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

"PICTURES OF FOOD?"The G-8's Incredible DealJames S. Henry

"Have we just been invited to dinner and served pictures of food?"

Aging poverty rockers Bob Geldof and  Bono are apparently quite satisfied with today's G-8 announcement on aid, trade, debt relief, and global warming.

Sir Bob, 51, called it "a great day...Never before have so many people forced a change of policy onto a global agenda."

Paul Hewson (Bono), 45, butchering a quote from Winston Churchill,  remarked that he "would not say this is the end of extreme poverty, but it is the beginning of the end."

On the other hand, the global NGOs that follow the subjects of debt, development, and trade reform most closely disagree vehemently.  For example:

• Oxfam UK said that "the outcome here in Gleneagles has fallen short of the hopes of millions." 

• Christian Aid said. "This will not make poverty history. It is a vastly disappointing result."

• The Jubillee Debt Campaign said the "the G-8 stand still on debt, when a giant leap is needed."

• Global Call to Action on Poverty said that "the people have roared, but the G-8 has whispered. The promise to deliver by 2010 is like waiting five years to respond to the tsunami."

• Friends of the Earth UK  said that on the issue of climate change, the G-8 accord represented "more talk, no action...a very disappointing finale."

• ActionAid said of the deal,  "It is still too little, too late, and much of it is not new money. Fifty million children will die before the aid is delivered in 2010."   

So whom are we to believe? 

Should we believe the NGOs that are full-time specialists in these issues, but also,  in a sense, have a vested interest in the glass being perpetully half-full? 

Should we believe the professional celebrities and politicians who also have a huge stake in the equally-curious notion that the way to "end poverty" is rely on their episodic cycles of concern and their undeniable ability to periodically whip us all into a guilt-ridden frenzy?

Or should we and the world's poor perhaps begin to do some thinking on our own about what "ending poverty" really means, and how to go about it?   

 

MORE LATER

GREEN-'HOUSING' GAZANSJames S. Henry and Andrew Hellman

The US government, the Palestinians, and indeed most Israelis are delighted that the Sharon Government has finally stood up to some settler extremists, and is still on track to pull out of the Gaza Strip by mid-August.  

However, we should all pay closer attention to the precise way that the Israelis are leaving.  There appear to be several missed opportunities to leave a much healthier economic base for Gaza's 1.4 million Palestinians when the Israelis leave-- a necessary, if not sufficient, condition for eventual peace. 

In particular, Israel is  now on a path to dismantle or destroy over 1500 homes and 1000 acres of greenhouses, which already provide thousands of jobs for Palestinians, and might provide thousands more....

GHETTO-FICATION?

At current course and speed, Israel may be missing a huge opportunity to help Gaza become something more than – in the words of Muhammad Dahlan, the Palestinian disengagement coordinator – "a giant prison camp," with 35 percent unemployment, 77 percent poverty, a youthful population whose median age is 16,  no seaport, a unusable airport, and few visible means of support other than foreign aid, rock-throwing, and amateur rocket-building.

No wonder that Hamas has been able to recruit a huge base of supporters there. It won seven out of ten local council seats in Gaza's municipal elections last December, and would likely have soundly defeated Mahmoud Abbas' Fatah Party in the Palestinian parliamentary elections that were originally scheduled for July 17th, but were postponed by Abbas indefinitely in June.

URBAN DE-RENEWAL

One missed opportunity is housing. At a recent press conference, Secretary of State Rice stated that 1,600 Israeli settler’s houses will be destroyed. The official rationale is that such single-family homes are not economically viable for the Palestinians in Gaza.

In reality, however, that rationale was just for public consumption, insisted upon by the Sharon Government for PR purposes.  With more than 1 million Gazans to consider, surely there are of course quite a few elderly couples,  young couples, and smaller families who might have used the houses. They also have other  potential uses -- business and government offices, clinics, even guest houses for visiting tourists, if the area ever stabilized.

The truth is that the houses will be destroyed for much less defensible reasons. First, it is widely viewed as one of the easiest ways to insure that the 8,500 Israeli settlers actually leave once and for all.

