By Muhammad Mahmud
Lecturer, IBA, Karachi
May 29 - June 04, 2000
The Paris Club rescheduling have proved unsuitable to many debtors
There are many reasons why the South has no moral obligation to pay
back much, even most, of the debts to the North. The debt payable is a part that is
genuinely incurred and has assisted the South in their development. Most of the debt is
otherwise illegitimate. These arguments are not new. When the US took over Cuba 100 years
ago it cancelled Cuba's debt to Spain on the grounds that the burden was "imposed
upon the people of Cuba without their consent and by force of arms". Such debts
became known as odious debts not obligations for the nation but for the powers that
A number of past debt payment agreements contained what are known as
"Bisque clauses" which give the debtor government the right to unilaterally
suspend or defer payments under certain conditions. Indonesia, for example, was given the
option of deferring principal repayments during the first 8 years, Colombia in the early
1940s was able to limit its debt service payments to 3% of government revenue, and this is
the basis of Jubilee 2000's Tegucigalpa declaration.
The 1953 London agreement on Germany's debt included such clause
specifically saying that Germany should repay its debts only out of a trade surplus, and
could halt payments if there was an inadequate surplus. This was based on the realisation
that the German debt crisis in the 1930s was caused in part by Germany taking new loans to
repay old debts. It explicitly assumes that the creditors will buy German exports in
sufficient quantity to allow it to repay debts. This is particularly important in terms of
poor country debts, because limitations in market access and deteriorating terms of trade
mean that most debtor countries also run a trade deficit. Such a bisque clause in poor
country debt might be useful to open northern markets.
Later after the Second World War, Germany would only agree to spend 3.5
per cent of its export income on debt repayments. It argued that anything higher would be
"unsustainable". Today, the world's creditor nations, including Germany, are
demanding that the world's poorest nations spend up to 25 per cent of their export incomes
on debt repayment. The cost of this hypocrisy is devastating especially when the
illegitimate debts of the Third world have soared to trillion of dollars. Some type of
illegitimate debts and their reasons for illegitimacy are discussed below.
Odious debts: Odious debt refers to debt that is contracted by
despotic or oppressive regimes, not in the interest of the nation, but to strengthen the
power of the regime. This concept of "odious debts" has a long history, arising
initially from the United States capture of Cuba from Spain in 1898. Spain demanded that
the US pay Cuba's debts and the US refused, on the grounds that the debt had been
"imposed upon the people of Cuba without their consent and by force of arms."
Furthermore, the US argued that, in such circumstances, "the creditors, from the
beginning, took the chances of the investment." Thus US Supreme Court set up a legal
precedent for the odious debts in the famous case of US abrogation of debts owed by Cuba
to Spain after Cuba's liberation from Spain. The concept of "odious debt" was
upheld and formally entered international law in 1923. In recent times, the debts incurred
by the Rhodesian Government during the time of Ian Smith, by the Government of Mozambique
during Portugal's suppression of those struggling for colonial liberation, and by the
apartheid regime in South Africa are all odious debts.
Dubious debts: The third world's debts in different form
originate in shady conditions. Most of the debt is official i.e. it is owed by the
undeveloped countries' governments to the governments of industrialised countries or to
international financial institutions such as the IMF and the World Bank. In Asia and Latin
America, much of the debt is commercial, owed to either banks or private enterprises.
Honorific debts: The "honorific" debts are the
financial obligations incurred in fulfilment of UN resolution. Such debts are owed by the
international community to the lenders and not by the regime that submitted to UN
resolutions. Zambia incurred millions of dollars to follow the UN resolutions on Rhodesia,
Mozambique and South Africa for over two decades. In all fairness and justice, why should
the people of Zambia be responsible for meeting those expenses and pay it as
"debts". In the name of justice and equity, Zambia should claim compensation
from the UN for loss of life and damage to its economy in pursuing UN resolutions that
were designed to bring justice and peace to peoples who were denied their human rights by
colonial and racist regimes.
The Government of Zimbabwe spent about US$1 million a day for almost
ten years (about US$3.6 billion) in defending the territorial integrity of the country
against measures of destabilisation by the apartheid regime of South Africa in clear
violation of UN resolutions. A burden of such proportions has crippled the economy of the
country. Who is to blame and who is to pay for? Obviously the UN!
Debts incurred by fraud:
A close scrutiny of third world debts
would show that some of the debts incurred by governments, or by commercial interests
backed by government guarantees, are of fraudulent character because in domestic law
illegal contracts are void. Such "debts" are not payable because they are
incurred for fraudulent reasons, or at least for reasons of doubtful nature. For example,
a drug dealer cannot take to court his corespondent for failing to keep to terms of an
illegal contract. There are cases of debts incurred, for example, for building a road or a
power project which either did not materialise at all, or which fell far short of required
specifications. These "debts" are actively couched by the North with conniving
of borrowers in the third world resulting in deals aimed at defrauding the state or the
people of the country. Further research in this area could yield valuable information on
what could turn out to be massive amounts of "debt" that need to be remitted or
canceled, since both the lenders and the borrowers were party to provable fraud.
