Submerging Markets™

BEYOND DEBT RELIEFThe Next Stage In the Fight for Global Social JusticeJames S. Henry

“Third World debt relief”  has become a little like Boston’s “Big Dig,” the Middle East “peace process,” and the “ultimate cure for cancer” -- long anticipated, endlessly discussed, and perpetually, it seems, just around the corner.

At the end of the day, after decades of effort, the fact is that very little Third World debt relief has actually been achieved.

There is also mounting evidence that even the paltry amount of debt relief that has been achieved has not done very much good. 

This is partly  because debt relief tends to reinforce questionable policies and bad habits that get developing countries into hock in the first place.  It is also because debt relief has reinforced the prerogatives of IMF/World Bank econo-crats, whose policies have often been incredibly detrimental. 

Finally, debt relief is also often a very poor substitute for other forms of aid and development finance. 

Furthermore, most of the costs of debt relief have been born by ordinary First and Third World taxpayers, while the global banks and Third World elites that have profited enormously from all the lousy projects, capital flight, and corruption that were financed by the debt have escaped scot-free.

This is not to suggest that the debt relief campaign has been utterly pointless.

It has provided a bully pulpit for scores of entertainers, politicians, economists, religious leaders, and NGOs. It  has occasionally reminded us of the persistent problems of global poverty and inequality.

It has also provided an excuse for some pretty good free concerts.

From the standpoint of actually providing enough increased aid to improve living conditions in debt-ridden countries, however, debt relief has been a disappointment. In the immortal words of Bono himself, "We still haven't found what we're looking for."

Fortunately, there is an alternative strategy that would have much greater impact. But this strategy would require a more combative stance on the part of anti-debt activists, and it would almost certainly not generate nearly as many convivial press conferences or photo opportunities.

“Fact Check, Please”

Surprisingly, there have been few efforts to take stock of debt relief efforts, to see whether this game has really been worth the candle.

It is high time that we took a closer look. After all, it is now more than 30 years since Zaire’s bilateral debts were rescheduled by the Paris Club in 1976, 27 years since UNCTAD’s $6 billion write-off for 45 developing countries in 1977-79, 23 years since the climax of the so-called “Third World debt crisis” in 1983,  and more than a decade since the inauguration of the IMF/World Bank’s debt relief program for “Heavily-Indebted Poor Countries” (“HIPCs”) in 1996. 

On the debt relief campaign side, it is two decades since the formation of the UK Debt Crisis Network, eight years since the 70,000-strong “Drop the Debt” demos at G-8’s May 1998 meetings in Birmingham, and over a year since the “Live-8/End Poverty Now” fiesta at Gleneagles.

Along the way, there have been Bradley Plans, Mitterand Plans, Lawson Plans, Mizakawa Plans, Sachs Plans, Evian Plans, and more than 200 debt rescheduling by the Paris Club on increasingly generous terms -- Toronto terms (’88-‘91), London (‘91-‘94) terms, Naples terms (’95-96), Lyon terms (’96-99), and Cologne terms (’99-).

Most recently, in the wake of “Live 8,” the G-8, the World Bank, and the IMF launched their “Multilateral Debt Relief Initiative” (“MDRI”) with a great deal of fanfare, declaring that it will be worth at least “$40 to $50 billion” to the two score  countries that are eligible. 

Realities

Despite all this activity, the fact is that developing country debt is now greater than ever before, and is still increasing in real terms. For most countries,  the debt burden – as measured by  the ratio of debt service to national income – is even higher than in the early 1980s, at the peak of the so-called “Third World debt crisis.” 

By our estimates,  as of 2006, the nominal stock of all developing country foreign debt outstanding was $3.24 trillion. This debt generated about $550 billion of debt service payment each year for First World  banks, bondholders, and multilateral institutions.

That includes $41 billion a year that was paid by the world’s 60  poorest countries, whose per capita incomes are all below $825 a year. Even after twenty-five years of “debt relief,” this annual bill for debt service still almost entirely offsets the $40-$45 billion of foreign aid that these countries receive each year. Their debt burden also remains higher, relative to national income, than it was the early 1980s.   

As discussed below, most heavy debtors also have very little to show for all this debt.  So these payments are, in effect,  a “shark fee” paid to First World creditors  for funds that have long since vanished into the ether – and a not a few offshore private bank accounts.

Present Value

Since most existing Third World debt was contracted at higher interest rates than now prevail, the “present value” of the debt -- a better measure of its true economic cost -- is actually even higher: nearly $3.7 trillion. 

China and India alone now account for about $.5 trillion of this developing country “PV debt.”  Both countries  were relatively careful about foreign borrowing, and they also largely ignored IMF/World Bank policy advice, so their debt burdens are small, relative to national income. But in absolute terms, their debts are large, simply because they are so huge.  They can easily afford it --  thanks in part to their non-neoliberal economic strategies, both countries now have high-growth economies and large stockpiles of reserves.

Of the other $3.2 trillion of “PV debt,” however, $2.6 trillion is owed by 26 low-income and 49 middle-income countries that pursued “high debt” growth strategies. 

These heavily-indebted countries have about 1.6 billion residents – over a quarter of the world’s population, a share that has been steadily increasing.

After decades of debt relief, their “PV debt/ national income ratios” are all in the relatively-high 60-90 percent range. Debt service consumes 4 to 9 percent of national income each year,  more than they spend on education or health, and far more than they receive in foreign aid.   
III. Where’s the “Relief”?

These numbers beg a question -- what have all the professional debt relievers at the World Bank, the IMF, and the Paris Club,  not to mention debt relief activists, been up to all these years?  How much debt relief have they actually secured, who received it, and how helpful has it been?

To begin with, it is not easy to measure “debt relief.” The definitions of debt relief  employed by debtor countries, commercial creditors, bilateral creditors, and multilateral organizations like the IMF/World Bank, the OECD, the Paris Club, and the Bank for International Settlements vary significantly, and the reported data is subject to huge discrepancies.  This helps to account for the fact that only a handful of systematic attempts to measure debt relief have ever been attempted.   

As usual, however, some things can be said. This article provides the most comprehensive estimate of debt relief to date, based on a careful review of these data sources and our own independent analysis. 

Overall Relief

Our first key finding is that the actual amount of debt relief provided to all developing countries to date has been pretty modest.

From 1982 through 2005, in comparable $2006 NPV terms, the total value of all low- and middle-income developing country debt  that was “relieved” -- rescheduled, written down, or cancelled –- was only $310 billion -- just 7.8 percent of all the pre-relief debt outstanding.   

Low-Income Relief

The relief ratio for the world’s 60 poorest countries  has been higher – about 28 percent of their pre-relief debt levels. All told, in PV terms, these countries have received  about $161 billion of debt relief – more than half of all the debt relief to date.  This is now saving the recipient countries about $15.3 billion per year of debt service.

This  is certainly nothing to sneeze at.  But it is a far cry from the extra $50 billion to $100 billion per year of cash aid that most leading development experts believe will be needed if developing countries  are to attain the (rather modest) “Millennium Development Goals” that were set back in 2000 by the UN, with a target date of 2015.   

It is also important to remember that most low-income countries have been waiting a very long time for even this modicum of debt relief, most of did not start arriving until the late 1990s. By then, several countries that had not been “highly-indebted” to begin with had become so, just by dint of the delay.

Debt Relief Sources – Low-Income Countries

Our analysis shows that 30 percent of  this low-income debt relief has come from the World Bank/ IMF’s HIPC and MDRI programs. Another 30 percent has come from Russia alone, which forgave a substantial load of bilateral debt that were owed to it by Nicaragua, Vietnam, and Yemen, when Russia joined the Paris Club in 1997. In February 2006, Russia also wrote off another $5+ billion debt that was  owed by Afghanistan.

Finally, another $65 billion of debt relief for low-income countries  was provided by the Paris Club, an association of First World export credit agencies (EGCs) like the US EXIM Bank and the UK’s EGCD.  These agencies have a strong “client base” among the ranks of First World exporters, contractors, and engineering firms. All these private entities received significant business from the first round of Third World lending, in the form of orders for large projects.  They are now eager to have the EGCs forgive still more loans,  at taxpayer expense, in order  to clear the way for another round of project finance.

