23.04.2002 Feature Article

Developing Countries Shackled By Debts .....

Developing Countries Shackled By Debts .....
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....;Whose responsibility and why An alarming number of developing countries are suffering under a crushing burden of debt. The culprit in this economic crisis is the International Money Fund (IMF) and the crippling policies they have imposed on these impoverished countries. Shackled by debt, these developing countries, representing four billion people or 80% of the world's population, felt they had little choice but to agree to implement the mandated reforms in exchange for IMF, World Bank and creditor government’s assistance. The distressing result is that hundreds of millions of people have been thrown deeper into the chasm of poverty. By 1995, the 41 countries most heavily in debt were burdened by a total external debt of $215 billion - up from $55 billion in 1980. This serious problem will only worsen as debt continues to climb in these countries - particularly if the IMF does not change its counter productive tactics. African governments alone now have over $350 billion of foreign debt. These governments must allocate 40% of their revenues to service a debt that is, in essence, impossible to settle. To even attempt repayment, these governments have been forced to divert scarce resources away from critical social services such as health, education and environmental protection. According to Jubilee 2000, the tragic outcome is that 13 children die every minute in the 40 poorest nations as a result of this redirection of funds. Recognizing that debt was threatening the viability of the international economic system, the world's rich governments, the World Bank and the IMF finally agreed in late 1996 to launch the Heavily Indebted Poor Countries Initiative (HIPC). However, this initiative has been a dismal failure. Let’s examine the reasons: Inadequate funding. Combined contributions to HIPC from the IMF and other creditors are insufficient. To make matters worse, instead of using its own resources to provide immediate debt relief, the IMF has sought bilateral sources of funding for HIPC. By refusing to use its own funds, the IMF is abdicating its role in the debt crisis. The terms and conditions of HIPC are too stringent: The debt-to-export ratios that determine eligibility for HIPC are excessively high. As if that were not bad enough, they miss the point of the whole debt relief program, in that the criteria are based on export levels and national income rather than human development needs. These high ratios exclude many debt-ridden poor countries. Only a few countries have reached the stage where they qualify for debt relief. Even for those who are eligible, often the debt relief granted will be insufficient to deliver a country to economic health. The relief is tied to Structural Adjustment Programs (SAPs): The IMF's Poverty Reduction and Growth Facility (PRGF), formerly known as the Enhanced Structural Adjustment Facility, has been directly linked to the HIPC Initiative. To qualify for HIPC relief, a country must suffer through at least three years of PRGF structural adjustment, which is notoriously difficult to complete due to its unacceptable austerity. The IMF has linked any additional contributions it might make to HIPC to the financing of a permanent PRGF structural adjustment program. Some academics and NGOs charge that the IMF and its policies are themselves creating debt. A recent study by the Development GAP found that, on average, the longer a country was undergoing structural adjustment, the higher its debt was likely to be. Attempts to address the debt crisis in the context of the IMF’s adjustment program wound up being counter purpose. The premise of the policy was to enable multinational corporations to access cheaper labor markets and natural resources, thereby increasing exports. But trade liberalization also means increased imports. If the likely scenario occurs – that imports increase at a rate greater than that of exports, the end result will be increased debt. Combine this with the fact that by liberalizing their economies, countries open themselves up to more foreign investment; their debt increases even further. The fact is - structural adjustment loans, designed to relieve the debt of poor countries, have not only failed to do so but have exacerbated the problem. These programs were so badly designed that borrowing countries have not been able to generate enough income to repay the loans. Many poor countries are now in a predicament - they pay more money to the World Bank and IMF each year than they receive in loans. For example, the IMF extracted a net US $1 billion from Africa in 1997 and 1998 - more than they loaned to the entire continent in that same time frame. To make matters worse, just as total debt in developing countries rose to $2.5 trillion in 1998 – an increase of $150 billion - commodity prices plunged. This trend financially crippled the already impoverished countries that subscribed to the IMF's policy of export-led-growth. The prospect of these countries being able to repay foreign debts is now even bleaker. Over the course of two decades, the IMF's Structural Adjustment Programs have wrecked social, environmental and economic havoc in the developing countries they were designed to help. So much so that the IMF and the World Bank announced at their 1999 annual meeting that poverty reduction would henceforth be their overarching goal. This long overdue enlightenment provoked justifiable skepticism. These histories of the IMF illustrates that it has consistently held the need for financial and monetary 'stability' above any other concern. It was the Third