Debt, Arithmetic, and Paradigm Shifts

There was a qualifier clearly missing from my recent posts on the G8 announcement on debt cancellation. It’s not quite so clear what that qualifier should have been, but ‘public’ is probably close to the mark. The G8 announcement of “100% debt cancellation” only applied to those debts owed to a few multilateral bodies which are, effectively, extensions of rich governments. Debts that are effectively owed to the taxpayers in the world’s richer countries.

Not covered were debts owed to private organisations, whether that’s standard loans to banks or from bond issues. For that matter, neither were loans to the Inter American Development Bank which is one of the major creditors of Latin American countries.

Nick’s posting “Debt, lies and statistics” is well worth reading for anyone seeking to understand the on-the-ground impact of this new package. He analyses the impact on Bolivia and finds that in the case of that country “100% cancellation” only means “41%” when loans to “other international banks such as the Inter-American Development Bank or Government creditors such as Spain” are taken into account.

I continue to feel that the new announcement is an important one. It goes further than previous announcements and it’s good to see anything new on the table, but as Nick rightly points out the rhetoric of “100% cancellation” is becoming tiresome. While there is always an argument as to why the latest announcement can be called “100%” without previous “100%” announcements being lies, every new 100% announcement at best undermines the power of government rhetoric, and at worst appears a deliberate strategy to discredit ongoing campaigns for further debt cancellation.

There is significant further work to be done, and unfortunately it may be made all the harder by this new announcement. While cancelling debt will not solve all poverty, international debt is an essential lynchpin holding many countries in poverty and subject to the whims of the World Bank, IMF, WTO and G8. To really cancel it will require at least one paradigm shift in how debt cancellation is approached.

The first paradigm shift required is for rich governments and their servant institutions to relinquish control of the debt relief process, replacing it with some form of bankcruptcy court independent of both creditors and debtors. If rich countries are really committed to transparent debt relief they have nothing to lose by handing over control, and if they are not committed to it, then it is in the interests of their citizens to have their governments’ interests and spending laid bare through a new process.

Even then, a second paradigm shift (or maybe it’s just one very significant one) is still required. At present, there is a severe reticence on the part of governments to regulate the international financial sector. While individual bankcruptcy within an individual country applies to all creditors, on the international stage there is little to no effort being made to rein in the private investment banks, vulture funds, and others who own significant amounts of developing country debt.

Our governments need to realise that the power of these transnational organisations is undermining their efforts to alleviate poverty and that effective regulation is needed. If they truly believe that debt cancellation is an important part of poverty reduction (as the recent G8 announcement indicates) then that debt cancellation needs to apply across the board. For some, such controls would be heretical, questioning the supreme power of the financial markets, but at some point a choice must be made between economic dogma and the demands of democracy.

Links: Jubilee Plus have also published a statement on the recent announcement. They have also published their debt database, providing useful breakdowns on the status of debt relief initiatives and total debt stocks.

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