The Debt Threat

Developing countries are crippled by their debts to industrialized nations. The moment for meaningful debt relief, says the author, is long overdue.

| Thu Jan. 20, 2005 4:00 AM EST

In October 2000, Congress announced that the U.S. would forgive the $435 million in debt owed it by the world's 33 poorest countries. The announcement, fulfilling a pledge made the year before by President Bill Clinton, seemed a major victory for a diverse coalition of debt-forgiveness activists, from U2 singer Bono to the conservative Sen. Jesse Helms. Four years later, however, little of that relief has actually come through, and developing countries continue to divert large portions of their budgets to servicing debts built up by previous regimes. Meanwhile, their people lack basic services like education and health care.

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In her new book, The Debt Threat: How Debt is Destroying the Developing World, Noreena Hertz looks at the history of third-world debt, its crippling effects on people in developing countries, and the work of activists pushing for debt forgiveness. Hertz, who serves as associate director for Cambridge University’s Center for International Business and ranks among Britain’s top young economists, spoke with MotherJones.com while on a book tour in the U.S.

MotherJones.com: You begin the book with a chapter on the efforts of Bono and of the Jubilee movement in Europe to cancel developing-world debt by 2000, a goal they didn't ultimately meet. What did these efforts achieve?

Noreena Hertz: In Europe, there was a huge movement for debt relief toward the end of the 1990s, where we had 500,000 people in Britain sending postcards to [UK chancellor] Gordon Brown to ask for debt cancellation. Even Gordon Brown’s own mother sent him a postcard. In Italy, soccer players would wear shirts with debt relief slogans on them. So in Europe, debt cancellation was kind of on the political radar screen thanks to the Jubilee movement.

In the United States, the Jubilee movement never really had a significant presence. Instead, there was this incredible effort by a rock star who managed to get debt taken seriously by the Clinton administration. Despite the efforts of the Jubilee movement in Europe and its significant presence -- and Bono’s 30 trips to Washington, pounding the corridors of power, getting [Arnold] Schwarzenegger and Jesse Helms and Billy Graham on board -- at the end of the day, little was achieved. Bono’s efforts managed to get the U.S. to agree to cancel $400 million, and overall pledges were made to cancel third-world debt. In fact, as of today, only 12 percent has actually been canceled. So we saw a lot of political rhetoric, but we didn’t see delivery.

Moving forward, the lesson that we can learn is that it takes a lot of legwork to actually see some meaningful movement now on debt relief. There’s real opportunity that we can because we’re again going through a period where rhetoric around debt is increasingly being provided by leaders ranging from Tony Blair to George Bush. I think we need to learn that while it’s hard to get debt on the agenda, you can [do it]. But then you have to hold politicians to account, because people are dying every day as a consequence.

MJ.com: Now that developing-world debt is on the political agenda, what do you find are the most common misperceptions people still hold about the issue?

NH: I think some people just think, “Didn’t that all get sorted out?” Well, no it didn’t, and there’s $13 million being spent every day by sub-Saharan Africa on debt servicing. Just think how many doctors and teachers and schoolbooks that could be spent on otherwise.

Another misconception is that there is a good program in place dealing with debt relief, administered by the World Bank and the IMF. There is, in fact, a very bad program in place. And it says countries haven’t met the requirements in order to get debt relief if they haven’t agreed to, in the case of Senegal, privatize all their peanut farms. Or in the case of Zambia, to privatize their national bank. So the conditions put on debt relief are actually the most extreme, neoliberal, World Bank- and IMF-dictated conditions.

Another big misconception about debt is people think, “Why should we be canceling these countries’ debts? They were lent this money and should have to pay it back. If I borrowed money from my bank, I have to pay it back.” But the people in these countries upon whose shoulders the debt burden falls never saw any benefit from the debt, because loans were made in such irresponsible ways. Throughout the Cold War, loans were used as a geopolitical tool, with the Soviet Union, China and the United States really using these loans as a way of getting geopolitical influence. Some of the most corrupt and tyrannical regimes the world has known actually were lent this money which, of course, never reached the people. For example, Mobutu in Zaire got half of American aid to Africa in the late ‘70s, but this money went for private estates he bought in Europe, or chartering a Concorde for private shopping sprees.