On the other hand, leading global banks like Citigroup, UBS, JPMorganChase, Goldman Sachs,  Deutsche Bank, BNP, and ABN-Amro, and Barclays, have provided a grand total of just $1.5 billion of low-income debt relief,  mostly by way of the HIPC program.

In the 1970s and early 1980s, of course,  these giant international banks led the way in syndicating loans for developing countries. At the same time, many of them also became pioneers in “private banking,” the dubious business of helping Third (and First) World elites park their capital offshore and onshore, as free of taxes and regulations as humanly possible. 

Since the early 1990s, apart from China and India, these private banks have largely handed over the task of providing new loans to low-income countries to multilateral institutions like the IMF, the World Bank, and the IDB, as well as to the EGCs.  Ironically, this has permitted them to focus on more lucrative Third World markets, including low-debt/ high-growth markets like China and India.

For middle-income countries, while the foreign loan business was booming in the 1970s and early 1980s,  these banks became deeply involved in stashing abroad the proceeds of the banks’ own country loan syndicates.   For low-income countries, private bankers  were more often called upon to recycle the proceeds of  loans from the development banks, the IMF, and the EGCs, as well as the proceeds of various government-owned asset rip-offs. 

Overall, therefore,  from the standpoint of debt relief, these First World financial giants have provided very little debt relief. This is despite the fact that they have not only reaped enormous profits from Third World lending, but also continue to reap enormous profits from Third World private banking. In the wake of the debt crisis, they have also been able to scoop up undervalued financial assets – banks, pension funds, and insurance companies – in countries like Mexico, the Philippines, and Brazil. In good times and in bad, in other words, these private institutions have always found ways to prosper, help their clients  launder money, evade taxes, and conceal ill-gotten gains, and they have never been reluctant to profit from social catastrophe.

We will return to these financial giants below, because the history of their involvement in this story suggests one possible antidote for our “debt relief” blues.

B. Middle-Income Relief

So-called “middle-income” countries like Brazil and Mexico have received $149 billion of debt relief –- just 4.3 percent of their $3.4 trillion of pre-relief debt outstanding.  As discussed below, most of this was obtained by the early 1990s, by way of Paris Club restructuring and  the Brady Plan.

This reflected the high priority given to these large, lucrative, highly-indebted markets in the 1980s by First World banks and governments, mainly because such a large share of their loan portfolios was tied up in them. 

That, indeed, was the true meaning of the “Third World debt crisis,” so far as First World bankers, central bankers, officials and, indeed, most First World journalists was concerned.  It was viewed primarily as a ‘crisis’  for the banks and their shareholders. Over time, as they managed to reduce their exposure, the “crisis” disappeared from the headlines  – except for the countries involved. 

Debt Relief Sources – Middle-Income Countries

Overall, private banks provided $75 billion of debt relief to middle-income countries, about half the total. Most of this was achieved through debt swaps and buy-backs. The Paris Club added another $28 billion, mainly by way of traditional bilateral debt rescheduling.

The US Treasury added $47 billion, by way of the Baker Plan (1985-89) and the Brady Plan (1989-95.)  On its own,  the Baker Plan actually increased  middle-income country debt by $77 billion, consuming $45 billion of US taxpayer subsidies in the process.

From 1995 to 2002, the US Treasury, the World Bank, and the IMF also provided short-term financial relief to several large middle-income countries like Argentina, Brazil, Mexico, and Indonesia. In theory, these were pure reschedulings, with all loans paid back with interest,  and no net impact on “PV debt” levels.

In practice, several of these bailouts were completely mismanaged. Indonesia, Mexico, and Argentina were all permitted to use their emergency dollar loans to bail out dozens of domestic banks and companies -- which just happened to be connected to influential members of the local elite, who were also “not unknown” to leading private bankers and US Treasury Secretaries.

So a large share of these bailout loans was wasted on outright graft. On the other hand, countries were still expected to service the bailout loans,  often at very high interest rates. Given their reluctance to raise taxes, especially on capital,  most countries repaid the bailout loans by boosting domestic debt – in effect, by printing money. For example, Mexico’s bailout in the mid-1990s ended up costing the country’s taxpayers more than $70 billion, while Indonesia’s bailouts ended up costing the country at least $50 billion.  In effect,  the  bailouts actually ended up increasing overall country debt levels,  just as the Baker Plan had done. Our estimates of debt relief have generously omitted the impact of these bailouts, which would make the total amount of debt relief even smaller.

Overall, during the 1970s and 1980s, middle-income countries like Argentina, Brazil, Indonesia, Iraq, Mexico, the Philippines, Russia, Turkey, and Venezuela became the world’s largest debtors. Combined with the fact that they have also received so little debt relief since the early 1990s, this helps us to understand why their debt service costs soared to all-time highs since 2000, in real terms, and relative to national income.  Recent debt relief programs have focused almost entirely on low-income countries, ignoring the situation of heavily-indebted middle-income countries.  This is another strategic choice that debt relievers may want to reconsider.

The Political Economy of “Debt Relief”

So what’s gone wrong with debt relief? Why has so little been achieved after all these years? Whose interests have been served, and whose have been ignored or gored? Is there a different strategy that could have  been more effective?

A. The Roots of the “Debt” Crisis

To understand this disappointing debt relief track record, it will be helpful to review the origins of the so-called “Third World debt crisis.”  This continuing crisis had its roots in the fact that from the early 1970s to 2003, developing countries absorbed  more than $6.8 trillion  of foreign loans, aid, and investment, much more foreign capital than they had ever before received.

A handful of developing countries managed this enormous capital influx more or less successfully -- for example, Asian countries like Korea, China, India, Korea, Malaysia, and Vietnam. For a variety of historical reasons, they were able to resist the influence of First World development banks and private banks. Today they are the real winners in the globalization sweepstakes, ranking among the world’s fastest growing economies  and the First World’s most important suppliers, customers, and potential competitors. 

Our concern here is not with this handful of winners, but with the great majority of the world’s 150 developing countries.  In general, compared with the winners,  they have been much more open to unrestricted foreign capital and trade since the 1970s, as well as policy advice from the “BWIs” (the Bretton Woods institutions – the World Bank and the IMF).  For many countries this close encounter with global capitalism has proved to be troublesome – indeed, for many,  disastrous.   

In effect, these countries have conducted a very risky policy experiment for several decades.  By now the results are clear. Across country income levels, these countries have  paid a very heavy price for unfettered access and dependence on foreign banks. Indeed, we are hard-pressed to find a single exception to the miserable track record of this “wide open, debt-heavy, bank-promoted” growth strategy.

Lousy Regimes and Unproductive Debts

Overall, we estimate that more than a trillion dollars – at least 25 to 35 percent  -- of the $3.7 trillion foreign debt that compiled by low- and middle-income countries from 1970 to 2004  either disappeared into poorly-planned, corruption-ridden "development" projects, or was simply stolen outright. 
For several of the largest debtors, like the Philippines, Indonesia, Mexico, Brazil, Venezuela, Argentina, and Nigeria, the share of the debt that was wasted was even higher. Indeed, one of the most important patterns underlying the  “debt crisis” was that borrowing, wasteful projects, capital flight, and corruption were all concentrated in a comparative handful of countries.   As we’ll argue, this is crucial fact for those who seek to revitalize the debt relief movement to understand,  because it implies that the interests at stake are far greater than those that have come to the surface in the struggle for “low income” debt relief. 
Low-Income Heavy Borrowers

In the case of the 48 low-income countries that eventually qualified for debt relief from the BWIs  under the HIPC and MDRI programs, a similar pattern of concentration applies. In the early 1980s,  the real value of these countries’ debts increased by 70 percent in just six years.  By the time the World Bank got around to launching HIPC in 1996, their debts had increased another 7-10 percent.  Just 11 of these low-income countries –- including Bolivia, Congo Republic, Cote d’Ivoire, DR Congo, Ethiopia, Ghana, Mozambique, Myanmar, Nicaragua, Sudan, and Zambia -- accounted for 68 percent of  this group’s debt increase from 1980 to 1986.

