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Central American University - UCA  
  Number 218 | Septiembre 1999



The "Solution" of the Rich

In June, the G-7 heads of state offered a purely cosmetic "solution" to the millions of anguished poor in the South and the millions of aware and sensitive people worldwide who are demanding cancellation of the poor countries' entire foreign debt.

Eric Toussaint

Some 17 million signatures collected worldwide to demand the cancellation of the foreign debt owed by poor countries were handed over to the heads of state representing the Group of Seven (G-7), the seven wealthiest countries on the planet, at their annual meeting in Cologne, Germany, on June 19. The same day, the G-7 leaders announced that they would write off US$70 billion, which they claimed represented 90% of the poor countries' debts and would therefore solve their debt problems. It was a lie, pure and simple.

A drop in the ocean

Accepting the figure announced by the G-7 countries, $70 billion represents just 3% of the total third world debt, which according to the latest World Bank report reached $2.03 trillion dollars in 1998, excluding the debts owed by the former Eastern bloc countries. More importantly, it is equivalent to only 35% of the $205.7 billion which the World Bank estimates was owed in 1998 by the world's 41 poorest countries: Angola, Benin, Birmania, Bolivia, Burkina Faso, Burundi, Cameroon, Central African Republic, Chad, Congo, Democratic Republic of the Congo, Equatorial Guinea, Ethiopia, Ghana, Guinea, Guinea Bissau, Guyana, Honduras, Ivory Coast, Kenya, Laos, Liberia, Madagascar, Mali, Mauritania, Mozambique, Nicaragua, Niger, Nigeria, Rwanda, Sao Tome and Principe, Senegal, Sierra Leone, Somalia, Sudan, Tanzania, Togo, Uganda, Vietnam, Yemen and Zambia.

The Committee for the Cancellation of the Third World Debt estimates that the real amount of the cancellations would only reach $25 billion tops, which represents approximately 12% of the debt owed by the countries that fall within this initiative and 1.2% of the total third world debt. In other words, it is but a drop in the ocean of debts.

We calculate this amount rather than the $70 billion announced by the G-7 for various reasons. First, several of these 41 countries will not fulfill the conditions set by the G-7 and those that do not apply their adjustment policies to the letter will have to forfeit the cancellation. The debt reduction is done case by case, country by country, and involves the application of at least three years of reinforced structural adjustments and the joint agreement of the International Monetary Fund (IMF), the World Bank and the Paris Club of creditor states from the North. The Democratic Republic of Congo, Sudan, Liberia, Sierra Leone and even Angola and Nigeria will not fulfill the conditions set, and their debts alone represent approximately half of what is owed by the 41 poorest and most indebted countries.

Second, the debts owed by these countries to the World Bank and the IMF will not be canceled because the statute covering these organizations prohibits them from writing off any credit. The repayment of part of the debt owed by these countries to the two institutions would go into a trust fund topped up by their member countries and the World Bank and IMF would use this fund to pay themselves.

The third reason is that part of the bilateral debts to be written off is made up of bad debts dating back to the early 1980s. The G-7 countries are canceling these credits because they know perfectly well that they no longer have any value. This part of the operation is nothing more than an accounting exercise of writing off irrecoverable credits from the old books.

This is why German Chancellor Schröder told a newspaper two days after the G-7's declaration that the cancellation of the poorest countries' debt did not imply any cost whatever to the German treasury. It is also why a Wall Street Journal Europe editorial said that the G-7 countries had provided the two Bretton Woods institutions (the World Bank and the IMF) with the possibility of refinancing old irrecoverable debts through new ones.

In conclusion, faced with concerned public opinion expressed in 17 million signatures and the anguish of the poorest countries in the South, the G-7 heads of state carried out a purely cosmetic operation in Cologne without even having to open their wallets.

South earns less; North spends less

Since the early 1990s, the G-7 group has periodically announced that it has adopted the right measures to improve the situation of the poorest countries: in 1994 in Naples, it claimed that 67% of their foreign debts would be canceled while in Lyon in 1996 the figure was 80%. Despite all this, the debt owed by the poorest countries continues to rise.

How can the debt still be increasing despite these successive cancellations? Could it be that the measures announced were never implemented? A partial answer can be found in the following paragraph from a speech given by François Mitterand at the G-7's July 1994 meeting in Naples: “Despite the considerable sums of money earmarked for bilateral and multilateral aid, the capital flow from Africa to industrialized countries is greater than the flow from the industrialized countries to developing countries.” Although the statement specifically refers to Africa, it could be applied to the third world as a whole.

The following facts provide us with a better understanding of the problem:
* In 1998, the third world paid back $30 billion more than it received in new loans.

* Public development aid has reached an all-time low, falling by 33% in real terms between 1990 and 1998.