MJ.com: When Argentina defaulted on its loans in 2002, part of the government’s argument was it didn’t want to pay off this debt at the expense of imposing on its people the kind of conditions you talked about. How has that decision impacted other countries?

NH: Well, Argentina has done so well after its decision to default on its $100 billion worth of debt. The economy is growing at a rate they haven’t seen for years; investment’s coming back; unemployment’s been slashed. They have done so well by deciding not to repay the debt -- and also, not to take onboard all the IMF’s terrible economic conditions -- that I think other countries are already looking at this.

Brazil is another country that potentially could go the same route, because [Brazilian president] Lula is walking this tightrope where he’s pledged to end hunger in Brazil and yet is servicing a mountain of foreign debt that has been eroding his public-spending abilities. At the moment, he’s been doing things like razing a lot of the rainforest in order to service the debt, but that is not a sustainable strategy.

So I think other countries are already looking at Argentina with interest. I think in Latin America, where we have a new wave of left-wing governments -- not only Argentina, but Brazil, Venezuela and Uruguay -- there might be contenders for strategic default.

MJ.com: How has Argentina been able to rebuild its economy since the default?

NH: Argentina has just been quite sensible in terms of spending and has been fiscally pretty responsible since default, and has tightened its belt. But also, Argentina has been doing things like putting additional taxes on exports, taxing financial transactions -- things that countries in a free-market economy are not supposed to be able to do. So they’ve been more strategic about the economic policies they’ve been taking. Another reason is that Argentinians have had more confidence in in their government over the past couple of years than they did have during the period where it was borrowing huge amounts of money and potentially going to dance to the IMF’s tune. And they've been bringing more money back into the country as well and putting it in the banks.

MJ.com: You’ve described some of the consequences debt for the developing world. What consequences could industrialized nations face if the third-world debt situation continues?

NH: It is a travesty that the world’s poorest people are having to use money that could be used for hospitals and doctors and nurses to repay debts instead. But as you pointed out, there’s also an enlightened self-interest to address third-world debt, because when poor countries have to repay debt, they do so at the expense of other things [such as] the environment, which is usually one of the first things to go. When a country needs foreign exchange, it will often do anything to get [it]. It will cut down its rainforests, sell off its fishing rights -- so we have even more of an overfishing problem today as Ghana, Nicaragua, Honduras and others sell off their fishing rights.

Also, there’s the link with terrorism. Obviously, it’s not that if a country has to service its debt, that will lead to extremism and terrorism. But what does happen is when the country has to prioritize its debts above all else, it won’t put money into schools or hospitals. In a lot of weak states where this is going on extremist organizations come in and [provide basic services] in their stead and get a lot of grassroots support. We’ve seen this in Pakistan, for example, where we have 6,000 extremist religious schools because the state isn’t providing money for education. The same in Somalia and other countries.

Another reason we need to worry about the problem is that when countries can’t invest in health, infrastructure, water or things like that, there’s more danger of disease. And in the age of jet travel, diseases come to wherever we are. There’s case after case over the last few years in the United States of West Nile virus, which was previously not known on this continent. Peru had its cholera epidemic in the 1990s, and that disease spread quickly all throughout Latin America, and into North America, too.

MJ.com: Recently, Gordon Brown and others called for a moratorium on debt payments for countries hit by the December 2004 tsunami, and the Group of Seven agreed to suspend payments. What does that mean for future debt-relief efforts?

NH: First of all, what’s really good about this is it’s one of the first times that a politician is saying, “If a country is in need, it shouldn’t have to repay its debt.” It’s important that that’s now been explicitly voiced in the case of these tsunami-hit countries. But of course, these are not the only countries in need. Sub-Saharan Africa, where 30,000 children are dying every single day from poverty-related diseases, is a region desperately in need. So we need to build upon this. We’ve got to say, “Fine. What’s good for Indonesia and Thailand and Sri Lanka must be good for Kenya and Burundi as well.”