All these top low-income borrowers were not only desperately poor to begin with,  but they were also either “weak open states” run by kleptocratic dictators, or  were caught up in bloody civil wars –  in most cases, both at once.   Sometimes the causality flowed in both directions -- excess debt could exacerbate political instability. But the primary relationship was the unsavory combination of weak states, corrupt leaders, wide open capital markets, and symbiotic relationships with “easy money” and seductive bankers.

Extending this analysis to the key middle-income debtors noted  above, we find similar long-run patterns of mis-government, weak states, and wide-open banking.

All this suggests that the heaviest debtors got into troubles for reasons that only were only  superficially related to  the usual villains in the orthodox neoliberal account of debt crises -- “exogenous shocks,” “policy errors,“ “liquidity crises,” and – when pushed to acknowledge the existence of corruption and capital flight – a “lack of transparency in the management of natural resources.”  Those countries that are deepest in debt and most in need of relief today include countries that have long been among the most consistently mis-governed, wide-open, and “mis-banked.” While natural resource wealth like minerals and oil have indeed often turned out to contribute to economic mismanagement,  their presence is not a sufficient condition for such mismanagement – the decisive question is the relationship between foreign and domestic elites.   

From the standpoint of debt relief, this pattern presents a dilemma –Without insisting on deep political reforms,  simply providing countries with more relief alone might accomplish little – they are likely to dig themselves right back into a hole. After all, corrupt dictatorships like the Central African Republic have been more or less continuously in arrears on their foreign debts since at least 1971!

The Debt/Flight Cycle

Servicing these huge unproductive debts took a large bite out of these countries’ export earnings and government revenues,  draining funds that were badly needed for health, education, and other forms of  public investment, and helping to produce crisis after  financial crisis. Growth, investment, and employment were throttled by the continuing need – enforced by First World creditors --  to generate enough foreign exchange to service the loans.

Meanwhile, even as all this foreign capital was rushing in, an unprecedented quantity of flight capital – including a substantial portion of the loan proceeds – headed for the exits.

Of course Third World capital flight is an old story, associated with long-standing factors like individual country political risk, unstable currencies, bank secrecy, the rise of “offshore havens,”  and the absence of global income tax enforcement. 

But the dramatic increase in poorly-managed financial inflows to the developing world in the 1970s and early 1980s – especially foreign loans and aid – boosted these capital outflows by an order of magnitude. They basically overwhelmed existing political institutions in many countries, producing the largest tidal wave of flight capital in history, and fundamentally revolutionizing offshore private banking markets. 

We simply cannot account for this sharp increase in flight capital unless we take into accounts its close relationship to all this “lousy lending and loose aid.” 

Poorly-controlled lending and foreign aid contributed to the rise of global flight capital in the first place.  From one standpoint it did so in a purely mathematical sense, by providing the foreign exchange that was needed to finance capital flight. But that doesn’t explain why these new “loanable funds” didn’t become a net addition to investment  in the borrowers’ economies. The loans also stimulated additional capital flight, for several reasons: (1) they destabilized the economies of many newly-indebted countries, providing more capital than they could productively absorb in a short period of time; (2) the inflows provided sources of government revenue that were not directly responsible to taxpayers. This generated enormous opportunities for corruption and waste, partly by way of poorly-planned projects with weak financial controls, and partly by providing Finance Ministers, central bankers, and other insiders with dollars they could use to  speculate against their own currencies; (3) the debt flows laid the foundations for a new, highly-efficient global haven network, which made it possible to spirit funds offshore and stash them in anonymous, tax-evading investments.  It is no coincidence that this network was dominated by the very same global banks that led the way in Third World syndicated lending. 

All this combined to encourage Third World officials and wealthy elites to move a significant share of their private wealth offshore, even as their own governments were borrowing more heavily abroad than ever before.   

Part of the resulting flight wave took the form of large stocks of strong-currency “mattress money” that was hoarded by residents of Third World countries -- especially $100 bills, Swiss francs, Deutschmarks, British pounds, and after 2002,  €100, €200, and €500 notes. By 2006, for example, the total stock of US currency outstanding was $912 billion. At least two-thirds of it was held offshore, especially in developing countries with a history of devaluations.   

An even larger amount  of capital flight was accounted by  private “elite” funds that were spirited to offshore banking havens  – often, it turns out,  with the clandestine assistance of the very same First World banks, law firms, and accounting firms.

The outflows that resulted from this “debt-flight” cycle were massive -- by my estimates, an average of $160 billion per year (in real $2000),  each year, on average,  from 1977 to 2003.   

Furthermore, a great deal of  this flight capital was permitted to accumulate offshore in tax-free investments,  especially bank deposits and government bonds by nonresidents, which were specifically exempted from taxation by First World countries. By the early 1990s, he total stock of untaxed Third World private flight wealth soon came to exceed the stock of all Third World foreign debt. 

Indeed, for the largest “debtors,” like Venezuela, Nigeria, Argentina, and Mexico – the same countries that dominated borrowing --  the value of all the foreign flight wealth owned by their elites is almost certainly now worth several times the value of their outstanding  foreign debts.   

For so-called “debtor” countries, therefore,  the real problem was never simply  a “debt” problem; it was  an “asset” problem – a problem of collecting taxes, controlling corruption, managing state-owned resources, and recovering foreign loot.  All this, in turn, was based on the fact that a huge share of private wealth had simply flown the coop, under the “watchful eyes” of the BWIs, other multilateral institutions, Wall Street, and the City of London.

Meanwhile, these countries’ public sectors – and ultimately ordinary taxpayers – were stuck with having to service all these unproductive debts, while their legal systems, banking systems, and capital markets also ended up riddled with corruption.

Conventional economists have not ignored these phenomena completely. But they have tended to compartmentalize them into “institutional” problems like “corruption” and “transparency,” and have treated them as “endogenous” to particular countries.  In this approach, the individual country is the appropriate unit of analysis. In fact, however, such local problems were greatly exacerbated by a global problem – the structure of the transnational system for financing development, on the one hand, and for stashing vast quantities of untaxed private capital  -- from whatever source derived --  on the other.

Human Capital Flight

This underground river of financial flight was also accompanied by an increased  outflow of “human capital” as well,  as large parts of the developing world became jobless and unlivable, and a significant share of its precious skilled labor decamped for growth poles like Silicon Valley and other booming First World labor markets. My own estimate for the net economic value of this displaced Third World “human flight” wealth, as of 2006,  is  $2.5 to $3.0 trillion. 

This offshore human capital does send home a stream of remittance income that is now estimated at $100 billion- $200 billion a year. But much of this is wasted on high transfer costs and other misspending. Clearly, a country that chooses to depend heavily on labor exports – as the Philippines, Mexico, Haiti, and Ecuador have done, is a poor substitute for generating jobs and incomes at home.   

Summary – Roots of the Crisis

Overall, the impact of the patterns just described on Third World incomes and welfare has been devastating.  Except for the handful of globalization winners that managed to avoid the “debt trap” and neoliberal nostrums, real incomes in the Third World basically stagnated or declined from 1980 to 2005.   While growth has revived since then, especially among commodity  exporters, large parts of the developing world are still struggling to regain their pre-1980 levels of consumption, social spending, and domestic tranquility. 

In addition to prolonged stagnation, many countries have also experienced sharp increases in unemployment, poverty, inequality,  environmental degradation, insecurity,  crime, violence, and political instability, all of which were exacerbated by the debt-flight crisis.

Of course, instability was sometimes beneficial – in Argentina, Bolivia, Brazil, Chile, Guatemala, Indonesia, Kenya, Mexico,  the Philippines, and South Africa, financial crises helped to undermine autocratic regimes. But we should be able to democratize without so much hardship.

All these Third World troubles provided a striking contrast to the First World’s relative prosperity during this period. To be sure,  there were brief hiccups at the hands of oil price spikes in 1973 and 1979, plus recessions of 1982-83, 1990-91, and 2001-03. Japan stagnated in the 1990s, and France and Germany also experienced prolonged doldrums. But these were the exceptions. Overall, a large share of the world’s poor basically treaded water, while most First World residents paddled by.  (continued on page 27)

B. “Can’t Get No Relief!”

Whatever one thinks of neoliberal policies, therefore,  it is very hard to make this track record look like an achievement. This perspective should help us to view  “debt relief” in a different light.

