On the face of it, the G8 debt deal is a scam. The money that qualifying countries save on debt repayments is almost entirely balanced by a corresponding cut in the aid that they receive from the World Bank.
The G8’s debt deal seems to work like this: the financial flows out of the country represented by debt service payments are cut, and at the same time there is a cut in the financial flows into the country represented by World Bank development aid. Result: countries find themselves in pretty much (not quite, but pretty much) the same situation they were in in the first place. They are paying less debt service and receiving less aid.
I would love to hear from people who think I’ve got this wrong – particularly if you work at the Bank and worked on the deal. As, if it’s not wrong, the G8 Debt Deal (the “Multilateral Debt Relief Initiative” or MDRI) is a near-total scam.
Not a total scam, though, for at least three reasons. For one thing, the IMF (International Monetary Fund) has cancelled its share of the debts of (pretty much) those nineteen countries. This happened in January, and doesn’t seem to have the same caveats as the World Bank proposal. But the IMF’s debt only amounted about 10% of the debt cancellation package agreed by (actually: prior to) the G8 in Gleneagles.
Second, the World Bank is generally upping its aid to the countries that are supported by the IDA (International Development Association), so even after their aid is cut to offset the debt cancellation, they will be in a better situation than before. Only not much better. According to a report from EURODAD (based on report from Debt Relief International here) the net benefit of the World Bank’s part of the debt deal ranges between $53 million a year to $1 million a year (mean benefit about $13 million), with the money being awarded according to what the World Bank thinks of national social and economic policy. Big winners are Ethiopia ($53m), Tanzania ($39m) and Uganda ($27m); little winners are Guyana ($1m), Bolivia ($4m), Niger ($5m). These are the figures which – as far as I can tell – represent the true value of the G8 Debt Deal.
Third, because the debt cancellation, even if offset by a cut in development aid, might leave the governments of the countries in question in a better position to respect their own internal democratic processes in setting economic and development policy. Last week Susan George came to Edinburgh (where I’m writing this) and spoke at the Scottish Parliament. Debt, she says, is power: the creditors have great influence over economic policy in the developing countries. For someone who takes this view (as I do), the G8 debt cancellation ought to be welcome since it might make a political difference even if the financial difference is small. But in the present case, the debt cancellation is only available to countries that have already satisfied the IMF that they will adopt and pursue strong programmes of adjustment and reform – to countries, it seems, that have already had the power exercised over them.
The World Bank debt deal has had a lot of publicity: Reuters/ABC tells us, for example, that $2.7 billion of cancellation has been granted to Zambia. Wonderful! And what’s the overall benefit to them this year? errr… $7 million (according to EURODAD).
I am very cynical about cynicism: it can be very superficially attractive (think only of Han Solo), and it’s a great way to make oneself look more clever than one actually is: but generally speaking it’s a rocky road. This isn’t meant to be cynical; it’s mean to be sceptical. If anyone thinks I am missing something, if there’s a substantial reason why this debt deal really is to be welcomed, I’d like to hear it.
