All of these calamities regularly make the headlines, and indeed, give many people many causes for worry. What they also have in common, claimed political scientist Susan George in her 1992 work, The Debt Boomerang, is that they are all directly linked to the Third World Debt crisis. Find a solution to the debt crisis, and we will be one step closer to solving those problems mentioned above. Or will we?
If the debt crisis really is the cause of such misery, it might be a good idea at this point to explain its origins. In the 1970s, the price of oil skyrocketed, making the oil-producing countries (OPEC) very rich. They deposited their profits in Western commercial banks in order to earn interest.
In order to pay this interest, banks had to make money. They did this by lending money to developing countries at very low interest rates. Unfortunately for the developing countries, the first oil-price shock lead to anti-inflationary fiscal and monetary policies in major industrial countries, and a major international recession came about in the mid-1970s. The resulting slackening of world-market demand forced the price of developing countries’ exports down, already placing them at a disadvantage when it came to repaying their debts. When the recession worsened in the 1980s, the lending banks raised their interest rates, making the debts even harder to repay, bearing in mind that the developing countries were taking in less money for their exports than at the time when they took the loans.
Some NGOs, such as CAFOD (Catholic Agency for Overseas Development) claim that money that could, and indeed should, be used for the health care and education of the debtors’ citizens, is instead used to service debts. However, this ignores the fact that the money acquired through the original borrowing wasn’t always invested in sensible projects like health and education; as Robert Guest, The Economist’s Africa editor has pointed out, much of it was squandered on prestige projects, such as dams, conference halls, steel mills many miles from the nearest port, often over budget, and so on. By undertaking projects that would never produce a return, or even worse, lining their own pockets (as Zaire’s Mobutu did) or by financing wars (as Ethiopia did), leaders of the developing world ensured that they would be unable to service their loans, let alone repay them.
That’s all well and good, but why should the ordinary citizens of Sub-Saharan Africa and elsewhere have to suffer because of their former leaders’ macroeconomic mismanagement? Some would say they shouldn’t. There is a concept in International Law known as Odious debt, which states debt incurred by undemocratic countries and used for purposes that do not serve the interests of the state should be unenforceable. The argument goes that present citizens of countries once ruled by tyrants shouldn’t have to pay for their past rulers’ misdeeds.
The counterargument to the Odious debt principle, which may explain why debts incurred by the Apartheid government of South Africa and the Mobutu dictatorship of Zaire have not been recognised by creditors as “odious”, is that governments are constantly changing in democracies, but states, as opposed to governments, are the ones that are expected to honour their debts. Indeed, it is an oft-repeated phenomenon in history, that one generation must clean up the mess left behind by the previous one.
Slogans such as “Drop the Debt” and “Make Poverty History” are useful, in that they increase public awareness of the issues, but in reality they just simplify a very complex subject. Who is to say that once a heavily indebted country receives debt relief, they will use the money freed up towards poverty reduction, rather than, say, wage war on one of its smaller neighbours, which is what Ethiopia did just a few months ago?
While I agree that while debt may be analogous to a tax on growth in indebted countries, I can’t accept the view that “calling it quits” alone is the answer. John O’Shea of GOAL has described this blind faith in the dropping of the debt as a naïve world view, in which there are no corrupt rulers, no corrupt governments and no nasty armies. Instead, these indebted governments would only be delighted to invest in education and health, if only the funds were freed up.
Unfortunately, the recent history of the Horn of Africa makes it clear, as if we needed proof, that there are still plenty of corrupt leaders and nasty armies going around. If we are serious about the combat against debt-induced poverty and its attendant problems as listed by Susan George, the question is not a simple yes or no one about whether seriously indebted countries should have their debts cancelled. Rather, it should be whether the debtor countries have the will and the ability to put in place structures to ensure that moneys freed will be channelled in the direction of alleviating poverty and not towards the armament factories or Swiss bank accounts. If the answer to the latter question is “yes”, then by all means make poverty history.