Only 284 families had signed up for compensation under the Evacuation Compensation Law, and officials are expecting more violence between Israelis and Palestinians as the August 15th disengagement approaches.

From Israeli's standpoint, the destruction also prevents the politically dangerous image of victorious Palestinians waving Hamas flags on the roofs of former settler's homes, celebrating another Lebanon-like eviction.

GREENHOUSE WEALTH

Greenhouses could be an even more important missed opportunity. Currently, there are about 1000 acres of Israeli-owned state-of-the-art greenhouses in Gaza. They are worth up to $80 million and employ about 3,500 Palestinians.  The fruits and vegetables that they produce account for 15% of Israel’s agricultural exports, mainly to Europe. According to agricultural experts, they might potentially provide  as many as 7,000 regular jobs, supporting, in turn, up to 30,000, and perhaps stimulating the growth of related industries. 

In short, figuring out a way to keep the greenhouses going could provide stable jobs and incomes for tens of thousands of Gazans, continued good business for Israel,  and also offer an opportunity for Israelis and Palestinians to show a little badly-needed cooperative spirit.

However, while the fate of these greenhouses is still being negotiated, and the idea of preserving them has some  advocates,  the outlook for them at this late date is grim.

According to two Israeli sources in a position to know, the most likely scenario is for the greenhouses to be dismantled and relocated elsewhere, or just demolished and replaced with new greenhouses at new settlements in Nitzanim, just 12 miles from Gaza.

These sources mentioned several key obstacles to a Gaza greenhouse idea.

First, with no seaport and Israel unwilling to permit Gaza to have air rights, and no highway to the West Bank, the perishable goods produced in these greenhouses could not reach the international market unless other transport arrangements are made. 

Second, Israel's settler certainly have no good will toward the Gazans, and Israel's agro-businesses don't  want to, in effect, put the Palestinians into business to compete with them.  A deal would have to be worked out for joint marketing and profit sharing, as well as compensation for the value of the greenhouses. Presumably the World Bank or USAID might be willing to finance such a solution, as they've indicated. Indeed, James Wolfensohn, former World Bank President and  Special Envoy for Gaza Disengagement, has evidently been trying to work out such a solution. The Dutch Government has also offered to buy them for the Palestinians.

Third, some have expressed concerns that the Palestinians may not be able to protect the greenhouses from looting by their own people -- though Palestinian sources deny that this is a real concern.

More generally,  there is no question that Israelis and Palestinians have little love lost for each other.  Right now the Israeli Government is focused on leaving as quickly and safely  as possible, and the Palestinians are focused on just having them go. Left to their own devices,  there will be no "win-win" solution.

 

DEBT RELIEF MYTHOLOGY One Week in Iraq's Worth, No Less! James S. Henry and Andrew D. Hellman

You know that it is high time to read the fine print and sharpen the pencil when Treasury Secretary John Snow, Angelina Jolie, Al Franken, Bono,  Bob Geldof, the World Bank's Paul Wolfowitz,  and the UK's Gordon Brown all line up on the same side of the field to cheer some change or other in First World policies with respect to the developing world. 

This was indeed a "feel good" week for First World development buffs,  as a group of G-8 Finance Ministers, warming up for next month's giant confab in Gleneagles,  Scotland, announced that they had finally agreed on "$40 billion of debt relief" for 18 poor, heavily-indebted countries in Latin America and Africa.

In his typically understated fashion,  the UK's Gordon Brown, Chancellor of the Exchequer and heir-apparent to Tony Blair, called the measure an "historic breakthrough," the "most comprehensive statement that finance ministers have ever made on issues of debt, development, health, and poverty" -- even if he did say so himself!

Perhaps so. Of course any amount of debt relief, no matter how picayune, is to be welcomed, especially by the 282 million impoverished inhabitants of these 18 benighted countries, whose median per capita income is $1153 per year ($PPP). Indeed,  at least  75 percent of  these poor folk somehow manage to survive on less than $2 per day, with an average daily income of  just US$.98. Fully half  of these countries boast life-expectancies at birth of less than 50 years.     