Ben at Jubilee Scotland
I think the use of the word “scam” is simply too harsh for most people to contemplate. I would be horrified to think that the hundreds of thousands of people, maybe millions of people, around the UK who took part in MakePovertyHistory (MPH) actions throughout 2005 are to be told that the whole exercise was a “scam” by the leaders of the 8 richest most powerful countries in the world. People’s expectations were raised to a very high level in 2005 that this was a special time to MPH. The G8 was meeting in Scotland, Blair as chair chose Africa and climate change as his two themes and it seemed that something could actually be done about the huge levels of poverty that exist in the world. People were encouraged to march, to write to their MP, to wear white wrist bands, to march in Edinburgh on 2 July, to pray, to fast, to do something, anything that could put pressure on these 8 men to MPH. For most people who will have read the headlines in the news after the summit or seen it on the TV it looks like the G8 cancelled the debts of the poorest countries in the world. This perception was not helped by the quote attributed to Bob Geldof who said ‘A great justice has been done … On aid, 10 out of 10; on debt, eight out of 10 … Mission accomplished, frankly’. I believe that he amended that comment in September 2005 perhaps it was just an off the cuff remark. But the fact is people listen to him and think that the debts have been cancelled. They might be surprised to know that the IMF debt relief came into affect from January 2006 and the World Bank debt relief didn’t begin for the countries until July 2006 a full year after it had been agreed at Gleneagles. If it is true that 30,000 children die every single day just because they are poor then its a tragedy that we can’t do something sooner. And if a total scam means that Ethiopia gets debt relief of $53m a year and Tanzania gets $39m a year then I quite like that kind of scam. I agree with Susan George that the power the rich countries have over the poorer countries has to change and maybe being less in debt is a step in the right direction, a small step but neverthe less a step. Finally, you ask for a substantial reason well simply people are alive today because of the G8 in Gleneagles and that you can’t argue with.
Thomas. One can “argue with” the fact that we have been scammed with the G8 deal. More people could of not have died because of a proper deal. You are defending a deal which has not been the best for everyone.
In the first sentence the author reveals his position on the issue. Referring to the G8 debt cancellation as a scam, he is obviously liberal and anti-corporate. Ben made no attempt to remain in a neutral position. However, rather quickly into the article he admits that his information is open to other interpretations and welcomes comments several times throughout the post.
According to Ben’s information, the G8 proposed a deal in 2005 to cancel the debt owed by 19 of the world’s poorest countries by paying off each country’s loan debt to the World Bank and IMF. Thus giving the country a clean slate with no debt or credit owed to any country or international banks. Ben admits that this sounds like a good deal, but then quickly points out that while the debt is erased, so too is an almost equal amount of aid that had been regularly given to each country by the World Bank. So while a country is debt free, it is also left in virtually the same poor condition it was in before the industrial world went down there to help end poverty.
From information I’ve gleaned here and there on the internet the way I understan the G8’s original plan, back in 1996 when HIPC initiatives began, was to loan millions of dollars to poor countries to spur enough economic growth so that they could afford to pay off their new debt and still maintain progressive social institutions. The problem was that 1/2 of the total countries that had been loaned tens of million dollars each year for nearly a decade, had not been able to generate enough sustainable revenue to pay off the loans and maintain health, educational and political reforms throughout the country. Some other blog articles have mentioned the fact that World Bank forced countries to spend more of their GDP on paying back their debt, than on the social programs that were supposedly so important to the G8. If one looks at all of this information, a few questions arise: Were the countries that were paying more of their GDP to debt than social programs doing so because they had a higher minimum percentage rate than countries who were earning enough to pay for both, or because they could not afford a common dollar amount demanded of all countries because they simply could not generate the revenue. If the former is true, then there is a legitimate gripe from people who accuse the World Bank of ‘scams’ and unfair loaning practices. But if the later is true, and the World Bank was only asking for the same set amount of money it asked from all countries it was loaning to, and that happened to take money away from social services in these 19 countries, then criticism should be of the original policy (which was made with good intentions and probably flawed like any initial human attempt to manage complex systems), and not the evil actions of a giant conglomeration.
I believe the later is true. The G8 revised their policies because they realized there was a problem; these countries were not escaping poverty, were not maintaining social programs, and were in debt on top of it. To solve this problem and still maintain the integrity of the World Bank (no bank just gives away money, they would cease to be effective if they did), the G8 decided to pay off all debt for the 19 of the near 40 countries. Yet instead of allowing the same situation to arise in another decade, a restriction was imposed on the World Bank by drastically reducing relief aid loans to an amount these countries could more realistically afford to repay. The G8 basically said, “OK Guyana, Bolivia and Niger, no harm no foul. You don’t have to pay us back, but don’t expect us to trust you enough to borrow that much money again and pay us back. Here’s a little, let’s see how you do with that.”