World 'debt crisis' of the 1980s that paved the way for the IMF to hold virtual neo-colonial control over developing countries. In the 1970s, commercial banks made large loans to developing countries – loans that were largely wasted by dictators and military regimes. When oil prices shot up in 1979 and US interest rates rose sharply in the early 1980s, heavily indebted countries suddenly found themselves unable to make soaring interest payments. Continual refinancing was the only way to avoid default on the loans. It was at this point that the IMF stepped in. Through its notorious Structural Adjustment Programs (SAPs), the IMF imposed harsh economic reforms on over 100 countries in the developing and former communist worlds. Under these reforms, unless the IMF certified that an economy was being 'restructured' and 'maintained soundly', the worlds’ public and private lenders would refuse to extend loans to that country. The IMF decided that this meant adherence to the policy package of structural adjustment, which essentially integrates national economies into the global market. What did this policy entail? Measures were introduced to remove restrictions on trade and investment, promote exports, devalue national currencies, raise interest rates, privatize state companies and services, balance national budgets by slashing public expenditure, and deregulate labor markets. One of IMF’s requirements was that countries privatize public companies and services and dismiss the public sector workforce. The problem with this policy is that in many developing countries, the public sector was a major source of employment. As the IMF forced countries to downsize government agencies, the ranks of the unemployed grew faster than the private sector could absorb. At the same time, these countries were required to remove barriers to foreign investment and trade. This pitted the private local producers against the better-equipped and richer foreign suppliers - leading to the closure of businesses and further layoffs. Similarly, the IMF policy of devaluing national currencies in less developed countries made imports such as energy resources and machinery more expensive, squeezing import-reliant domestic industries which were forced to lay off even more workers. Likewise, the IMF policy of raising interest rates prevents small businesses from getting the necessary capital to expand or even to stay solvent. The predictable result is the closure of many businesses and yet more workers joining the ranks of the unemployed. In total, IMF's purely market-based approach has directly contributed to a 30% rate of unemployment and underemployment for at least one billion adults who comprise the global workforce. Take Senegal for example. This country is touted by the IMF as a success story because of increased growth rates. Yet unemployment increased from 25% in 1991 to 44% in 1996. In South Korea, a US $58 billion structural adjustment loan in 1998 contributed to an average of 8,000 people a day losing their jobs. Compounding this harsh reality is the lack of existing social safety nets that can support people out of work. In Haiti, the government had been pressured to freeze wages and rewrite the labor code to eliminate a statute mandating increases in the minimum wage when annual inflation exceeds 10%. By the end of 1997, Haiti's minimum wage was only $2.40 a day, worth just 19.5% of the minimum wage in 1971. In Zimbabwe, spending per head on healthcare has fallen by a third since 1990 when a structural adjustment program was introduced. UNICEF reported in 1993 that the quality of health services had declined by 30% since then. Twice as many women were dying in childbirth in Harare hospital compared to 1990; and fewer people were visiting clinics and hospitals because they could not afford user fees. These same policies have had an equally devastating effect on the provision of education in developing countries. Under the mandate to reduce the size of the state, the IMF has encouraged the privatization of schools. When this was undertaken in Haiti, an IMF report indicated extreme deterioration in quality of education and attendance rates. This educational crisis will hamper the country's human capacity for many years to come. For example, in Haiti, only 8% of teachers in private schools (now 89% of all schools) have professional qualifications, compared to 47% in public schools. Secondary school enrollment dropped from 28% to 15% between 1985 and 1997. Nevertheless, the report ends with recommendations for Haiti to pursue further privatization initiatives. In Ghana, the Living Standards Survey for 1992-93 found that 77% of street children in the capital city Accra dropped out of school because of an inability to pay fees. In Zambia, the government has been forced to slash its spending on education from $30 per primary school pupil in 1991 to $6 today. Enrollment consequently, has fallen from 96% in the mid 1980s to 77% today. Hunger and farmer bankruptcy is also a disastrous consequence of budget cutting under IMF programs. Higher interest rates often prevent small farmers from getting the capital needed to stay afloat, forcing them to sell their land, work as tenants, or move to the slums of large cities. These policies led to the removal of price supports for essential items, including food and farm inputs such as fertilizer, whose prices then rose dramatically. This problem is compounded by IMF-inspired currency devaluations, which make imports of food and inputs more expensive. In 1989, following a 200% increase in the price of bread in Caracas, riots ensued in which the army responded by firing upon crowds and killing 1,000 people. At the same time, in Western Europe and North America average supplies exceed 3,500 calories a day. In Sub-Saharan Africa and South Asia, the average supplies are less than two-thirds this amount. 