Given this history,  we might well have expected that at least by now,  First World governments, the BWIs, and even the global private banking industry would have acknowledged their partial  responsibility, pitched in, and offered to share a large portion  of the bill.

Obviously this hasn’t happened. As the sidebar discusses, this is not because of any principled opposition to “debt relief” per se. Indeed, debt relief turns out to be a venerable capitalist institution, at least where the debtors in question have clout. 

Nor was it possible for the countries themselves to agree on a unilateral moratorium on debt service.  More generally, while a handful of individual countries -- Argentina in 2001-2, Russia after World War I, and Cuba in the early 1960s and 1980s –- have declared debt moratoria on their own,  Third World debtors as a whole have never been able to marshal the collective will needed to take this step. 

Given this, the only alternative has been to rely on voluntary actions by First World creditors, as accelerated by appeals to conscience. We’ve seen the rather modest results that this approach has achieved.

Several key factors are at work here:

•    Sticks. Most developing countries believe they are too dependent on the  trade finance and aid to risk outright defiance of international creditors.

•    Carrots. Many members of the Third World elite have been “bought in.” One common reward is the opportunity to participate in international ventures and receive foreign loans and investments.  Beyond that, there is a whole range of other incentives, including  offshore accounts, insider profits, and outright bribes and kickbacks. There are also more subtle forms of influence  -- Dow Jones board seats (Mexico’s Salinas), positions at prestigious universities, banks and BWIs (Mexico’s Zedillo at Yale, Argentina’s Cavallo at NYU, (Bolivia’s ex-Finance Minister Juan Cariaga) and any number of other former officials at the World Bank/ IFC) participation in other exclusive organizations (for example, the Council of the Americas, the Council on Foreign Relations, or the Inter-American Dialogue), and even more subtle forms of ideological influence. These intra-developing world networks have been relatively weak.

•    The Banking Cartel. Compared with the debtor countries,  the global financial services industry is very well organized. Country specialists at leading banks and BWIs have dealt with the same debt problems over and over again, while on the country side, dozens of debt negotiators  have come and gone.  Specialists like Citigroup’s William Rhodes and Chase’s Francis Mason were adept at isolating more militant countries and exploiting inter-country rivalries. Boilerplate language in standard country loan and bond contracts – for example, jurisdiction and cross-default clauses – also helped to perpetuate the “creditor cartel.” 

•    Declining Political Competition.  After 1990, the Soviet Empire ceased to be a serious competitor for Third World affections. Interestingly, from that point on, the real value of total First World aid and aid per capita to developing countries fell until late 1990s.  Meanwhile, First World banks completed write-downs of Third World loans, and  the BWIs and other official institutions displaced them as the principle source of new low-income loans.  With credit risk effectively transferred to the public sector, and the largest debtors focused on the neoliberal reforms that the BWIs were demanding in exchange for debt relief, debtor country support for joint relief atrophied.

With country debtors so fragmented, “small-scale” debt relief became just another instrument of neoliberal reform, while the cause of “large-scale” debt relief was relegated to the NGO community, without much developing country involvement. The resulting “movement” was a loosely-run coalition of First World NGOs and well-meaning celebrities. Lacking a strong political base, the movement mounted a series of intermittent media campaigns. It also assumed the supplicant position of appealing to the “better selves” of  politicians like Tony Blair and George Bush, central bankers, and BWI bureaucrats – a hard-nosed, flea-bitten bunch if ever there was one.

The Best-Laid Plans…     

One factor that certainly has not played a role in the failure to achieve substantial debt relief is a shortage of clever proposals from the First World policy establishment.

Indeed, ever since Third World borrowing took off in the 1970s, there has been a plethora of schemes for “international credit commissions,” “debt facilities,” debt buybacks,  debt-equity swaps, and “exit bonds.” In the last decade, as frustrations with HIPC grew, there have also been proposals for a new “sovereign debt restructuring agency,” global bankruptcy courts, and modifications in the boilerplate contracts noted above.

These proposals provided grist for a steady stream of journal articles and conferences, but very few made much practical difference. The overall pattern was  one of cautious incrementalism -- a  series of modest proposals, each one just slightly more ambitious than its predecessor, and all doomed to be ineffectual – but with the  saving grace that at least no powerful financial interests would be offended.

A. The Baker Plan

The majority of today’s Third World population  was not even born in October 1985 when Reagan’s second Treasury Secretary, James A. Baker III, announced his “Baker Plan” for debt relief. This acknowledged the fact that the market-based debt rescheduling approach to the debt crisis pursued by commercial banks since 1982 wasn’t working.  Indeed, traditional rescheduling was aggravating the problem, because banks had ceased to provide new loans, while continuing to role over back-due interest at higher and higher interest rates.

The Baker Plan hoped to change this by offering a combination of new loans funded by US taxpayers and the MFIs, plus some private bank loans, in exchange for “market reforms” in the recipient countries. It was motivated by the conventional notion that the 1980s debt crisis was basically a short-term “liquidity” problem, not a reflection of deeper structural interests. Supposedly a fresh round of (government-subsidized) new loans, conditioned on reforms, would allow debtor countries to “grow their way” out of the “temporary” crisis.

By 1989, the Baker had produced a grand total of $32 billion of new loans,   mainly to 15 middle-income countries like Mexico and Brazil. This was achieved at a cost of  $45 billion to First World taxpayers, by way of the US Treasury. By comparison, the gross external debt of all developing countries at the time was about $1 trillion, so the amount of relief provided was relatively small. Indeed, to the extent that the Plan added $77 billion to Third World debt,   it actually constituted negative debt relief.

Finally, of course, both Plans omitted almost all low-income countries completely, partly because First World exposure to them was limited,  and partly because at that point, the notion of writing down “development loans” was still  anathema to the World Bank and the IMF.

B. “Market-Based” Debt Relief

While observers were waiting for the Baker Plan to work in the late 1980s,  private banks  were also busy retiring to manage some $26 billion of debt on their own, by way of so-called “market-based” methods, including buy-backs and debt swaps. Some of these techniques had harmful consequences for the countries involved. They also tended to reinforce the de facto “takeover” of the Third World debt problem by the BWIs and other official lenders. With our support, however, they succeeded in offsetting part of the Baker Plans’ harmful effect on debt levels, however. 
C. The Brady Plan

When these two approaches failed to make much of a dent in the problem, James Baker’s successor, former Wall Street investment banker Nick Brady came up with a more aggressive debt swap plan in March 1989. The key motivator was not just generosity. Brazil’s February 1987 attempted moratorium on interest payments had set a dangerous precedent,  and Mexico’s rigged July 1988 Presidential transition, combined with its huge debt overhang and declining oil prices, suggested that a more widespread default might occur unless more debt relief were forthcoming. 

Under Brady’s plan, first implemented by Mexico in July 1989, private banks agreed to swap their country loans at 30-35 percent discounts for a menu of new country bonds, whose interest and principle were securitized by bonds issued by US Treasury, the World Bank, the IMF, and Japan’s Export-Import Bank – backed up, in turn, by reserves from the debtor countries. 

By the end of the Brady Plan in 1993, this “semi-voluntary” incentives scheme had provided another relatively small dose of relief, mainly to about 16 Latin American, middle-income countries like Argentina, Brazil, and Mexico, plus US favorites like Poland, the Philippines, and Jordan.  With the help of taxpayer subsidies, it also succeeded in virtually wiping out the debts owed by several small developing countries – Guyana, Mozambique, Niger, and Uganda – to private banks. By 1994, just prior to Mexico’s “Tequila Crisis,” the Brady Plan had yielded about $124 billion (in $2006 NPV terms) of debt reduction – at a cost of $66 billion in taxpayer subsidies.  To date, it remains the largest – and most costly -- initiative in the entire debt relief arena.