At the risk of appearing to be slightly cynical, however,  we may wish to pause for a few seconds before  popping the champagne bottles, tapping the kegs,  and inviting our starving Third World brethren over  for a few brewskis, a jol,  and a brai to celebrate the "end of poverty" in our time.

As discussed below, in the words of one famous aging rocker, when it comes to debt relief, "We still haven't found what we're looking for."

                                          Download PDF Version

LONG TIME A COMIN'

In the first place, the 18 particular countries selected for this dose of debt relief were not chosen at random, or on the basis of need alone. They are a subset of 69 countries that are regarded by the World Bank and the UN as "heavily" or "severely" indebted.

The select 18 are the ones that, for a variety of serendipitous reasons,  just happen to have enrolled in and survived the arduous "HIPC" process that was established by the World Bank/IMF in 1996, supposedly to help poor countries sharply reduce their debt burdens.

Unfortunately, the huge World Bank and IMF bureaucracies  have proved to be much better at carefully rationing  debt relief than at  making sure that such impoverished countries did not get up to their eyeballs in debt in the first place.

Since 1996, the multilaterals'  armies of ex-pat peu tyrants  have conditioned debt relief on all the usual "structural adjustment" strictures -- repackaged, without much  empirical justification,  as "poverty reduction."

(Aside to Jeffrey Sachs: "dollar a day world poverty," as defined by the World Bank, only declined from 1981 to 2001 because of a 500-million+  decline in the number of poor in non-neoliberal China -- most of which occurred in the early 1980s because of a massive redistribution of land to peasants! )

The 18 favored few include Benin, Bolivia, Burkina Faso, Ethiopia, Ghana, Guyana, Honduras, Madagascar, Mali, Mauritania, Mozambique, Nicaragua, Niger, Rwanda, Senegal, Tanzania, Uganda, and Zambia. Each one has taken significant steps to alleviate  debt burdens under the so-called "Enhanced"  Heavily Indebted Poor Country Initiative (HIPC).

This is a costly process that has forced such countries to jump through elaborate hoops with respect budget deficits, monetary policy,  privatization, and other favorite, unproven neoliberal nostrums.  Most of these countries started this process in 2000, and have been waiting for debt relief ever since. 

The result  was that, as of early 2004, after a decade of HIPC's tender mercies, the "select 18's"  external debt had been reduced by a grand total of $2.9 billion,  from $83.3 billion to $80.4  billion -- about  3 percent.  True, several did garner some interest rate reductions along the way,  but these 18 countries -- among the world's poorest -- have  continued to pay more than $3 billion of debt service per year to their creditors.  

Since 2004, with HIPC's mandate set to expire at the end of 2006, and debtor countries becoming more and more desperate for relief,  the pace has picked up. But before the  G-8 Finance Ministers weighed in this month, the 18's total external  debt still stood at $61.6 billion.

This included the $38.2 billion of nominal (face value) debt and capitalized interest from the World Bank, the IMF, and the African Development Bank that has just been forgiven, and another $23.5 billion of debt from "bilateral" government loans (mainly the infamous ECAs) and some private, government-guaranteed debt.

As of this year, after a decade of HIPC, servicing this debt was still costing these 18 countries almost $2.2 billion a year in debt service. 

This may look like a modest sum to many First World residents who are used to seeing much larger sums spent on agricultural subsidies, submarines, highway programs, and invasions of distant countries. 

But it is a very large share of the $2.9 billion that all 18 of these countries spend each year on education, and the $2.4 billion they spend on public health.

MINI-MOUSENUTS  

Second, the actual cash value of the debt relief granted by the G-8  is far less than the widely-touted "$40 billion."  And the "100 percent debt reduction" proclaimed by the mass media actually amounts to just  62 percent.   