While it easy to criticize corporations these days for acting unconcerned with the actual well being of people and only care for their bottom line, I believe that is not an accurate description of the World Bank, G8 or the IMF. Instead, I would say that these worldwide networks of people, resources and information are genuinely trying to change the world into a less poverty stricken state. To do this they realize they must remain open to policy change, but they also realize they must hold themselves and heavily indebted poor countries accountable for all monetary transactions. Otherwise you create a country with an economy that can not operate within the globalized world, and no relative progress has been made.
Robert, thanks for a nice thoughtful response; much appreciated. However, there are problems with the interpretation you propose.
First, two corrections: (i) the MDRI deal only gets rid of multilateral (Bank/Fund/AFDF) debt of the 19 countries, and so does not quite leave them with “no debt or credit owed to any country or international banks.” You’re almost right: for the countries in question, though, multilateral debt makes up the majority of their external debt; furthermore many G8 countries (I don’t know how many offhand, but certainly UK and Canada) delete their bilateral debts once the country acceeds to MDRI debt cancellation. Private debts, though, are left untouched.
(ii ) a correction for me: I am right that the WB lowers aid to MDRI-recipient countries by a significant proportion (around 2/3 on average) of the debt received, but I neglect to mention that the total outflow of aid from the WB’s IDA is intended to remain the same. This means that other countries that are not recipients of MDRI get more aid.
Regarding the substance of your comment, you argue that if the WB was asking the same from everyone, then it cannot be criticised for unfair practices even if for some countries this resulted in education and health cuts. Your argument apparently depends on the assumption that even-handed application of a policy cannot be unfair: but this is a false assumption. Suppose there are ten soldiers, one of which has massive wounds, and the Doc has bandages enough for one but insists on dividing the bandages equally between ten such that the wounded one dies. This is obviously unfair. You will respond that it is the *policy* which is unfair, not the application of it, but this move doesn’t work in this context. Clearly the doctor who would apply this unfair policy is acting unfairly.
But it can be that a policy which ends up being unfair can have been made with good intentions: this is what you suggest about the loans made by the G8 and its institutions over the last ten (actually thirty) years. But this is wrong. The debt crisis pefigured by the “Mexican Weekend” of 13th – 15th August 1982 was a crisis because there was a possibility of the collapse of the US money-centre banks (Chase Manhattan, Bank of America etc) if the developing countries did not continue to meet their interest payments. The international community – which includes the elites in the developing world who went along with this – chose to impose austerity budgets on the developing countries, and so maintain interest payments at the expense of their public expenditure, in order to save the money centre banks. This is just from the text-books (Corbridge, S. Debt and Development, Blackwell 1993). Development was sacrificed to save the banks: this is not a policy that had the best of intentions.
You could respond that the world on aggregate would have been even worse off if the money centre banks had collapsed; this would be a serious counterattack though it has to get over the objection that it is hard to imagine HOW could things be any worse in Zambia, in Mali, than they actually are. (This point is drawn from Easterly, W., Jo. Dev. Economics 76 (2005) pp.1-22.) These and many many other countries are living economic catastrophe. This is an emotive response on my part, though, and a bit underhand. If you know of any studies on counterfactual econommic history after 1982 I’d be fascinated. Perhaps Ajit Singh has done one. He is reported to have said that he could have prevented the debt crisis if anyone had listened to him in 1982.
You imply, finally, that it is the developing countries’ faults that they got into debt distress and so it is only wise that they should not be trusted with many loans for the near future. Responding to this point in a lecture, Joe Stiglitz argued that he could imagine that this was true if it was just one or two countries who were in trouble, but the extent of the debt distress leads him to think the cause is systemic. As I understand it, the systemic problems are as follows:
In the 1970s: inflation in US; non-risk averse lenders from the major US banks; evasion of domestic lending regulations by the major US banks; high oil costs; over exposure to interest rate fluctuations of the developing countries – this set up this problem.