Some have argued that Brady Plan also had a beneficial indirect effect on the total amount of new loans and investments received by debtor countries in 1989-93, by way of its impact on equity markets and direct investment.  However, these gains were more than offset by increased capital flight, leaving a net benefit to developing countries that was almost certainly lower than the initial First World tax subsidies.

Furthermore, any such gains were largely wiped out by the subsequent financial crises in Mexico, Argentina, Brazil, Nigeria, Peru, and the Philippines in 1995-99. These were partly due to the brief surge of undisciplined borrowing, facilitated by the Brady Plan   Indeed, while the early 1990s produced a reduction in debt service relative to exports and national income for the 16 countries, by the end of 1990s, most of the “Brady Bunch” had seen their debt burdens return to pre-Plan levels. 

Overall, therefore, this provides a graphic illustration of the point noted earlier: without basic institutional reform – not just “market” reforms within one country, but more general reforms of the global financial system – debt relief in one period may just lead to increased borrowing and another crisis in the next.

D. “Traditional” Bilateral Relief – Low Income Countries

As noted, these early debt relief initiatives were focused mainly on the world’s largest debtors, although a handful of low-income countries took advantage of them. By the late 1980s, there was a growing recognition of the trend described earlier – that the debts of low-income countries were exploding. 

These countries were also paying astronomical debt service bills, despite the fact that they had all qualified for “concessional” finance. By 1986, 19 out of the (future) 38 HIPC low-income countries were devoting at least 5 percent of national income to servicing their foreign debts, and many countries were paying much more. On average, debt service consumed over a third of their export revenues, compared with less than 10 percent  a decade earlier.  And the “present value” of their low-income country debt had continued to rise throughout the Baker/Brady Plan period. By 1992, the debt was three times the l980 level, and well above the 1986 level.  Finally, from 1985 on, private bank lending to low-countries had  only  been exceeded by lending by development banks and export credit agencies.

One of the first to recognize the need for a closer focus on low-income debt was another UK Chancellor, Nigel Lawson. In 1987 he proposed that the Paris Club refocus its negotiations with debtor countries on trying to reduce  their “debt overhang” – the present value of their expected future debt service payments.  This  was a striking contrast to conventional debt relief, where the goal of rescheduling had always been to  avoid write-downs and preserve the loans’ present value by stretching out repayment. Once again,  that had assumed that the key debt problem was one of “illiquidity” and that the nasty random shocks would soon reverse themselves. As Lawson and other observers had come to recognize, in the absence of serious intervention, the resulting “debt overhang” might just become permanent.

Lawson’s proposal launched the Paris Club on a prolonged series of debt restructurings. In the next decade,  it conducted 90 bilateral restructurings with 73 individual countries, on increasingly-generous term sheets.  By 1998, this effort – supplemented by assistance for debt swaps from the World Bank/IDA’s Debt Facility --  had produced another $95 billion of debt relief. 
E. HIPC

In September 1996, the BWIs established the “HIPC Initiative,” their first comprehensive debt relief program ever, targeted at “heavily-indebted developing countries.” They didn’t take this initiative unilaterally – they were responding to numerous complaints from NGOs and the debtor countries, who said that existing  relief programs were not doing enough for the world’s poorest, most insolvent countries, and that it was  also high time for multilateral lenders like the IMF and the World Bank to finally share the costs.

Initially the program was supposed to include the 41 low-income countries that had been included on the World Bank’s first list of “HIPCs” in 1994. That list was supposed to have been determined by objective criteria, including real income levels and the “sustainability” of projected debt service levels,  relative to projected exports. But such criteria are of course anything but objective, especially where acute foreign policy interests are concerned. The original list of countries  would have included all those with per capita incomes less than $695 in 1993, plus (a) PV debt to income ratios of at least 80 percent,  or (b) debt service to export ratios of at least 220 percent. Those criteria would have admitted such major debtors as Angola, Nigeria, Kenya, Vietnam and Yemen.  On the other hand,  it would have also omitted future HIPCs like Malawi, Guyana,  and Gambia. As of 1996, the countries on this original HIPC list accounted for $244 billion of debt and 672 million people – about 63 percent of all low-income country debt and more than a third of all low-income country residents.

Qualifications

For a variety of reasons – including shifting admissions criteria, the desire of the BWIs to contain costs, and sheer geopolitics – this initial list was soon altered.  Seven countries, including several large low-income debtors like Kenya, Nigeria, and Angola, were eliminated, while nine much smaller countries suddenly qualified for relief.   When the dust settled, there were still precisely 41 countries on the HIPC debt relief list. However, compared with the original list, as of 1996, they now only accounted for 39 percent of all low-income country debt –- indeed, only 6 percent of all developing country debt --  and just 23 percent of all low-income country residents.

This downsizing was partly just due to BWI self-interest. The World Bank is a self-perpetuating bureaucracy, funded by its own long-term bond sales, as well as by First World contributions.  It is always very concerned about securing its own cash flow and debt rating.

In principle, contributions from the BWI’s  First World members could always make up any shortfalls.  In practice, however, the World Bank liked to avoid having to solicit contributions from the US Congress – it always meant difficult hearings where the Bank had to explain where Togo or the Comoros was, and why it deserved assistance.

Initially the BWIs had proposed to fund HIPC debt relief by liquidating part of the IMF’s huge 3.22 metric tons of gold reserves, whose market value had increased to several times book value.  Indeed, in 1999-2000, the IMF had conducted a round-trip sale and buyback of 12.9 million ounces with Brazil and Mexico, booking the profit to fund HIPC’s initial costs.  Here, however, another powerful set of interests intruded. The BWIs’ proposal for a much larger gold sale were successfully scuttled by the World Gold Council’s lobby, whose membership includes 23 leading global gold mining companies, including the US’ Newmont Mining, South Africa’s AngloGold, and Canada’s Barrick Gold Corp. 

So debt relief turned out to be  something that  the BWIs  had to fund on a “pay as you go” basis,  through bond sales and periodic contributions from its First World  members. The larger the amount of debt relief, the smaller the World Bank’s own loan portfolio, and the more it feared that its own bond rating and financial independence might be jeopardized. So it had an innate bias in favor of providing less debt relief.

As for the precise list of qualifying countries, there were many anomalies. For example, as of the mid-1990s, Angola, Kenya, Nigeria, and Yemen all had higher debt burdens and lower per capita incomes than many of the countries on the final HIPC list, but they were excluded. 

On the other hand, at the behest of France, HIPC analysts also designed specific rules so that the Ivory Coast would be included, despite the fact that it had a higher per capita income and lower debt burdens than many other countries on the list. Guyana,  a bauxite-rich former British colony in northeast South America with a population of just 750,000 and a  real per capita income of $3600 – clearly a “middle income” country, if anyone cared to object – was also admitted.

Meanwhile, HIPC excluded 29 other mainly middle-income countries that had been classified by the World Bank itself as “severely indebted,” including “dirty debt” leaders like Argentina, Ecuador, Indonesia, Pakistan, and the Philippines. In many cases their debt burdens were much heavier than those that were admitted to the HIPC club.   (continued below)

All these exclusions were important, because it turned out that while the “HIPC 38” did reduce their debt service payments by about $2 billion a year from 1996 to 2003, debt service payments by non-HIPC low income countries actually increased by several times this figure.   

Overall,  the BWI’s filters with respect to “sustainable debt” and income were inconsistently applied. They were intended to contain the size of debt relief and focus it on tiny, more malleable countries.

The Long March

Debt critics were naturally a little disappointed at HIPC’s modest scope, relative to the size of all outstanding Third World debt. But at least they thought they could count on the BWIs to provide speedy debt relief to those countries on the HIPC list.

Unfortunately, even for those countries, the journey usually proved to be a very long march. The World Bank and the IMF decided to impose   a  long, drawn-out, tortuous process before countries actually got any relief, conditioning it on a menu of all the BWIs favorite neoliberal reforms, including privatization, tariff cuts, and balanced budgets.

