Harvard economist calls on Japan to take the lead on debt cancellation, and attacks the “phoney calculations” of the IMF

Renowned economist Jeffrey Sachs today (29^th March) called on Japan to provide bold leadership and cancel all debts owed to Japan by HIPC countries at the G8 Summit in Okinawa.

He argued that Japan “is one of the greatest role models for what development can accomplish” because of its own successful and rapid economic development. Japan's generous aid budget ensures its place in delivering the right sort of assistance to the poorest people – and what they need first is urgent debt cancellation. “The moral burden of this debt is weighing on the top leaders of the world,” he said. Professor Sachs put this case to the Japanese Ministry of Finance and the Japan Bank for International Cooperation in Tokyo on Wednesday 29 March.

Speaking to a packed Jubilee 2000 press conference at the Tokyo Foreign Correspondents Club, Sachs argued that “at a time when the world is more divided than ever, the world's richest people should help the world's poorest people”. Sachs attacked the IMF as the “ultimate bureaucracy”, putting their own internal interests before the needs of people in the poorest countries whose very lives are at stake. He explained that he had been in Nigeria the week before and the IMF were putting pressure on the Nigerians to spend $1.6bn on debt service to the richest nations, while the new government could only afford $360 million for poverty reduction measures. “In other words the IMF expects the Nigerian government to divert five times more of their resources in debt service to rich nations, than to their own poor”.

Sachs joined Yoko Kitazawa and Ann Pettifor, leaders of the Jubilee 2000 campaigns in Japan and the UK respectively, at the breakfast briefing. Ms Kitazawa announced that the Japanese campaign would be meeting with Prime Minister Obuchi the following day. The Japanese Jubilee 2000 campaign would be asking the Japanese-chaired G8 Summit to go further than Cologne and agree 100% debt cancellation for the poorest countries. Ann Pettifor announced that she was in Japan with a team of organisers to prepare for a large public event at Okinawa. “Beijing was a long way for protesters to travel,” she said, “and so was Seattle. But thousands of people from around the world travelled to both Beijing and Seattle. They will come to Okinawa if the G7 do not act to cancel outright the debts of the poorest countries”. She argued that Japan had rightly challenged the IMF's mishandling of the Asian crisis, and had long questioned the “Washington consensus” of economic policies. This gave Japan authority to take a much stronger political lead in the international financial institutions - and to use it effectively on behalf of the poorest countries.

Sachs attacked the obstructions of the World Bank and IMF to debt cancellation. “After last year's commitments on debt cancellation by politicians, the bureaucrats at the IMF, World Bank and European treasuries have set out to restrict and obstruct the process”, Sachs said. “There is no bureaucracy more intent on slowing down debt cancellation than the IMF and World Bank,” he said. But he also refused to give “high rating to Treasuries for their inertia in progressing debt cancellation”. He argued that “the real burden of debt cancellation to the rich countries is very little” and attacked the IMF`s “phoney calculations” on the cost of debt cancellation. These had confused decision-makers, leading them to believe that debt cancellation was not affordable. “I fault the IMF,” he said, “for making phoney calculations”. “The IMF decided arbitrarily that a debt to export ratio of 150% is “sustainable”, no matter how many people are dying or how stressed the real situation in a country.” By using “phoney calculations” the IMF inflated the cost of debt cancellation, and then argued it was not possible because G7 treasuries could only make limited resources available. “Only a bureaucracy like the IMF would proceed in this way”.

Professor Sachs began by stressing to reporters that international debt is not a complicated issue – it does not require a PhD in economics to understand it. “Indeed a PhD might be an impediment. But even with a PhD its possible to get to the heart of this matter,” he said. The most challenging aspect of the debt issue is that very few people care about, or pay attention to the plight of the poorest in Mali in Tanzania or in Nigeria. “Jubilee 2000`s phenomenal success has been in drawing attention to the plight of these people; and persuading politicians in the US and Europe to care”.

Sachs expressed his outrage at the “morally untenable” situation in which the rich collect debt payments from the poor: “it's a shame on all of us in the rich world”, he said. But he also identified it as economically untenable – “if a country`s population is afflicted with the HIV virus, or has no access to clean water and sanitation there is no way of achieving stability and economic development”. Debt, he argued, is a fundamental barrier to development. Debt cancellation will not solve all the problems. “It is a necessary, but not sufficient condition”, he argued. “But just because it is not sufficient on its own does not mean it should not be done”.

Sachs identified the Okinawa Summit as an opportunity for bold leadership by Japan. “Japan is the greatest role model for sound economic development,” and so has a natural leadership role at the Okinawa Summit. “Debt cancellation has a low cost but extremely high moral and economic value”, and the Summit could be remembered as a great accomplishment at the turn of the new millennium. “If Prime Minister Obuchi were to pick up the phone today, and canvass other G7 leaders on the issue, he would find that they are willing to go the whole way”.

Japan requires the poorest countries to repay their debts, but offers relief in the form of grants matching debt payments. The Japanese finance ministry argues that this is preferable to outright cancellation. Commenting on the scheme Sachs called it “unnecessarily complicated”. Japan is a generous donor but if the way help is given isn't effective it should be changed. Direct debt cancellation would cost the same, as well as being better for the poorest countries - and would allow Japan to take more credit for its action.

Sachs talked about the reaction of the IMF and World Bank to the recent Meltzer Commission report, which calls for a dramatic shift in the roles of the international financial institutions. “Never have you seen more scared bureaucrats in Washington”, he said. The Commission argued that the IMF is overextended, trying to run more than 50 countries, acting as a surrogate government with Washington in control. Even with 100% success rate this would be questionable, but considering the low degree of success in the IMF's prescriptions it is intolerable. The IMF should pull back to a role of preserving financial stability and acting as a lender of last resort.

The World Bank is also over-extended, but in a different way. The World Bank gives 75% of its loans to richer countries, rather than focusing on the very poorest. Instead of behaving like a commercial bank, the World Bank should be an intelligent development agency, working to provide creative solutions to long-term development problems like climate change and the lack of vaccines for malaria and other diseases.

Professor Sachs was highly critical of the way the IMF had appointed its new managing director. Japan's nomination of Eisuke Sakakibara as a candidate had been welcome, but the process was sewn up by President Clinton and the European Union countries. “The IMF poses as a global institution representative of all its membership, but in fact it's a creditor institution. It needs to be truly global, but should not pretend to be until it really is. In previous centuries we had electoral systems where you could only vote if you had money – and that's how the IMF still works today”.

Asked about the possibility of corruption or arms buying detracting from the effectiveness of debt cancellation, Sachs said that his experience from working with many debtor governments is that if you challenge countries to say how they will spend the money, they will meet the challenge. But “if you take the view that you can't do this unless you can ensure 100% success, this isn't the scheme for you. In fact you probably shouldn't step out the front door.”