* In 1998, the third world in general repaid $250 billion, while public development aid only just broke the $30 billion mark.

In other words, third world countries have transferred eight times more money to the rich countries than they have received in much-hyped development aid. New debt crises erupt and will continue to erupt because the prices of products sold by third world countries on the world market are falling considerably, while the debt-service interest rates are rising. In short, third world countries are earning less and paying more. Meanwhile the most industrialized countries are making savings on the import of raw materials from the third world. In addition, the interest rates on the public debts owed by industrialized countries have fallen since the Asian crisis generated a “quality-seeking” capital flight from the third world back to the North. These are the ways the countries of the North are spending less.

The South: To pay or not to pay?

In 1982, the total third world debt jumped to $590 billion but by 1998 it stood at $2.03 trillion, even though the third world countries paid out some $2.5 trillion in debt servicing over that period. In other words, since the explosion of the debt crisis in 1982, they have repaid four times over what they owed at that time, yet they ended up 3.5 times more indebted than when they started. With respect to Latin America, the UN's Economic Commission for Latin America (ECLA) estimates that the net capital transfer from Latin America to the North rose to over $200 billion between 1983 and 1991. Latin American countries have transferred colossal sums to creditors in the North: between 1982 and 1996 they paid out $739.9 billion, like the rest of the third world over three times the amount they owed in 1982.

Given this situation, will the measures announced in Cologne improve the situation of the majority of the world's poor? Not likely, since most of them live in India, Indonesia, Brazil, Bangladesh, Pakistan and Mexico, none of which benefit from the cancellation measures. Furthermore, the countries in line for debt cancellation will have to apply draconian austerity measures for three to six years. The greater fiscal pressure on services and essential consumer goods will reduce the buying power of the poorest citizens and reduce access to health care, education and other social services. In these countries, at least 50% of the population is already living in absolute poverty; in Mozambique and Rwanda the figure is over 70%.

Squaring the circle

The measures announced in Cologne are an extension of the Highly Indebted Poor Countries (HIPC) initiative taken in 1996 by the World Bank, the IMF and the G-7 countries. But have the measures taken in the framework of this initiative improved the fate of the affected populations? The answer is no, as the World Bank itself has recognized while at the same time calling for patience.

Although people's living standards have not improved, has there at least been an improvement in the economic situation of the states involved? Are they paying lower annual debt service? No. In fact, quite the opposite is true: they still have to repay more than they receive. In 1997, the rich countries loaned the poorest countries $8 billion and the latter repaid $8.2 billion, $200 million more. Thus the World Bank Group's International Reconstruction and Development Bank and the IMF receive more from the poor countries than they actually lend them.

Looking toward the future, the World Bank has just admitted that, despite the announced debt reduction measures, the repayments will not decrease and, worse still, some countries such as Mali and Burkina Faso will have to repay more than before. The G-7 has put the IMF and World Bank in charge of ensuring that countries from the South properly implement the planned economic policies. It's a bit like recruiting pyromaniacs to the fire brigade. According to the G-7 communiqué, these plans must favor an improvement in the provision of health attention and education to the population. Is it really possible to imagine such an improvement in the strict context of budgetary austerity? It's like trying to square the circle. Even after its debt has been reduced, Mozambique will still have to dedicate over 40% of its budget to debt repayments. How on earth is it supposed to improve its people's health under such conditions?

Total cancellation is the only solution

According to the World Bank, the number of people living below the absolute poverty line—with a daily income of under $1—has risen from 1.2 billion to 1.5 billion between 1987 and 1999. Over 80% of the planet's population lives in the third world and only 12% in North America, the European Union and Japan.

In fact, as the United Nations Development Program's annual Human Development Report repeatedly points out, it is not that the North helps out the countries of the South, but rather that the populations of the South transfer considerable wealth to those who possess capital in the North. And they do it at the price of great suffering and intolerable sacrifice. This transfer takes place through two fundamental mechanisms: debt repayments and unequal terms of trade.

For this reason, the only solution is to completely annul the foreign public debts owed by all third world countries. And to ensure that this annulment does not favor dictatorial and corrupt regimes in the South, the assets that they hold in the rich countries should be frozen, and, following an investigation, be sent back to the third world populations by means of a development fund managed democratically in the country of origin.

At the same time, complementary measures should be taken, including the abandonment of structural adjustment plans, the establishment of a tax on financial transactions such as the Tobin rate, the development of regional South-South agreements, etc. And to ensure that the debt-accumulation mechanism does not start up again after the debts have been annulled, we should go even further and begin to create a new, fairer and more humane economic order.

Eric Toussaint is a Belgian economist and president of the Committee for the Cancellation of the Third World Debt (CADTM).

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