This was especially hard to account, in light of the fact that the HIPCs on the final list were hardly prime prospects for First World banks, contractors, or equipment suppliers. Fully half had populations smaller than New Jersey’s, with per capita incomes averaging less than $1100, and average life expectancies of just 49 years. So offering this crowd debt relief was unlikely to set a dangerous “moral hazard” precedent.
Nevertheless, under the original 1996 “HIPC I” scheme, countries were supposed to spend three years implementing such reforms under the WB/IMF’s watchful eye before they reached a “decision point.” Then a debt relief package would be assembled and a modest amount of debt service relief would be approved.
Countries were then supposed to continue their good behavior for another 3 years before reaching the “completion point,” at which point they’d finally see a serious reduction in debt service.
Even then, they wouldn’t receive a total debt write-off, but only a partial subsidy, reducing debt service to a level that the WB/IMF considered “sustainable,” relative to projected exports. 
Along the way, countries were also expected to draw up an IMF/World Bank-approved “Poverty Reduction Strategy Paper,” negotiate a “Poverty Reduction and Growth Facility,” and engage the IMF and the World Bank in regular, rather intrusive “Staff Monitoring Programs.”
To some extent, all this policy paternalism was justified by the fact that, as we’ve seen, many of these countries were unstable, poorly-governed, war-torn places. This is the old “more sand, same rat-holes” aid dilemma noted earlier – those countries most in need of assistance are also often precisely the ones with the most limited ability to use it wisely. Furthermore, under the influence of neoliberal policies, state institutions in many of these countries have become even weaker.

However, from the standpoint of delivering debt relief in a timely fashion,  the BWI’s strictures clearly went beyond the pal. Many BWI technocrats  adopted a kind of righteous, almost creditor-like stance toward the countries – perhaps because, after all,  the BWIs are substantial creditors.  They may also prefer gradual debt relief because this preserves their control. In any case, all of this is a poor substitute for the more constructive  neutral role that, say,  a “trustee in bankruptcy” would typically play in bankruptcy proceedings.

Combined with country backwardness, this  creditor-cum-neoliberal-reformer mentality had  predictable results. Indeed, if HIPC’s  true goal was to avoid giving meaningful debt relief, it almost succeeded!  By 2000, just six countries – Bolivia, Burkina Faso, Guyana, Mali, Mozambique, and Uganda - had managed to reach “completion,” and zero debt relief had been dispensed. Eventually, HIPC I afforded a grand total of $3.7 billion  of debt relief  to these six countries.    Even this amount was not distributed immediately in most cases, but was spread out over decades. For example, Uganda’s debt service relief from the World Bank was stretched out over 23 years, Mozambique’s over 31 years,  and Guyana will still be collecting $1 million per year of debt relief in 2050!

Would that First World  creditors and the BWIs had been anywhere near as circumspect about making loans to developing countries as they have been  about administering debt relief!

HIPC II

In June 1999,  following the massive “Drop the Debt” rallies at the May 1998 G-8 meeting in Birmingham, the WB/IMF launched “HIPC II,”  supposedly a faster, more generous version of HIPC I. But even this version soon proved to be embarrassingly slow. By 2006, of the 38 countries on the initial HIPC list way back in 1996, just 18 had reached  the “completion point.” Eleven others had reached their “decision points,” after a median wait of 49 months, but five of these were reporting “slow progress.”  Of the other original nine, just one was both ready to qualify and interested in participating. 

To fill out the ranks, in 2006 the WB/IMF identified six more low-income countries that might still be able to qualify for HIPC relief before the curtains finally descend in December 2006. However, only two of these were both ready and willing to try for this deadline. 

All told, compared with the original target group, at the end, HIPC was down to providing debt relief  to countries that accounted for just 18 percent of outstanding low-income debt and 13 percent of the world’s low income population.

The HIPC Sweepstakes

Those countries that managed to navigate all the HIPC hurdles did finally receive some debt relief – all told, for HIPC I and HIPC II,  a grand total reduction in debt service of $832 million per year for 2001-2006, compared with debt payments in 1998-99.  This sum was divided among for all 27 countries that had reached their completion or decision points. 

Some countries did much better than others.  For example, middle-income Guyana progressed quickly through the program, qualifying for debt relief to the tune of $937 per capita from both HIPCs  – compared with the “HIPC 38’s” average of just $75 per capita.  Indeed, Guyana became something of a pro at debt relief – by 2006, it had achieved a record total of $2971 for each of its citizens,  from all debt relief programs to date. 

Sao Tome, Nicaragua, Congo Republic, Guinea-Bissau, Zambia, Bolivia, DR Congo, Mozambique, Mauritania, Sierra Leone, Ghana, and Burundi also did relatively well on a per capita basis, all realizing more than $100 of HIPC relief per citizen. 

In terms of the share of all HIPC relief received, the clear winner was DR Congo, Mobutu’s old stomping ground,  which commanded an astounding 18.2 percent of al HIPC relief, and, indeed, nearly 8 percent of all First World debt relief received by low-income countries.

In these terms, other winners included Nicaragua (9.5% of HIPC, 10.8% of all relief), Zambia (7.2%/4.9%), Ethiopia (5.7%/5.5%), Ghana (6.2%/2.6%), Tanzania (5.8%/4.8%), Bolivia (3.7%/4.2%) and Mozambique (5.8%/6.7%), which single-handedly captured 55 percent of HIPC I’s $3.7 billion benefit.

Compared with our original list of “war-torn debt-heavy dictatorships,”  there is a huge overlap: The top ten low-income borrowers  in 1980-86 accounted for more than half of both HIPC relief and all First World debt relief distributed from 1988 through 2006.  On the other hand, many other indebted low-income countries received much less debt relief, both in per capita and absolute terms. 

This per country/ per capita debt relief analysis, presented here for the first time,  underscores several of the most serious problems with using debt relief as a substitute for development aid.

Of course it is difficult to insure that reductions in debt service (or the increased borrowing that occur in the aftermath of debt reductions)  will be applied to worthy causes. (“The Control Problem.”)

Even apart from that, as noted in the accompanying tables,  the amount of relief available varies wildly across countries, according to factors that may have very little to do with development needs. (“The Correlation Problem.”)

The BWIs in charge of the HIPC program tried to tackle the “Control Problem” by insisting on country “poverty reduction” programs and policy reforms, and by monitoring government spending,  and so forth.  Whether or not that has worked is a matter of dispute – there is a strong case to be made that most of this conditionality was counterproductive. Clearly it succeeded in slowing down the distribution of relief.

But there is nothing that HIPC could  do about the “Correlation” problem – the lack of proportionality between debt relief and development needs. Relying on debt relief, in other words,  inevitably means that some of the worst-governed, most  profligate countries in the world may reap the greatest rewards.

Overall HIPC Results

As noted, HIPC does appear to have reduced foreign debt service burdens somewhat, especially for the 18 countries that managed to complete the program – although domestic debt service may be another story.

However, 11 of the original 38 HIPC countries still had higher debt service/income ratios in 2004 than in 1996. Indeed,  to this day, poor Burundi is still laboring under a PV debt/income ratio of 91 percent!

Furthermore, debt service ratios had already declined for 25 out of the 38 countries from 1986 to 1996, prior to HIPC’s existence. Debt service burdens also declined for many other low-income countries that didn’t enroll in HIPC, as well as for the 9 “pre-decision point” countries that have so far received no relief from it.  So it is not easy to call the HIPC program a “success,” even for those countries that have been able to reach the finish line. 

What is also indisputable is that the total amount of debt relief achieved by HIPC to date has been very modest. While conventional press accounts often refer to HIPC as providing at least “$50 to $60  billion” of debt relief to developing countries, the more accurate estimate is at most $41.3 billion by 2006. This is less than 10 percent of all low-income country debt outstanding. 

Of this, $7.6 billion was awarded to the original six countries in the HIPC I program, and another $33.7 billion is expected to be received by the other 23 countries that have at least reached  the “decision point.”  The potential cost of providing relief to the remaining 9 to 15 countries that might still qualify for HIPC is estimated at $21 billion, but very little of this will ever be forthcoming.  Indeed, the timing  and levels of relief are still highly uncertain for half of the 11 “decision point” countries.

Once again, all these figures refer to the present values of expected future debt service relief, not to current cash transfers. As of 2006, only a third of HIPC I’s relief and less than 20 percent of HIPC II’s had actually been “banked” – an average of less than $1 billion of cash savings per year, to be divided up among all these very poor countries.

