bank met. Or, better said, Lidy Nacpil met “John Smith”, an actor who played, scarily realistically, a World bank representative quoting solely from the Bank’s official documents. In the debt tribunal, the legal principle of ex aequo et bono (“from equity and conscience”) was applied, according to which an arbitrator or tribunal has the power to move away from the law as laid down and to consider the case in the light of arguments of natural justice such as fairness and equity.

Lidy presented her country’s case: The New Economics Foundation has calculated that the Philippines need at least 63% debt cancellation in order for the government to meet the basic needs of its citizens, such as health, education and infrastructure, without taxing those living below the ‘ethical poverty line’ of $3 a day. According to a recent study, 107 countries are burdened with an ‘unpayable debt’ like the Philippines.

Former president Marcos, who governed the country from 1965 to 1985, left the Philippines with more than half of its current foreign debt. Although democratically elected, Marcos turned the Philippines into a dictatorship with martial law in 1972. When he fled the country in 1985, the country’s debt had gone from US$1 billion to of US$28 billion, most of it either stolen by Marcos or invested in failed or useless projects. The Bataan nuclear power plant is notorious in this regard. It was built by the US company Westinghouse on an earthquake fault-line at the foot of a volcano and has therefore remained unused. Westinghouse got paid generously nevertheless as the US government credit agency took over the standing debt. In 2007, the Filipino government finally completed paying off the $1.5 billion for the plant’s construction, more than 30 years after it began. As Marcos’ regime devastated the country’s economy, subsequent governments had to continue taking on loans to pay off the old ones.

During the fourteen-year dictatorship, the World bank granted five loans to Marcus. Now, the Philippines still owe the World bank around US $3 billion out of a total foreign debt of US $47,5 billion. The original loans from the World bank have long since been repaid, but because the interest has compounded, 80% of the debt is still owed. If nothing changes, Filipino taxpayers will continue to pay for the illegitimate debts of Marcos until 2025, 39 years after he was overthrown. While ‘Smith’ glorified the loans as an investment in pro-poor development, Lidy Nacpil said there is little evidence that the World bank has had any positive impact at all. ‘Debt cancellation is a call not for charity but for justice’, Nacpil concluded.

Of course, one could argue that debt cancellation would create poor incentives by making future borrowers hope that they will have their debts waived too. Also, developing countries are dependent on loans and if creditors would stop this flow of money due to lack of trust in return, the result could be disastrous, especially now in times of economic downturn. This, however, would relieve Northern countries of responsibility too easily. As we have seen, a major part of the third world debt is the result of the self-interested and reckless lending of first world creditors during the Cold War. Filipino people are currently forced to pay off a loan that was not taken up in their name and went to support an undemocratic dictator. The World bank could have reasonably foreseen this and should thus assume responsibility. Besides, one could argue that the Filipino people themselves never had a contractual arrangement with the World Bank.

The envisioned debt tribunal is just one step in creating a fairer lending system. Future loans should be given responsibly, on fair terms, and in a transparent way that is open to scrutiny by parliaments, media and citizens. Any loans given on unjust terms should be considered the responsibility of the creditor and thus eligible for cancellation in future. Jubilee’s mock tribunal demonstrated that debt arbitration can be done fairly and effectively. Or would it take a Bono to convince the Scottish government?