Background – Why Do Poor Countries Owe So Much?

The international financial markets were awash in funds, but a global financial recession had reduced demand for loans. Bankers could only make money on the petrodollars if they found ways to make more loans. In many cases, aggressive lending officers from the large private banks made highly questionable loans to developing countries that were unlikely to be able to repay them. About one-fifth of the money went to military spending, often for dictatorial regimes. Other funds went to development projects that were never likely to lead to much actual development. Some of the money found its way back to suppliers of arms, construction services, or agricultural equipment in the lending countries. In some cases, corrupt officials in the borrowing countries simply stole the money.

The loans had been made at low but floating interest rates. Adjustable-rate mortgages are familiar to homebuyers in the U.S., but the floating-rate loans made in developing countries differed in a few respects. Few steps were taken to ensure adequate income to cover the payments, nor was collateral provided. Instead, the countries themselves became the collateral. Most important, the debtor countries often did not receive any tangible benefit - such as a house - from the loans.

The most important difference between these international loans and household mortgages is that the concept of bankruptcy underlies home mortgages, but not international loans. Bankruptcy is unpleasant for the borrower, but it ensures that the extraction of what is due has some limit: the financial pain can only reach a certain level before the courts intervene. No such protection exists for the people of developing countries who have unwittingly countersigned the notes incurred by their leaders, some of whom are now deposed, dead, or both.

How Was the Money Used?

How Did the Crisis Emerge?

This is the international equivalent of a bank lowering the minimum payment on a credit card. What happens to a consumer who charges the limit on a credit card, but makes only the minimum payment? That consumer becomes a perpetual debtor - never able to pay off the card. In the same way, the IMF rescheduling offers did not alleviate debt - they merely prolonged it. The "crisis" was averted in the sense that they continued to get paid, but the underlying problem actually deepened.

Moreover, the international lenders extracted a concession in return for granting these extensions. That price came in the form of structural adjustment programs, known by critics simply as SAPs, because of their tendency to sap the wealth of debtor countries. Mexico’s moratorium resulted from debt payments becoming too great relative to export earnings. To prevent this happening again - in Mexico and elsewhere - the IMF and World Bank urged "sustainable debt" ratios. This meant that export earnings had to be increased, government spending deficits reduced, and gross domestic product increased. From the financiers’ perspective, these adjustments would make the debtor economies healthier: but healthier solely in terms of the ability to sustain debt payments. The IMF and World Bank seem have been motivated by a particular and narrow view of morality that insists that if debts exist, they must be repaid, no matter what. That sense of responsibility resonates deeply in our culture, but some movement toward a broader view of morality seems to be occurring.

In the end, SAPs gave the creditor institutions unprecedented control over the economies and finances of the world’s poorest countries. They allowed the banks to distort those economies into machines whose primary purpose became debt service, rather than the well-being of local people.

Within a few years after Mexico’s moratorium, attention to the debt "crisis" waned, as the SAPs allowed countries to make the minimum payments to service their debts. Over time, however, concerned observers became alarmed at the human costs of the SAPs. By the end of the 1990s, the average person in a developing country would owe approximately $400 to the West. That is far less than the average credit card balance in the United States, perhaps the cost of a long weekend vacation. But for many people in the world, this debt is not payable - it exceeds the entire annual income of many of the world’s people.

The principle will never be paid off, but interest payments continue. Service on these debts now amounts to about $40 million dollars from Africa alone - EACH DAY. A major fundraiser such as Live Aid provides only enough to cover a day or two of interest payments. Developing countries now spend nine dollars on debt service for every one dollar they receive in foreign aid from all industrial countries combined.

The SAPs have privileged debt payment over all other expenditures in the debtor countries. The effect on health has been dramatic. In Uganda, for example, spending on health care is now just $3 per person, but debt service is $18. The SAPs have undone some programs that were making a difference in people’s lives. During the 1960s and 1970s, deaths among children were declining, but that trend has been reversed in the 1980s and 1990s in Zimbabwe, Zambia, Nicaragua, Chile, and Jamaica - all countries enduring structural adjustment. Diseases such as tuberculosis and yellow fever are making a comeback after years of improvement. The SAPs have had a similar impact in sectors other than health, as spending on education and government payrolls has declined.

Because of the emphasis on keeping export earnings high relative to debt service, the SAPs have coincided with broader efforts to liberalize world trade. In other words, the negotiations over the World Trade Organization and GATT - the General Agreement on Tariffs and Trade - have not been among equal players. The debtor countries at the table have been pushed into accepting free trade agreements because of their status as debtors and the need to satisfy SAP requirements.

The terms of trade may be "free," but the playing field is not level. Debtor countries are increasingly under pressure to export cash crops at the expense of domestic food crops. They are forced to accept low prices for these crops because so many debtor countries are in this position and because they are forced for the first time to compete head-to-head with highly subsidized and technically sophisticated farmers in the industrial countries. Maize is now exported from the U.S. to Mexico, where locally-grown maize had been a staple for thousands of years, since its discovery in the Valley of Puebla.