In the 1980s: monetarism (low inflation targets, high interest rates); global recession. This actualises the problem.
The story of debt can be reconstructed from these bones without ever mentioning those darlings of the western media: the corrupt dictator or the incompetent developing country finance minster.
Ben
Jubilee Scotland
I think our discussion should shift away from blaming the World Bank, US banks and western media for the current economic state of the global south. While these institutions may be responsible for the debt of many countries within Africa, South America and Asia, they cannot be held responsible for the poverty that already existed. Global south countries, particularly in Africa, have been in a perpetual state of poverty for longer than anyone has kept record of. People point to many reasons for this; lack of natural resources, lack of a religious revolution or enlightenment, exploitation by Europeans, high population growth rates, high infant mortality rates, disease, authoritarian governments, planned market economies the list goes on and on. However, after briefly researching counterfactual economic history (as you suggested), it may be more accurate to say that the above mentioned causes of poverty are actually part of systemic changes caused by “the new institutional economics” (the role institutions play in economic growth), a revolutionary theory in the field of new economic history pioneered by the 1993 Nobel Prize in Economics winner, Professor Douglass C. North.
North has theorized that, “Innovations, technical changes and other factors that are generally regarded as explanations, are not considered to be sufficient. They are themselves a part of the growth process and cannot explain it”. Instead, “North maintains that new institutions arise, when groups in society see a possibility of availing themselves of profits that are impossible to realize under prevailing institutional conditions. If external factors make an increase in income possible, but institutional factors prevent this from happening, then the chances are good that new institutional arrangements will develop” ( http://nobelprize.org/nobel_prizes/economics/laureates/1993/press.html )”. These theories go far in explaining the development of American and European economies, and when applied to countries that remain in poverty, it suggests some interesting explanations as to why the economic development of the global south has failed.
One suggestion that can be derived from the application of North’s theories is that there simply have not been any external factors that have made an increase of income for groups within the societies possible. This can not be the case, however, as the global south has enjoyed access to natural resources that have been traded globally for centuries; including agriculture, oil, diamonds, timber, people and precious metals. Opportunities for economic growth have always existed, so why were they not sought out and utilized by the societies that had access to them? Again applying North’s theory that groups within a society will attempt to take advantage of a presented opportunity to increase their incomes, and accepting as fact that there have indeed been instances throughout history when economic growth opportunities have presented themselves to countries within the global south, one is led to conclude that either: 1) Poverty stricken countries developed institutions that have and continue to effectively prevent their societies from attaining income increase and thereby prevent the creation of new institutions to foster potential growth. 2) The societies themselves never viewed increase in income as a utility and therefore saw no value exploiting any of the presented chances for economic growth. 3) Groups within the society simply did not exhibit the ambition necessary to utilize the opportunities presented over the centuries. Since we are talking about the global south, and therefore dozens of countries, it is likely that these conclusions apply in various configurations to various degrees. Still, if North’s theories are correct (which the world economic community has generally agreed that they are) and I have applied them correctly (an 8th grader could have followed my same thought process), then it is the institutions within each global south country that created the initial state of poverty.
An obvious counter argument to this is that European colonists put the institutions within poverty stricken states in place. However, these institutions are still subject to the same economic principles North discusses, and should have been modified or replaced when new methods for maximizing a society’s income presented themselves. If repressive institutions still exist, then one of three explanations is possible. 1) The institution is currently in a state of forced change. 2) There are no better economic alternatives to force the change. 3) Groups within the societies lack the ambition/desire/ability to attain the alternative methods of economic growth and force change. According to North, “Institutions are sets or rules, compliance procedures, and moral and ethical behavior of individuals in the interest of maximizing the wealth or utility of principals”. This suggests that if an institution exists within a society, then both the society and the institution share the same ethics and morals, else the institution would be forced to change so that individuals could continue to maximize their utility. So do societies in the global south share the same values as European colonists, or is there something fundamentally different between these societies and those of America and Europe that prevent North’s theories from being applicable? Perhaps it is simply that the global south is in a state of change and the results will not be apparent for decades or longer.
