The North-South Institute Newsletter
Vol.3, No.3 (1999)

In this issue  Debt relief: too little, too late?  New fund for health and safety research  Financing international development  Conflict and development  Is aid a one-way street?  Briefs Previous Issues of Review

 

Debt relief: too little, too late?

At their annual meetings in late September, the World Bank and the International Monetary Fund (IMF) agreed to measures for faster and greater forgiveness of the debt of heavily indebted poor countries. The move followed recommendations made by leaders of the G-7 at their June 1999 meetings in Cologne.

Under a program now called the “Enhanced Highly Indebted Poor Country (HIPC) Initiative,” the Bank and the IMF propose an average debt reduction rate of about 54 percent, over the next three to five years, for 33 to 36 of the world's poorest countries. These institutions anticipate this will help accelerate the rate of economic growth and poverty reduction in those countries. The world's 41 poorest countries owed US$ 201 billion at the end of 1997: 85 percent of this was owed to multilateral and bilateral creditors (the Bank, IMF, regional banks, export credit agencies, and similar bilateral and multilateral lending institutions).

However, research carried out by The North-South Institute (NSI) suggests the “Enhanced HIPC” doesn't go far enough. According to NSI Researcher John Serieux, closer to 85 percent of the total debt would have to be forgiven to have any appreciable effect on economic growth and poverty reduction in these countries.

Serieux says this is all the more important because the debt crisis facing the poorest countries cannot simply be blamed on reckless commercial bank lending, as was the case for the middle income countries in the late 1970s. Rather, it was initially caused by changes in the global economy that placed new, permanent, limits on these countries' debt carrying capacities. This was exacerbated by continued lending that emphasized restructuring rather than debt relief, then by absurdly insufficient amounts of debt relief through overly complicated procedures. In effect, says Serieux, these countries have arrived at the point of unserviceable debts and economic failure largely because the international community was unwilling or unable to recognize that what appeared to be modest debt loads in the early 1980s were already unsustainable.

A history of debt relief 1988 The Paris Club introduces the “Toronto terms” that include rescheduling arrangements, debt stock reductions of up to 33 percent, and debt service reductions of up to 30 percent. Before negotiating its debt with the Paris Club, a country must agree to an IMF stabilization or adjustment program 1988-99 Increasingly generous terms are introduced through the Paris Club's “London terms,” “Naples terms,” “Lyon terms,” and “Cologne terms” that will offer up to 90 percent of debt and debt service reduction. 1989 The Brady Plan enjoins commercial banks to work with developing countries to reduce debt. IMF and World Bank resources can be used to facilitate these transactions. The plan stresses the importance of adjustment programs as an adjunct to debt reduction. 1996 The HIPC initiative introduced by the World Bank and the IMF offers debt relief consideration to poor countries whose debt is considered to be unsustainable even after Paris Club debt relief terms are applied to all debt other than multilateral debt. 1999 The “enhanced HIPC” initiative proposes to reduce to US$60 billion the (1998) net present value of the debt of 33 to 36 countries, an average forgiveness rate of 54 percent. It offers a more generous interpretation of debt sustainability and formally links debt reduction with efforts at poverty reduction.

The price of debt
Countries with a heavy debt burden face some hard choices. When the cost of debt is exacerbated by a fall in the country's terms of trade and resultant domestic economic stagnation, the country can slip into a “debt overhang” situation—where the debt stock exceeds the country's future capacity to repay. Hard choices then become impossible choices.

The consequences are obvious: reduced investment in people, particularly in education and health, as well as in infrastructure. And data confirms the period of heavy and increasing debt for HIPC countries coincided with a slow-down in the rate of human development.

Not surprisingly, therefore, since the early 1980s HIPC countries have been the main users of the Bank and IMF's structural adjustment programs and the fund's emergency financing facilities. But although they may have bought a temporary respite from the cash crunch, these programs have not produced an economic turnaround. That is largely because the fundamental problem —debt overhang—was not adequately addressed, says Serieux. And as long as the fundamental source of instability—an unsustainable debt load—remained, private agents would not invest in these countries.

Raising the target
There is little doubt that debt relief could greatly stimulate efforts to reduce poverty and foster human development. But “given that most of these countries were able to service, on average, less than 50 percent of their debt, anything less than a significant and front-loaded reduction in the current debt will not help reduce poverty,” says Serieux. And, he says, even that level of debt servicing was achieved at the cost of reduced levels of human development and growth.

Debt reduction would have to be significantly higher than 60 percent—closer to 80 percent —if improvements are to be made in poverty reduction and human development. The “enhanced HIPC” initiative's 54 percent forgiveness rate is almost certainly insufficient to eliminate the debt overhang. These same countries have been able to obtain an average discount rate of 85 percent on commercial bank debts. 

The NSI will publish John Serieux's research paper, “Reducing the debt of the poorest: challenges and opportunities,” as part of its Briefing series early in 2000.

New fund for health and safety research Canadian researchers are invited to submit proposals to the newly established Don Taylor Memorial Fund for a study of labour and human rights in developing countries. The Fund, sponsored by the Friends of Don Taylor in cooperation with The North-South Institute, is seeking proposals for a multidisciplinary study on the health and safety conditions of developing-country workers, linking those conditions to environmental and public health concerns in the communities where they live and work. The study must focus on a country and workplace where there is substantial Canadian involvement, whether through government agencies, corporations, nongovernmental organizations, or trade relations. According to the fund's “Call for Proposals,” the project objectives are: To highlight issues related to labour and human rights in developing countries To stimulate research and well-informed journalism To raise awareness among Canadian workers, consumers, and decision-makers about the impact of Canadian involvement in developing countries To build a credible source of background information and to support efforts to improve the conditions of workers in developing countries With a budget of $100,000, the research will be conducted by a team, including at least one Canadian trade unionist, one scientist or academic, and one person from the subject country. The research team is to be based on a substantial partnership with the individual or group in the subject country. The project must also add to the knowledge, skills, and resources of workers in the given country and include a collection of data on the health of workers and people in the communities. The fund was established in memory of Don Taylor, a Steelworker and social activist who died of cancer in October 1997. Taylor helped build The North-South Institute, the Canadian Civil Liberties Association, the Grape Boycott, and countless links of solidarity with workers in Africa, Asia, and Latin America. He spent the last years of his life designing and writing training materials on health and safety issues for Canadian workers. The deadline for proposals is Jan. 31, 2000 and the successful project will be announced by July 31, 2000. For more information contact Heather Gibb, NSI Senior Researcher, at (613) 241-3535 ext. 233 or by email at hgibb@nsi-ins.ca.

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