The total face value of the debt canceled by the World Bank ($31 billion), IMF ($4.2 billion), and African Development Bank ($3.0) adds up to $38.2 billion.  But in cash terms, since the average interest rate on the debt is only 3.5 percent, its cancellation amounts to an annual saving of just $1.34 billion a year.

This saving is certainly nothing to scoff at. But from the standpoint of the developing world as a whole, it compares rather unfavorably with, say, the proposed  doubling of First World foreign aid levels to genuinely-poor developing countries. Recently proposed by Tony Blair's Commission for Africa,  among others, this would increase current First World aid from roughly $25 billion (counting only the aid to genuinely poor countries) to at least $50 billion a year by 2010. 

From this standpoint, this month's  G-8 debt cancellation only gets us about 6 percent of the way home toward Blair's incremental $25-$30 billion a year of increased aid.   

The annual $1.3 billion saving also compares rather unfavorably with the $1.3  billion per week that the Iraq War now costs, according to the latest figures available from the US Congressional Research Services. Apparently it is much more expensive to kill people than it is to keep them alive.

As for the "100 percent debt reduction," the G-8 decision still leaves the 18 "favored few" with $23.5 billion of bilateral government debt and private debt -- and about $800 million a year of debt service.

Furthermore, there will be no relief of any kind until the G-8's proposals are ratified at the World Bank/ IMF Annual Meetings in September.

Finally, assuming - optimistically - that these countries would otherwise continue to pay the $1.3 billion per year to the multilateral institutions for the next 20 years without default, and that the multilaterals' lending cost is less than or equal to their cost of funds, the "net present value" of the debt cancellation is not $40 billion, but at most $16 billion. 

Indeed, from the standpoint of World Bank and African Development Bank bondholders, if the G-8's taxpayers can be persuaded  "take them out" of these "dog countries" and their risky future payments in exchange for, say,  $16 billion in cold cash for the multilaterals,  that would be a very profitable deal indeed  -- since the World Bank's cost of funds, for example,  is not the 3.5 % average debt service ratio now paid by these countries, but at least 4.7 %.

At that discount rate, the PV of the 18's expected future debt service is worth no more than $14.8 billion.  So if they could $16 billion from First World taxpayers to divide amongst themselves, that would leave the multilaterals with a tidy $1 billion+ gain -- compared with having to  continue to play  bill collector with dirt-poor debtors, and administer the thankless HIPC program. 

And I bet you thought it was all about generosity!!!

200,000 LAWYERS

Third, from the standpoint of "ending poverty in our time," this debt cancellation is like 200,000 lawyers at the bottom of the ocean -- at best, a good start.

The 41 other "severely or heavily indebted" countries, with 900 million residents,  have at least  $1.02 trillion in debt outstanding. By HIPC standards, their debt burdens are even heavier than for the semi-fortunate 18 -- for example, on average, debt service for the other 41 is 6 percent of national income, compared with just 2 percent for the 18, and 13.3  percent of exports,  compared with 11 percent for the 18. 

At least 20 of these other  heavily-indebted countries that are either waiting to be accepted into the HIPC program (n=11), or are caught  in the lengthy "interim period" phase (n=9).

The apparent inconsistencies are glaring.  For example, Benin, one of the fortunate 18, only has a $ .8 billion foreign debt,  a 1.74%  debt service to income ratio,  and a $1110 ($PPP) per capita income. Burkina Faso, another one of the 18, has a $.661 billion debt, a 1.25 % debt service to income ratio, and an $1170 ($PPP) per capita income.  Malawi, one of the less favored 41, has  a $2 billion debt, a 2.1 percent debt service to national income ratio, and a $590 $PPP income per capital. It has been waiting for debt relief from HIPC since 2000. The DR Congo -- formerly the notorious dictator Mobutu's personal fiefdom,  Zaire --  with 53 million people, a $660 $PPP per capita income, a $7.6 billion debt, a 2.7% debt/GNI ratio, and a 45 year life expectancy, has also been hanging fire since 2003, waiting for some relief. It fails to qualify for a mixture of technical and political reasons -- including the fact that it remains a war zone.

