"The light of publicity, the fire of debate, the sense of sharing, the structures of partnership; all these must be guaranteed in the arrangements for debt relief. No `behind doors' decisions, no exclusion of key partners.

“This means that the conditions for meeting the needs of the poor should be set by local people and institutions within the debtor country, not only by outsider creditors imposing their preferred prescriptions.”(1)
Jubilee 2000 campaign, Zambia

The unhealthy consequences of addiction

International creditors and sovereign borrowers are hooked on reckless lending and borrowing habits – as a way of making quick returns on the one hand, and financing development on the other. These habits have unhealthy long-term consequences:

• First, careless, unregulated foreign borrowing by unaccountable elites is the root cause of the economic cancer of unpayable debts; debts which gradually, but fatally, undermine the economic health of the poorest nations.
• Second, debt leads to dependency on Washington-based creditors, which in turn undermines autonomous decision-making in debtor nations, and erodes democratic, accountable institutions.
• Third, the secretive and furtive nature of negotiations between those addicted and their “dealers”, fosters corruption.
• Fourth, those who peddle loans, are unlikely to encourage debtors to kick the habit. On the contrary, their motivation is to increase the addiction.
• Fifth, there is now a widespread consensus that economic remedies prescribed by the “dealers”, (represented by the “Washington Consensus”) do not offer any lasting cure. On the contrary, we argue, they aggravate the symptoms.

Still in the dark ages

Creditors from the richest countries of the world dominate international lending, re-scheduling and debt cancellation. They play the roles of interested party, witness, plaintiff, judge and jury, in the court that is the international financial system. This position of creditors violates all the most basic principles of the rule of law. (2)

“Life for the medieval debtor was likely to be nasty, brutish and short. In 1285 an Act was passed by which (debtors) were to be imprisoned in irons, and if they were unable to make restitution, they were left to rot, if necessary for the rest of their lives.”
R.M. Goode, Commercial Law, Chapter 34,
Principles of Insolvency law, 1982.

The international financial system of today resembles the dark ages of the medieval era, when creditors had the power to imprison and destroy the lives of debtors. These days we do not have debtors' prisons for people. We have them for countries instead. The IMF, which effectively acts as an agent for all international creditors, holds the keys to these debtors' prisons, both public and private. Instead of imprisoning debtors in irons, creditors today dictate economic policy to the poorest countries, impose economic austerity programmes, undermine fledgling democracies and withhold aid.

As a result, and in the absence of an independent, fair and transparent legal framework, the unsustainable debt burdens of the poorest countries have become unbearable millstones. Negotiations have dragged on endlessly, with countless reschedulings, and no orderly workout of cancerous debts.

International creditors are not only exempt from the rule of law; they have also enjoyed protection from the rule and discipline of market forces. When debtors have defaulted, the debts have either been nationalised, ie transferred to taxpayers in debtor nations; or the IMF, using taxpayer funds, has bailed out creditors in Wall Street and elsewhere.

As Kunibert Raffer has argued, “this is a system absurdly at odds with the Western market system. At a time when riskless decision-making by bureaucrats is abolished in the East, there is no reason why it should be preserved in the West. It is the most basic precondition for the functioning of the market mechanism that economic decisions must be accompanied by (co)responsibility: whoever takes economic decisions must also carry financial risks.”2

In this report we examine the popular myth that the debt crisis was due to the incompetence and corruption of addicted poor country governments. That the rich loan pushers are prudent and wise, and the poor addicts corrupt and stupid.

In addition we argue that debt crises will recur unless the endless circle of international lending and borrowing is subject to the discipline of the law and the market. There will never be an orderly and full workout of poor country debts as long as creditors remain in the driving seat, addicted to their habit of rescheduling and new lending.

This report outlines an alternative prescription for the long-term economic health of the most indebted nations. We have been tasked by campaigners in the South to demand greater justice in relations between international creditors and poor country debtors. Jubilee 2000 campaigners in Africa, Latin America and Asia have laid particular emphasis on the need for tough conditions for debt cancellation. They want to ensure that:

• any funds released are not corruptly diverted;
• debt crises are prevented in the future; and
• that the debt cancellation process strengthens local democratic institutions, advances economic literacy, and holds elites accountable to their citizens.

Similarly Jubilee 2000 campaigns in the North are calling on politicians to account for lending policies to developing nations – to ensure that lending is not used to foster corruption, and to promote sales of military equipment and other luxury goods to dictators.

The current process for debt cancellation, the Heavily Indebted Poor Country (HIPC) Initiative, is laden with conditions but these are all imposed from Washington, and as history shows, top-down conditions do not prevent corrupt diversion of funds. In addition, as countries receive some debt cancellation under the HIPC initiative, there is nothing to prevent them borrowing recklessly again, so creating the next debt crisis.

Jubilee 2000 argues that while creditors remain in control of the debt cancellation process, foreign policy agendas will influence decisions, mistakes will continue to be made and the cancer of debt will continue to erode the economies of the poorest nations.

Kicking the Habit

What are urgently required are new partnerships and a new framework for regulating relationships between sovereign debtors and their public and private creditors. There must be an independent framework for arbitration when debts become unpayable. We argue that modest alterations should be made to the international financial architecture, to put such an arbitration process in place, encourage public scrutiny, participation and accountability, and prevent high levels of debt and default recurring. This alternative is not without difficulties; but it will have the following advantages:

• to restore some justice to a system in which international creditors play the role of plaintiff, judge and jury, in their own court of international finance.
• to introduce discipline into sovereign lending and borrowing arrangements – and thereby prevent future crises.
• to counter corruption in borrowing and lending, by introducing accountability through a free press and greater transparency to civil society in both the creditor and debtor nations.
• to strengthen local democratic institutions, by empowering them to challenge and influence elites.
• to encourage greater understanding and economic literacy among citizens, and thereby empower them to question, challenge and hold their elites to account.

This requires a total change in creditor and debtor thinking – toward justice, fairness, transparency and empowerment; and away from secrecy, long-distance monitoring, conditions and controls, new loans, new borrowings – and ever higher levels of debt.

There are no easy answers. There is no textbook. And every debtor country will be different. But creditor control over lending and conditionality has failed the poorest people in the world and is now blocking democratic and transparent alternatives.

The poorest people in the poorest countries are the victims of corruption; they clamour for more power over their reckless elites. They demand a voice in how money from debt relief is used. We show that from Ireland to Uganda to Peru methods are being developed to allow genuine local control or monitoring of development funds.

In conclusion, it is time for a new start. The lenders who backed Mobutu, Suharto and Latin American dictators cannot claim any moral authority to demand debt repayment and tell the poor of those countries how to use their money. Their paternalism rings hollow.

We must move forward. Real democratisation, genuine good governance and tighter controls on corruption and waste can be promoted if we shift control of the lending and debt cancellation process to stakeholders represented on a Debt Review Body, with representatives of parliament, civil society, the debtor government and its creditors. Democracy is messy, and takes time to develop. But paternalism and Washington central planning have failed and must be replaced by a real shift in power to indebted nations and democracy.

Only then will creditors and debtors be able to `kick the habit' and bring to a close the endless cycle of lending and borrowing, that leads to corruption, waste and future crises. Only then can debt relief and new loans meet the needs of the poor.

Endnotes

1 Peter Henriot, Debt relief and HIV/AIDS programmes: possibilities and hopes, Lusaka, 16.9.99.

2 Kunibert Raffer, What's good for the United States Must be good for the World. Advocating an international Chapter 9 Insolvency. Kreisky Forum Symposium, Vienna, September 1992.

• Full text of the report.