I would conclude this: All societies are basically rational; therefore economic principals can be applied. However, societies define profit and utility differently; earning money is not always (the main) a perceived benefit of individuals. Countries in the global south are finding that without wealth, they are going to continue to starve and die. It is going to take time before the societies in poverty stricken states adopt the same values that Americans, Europeans, and other states within the global north have utilized to create a world that trades trillions of dollars on a daily basis. Once global south societies begin to adopt these values, North’s theories will apply and run their course, causing institutions that prevent societies from maximizing their utility to change or become extinct. Does this mean that societies will have to give up their cultures and buy into free market capitalism just to eat? Possibly, but according to Marx, eventually even capitalists will have to give up their cultures to create a sustainable communist or socialist economy. The sooner global south states adopt the same rule sets that the prosperous global north plays by, the sooner they will end their own poverty.
PS After writing this, I realized that maybe I did not make it obvious that proof of my argument takes place in the form of both China and India’s success from opening up their economies to free market principles. If any more need be said of this, please send me an email and I will gladly illustrate the gross benefits China and India have reaped from adopting US theories and stategies for economic growth.
Sorry for the delay in replying to this. Several points:
1. It is false that global south countries have always been poor. Consider this, for example:
———-
In 1324 Mansa Musa, the sultan of Mali, decides to make the pilgrimage to Mecca. His richly attired retinue and his heavily laden animals reflect his financial status – for he effectively controls the African gold trade which now supports the currency not only of Islamic states but of European communes and kingdoms. (The most valuable coins of Roman Catholic Europe have until recently been minted in silver, but Genoa, Florence and Venice reintroduce gold in the late 13th century and northern kingdoms soon follow their example.)
Contemporary accounts say that when Mansa Musa passes through Cairo, on his way to Mecca, his caravan numbers 60,000 people and his camels carry 12 tons of gold. He distributes largesse to religious institutions and to fawning courtiers alike.
Indeed he is so generous with the abundant gold of Mali that the value of the metal in Cairo suffers a temporary slump. But the reputation of Africa and its wealth is securely established.
From: History of Africa
http://www.historyworld.net/wrldhis/PlainTextHistories.asp?groupid=1473&HistoryID=ab24
———-
2. Moving to more recent history: one text book on African history asserts that the post-colonial African governments were not doing badly with respect to growth and development. It is common to denigrate them, but this is to emphasise the failures over successes. It was debt, which surged in the 1970s, which put an end to this development. [“Africa since 1940: The Past of the Present”, by Fredrick Cooper (CUP: 2002)]
3. Joe Stiglitz argues (“Making Globalisation Work”) that India and China, etc., protected their industrial sectors for decades, though tariff barriers, until they were strong enough to compete on the world market. India only recent liberalised its capital markets; China still has not. Liberalisation works when proper institutions have been set up to sustain them; where they do not exist, as in Russia, Iraq, and many African countries – it is a catastrophe.
4. This may have some implications for how to understand the application of North’s theories to Africa. My first thought here is that for North’s mechanisms to apply, there must be some underlying institutional structures already in place which enable it. There must be the flexibility within the society to enable institutional development to occur in response to new opportunities. It can be argued that the colonists left African states without these institutional preconditions: elites siezed control of state resources, as there were no other assets left within the country for elites to vie over. In which case, North’s mechanisms might start functioning once civil society or popular democracy takes hold. I’d have to think about this.
Ben
Jubilee Scotland
Which makes him nothing mroe than a village idiot gravelling at the feet of America’s enemies. One of the comments I’ve seen is that he
was nominated before February 1 of this year.
Despite how it measures, it can still spark your interest, that’s for sure.