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Towards a Solution of International Debt Problem

John Powers, who served as a full time Augustinian Volunteer at the United Nations, reports what he learned at a seminar for U.N. Non-Governmental Organizations (N.G.O.) on Third World Debt. His report suggests some areas where movement towards a solution may take place.

The Seminar

The problem of the third world debt is one that is beyond most of us who are not economists, yet I had the pleasure of having a view into the problem and some proposed solutions.

Powers

Not long ago I received an invitation for all interested Non-Governmental Organizations to attend a seminar offered by the Frederick Eber Foundation on the subject of the third world debt. The guest speakers for the seminar were Ann Pettifore, the coordinator of a radical think tank on the debt problem for Jubilee Plus (formerly known as Jubilee 2000), and Juergen Kaiser, an expert on debt relief for Jubilee Plus. We had two days together yet the problem is bigger than can be unpacked in two days. Still, the two speakers covered some of the most important aspects of the problem and its solution.

The Problem

Let me start at the obvious beginning. There are several developing countries that have crushing debt problems.

These debt problems have been caused by a myriad of things but for the purpose of this article I will just say that these countries have become caught in a cycle of borrowing. So, an initial loan is taken and it cannot be paid back and so more money is borrowed with a plan to repay the first loan. This is where the problem starts for Kaiser.

When countries cannot pay their debt there is a series of meetings to decide a plan. At these meetings there are two groups present: the creditors and the debtors.

The creditors exist as a group that has been dubbed the Paris Club. The Paris Club is basically the group of creditor nations that originally formed for strength in numbers against the debtor nations.

At these meetings the Paris Club meets amongst themselves as the debtor nation’s representatives wait in, literally, the other room. The Paris Club then presents a solution for repayment that usually includes more loans from the International Monetary Fund (I.M.F.) and/or World Bank.

The debtor either rejects or accepts the offer, although a rejection is unlikely since there is usually no negotiation that is possible. The debtor nations are, in Kaiser and Pettifore’s view, forced into taking on more loans and spending massive amounts of their national budget on repaying the previous loans with the loans they have just received.

Effects of the Problem

As an example Pettifore gave Pakistan. Pakistan spends 54 per cent of its national budget on debt repayment, 33 per cent on its military, and 18 per cent on development.

This has caused a situation in which 80 per cent of villages lack access to water and a staggering 49 million adults are illiterate. Certainly the government of Pakistan can not be excused for spending so much on their military while their people languish, yet the solution for the I.M.F. was a 2 billion dollar loan to pay off their debt, in effect paying debt with debt. As Kaiser put it, it is like fighting drunkenness with liquor.

Keys to Solving the Problem

Pakistan is only one example of what happens to most Heavily Indebted Poor Countries (H.I.P.C.). There are a few different solutions that Pettifore and Kaiser are pushing at the moment.

Kaiser argued that the Paris Club does not have any international basis or legitimacy. They are basically an informal group that finds strength together. He suggested that there might be the possibility of a debtors club but this would only be a temporary fix.

Both he and Pettifore agree that there must be some sort of framework and discipline in place in the international market for creditors and debtors alike. So far international lenders have operated with no risk because of the cycle that is perpetuated over and over.

They have also operated with no principle besides that of their own countries' accounts that demand settling. The lack of framework has come about, according to Pettifore, because of the lifting of the restraint on capital that came in 1979 with Margaret Thatcher and Ronald Reagan.

Money began to flow freely and banks and businesses could deal with whomever and how ever they pleased. This free flow of money is changing already because of President Bush’s push to seize dirty money used to fund terrorists. This situation, claims Pettifore, makes the time ripe for imposing some sort of structure to get a hold on the debt problem.

The most important solutions to the problem at large have to do with transparency and the U.S. law code on bankruptcy.

Transparency refers to the suggestion that the closed meetings of the Paris Club become open to many more than just themselves. Kaiser and Pettifore would like to see the debtors, creditors, the I.M.F., the media, the public, and members of civil society organizations present at the debt meetings. Pettifore says that this will only happen through movements of civil society and not through the United Nations or any other political body.

The next and most recent solution is trying to formulate some sort international version of chapter 9 or declaring bankruptcy. In this way the debtor countries would have the time to restructure their own economic plans without the pressure of their creditors being so heavy.

More information on the debt problem may be found at Jubilee U.S.A. Network (Opens new window).