A month ago, another big landmark happened when it was decided that 80 percent of Iraq’s debt would be canceled. And that was a tacit admission that when you make loans to tyrannical, odious regimes, the people shouldn’t have to repay them. Because, of course, the vast majorities of money lent to Saddam Hussein were knowingly lent to a dictator who was using them to finance his wars and build his palaces.

So in the past couple of months, we’ve had these explicit statements for the first time that those illegitimate debts should be canceled. These principles need to guide the whole of debt relief, and this is what we’ve been calling for. We need to use these two situations to have an inherent, clear framework for determining whether or not a country should have to cancel its debts. I think that out of this tragedy, there is an opportunity, finally, to fairly address the whole issue of debt.

MJ.com: One of the conservative arguments against debt forgiveness is that it could enable future governments to spend the way Hussein or others did. What safeguards could be put in place so that doesn’t happen?

NH: Lenders have got to be much more responsible themselves about lending; they need to have restrictions on whom they can and cannot lend to, and stop lending to terrible regimes. I think borrowers also need to take responsibility. Countries shouldn’t look at debt as a first resort out of foreign debt, but work harder to mobilize domestic resources, to collect taxes at home, to spend money at home more wisely. Otherwise, this is a situation that will repeat itself. So I think there’s a role for governments on both sides to play.

There are also things that can be done so poor countries have resources and funds without having to borrow. I’m thinking of the active measures to repatriate corrupt dictators’ funds -- there are hundreds of billions of dollars in stolen money just sitting in Swiss and Bahamanian offshore bank accounts. They could also create new monies through things like remittances, the money that migrant workers and others send home (Eighty billion dollars were sent to Latin America and the Caribbean last year, for example.) Countries could create financial instruments around this that could be used for the development of poor countries in need. So I think we can be much more innovative about ways forward, so that it isn’t just about borrowing money, and we can actually create new money that would be very useful.

MJ.com: What are the next steps needed in order for serious debt relief to become a reality?

NH: We have to get the story out there. People need to understand that children in Africa are not able to go to school and are facing life expectancies under 30 because their governments have no money to deal with health or education, their people’s most basic needs. We have to make it so people understand the history of debt, the story of debt, why countries are in the situation they’re in. And then to understand that they can in no way blame the people in that country today; that there’s a historical backstory to debt.

Another important message is that canceling the debt is completely within our reach. The cost of canceling all of sub-Saharan debt would amount to $170 billion by most conservative estimates, and that’s less than the cost of the U.S. military operations in Iraq so far. So it’s not a matter of available resources; it’s a matter of what we choose to do with them.

Third, there is a timeline. We could have real movement on debt relief this year. Debt is on the political agenda for the July meeting of the leading economic countries, the G8, which is being held in Scotland. Provided that there is sufficient public support for debt relief, I think we could actually see real traction. The G8 has to set the agenda, and the developing countries need to feel that the debt relief will not be paid for with the aid they would have been getting otherwise. The cancellation needs to be additional to aid.

Also, in order to really impact people’s lives in the world’s poorest countries -- and this is something the left has traditionally shirked from -- we have to acknowledge the real issue of corruption in many of these countries, and think anew about how to make sure monies released actually do reach the poor and needy. A couple of years ago, Nigeria spent $330 million on a new soccer stadium, more than the country’s health and education budget combined. This is something a lot of activists I speak to in the south say, that their main problem is often their own governments.

It’s not enough just to cancel the debts; we also have to put in place mechanisms that ensure the monies do reach the poor, needy and vulnerable, and make that a condition of debt cancellation. I propose that we set up trusts that will protect the monies in such a way, and make that the condition for debt relief.

Also, I think debt relief has to be decoupled from IMF and World Bank conditions. Because empirical evidence is clear that these conditions negatively impact growth. I think once we’re in July, the G8 will have to agree not only to cancel debt, but also to cancel illegitimate debt and debts where servicing them means the country can’t meet its people’s needs. As we’ve just seen with the tsunami, it’s the poorest and most vulnerable in these countries who were most hurt because they had nobody looking out for them anywhere, were living in makeshift homes, and were much more vulnerable.

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