(Nota bene: Iraq also remains a war zone, but the international community has worked overtime to give its 25 million people tens of billions in debt relief.)

There are at least a few dew drops of social justice in the G-8's  discriminations,  however.  Bolivia, lately in the news because it is on the verge of descending into armed conflict between the indigenous majority and its  blancos/ "gente decente"  elite,  undoubtedly deserves special consideration,  after a decade of neoliberal policies that basically succeeded in increasing poverty, inequality, and social tensions to the breaking point --  as the IMF itself has admitted in a recent report.

Nicaragua, another long-suffering satellite of American foreign policy that had the temerity to toss out a US-backed dictator -- sort of a Mobutu with maracas -- and ended up the world's most heavily-indebted country in the 1990s, relative to its size, has also qualified for $265 million in additional debt relief. At the moment, like Bolivia,  the country is in a state of emergency -- another good example of  neoliberalism's pronounced tendency to overplay its hand.

SUMMARY

Elsewhere, we've expressed grave doubts about the "more sand,  same  rat-holes" approach to increasing foreign aid, wiping out debt, and "ending poverty."

Fighting poverty, after  all, is not just about malaria nets and drinking water. Ultimately it is about deep-rooted, long-term structural change, political mobiliization, the redistribution of power, land, education, and technology, entrepreneurship, and the overthrow of established orders. These are concepts that  World Bank bureaucrats, let alone "development economists,"  may never understand.

At this point, however,  it remains true that the poor in many debt-ridden countries are in dire need of short-term relief. 

In that spirit, it would be great  to see the G-8, the World Bank, the IMF, and other so-called "development banks" work even harder to finally deliver on their long-standing commitments to debt reduction  for  quite a few more of the poorest of the poor.

    (c) SubmergingMarkets.Com, 2005.   

 

         

 

 

 

 

 

"Why Can't the World Bank Be More Like a Bank?" Background to WSJ Op Ed Piece, June 1, 2005 James S. Henry and Laurence J. Kotlikoff

With Dr. Paul Wolfowitz's ascension to the World Bank's Presidency this month, we've continued the proud tradition of having the Bank run by white male Americans whose primary careers and reputations have had virtually nothing to do with economic development, certainly not in poor countries.

Previous World Bank presidents have included a long line of successful Wall Street investment bankers (James Wolfensohn (Salomon), George D. Woods (First Boston)), commercial bankers (A.W. Clausen (B of A), Lewis T. Preston (Morgan), Eugene R. Black (Chase), car company executives/ Defense Secretaries (Robert S. McNamara), newspaper publishers (Eugene Meyer (Wash Post)), Wall Street lawyer-bankers (John J. McCloy (Chase)), and long-time US Congressmen (Barber B. Conable).

Such backgrounds may have honed their management skills -- although commercial banks, newpapers, car companies, and the US Congress have never been noted for managerial excellence. But all of these gentlemen certainly needed a great deal of on-the-job learning with respect to all other aspects of the World Bank job. As a group, they were also rather more sensitive to the concerns of Wall Street than of Poor Street.

In Dr. Wolfowitz's case, there has at least been,  thanks be, no Wall Street in-breeding.  He also has a strong background in international relations, not only as Deputy Secretary of Defense and Dean of the John Hopkins School of International Relations,  but also as Assistant Secretary of State and Ambassador to Indonesia back in the 1980s.

He may have been a bit palsie-walsie with former dicators like Indonesia's Suharto and the Lee family dynasty that still runs Singapore. But that is hardly unique among World Bank Presidents. And we also know that, in the best neo-Straussian tradition, he is also capable of being a radical Wilsonian democrat when it suits him -- at  least in the case of Iraq and several other carefully-selected Middle Eastern countries.  

Finally, regardless of what we may think of Wolfowitz' naivete' about Iraq, the fellow is clearly a quick study, and is evidently not shy about rethinking conventional strategies and shaking up entrenched bureaucracies. These attributes, rather than specific experience, may be precisely what the World Bank needs most at this point.