The High Costs of HIPC Relief   

Even these modest savings were not cost-free to the countries involved. To comply with the BWI’s demands  for HIPC relief, developing countries were required to the usual panoply of neoliberal reforms, many of which had perverse political and economic side effects. There are many examples that illustrate this point.   

F. MDRI

Our final stop on the debt relief train is the “Multilateral Debt Relief Initiative” (“MDRI”), announced with so much fanfare at the July 2005 G-8 meetings.  On closer inspection, this debt relief plan was even less impressive and generous than HIPC.

By 2004,  many debtor countries  and First World NGOs had finally had it with HIPC.  However, MDRI only really came together because the UK Chancellor, Gordon Brown, saw a chance to earn some political capital, make up for the UK’s lagging foreign aid contributions, and  heal some of the bad feelings that had been generated by the UK’s support for the Iraq War, all at very little cost.

With HIPC already set to expire,  and with so much low-income debt still outstanding, Brown decided to work closely – and indeed help to fund -- the Live 8/”End Poverty Now” alliance’s “free” concerts.  The collaboration with the NGOs was facilitated by the fact that one of Brown’s senior advisors, a former UBS banker, was an Oxfam board member, while Tony Blair’s senior advisor on debt policy was Oxfam’s former Policy Director. 

These connections no doubt smoothed the reception for Brown’s proposals in the NGO world,  but they ultimately failed to achieve very much incremental debt  relief for poor countries.

To begin with, the actual cash value of the debt relief provided by MDRI is  far less than the "$40 to $50 billion" that was widely touted in the press. 

The face value of the IMF, World Bank, and African Development bank debts of the low-income countries that may be eligible  for cancellation adds up to about $38.2 billion. 

But MDRI’s debt relief, like HIPC’s will not distributed in one fell swoop.  Given the concessional interest rates that already applied to most of the loans in question, and that fact that many of them were already in arrears, the actual debt service savings that these countries may realize from the program is just $.95 billion per year, on average, distributed over the next 37 years, to be divided among 42 countries.

This may appear to be a modest sum to First World residents who are  used to seeing much larger sums spent on farm subsidies, submarines, highway programs, and invasions of distant countries.  But it is undeniably a large share of the $2.9 billion that the top 19 likely qualifiers for the program spend each year on education, or the $2.4 billion they spend on public health.

Still,  the  G-8 debt cancellation gets us just 6 percent of the way home toward, say, the Blair/Brown Commission for Africa’s proposed $25-$30 billion per year of increased aid for low-income countries in Africa.

It also compares rather unfavorably with the $1.3  billion per week that the Iraq War was costing in 2005, and the $2 billion a week that it is costing now.   

Furthermore, to qualify for this MDRI relief, countries will still have to go through many of the same hoops that HIPC put them through. At least 8 countries among the 42 – including large debtors like Somalia and the Sudan --  may never meet these qualifications.

Even for the top 19 countries that are likely to qualify, MDRI will still leaves them with $23.5 billion of higher-priced bilateral government debt and private debt that are outside the program, with an annual debt service bill of $800 million a year. And here again, of course, the point bears repeating – the countries have virtually nothing to show for all these debts.

Finally, even assuming - optimistically - that MDRI’s  42 potential beneficiaries would otherwise continue to pay the $.7 billion to $1.3 billion of debt service owed to the BWIs and the AfDB over the next 37 years without arrearages or defaults, the "net present value" of this debt cancellation is not $40 billion, but at most $15 billion. In fact, given the  likelihood that some debtors may not qualify for the program, the PV of expected MDRI debt relief is really closer to $10 billion.

In fact, from the standpoint of World Bank and African Development Bank bondholders,  they may well prefer to have their member countries to take them out of these "dog countries."

Indeed, that might even be a very profitable deal for the World Bank,  since its cost of funds  is not the 3-3.5 percent paid – if and when  they pay -- by these low-income debtors, but at least 4.7 to 5 percent. Assuming that the members of the World Bank’s Executive Board will honor their pledges, exchanging a stream of highly-uncertain debt service payments from these benighted countries for $10 billion  to $15 billion of cold hard cash may look like a pretty good deal for the Bank.  Certainly it is better than having to play bill collector to all those nasty hell-holes.

And I bet you thought “debt relief” was all about generosity!

VI.  Summary – A Modest Proposal

So what are the key lessons from this saga for would-be debt relievers? And where should debt campaigners focus their energies now?

1. Beyond the BWIs.

As we’ve argued, it is no accident that twenty-five years after the debt crisis, some of the poorest countries on the planet, as well as many middle-income countries, continue to be struggling with their foreign debts. 

If we accept the basic premise of debt relief – that debtors who have become hopelessly in debt  deserve a chance to wipe the slate clean, once and for all,  then our conventional approach to debt relief, as administered by the IMF, World Bank,  the US Treasury, and the Paris Club, is a failure.  Not only has it failed to deliver the goods, but it has also had very high operating costs, in term of  delays, administration, and excessive conditionality.

Evidently it was not enough that so much of loans that these countries borrowed was wasted, stolen and laundered right under the noses of our leading banks. Debtor countries were then expected to jump through elaborate BWI policy hoops, testing out all their favorite policy prescriptions in order  to avoid having to continue paying for it for the rest of their lives.

In particular,  the huge World Bank and IMF bureaucracies  have proved to be far better at rationing  debt relief than at  making sure that impoverished countries don’t get up to their eyeballs in debt in the first place.

Indeed, Russia alone – which is itself still heavily-indebted  --  has been far more generous and expeditious  with developing countries than the BWIs.
If we are really serious about providing substantial amounts of debt relief, we will to find or design new institutions to administer debt relief. 

2. Beyond Narrow Debt Relief.

It not really surprising that First World governments and the BWIs tend to side with international creditors -- as, indeed, governments have often sided with landlords, enclosers, gamekeepers, slave-owners, and other propertied interests.

What is surprising is that, despite the very high stakes for developing countries, and the availability of so much potential mass support for a fairer solution, the debt relief campaign has been so ineffective.

This is no doubt partly just because it is difficult to sustain a global not-for-profit campaign across multiple activists and NGOs. It is also because the campaign faces powerful entrenched interests.

But another difficulty may be of our own making. Compared with the dire needs of many countries and the sheer volume of “dubious debt” and capital flight, we believe that the debt relief movements’ demands have simply been far too meek.

To make a real difference, the debt relief movement needs to get much tougher on two  closely-related  but necessarily more contentious aspects of the “debt” problem:

(1)  Dubious debt, contracted by non-democratic or dishonest governments and wasted on overpriced projects, shady bank bailouts, cut-rate privatizations, capital flight, and corruption. As noted earlier, my own rough estimate is that such debt may account for at least a third of the $3.7 trillion of developing country debt outstanding. 

(2) The huge stock of anonymous, untaxed  Third World flight wealth that now sits offshore – much of it originally financed by dubious loans, as well as by resource diversions,  privatization rip-offs, and other financial chicanery. 

Most of this wealth – estimated at  $4 trillion to $5 trillion for the Third World alone – has been invested in First World assets, where it generates tax-free returns for its owners and handsome fees for  the global private banking industry.

Obviously the sums at stake here are much larger the debt relief campaign has tacked so far. The issue also affects middle-income debtor countries as well as low-income ones. Finally, it also begs the question of the on-going responsibility of leading private global financial institutions, law firms, and accounting firms that built the pipelines for Third World flight capital, and continue to service it.  Since the 1980s, several of these institutions have become many times larger and more influential than the World Bank or the IMF.

If the debt relief movement had the will to tackle such problems, there is much that could be done.

For example, we could imagine:

(1) Systematic debt audits, and a global asset recovery institution that helped developing countries recovery stolen assets;

(2) Revitalization of the “odious debt” doctrine,  which specifies that debts contracted by dictatorships and/ or spent on non-public purposes or personal enrichment are unenforceable.

(3) Promotion of  international tax cooperation and information exchange between First and Third World tax authorities – including as one early step the creation of a “Tax Department” at the World Bank, which doesn’t even have one!