35 developing countries, including nearly half the countries of Africa, have average supplies of less than 2,200 calories per day. According to recent estimates, over 800 million people, equivalent to 15% of the world's population, get less than 2000 calories per day and live a life of permanent or intermittent hunger in which they are chronically undernourished. Responding to the pressure of the international NGO movement to cancel the debts of poor countries, the IMF, World Bank, and creditor governments are beginning to revise the HIPC program by lowering eligibility thresholds and increasing financing for debt relief. But as Robert Weissman of Multinational Monitor points out, the additional $45 billion committed for poor country debt-relief at the G8 meeting in Cologne will result in only 16 countries making significantly smaller debt payments. “A large portion of the debt forgiveness would only apply to loans that have already been written off by lenders but were still on the books as obligations of the poor country”. Furthermore, total debt relief funds may be far less than promised if the US Congress pursues its threat to vote for only a fraction of the US's HIPC contribution. The system, if it works at all, will do so to protect creditors' interests and ensure a steady flow of repayments, rather than freeing up resources that could be dedicated to health, education, rural support, and environmental protection. As the IMF's own Website inadvertently admits, its main objective is not poverty reduction but rather the reduction of debt burdens to levels that will "comfortably enable countries to service their debt and broaden domestic support for policy reforms". If the IMF is counting on debt relief to make them and their policies more palatable, they will have a very long wait. Meanwhile, it will be the poor, once again, who will suffer. The developing world, in particular Africa, has been portrayed as a major financial burden on the International Community. This is ridiculous. Africa is disproportionately aid dependent, but it does not receive a disproportionate amount of aid. This misperception confuses the actual amount of money African countries receive, which is relatively small, particularly when the importance of that assistance is measured relative to the countries' gross national products (GNPs). Collectively, sub-Saharan Africa receives just over a quarter of all official multilateral and bilateral assistance in the world. It receives approximately 7% of U.S. foreign aid. Approximately 10% of official development assistance to sub-Saharan Africa consists of emergency funds to victims of natural and human-made catastrophes. On a per capita basis, the region receives slightly more on average than other low-income countries but only about one-fifteenth as much as Israel.
Because the economies of African countries are so small and so depressed, even modest amounts of funding represent a huge percentage of their GNPS and government budgets. 22 of the 30 most aid-dependent countries in the world are in Africa.
By anyone’s standards, Aid, trade and globalization is bypassing Africa, leaving African countries marginal to all global trends – economical, social and cultural. The basic facts are discouraging. With just over 10% of the world population, sub-Saharan Africa accounts for only about 1.5% of world trade. Africa receives less than .6% of foreign direct investment, while portfolio investment is essentially nonexistent, with the exception of South Africa. Sub-Saharan Africa has an average of only 15 telephone main lines per every 1,000 people, compared with a worldwide average of 133 per every 1,000 people. A reliable estimate of how many personal computers, fax machines, and mobile telephones owned by Africans is not even attainable. Information is poorly distributed, with access to newspapers, radio, and television the lowest in the world.
The population explosion ran well ahead of any capacity to develop an economic surplus for modernization. Widespread poverty limited private savings; as did the consumerism of elites who were stashing loot in foreign banks. Foreign corporations leveraged highly favorable tax deals but focused narrowly on raw material exports, refusing to reinvest their profits to diversify local economies.
African states also failed to raise funds for development. They were either unable to generate sufficient tax revenue to sustain existing government services, or corrupt civilian and military elites diverted funds to personal accounts. Such was the case in oil-rich Nigeria and Mobutu's mineral-rich Zaire. Without an adequate flow of tax revenue, governments turned to deficit financing that fueled inflation, often at rates exceeding 100%. This eroded civil service salaries - teachers, magistrates, nurses and doctors could not survive on their incomes. Soon most state employees succumbed to some degree of bribery. These trends were exacerbated by an acute shortage of foreign exchange as Africa's terms of trade deteriorated. Ghana for example saw the price of cocoa its major export collapse. In the wake of this continuing inability to earn sufficient foreign exchange, and in the wake of OPEC's oil price hikes in the 1970s, country after country borrowed heavily to sustain imports
Africa has suffered centuries of slavery, economic exploitation, colonialism and neo-colonialism. As a result, it has been left impoverished. The continent of my birth and my homeland needs a new partnership and I am determined to build it. Why should Africa, the cradle of humankind, remain the scapegoat of the world?