They may also be precisely what the G-8 needs, as it meets in July in Scotland to consider some  rather fuzzy-headed  proposals to sharply expand the First World's commitment to development aid.

Of course "ending poverty" is a noble, apple-pie objective that is as good as any other at getting former Deputy Defense Secretaries, Treasury Secretaries, economists, and rock stars alike to wander through African backstreets and huddle down around the camp fire, singing "Cum By Ya."   

But the point is that unless we deal with the structural reasons that poverty exists in the first place, some of which -- like First World agricultural subsidies,  lousy lending, and "pirate banking's" role in Third World tax evasion  -- are not very pretty, and will not be solved just by increasing aid budgets -- we won't "end" poverty.  We will simply pour more money down the same "development industry" rat holes that now consume more than half of every "phantom aid" dollar. 

Indeed, in the long run, we may even risk expanding poverty, because handing out doles to a perpetual underclass is a recipe, not for ending poverty, but for eventually ending aid.

In the spirit of welcoming Dr. Wolfowitz to his new position, BU's  Professor Larry Kotlikoff and I have suspended disbelief, and have produced the following semi-Swiftian proposal for "Making the World Bank a Real Bank."  Download WSJArticle.pdf

Of course our proposal needs refinement. It is intended in part just to stimulate debate.  However, it is not as if the existing international systems for financing development and distributing aid to the world's poor, much less marshalling their life savings and helping to transmit their remittances back home are perfect. If they were, there would be no need for this discussion in the first place.

                                    (c) SubmergingMarkets.Com 2005

 

 

WHAT'S SO F'IN FUNNY? From One Wolfie to Another"We Have a New Pope!"

News Flash! - World's Poor Dancing in Streets!

A note to our Faithful Readers: Our Editor is on book leave, writing a long-awaited tome on international private banking.  Meanwhile, we will pass the time by offering free "Submerging Market" hats to the best proposed captions.  Here's the first. Question: Why are two these fellows smiling?

Send your proposed entries to [email protected]. Good luck!

SO-CALLED “NATURAL” DISASTERS Part II. The Need for a Global Disaster-Relief AgencyJames S. Henry

Download pdf

So far, the Boxing Day 2004 Sumatra tsunami is still not quite the most destructive earthquake-related disaster in history, but this may soon change.  Until now, the casualty records have been held by the 7.8 Richter-scale earthquake that leveled Tangshan, China, in 1976, claiming at least 244,000 lives, and by the 1556 earthquake in China’s Shanxi province that claimed 830,000.

However, the Sumatran quake has already resulted in more than 150,000 deaths, including 94,081 confirmed dead in Indonesia, nearly 9000 dead or missing in Thailand, 15160 in India, (andup to 20,000 more in the Andaman and Nicobar Islands), 44,000 in Sri Lanka, and 396 in Tanzania, Somalia, the Seychelles, Madagascar, the Maldives, Burma, Malaysia, and Bangladesh. Furthermore, the latest reports from UN observers in the region indicate that even these death tolls may grow “exponentially.”

For the bankers and investors in the audience, the purely economic impact of the Sumatra tsunami is expected to be relatively slight, since most of its victims were indigenous poor people in remote areas, and the region's tourist industry will quickly recover. Japan’s 1995 Kobe earthquake, in contrast,  caused more than $100 billion of property damage. 

However, in terms of lives lost, injuries, displaced people, and damage caused beyond the boundaries of the country where the earthquake originated, Sumatra is already a record-setter. While other tsunamis have taken lives outside their countries of origin, this one’s long-distance impact has already taken more lives in more countries than all other tsunamis since 1800. The potential human and geopolitical impact of all this is much more significant than the destruction of over-valued Kobe high-rises.

In other words, this is one of the most profound transnational disasters ever. It is therefore not surprising that, as discussed below, it has already commanded an overwhelming global response from the world's aid donors -- at least on paper.

For the moment, at least, the developing world may have finally succeeded in capturing our attention, if by nothing more than the sheer power of its own suffering.  Perhaps we will finally now come to understand that both the relief and the prevention of such disasters are appropriate global responsibilities.