The net result of the SAPs has been a widening of the gap between rich and poor. A common measure of this gap is the difference in income between the richest 20 percent - or quintile - and the poorest 20 percent of a population. In 1960, the richest quintile had income levels 30 times those of the poorest quintile. After four decades of debt-funded "development," the gap is now sixty-fold. For fully one billion people, the past decade has seen not just slow economic growth, but negative economic progress. One billion people are poorer now than they were a decade ago. And wealth seems to matter. Life expectancy in the lender countries is 78 years; in the debtor countries, it is 51.

Based on the UU principles of justice and the worth and dignity of every person, what I have described so far should be enough to cause serious concern. But another UU principle is the interdependence of life and of people. It should not be surprising that a problem that affects so many will have a variety of impacts on us. Consider just a two of these: environmental damage and unemployment. When people hear that I have studied deforestation in the Amazon, they sometimes ask how "those" Brazilians could be so irresponsible as to cut down a resource that is clearly important to the whole world. I found, however, that much of the devastation I witnessed in the Amazon could be connected fairly directly to the SAPs, particularly those that required Brazil to shift so much of its land from the production of food to the production of cash crops such as oranges and soybeans.

In the short run, consumers in the rich countries have benefited from the SAPs - factories in debtor countries are turning out manufactured goods in huge quantities, competing with each other for export earnings. The result has been a dramatic drop in the cost of basic manufactures such as toys and household goods. Those prices that keep falling in WalMart are falling because of this flood of imports, and WalMart has even quit pretending otherwise. I say this benefits the consumer in the short run, because in the long run, these falling prices undermine employment in U.S. manufacturing and even in some sectors of U.S. agriculture.

What is Being Done Now

The word "jubilee" seems to have come from the Hebrew for "ram" - the ram’s horn that was to be blown to signal the arrival of the season of forgiveness. The word "jubilation" comes from an unrelated Latin word for "wild shout," but it has influenced our modern reading of the word "jubilee" as a festival.

The Biblical Jubilee rests on the concept that all wealth belongs to God. Some have interpreted this to mean that no individual should have wealth, but Jubilee ensures the opposite response: every individual should have at least some wealth. The prophets were very concerned about the concentration of property in a few hands. The Jubilee ensured that the concentration of wealth would be reset to some level of equity from time to time.

A Reform Torah commentary suggests that the Jubilee year might never have been practiced historically, because of some technical issues, but that it has strongly influenced many thinkers, including Henry George, the American social reformer of the nineteenth century. Because of Jubilee principles, the lands in Israel that were purchased by the Jewish National Fund have been made available only for settlement and cultivation, but not for profit. The Fund has ensured that much of the land of Israel is managed for sustainable and socially productive use.

Drawing on the Jubilee tradition, religious leaders and many others have brought pressure to bear on the IMF and World Bank, which have now proposed more significant debt relief than in the past. Through their Heavily Indebted Poor Country (HCIP) Initiative, they have proposed further rescheduling of debt and relaxation of some of those onerous requirements - such as export levels - that drive the SAPs. Critics argue charge that although the exact targets are a slightly more generous, the HIPC Initiative remains a rescheduling program rather than a debt forgiveness program, and it amounts to kinder, gentler variety of SAP.

The sad irony is that everyone involved knows that somewhere between half and two-thirds of the outstanding debt is unpayable, yet the creditor nations have so far insisted on keeping the debt on the books. In many cases, the debts have even been deeply discounted on the ledger books, but the full burden of the debt remains in place. That means that a debt may appear on the lender’s books as an asset worth $10 million, but it will still appear on the debtor’s books as a liability worth $100 million.

This might sound like a semantic difference, but it is important, because the interest payments are based on the full value of the debt, not on its open-market worth. Of the $371 billion owed the poorest countries, somewhere between $160 billion and $300 billion is unpayable, but the cost to forgive it would be far less, because most of that unpayable portion has already been shifted to U.S. taxpayers as banks wrote them off in the 1980s.

It is for this reason that the outright debt forgiveness proposed by President Clinton is financially feasible, even if it is politically difficult. He proposes forgiving all debts owed directly to the United States by countries in the Heavily Indebted group. Because of the deep discount, this would amount to only $6 billion. He would condition the debt forgiveness not on structural adjustments but simply on a redirection of debt service to alleviate poverty. Clinton does not go as far as some would like. His proposal focuses on the 36 countries the IMF has identified as most impoverished; the Jubilee 2000 Coalition has identified 52 countries that need this relief. But by taking this stand unilaterally, Clinton has thrown down the gauntlet for other six richest industrial nations - which own almost half of the debt individually -- and for the IMF and World Bank - which own most of the rest on behalf of these same countries.

I had planned to end on a pessimistic note, because Clinton needs Congressional approval to implement his plan, and he seems to have few friends in Congress these days. But in my research, I came across this intriguing article in the October 9 Washington Post:

What can we do?

I encourage you to contact your political representatives to find out where they stand on the issue of debt relief. During coffee hour, you may wish to join the 17 million people from over 100 countries who have signed the Jubilee 2000 petition so far. It calls on the lending nations to forgive the debts of the most impoverished and to take measures to prevent such unpayable debt from building again in the future.

Thank you.