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INTERNATIONAL DEBT JEROLIM FILIPPI 9952100 Mikro-Makro Institut L.Gubitzer Tutor: Anamarija Batista 7.6.2001 Structure: • Background Information • Current Information o Suggestions for Reform • 1.Jubilee 2000 • IMF o Witch are Heavily Indebted Poor Counties (HIPC)? The key changes (HIPC) • Uganda (first HIPC) o Political Background o Economic Background o Corruption • Final Word • Sources Background Information:* The debt crisis began in the mid-1970s when many of the Organisations of Petroleum Exporting Countries (OPEC; e.g., Saudi Arabia, Kuwait) amassed great wealth. Banks were eager to lend billions of dollars to OPEC nations as well as other developing countries. These countries borrowed large sums of money at low, but floating, interest rates. As a result of the irresponsibility of both creditor and debtor governments (e.g., corruption, private projects benefiting only the rich, etc.), the countries did not use the money for productive investment; rather, they spent these new dollars on immediate consumption. Consequently, these governments amassed debt and refused to repay their loans. Aristocrats controlled the government while the poor had no voice in these loan matters, nor did the loans benefit them. These adjustable interest loans skyrocketed in the early 1980s when the United States attempted to reduce inflation by enforcing stringent monetary policies. The Reagan administration did all of this while also cutting U.S. income tax rates. Around the globe, raw material prices fell sharply, meaning poor countries had even less money to repay their debts. Rising nominal interest rate as well as declining export prices and quantities resulted in sudden increase of the debt burden. In August 1982 the international debt crisis was sparked when Mexico (between 1971-1986 Public and private sector borrowed $75 billion and at a same time their repayments were $70billion), a large debtor, suspended payments. The immediate causes were a widespread economic slowdown, and sharp increases in international interest rates. Both Brazil and Mexico nearly defaulted on their loans and required still more loans and other foreign aid assistance. According to international law, there was (and still is) no option for these poor countries to declare bankruptcy. At the end of 1988 Latin America owed $401.4 billion Commercial banks, in conjunction with First World governments, rescued their own situations and prevented default. However, many developing countries were left in great debt, and, as a result, could no longer get loans. With nowhere else to turn, these nations have relied heavily on the World Bank or the International Monetary Fund (IMF). The IMF required "structural adjustment programs" in these countries. Debtor governments had to agree to impose very strict economic programs on their countries in order to reschedule their debts or borrow more money. Put simply, countries had to cut spending to decrease their debt and stabilise their currency. The governments limited their costs by slashing social spending (e.g., education, health, social services, etc.), devaluing the national currency (via lowering export earnings and increasing import costs), creating strict limits on food subsidies, cutting workers' jobs and wages (especially workers in government industries and services), taking over small subsistence farms for large-scale export crop farming and promoting the privatisation of public industries. Most countries have experienced the economic trauma of a recession and often a depression; and the poorest of the poor have been most affected. The Current Situation: The international debt crisis has continued to worsen since it erupted in the early 1980s. For example, estimates suggest that "at least half a million young children have died in the last 12 months as a result of slowing down or the reversal of progress in the developing world which is the result of unprecedented borrowing, rising interest rates, falling commodity prices, inadequate investment of borrowed funds, and the domestic and international management of the resulting crisis" (UNICEF, 1989). Currently, developing countries as a whole owe over $2 trillion. The gap between wealthy nations and poor ones continues to increase. 20% of the people hold 83% of the world's wealth while the poorest 20% receive only 1.4% of the total income. Over one billion poor people in the world's impoverished countries suffer because of the debt (e.g., over 500,000 children die each year because of cutbacks in health services). The debt burden inhibits room for human development in a country because social services are cut to pay back the money owed; the burdens of debt and structural adjustment are placed unjustly on the backs of poor people. Developing world debt stands at more than $2.2 trillion. Forty seven of the poorest countries owe around $350 billion, a relatively small sum by international financial standards. Suggestions for Reform: 1. Forgive countries their debts Jubilee 2000/USA vigorously recommends this as an essential first step. 2. UNICEF recommends that governments and commercial banks cancel some of the debts of the poorest countries. 3. Restructure the debt weighed down by current demands. 4. Reduce trade restrictions on the products of poor nations. 5. Loans/grants to poor nations should be in smaller amounts targeted; huge sums of money are often misspent by corrupt government officials. 6. Create new ratios for the Heavily Indebted Poor Countries (HIPC). For example, debt to GDP (Gross Domestic Product) and debt-to-budget expenditures INSTEAD OF debt-to-exports (the overall debt of a country defined by the average level of exports over a 3-year period) and debt-service-to-exports (the comparison of a country's annual debt repayments to its exports per year). 1.Jubilee 2000 “That fiftieth year shall be a jubilee for you; you shall not sow, or reap the after growth, or harvest the unpruned vines. For it is a jubilee; it shall be holy to you; you shall eat only what the field itself produces." "Thus in the spirit of the Book of Leviticus (25:8-12), Christians will have to raise their voice on behalf of the poor of the world, proposing the Jubilee as an appropriate time to give thought, among other things, to reducing substantially, if not cancelling outright, the international debt which seriously threatens the future of many nations." There is a global movement, which started in 1996, called Jubilee 2000, which is calling for the cancellation of the unpayable debt of the world’s poorest countries. This call is couched in a vision of the Biblical Jubilee (Leviticus 25), which calls for the periodic cancellation of debt, redistribution of wealth and renewal of creation. The biblical understanding of jubilee is rooted in the restoration of God's justice to the world. It is the responsibility of all Christians to act on the social dimensions of their faith. Discipleship entails being good stewards of God's creation, working to reduce violence and oppression, and to eradicate poverty and all kinds of debt.
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