We may also wish to reserve some of our benevolence and good will for the victims of more "routine" Third World perils -- for example, the two million children who die from drinking dirty water each year, the 1.6 million people who still die each year from tuberculosis, and the 1.2 million who die from malaria. These continuing disasters may not be as dramatic, sudden, and visible as tsunamis and earthquakes, but they are no less worthy of our concern.    

TO THE RESCUE?

Après le fait, the world community has mounted a huge relief effort to provide clean drinking water, food, medicine, energy, medical care, and temporary shelter for 5 million displaced people.

The most rapid progress has been made on fund-raising.  In one week, 45 governments and international institutions pledged  more than $3.2 billion in humanitarian aid, more than the world spent on all such disasters from 2002 on. The tsunami pledges so far include an incredible $680 million from Germany, $500 million from Japan ($3.91 per capita),  $350 million from the US ($1.19 per capita), $182 million from Norway ($39.13 per capita), $96 million from the UK ($1.59 per capita), $76 million from Sweden ($8.39 per capita), $76 million from Denmark ($14 per capita), $250 million from the World Bank, $175 million from the Asian Development Bank, $309 million from other EU member countries ($1.06 per capita), $66 million from Canada ($2.06 per capita), about $60 million apiece from Australia ($3 per capita) and China (5 cents per capita), $50 million from South Korea, and $25 million from Qatar. Somewhat less generously, Saudi Arabia and Kuwait have each contributed $10 million, New Zealand $3.6 million, Singapore $3 million, Venezuela, Libya, Tunisia, and UAE $2 million, Turkey $1.25 million and Mexico $100,000.

Furthermore, there are also discussions underway among G-8 countries to provide debt relief for Indonesia, Sri Lanka, and the other victim countries, which might yield another $3 billion a year -- so long as these countries agreed to spend it on aid for tsunami victims.

Three days after the quake, President Bush had promised just $35 million. As several observers noted, that was just 12 cents per capita, less than 10 percent of Canada’s per capita effort. As Vermont Senator Patrick Leahy said, “We spend $35 million before breakfast in Iraq.”

Furthermore, in 2004, the US Congress had provided $13.6 billion to Florida’s hurricane victims, 5.6 times more than the $2.4 billion that the US spent on all global humanitarian assistance that year. Colin Powell rebuked the critics in public, reminding them that the $2.4 billion was 40 percent of the entire world’s budget for humanitarian relief in 2004. Apparently he also quietly lobbied the President to increase the official US aid.

Meanwhile, in addition to the pledges of official government aid, more than fifty private relief agencies have also pitched in, from Action Against Hunger, CARE, Catholic Relief, Doctors Without Borders, Islamic Relief, Oxfam, the International Red Cross, and Save the Children to UNICEF, World Action, and WorldVision.  The  American Red Cross alone reports that it has already received more than $79 million in private aid pledges for tsunami victims, while CARE US has received $3.5 million, Doctors Without Borders $4 million, Save the Children $3 million, Americares $2 million, Oxfam US $1.6 million, Catholic Charities $1.1 million, and World Vision $1 million.

Private donors from European countries have also been exceptionally generous. For example, Swedes’ 9 million people have contributed more than $60 million, in addition to the $76 million that their government has offered – more than $15 per capita. And Norway’s 4.6 million people have raised nearly $33 million in private donations, in addition to their government's $180 million -- a $46 per capita global record for tsunami relief.

...THE PAPER THEY’RE PRINTED ON?   

Unfortunately, the historical record shows that such official government disaster aid pledges are cheap -- they often do not result in “new money,” and many countries actually renege on their official pledges completely.

For example, in the case of Iran’s Bam earthquake in December 2003,  40 donor countries also responded to a similar “UN flash appeal,”pledging $1.1 billion of aid. However, one year later, less than 2 percent ($17.5 million ) of that has been forthcoming.  Most foreign aid workers and journalists came and went in less than a month, and Bam’s reconstruction problems have long since disappeared from the headlines.  While significant progress has been made in restoring basic services like water and electricity, most of the city’s 100,000 former residents are still unemployed and living in tents.