Certainly Africans must take responsibility for today's endemic corruption, human rights abuses and ubiquitous violence. Regardless, Africa still suffers from international policy neglect. During the cold war, both sides manipulated the continent, using proxy wars and client states. Once the Soviet Union disintegrated, both west and east virtually turned their backs on Africa. Yet common humanitarianism aside - its success remains vital to western interests, because a successful Africa would create a much safer, more environmentally sustainable world. It would reduce aid budgets and the UN's budget. It would open up new markets and remove havens for terrorism that will otherwise increasingly threaten the west.
We live in a world where some countries enjoy a material abundance beyond the wildest dreams of our forefathers. Such countries are rich because they are productive. The sources of that productivity are their growing markets, technological improvements, and investment in human resources The new growth economics literature has formalized some of these findings, but economic historians, development economists, and specialists in growth accounting have broadly understood them for some time. By any standard of measurement much of the world's population is still poor, with individuals subsisting on less than two dollars a day. The disparity between the well-being of the average person in the developed world, where per capita annual income may exceed $20,000, and that in low-income countries such as Haiti or most of sub-Saharan Africa, where it may be under $500 a year, is striking. Especially when one sees, up close, the reality of the living conditions associated with such poverty.
As I was writing this article a friend of mine asked, “You are always saying there are lots of resources in Africa, how do you account for the persistence of poverty in the midst of plenty?” If you understand the sources of plenty, why don't poor countries simply adopt policies that promote abundance instead of poverty”? The answer is straightforward. We don’t have all the answers just yet. We know what has to happen, but don’t have all the answers on what must be put in place to make this vision a reality.
We must create incentives for people to invest in more efficient technology, increase their skills, end organize efficient markets. Such incentives are embodied in institutions. Thus we must understand the nature of institutions and how they evolve. Institutions are the framework that humans create to structure human interaction. They are made up of formal rules-constitutions, laws, and regulations and informal constraints-conventions and norms of behavior, and the way both are enforced.
Well-specified property rights that reward productive and creative activity, a legal system that enforces these laws at low cost, and internal codes of conduct that are complementary to such formal rules are the essential underpinning to productive economies. But well-specified property rights and an effective legal system are the creation of the political structure. Unfortunately, we do not know how to put such a political structure in place. Informal norms of behavior that make for honesty, integrity, and hard work are the product of long-term human interaction; we do not know how to create them in the short run.
The result has been that efforts to improve the performance of poor countries have been something less than a rousing success. Sub-Saharan Africa remains a basket case, and donor efforts to transform the diverse parts of the former Soviet Union into productive economies have so far been a dismal failure. But us, the African people are growing in our understanding of the process of political-economic change. The sources of informal constraints such as norms of behavior are a major modern priority in the social sciences and down the road will accelerate the reduction of poverty.
In recent years, economic decline and the decay of administrative structures have further weakened the capacity of most African states to govern effectively. The authoritarianism of many African governments, coupled with their incapacity to project power, has provided a fertile breeding ground for armed opposition movements. This situation has given way to a paradox wherein governments can easily arrest political opposition leaders in their capital cities but have little capacity to curb even minor-armed insurgencies in rural areas. Civil wars further undermine economic conditions and weaken the governments' already tenuous hold on power. War becomes a means of livelihood for young men without prospects.
However the new generation of African Leaders is committed to Economic Reform. These leaders are determined to promote economic development and to reconstruct the state administrative capacity. But they remain extremely suspicious of popular participation and even more so of party politics. As my friend wisely said at the AGOA roundtable “Africans Must Take More Responsibility for solving their Own Problems”. I want to tell him that yes we must, and we have indeed begun the process. But in return I must ask - is the west willing to live with African solutions that they do not necessarily favor? My grandmother who does not speak English ones told me that “se koobi fi nsuom be kakyere wo se odenkyem ano so a, yen di no akyini”. (Pardon my twi witting) Translation-If the fish comes out of the water to tell you that the crocodile’s mouth is big, you don’t challenge it. We know our problems and we are the best people to write the necessary prescriptions, not the ‘west’ consultants who have been paid to recommend programs that promote selfish interests that bring hardships to the people.
Edited by Michelle Lane

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