Debts due to experts' fees:
There are, then, "debts"
that take the form of fees that The West charges for sending their "experts" and
consultants in the third world whose major beneficiaries are Western governments,
corporations or businesses. This implies that there are fees charged for work done by
experts that are justified or legitimate. Such charges could only be justified on grounds
of public welfare and lack of availability of local consultants; and at fair price and
performance. However many projects in the third world do not meet these criteria. In many
projects, the beneficiaries tend to be not the local people, but companies based in the
home countries of the experts. This is particularly true of ex-colonies in Africa and Asia
where the British and the French have tend to maintain a hold through the use of
Debts due to accumulation of interest:
All interest payments are
not illegitimate, as it is part of the law of the market. However the debt rises with
every rise in the interest rate without any correspondent transfer of real assets, such
"debt" is hardly justified. US Treasury of the Bank of England raises the
interest unilaterally more for domestic than foreign reasons--affecting the debt owed by
countries of the third world adversely.
Debts due to foreign exchange volatility:
Then there are
"debts" that are related to changes in foreign exchange. Like in the case of
unilateral increases in interest rates, some "debts" are a product of the
volatility of the market for foreign exchange. The foreign exchange market generally works
in the long run against the interest of the Third world countries. Frequent devaluation of
their currencies often at the coercion of the International Financial Institutions (IFIs)
in part fulfilment of its lending conditionalities increase the debt burden without any
corresponding transfer of assets to them.
Last but not the least, there are debts incurred by the developing
countries because their development policies were misguided by IMF, World Bank and lending
countries could not fulfil development targets. Many IMF or World Bank designed strategies
of "development" failed, exacerbating the debt burden. Many senior officials of
the World Bank (such as the former vice-president of the World Bank, Joseph Stiglitz) now
admit their failures due to seriously and fundamentally flawed policies. According to
Joseph Stiglitz, the convergence of policy from the US Treasury, the International
Monetary Fund (IMF) and the World Bank (WB) the so-called Washington Consensus (WC)
can be misguided, misleading and neglect fundamental issues. Hence, the debts owed
by countries as a result of the failure of the Bretton Wood Institutions' strategies of
"development" are both illegitimate and unpayable.
UNDP's International South Group Network (ISGN) estimates that between
80 and 90 per cent of these debts belong to odious categories. Debts that are odious,
honorific, fraudulent, illegitimate, unilaterally hiked by the lenders through interest
rate and foreign exchange manipulations, fictitious (without corresponding transfer of
real assets to the South), and due to Washington Consensus (WC) should be laid at the
doorstep of the IMF and the WB as their illegitimate and unwanted baby.
Debts bondage: Whatever its odious, honorific, fraudulent, or
fictitious character, the debt bondage is real. It hurts and hurts hard. The right to
development, enshrined in several UN resolutions, is denied as net effect of debt because
the debt serves as a means of inflating capital resource needed by the Third world to
service the debt and to undertake development and social projects. The result: the South
is endemically capital-starved. The more capital it raises in the West, the bigger the
debt stock becomes, the more of it goes to pay interest on previous loans, and the less is
available for genuine development. It is a never-ending squeezing coil of serpent of debt
that becomes a means of imposing conditionalities on the borrowers.
Deceptive relief: The Paris Club rescheduling have proved
unsuitable to many debtors as theirs was a problem not of liquidity but of insolvency. The
Toronto terms provided aimed at reducing the value of the rescheduled debt service by up
to one third benefited only 20 countries by rescheduling about $6 billion. Since their
establishment, Naples terms have been granted to only 23 countries for total restructuring
of $9 billion. On commercial debt, the main instrument has been the "Brady Plan"
which was intended to contribute to the improvement of the debtors'
"creditworthiness". Only 15 countries were able to apply it eliminating 20% of
their commercial debt, equivalent to about $40 billion through choosing offers from
options menu which included buy-back of outstanding loans at discount. The latest
"gimmick" is the HIPC initiative meant for the heavily indebted poor countries.
The aim is not to eliminate debt but to bring it down to 'sustainable debt-servicing'
levels. In return, the countries have to prove a 'track record' of sustained application
of IMF-WB conditionalities for six years, and then continue to do so for the future. In
spite of these essentially public relations exercises, the debt burden has soared from
trillions of dollars. It defies all sense of proportion, justice and credulity.
From the discussion above the following recommendations on the debt
issue come to fore front:
The United Nations should take its own responsibilities seriously
and assume some of the debts incurred by debtor countries in pursuance of UN resolutions
The World Bank, the IMF and other IFIs should take responsibility
for debts incurred as a result of their misguiding developing countries on a false road to
development such as the Washington Consensus
HIPC should simply be scrapped. It is a cheap, and rather
cynical, trick to create the illusion that "something" is being done for
"the poor" of the world.
The negotiating fora in which debts are discussed or negotiated
should move away from the Paris consortium or any creditor-based institutions.
The debtor governments should form regional or multi-national
consortia to refuse to pay illegitimate debts. They should, however, pay the debts that
have been legitimately incurred, and that have resulted in actual transfer of net assets
from North to South.