Such reneging by the world community has also been the pattern in most other recent disasters, including Mozambique’s 2000 floods,  Central America’s Hurricane Mitch in 1998, and similar crises in Somalia, Afghanistan, and Bangladesh. 

We will just have to see whether the victims of the Sumatran tsunami  experience something similar. UN Secretary General Kofi Annan has predicted that it will take a decade for many of the countries affected by the tsunami to recover.

ANOTHER AD HOC RELIEF EFFORT?

Each time there is a crisis, the world’s aid organizations have to scramble to pass the hat.

The outpouring of all this assistance for the tsunami’s victims on short notice has been impressive.  But perhaps we should not be so proud of ourselves. The reality is that this effort has been yet another ad hoc, “aid pick-up-game," where the world waits until there is already a life-and-death crisis with millions of people in peril to swing into action, raise money, and rush assistance to the front lines.

This reactive approach has many unfortunate side-effects:

~       Each time there is a crisis, the world’s aid organizations have to scramble to pass the hat,  even as they are also scrambling to organize assistance. 

~       The actual delivery of relief on the front lines is much slower than it needs to be.

As usual,  in the case of the Sumatra tsunami,  most of the victims are located in remote areas with poor transportation, sanitation, water, and health care systems,  and many other problems. Several key regions – in this case Indonesia’s Aceh province, Sri Lanka’s eastern regions, and Somalia – also have active guerilla movements or local warlords. Some countries -- India, in this case – have also insisted that they don’t need any foreign assistance, showing more concern for nationalism than their own people. 

However, when it comes to disaster relief, all of these problems are just par for the course, and predictable. What is inexcusable is the world has once again had to organize yet another massive relief effort from scratch.

One result is that in most of the affected countries,  it has taken more than a week to get medical aid and substantial quantities of  food, blankets, and clean water – to the victims. In a situation where hundreds of thousands are injured and each incremental day costs hundreds of lives, only Finland and Norway had relief planes in the air by Tuesday December 28, two days after the disaster. Most other donors needed a whole week.    

~       Given the semi-voluntary nature of the relief process, national interests, domestic politics and media exposure play an excessive role in deciding how much aid is given, who manages the assistance, and how much goes to any particular crisis – as compared with raw human need.

~       One by-product of all this was last week’s unseemly spectacle, where donors like the US, the UK, and Japan conducted a veritable public auction for the value of their aid pledges. The results may have little to do with actual aid requirements. We can only hope that this time around most the pledges will be honored. 

~       There is a tendency for global aid efforts to be limited by the media’s attention span – as Bam’s victims, the residents of Sudan’s Dafur region, and the victims of other disasters have learned the hard way. When the number of “new bodies”  tapers off, so does the attention – and the aid.

THE NEEDS FOR A  GLOBAL AID ORGANIZATION

If global humanitarian aid were run on a more business-like basis, 

~       There would be an ample global “reserve” set aside for such emergencies. This would be funded by a global tax in proportion to objective measures of donor capacity like population size and wealth.

~       In case of an actual calamity, we would not try to assemble “aid brigades” on short notice from dozens of different organizations all over the globe and expect them to work well together under impossible conditions. There would be already be a solid global organization in place, ready to respond rapidly, with coordination agreements and contingency plans already worked out with local governments.

This organization would also have basic stocks of transportation equipment and relief supplies pre-positioned in key regions of likely need.  After all, the US military alone now has 890 bases around the world that are on ready-alert, prepared  to fight wars at a moment’s notice.  The world community has zero “aid bases,”  prepared to fight to save human lives at a moment's notice.

Given the increasingly global nature of  so-called “natural” disasters, the current approach to global humanitarian relief is no substitute for a permanent, well-funded, global aid organization.

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© James S. Henry, Submerging Markets™, January 05

http://www. submergingmarkets.com