(4) Codes of conduct for transnational banks, law firms, accounting firms, and corporations, prohibiting their active facilitation of dubious lending, money laundering, and  tax evasion.

(5) The enactment of a uniform, minimum, multilateral  withholding tax on offshore “anonymous” capital – the proceeds of could be used to fund development relief. 

Many other  ideas along these lines are conceivable. Obviously a great deal of organization and education across multiple NGOs would be needed to tackle even one of them. But the most important requirement is nerve – the willingness to move beyond the debt movement’s all-too-narrow focus, to tackle the real issues in this arena.

3.  The Limits of Debt Relief

Earlier in this essay, we  expressed serious doubts about the "more sand,  same  rat-holes" approach to wiping out debts, increasing aid and "ending poverty."

As we argued, most of the prime candidates for debt relief would also have great difficulty in managing it. This skeptical viewpoint has recently received even more support -- there are disturbing reports that the corrupt leaders of poorly-governed, resource-rich countries like DR Congo and Malawi  are squandering the debt relief that they’ve recently received on fresh rounds of dubious borrowing and arms purchases.

The fundamental problem, glossed over by many debt movement campaigners, is that combating poverty is not just a question of malaria nets, vaccines,  and drinking water. Ultimately it requires deep-rooted structural change, including popular mobilization, and  the redistribution of social assets like political power, land, education, and technology. These are concepts that  BWI technocrats, let alone film stars and rock stars, may never understand.

On the other hand, it remains the case that poor people in debt-ridden countries are in dire need of almost any short-term relief whatsoever.  In that spirit, it would be wonderful to see the debt movement,  the G-8, and the BWIs join hands just one more time and finally deliver on their long-standing rhetorical commitment to deliver substantial debt relief. 

As we’ve just seen, the 1.6 billion people who reside in heavily-indebted developing countries are still waiting.

***
(c) SubmergingMarkets, 2006

"SO MUCH FOR THE WALL...."Israel's Strategic Blunders, Round TwoJames S. Henry

Almost everyone except the bovine US President -- who also believes that US-backed forces are winning in Iraq, Afghanistan, and the "GWOT," despite mounting evidence to the contrary -- now acknowledges that Israel has suffered an important strategic setback at the hands of Hezbollah.

Indeed, the "soul-searchers" reportedly include a majority of Israelis, many members of the IDF, leading US and Israeli security analysts,  and Prime Minister Ehud Olmert himself. As one leading Israeli journalist put it today, "This is not merely a military defeat. This is a strategic failure whose far-reaching consequences are still not clear." 

☮ Lessons (Re-) Learned?

 In hindsight, both Israel and the US should now (re)-learn some very costly lessons about the risks of taking on a highly-motivated, well-trained and adequately-armed guerilla army on its own turf. They also have now an opportunity to remember some important lessons about the limitations of purely-military solutions to such conflicts.    

▣ As in the case of  the US strategic bombing campaign in Vietnam, Nato's air war in Kosovo (1999), and, indeed, the Allied air war against the Nazis during World War II, Israel's month-long air war against Hezbollah has largely failed to accomplish its strategic objectives. In particular, Hezbollah's ability launch dozens of missiles into northern Israel went utterly unscathed, with the largest single number of missles launched on August 12, the day before the ceasefire.

▣ Given the elaborate ground defenses, arsenal, and trained force that Hezbollah was able to pre-position in South Lebanon, its ground forces also avoided the knock-out blow that Israel and Washington had hoped for.

▣ By far the most effective "weapons" on the ground were not Iranian-supplied long-range missiles, drones, cruise missiles, or even Katushyas, but a combination of disciplined ccombat training and tactics,  heavy investments in combat engineering, remote sensing, and other defensive equipment, and sophisticated anti-tank missiles, many of which appear to have been supplied by Russia, by way of Iran and Syria.

▣ On the other hand, proponents of anti-missile defense systems, "smart bombs," 60-ton Merkava tanks,  border walls/electronic fences, and "infowar" clearly have some work to do. None of these systems performed very well for Israel during this conflict.   

▣ The widespread bombing campaign exacted a horrific price from Lebanon's civilian population, uniting most political factions within Lebanon against Israel rather than against Hezbollah, at least temporarily.

▣ Only part of this campaign's horrific civilian toll in Lebanon can be explained by Hezbollah's propensity to "swim" in the civilian sea -- part was simply due to targeting mistakes on made by the Israeli Air Force and its intelligence sources, and part was due to deliberate choices made to go after "dual use" targets,  including oil refineries, bridges, power plants, and transportation vehicles.

▣ The Summer War has also greatly boosted political support for Hezbollah on the "Arab street" throughout the Middle East, converting initial criticisms by the Saudis, Egypt, Jordan,  Kuwait, and other conservative regimes into widespread expressions of support. We suspect that much of this official support is insincere, but it probably reflects a genuine fear that these regimes have of their own people. 

▣ Syria, which had been under strong political pressure to continue its detachment from Lebanon, has been "reaccredited" by Israel's excesses during the conflict -- able to assume the self-righteous role of Lebanon's protector against foreign aggression. On the other hand, the Baathist regime may also now be in a stronger negotiating position with respect to the West.

▣  Iran's hardcore anti-reformers have so far only been strengthened by Hezbollah's performance to date in this conflict, and by Israel's costly tactics. Nor were they discouraged from pursuing their nuclear development program. Their only real challenge now will be to replenish Hezbollah's sorely-depleted missile arsenal, and to find ways around the "ceasefire's" prohibition on Hezbollah repositioning.

▣ Most important, Hezbollah's ability to define victory as "not losing" against one of the world's most powerful armies has certainly not encouraged other radical groups around the planet to lay down their arms and pursue peaceful alternatives.

▣ For every Hezbollah fighter that was killed by the Israelis in the last month, the heavy bombing campaign probably generated several new recruits -- not only in Lebanon, but also in Afghanistan, Iraq, Kashmir, and the West Bank.

• In short, as a result of this strategic setback, Condi Rice's Panglossian "birth pangs of democracy" are likely to prove more prolonged and painful than ever.   

WAS THERE ANY ALTERNATIVE?

▣ At a tactical level, clearly Israel and the US both need to do much work to do regarding the failures of their intelligence operations with respect to Hezbollah's arsenal and military preparations. We can add this to the lengthy list of their  other intelligence failures in the last decade alone.

▣ The preference for high-altitude offensive bombing,  naval shelling, and open-field tank/ heavy vehicle warfare over hard-slog ground offensives also needs to be reexamined. To the extent that this reflects a preference for arms-length "hi-tech warfare," and a reluctance to sacrifice infantry for the sake of defeating dedicated militants like Hezbollah, this may indeed rise to the level of the same "morale/ will to die"  handicap that has crippled other many colonial armies,  in places like Vietnam, Algeria, China, and (long ago) the US itself.      

▣ At a strategic level, the notion that the "enemy" simply consists of a finite stock of "fanatical terrorists," motivated primarily by "Islamo-fascist" dogma, or -- as Benjamin Netanyahu put it last week -- "12th century religious doctrines," is simple-minded and unhelpful. Among other things, they were clearly very professional, highly-trained soldiers. Unless military planners come to appreciate the political implications of what they do, and the real nature of their enemies, they may lose the war both on and off the battlefield.

▣ Another key point here is that the "Islamofascist" categorization, and the tendency to lump all "Islamic radicals" and "terrorists" together, has blinded both the US and Israel crucial schisms -- for example, the Alawite-Sunni rivalries that have been so important in Syria, Shiite-Sunni rivalries in Iraq, Bahrain, and Lebanon, and secular - religious rivalries in Palestinine.  

▣ True, it is now very late in the day, and the long-term failure of Israel and its enemies in the region to make any progress at the bargaining table may indeed mean that this overall story is headed for a terrible climax.

From this angle, however, perhaps the one good thing about this strategic disaster is that it may remind Israel and the US that, whatever the final outcome of any attempt to solve the problems of the Middle East by military means,  it will not be cheap, easy, or devoid of surprises.

• (c) JSH, SubmergingMarkets, 2006