Jubilee 2000: Research: JDRAD discussion paper: THE CASE FOR AN INTERNATIONAL INSOLVENCY COURT

THE CASE FOR AN INTERNATIONAL INSOLVENCY COURT (IIC)

A JDRAD Discussion Paper prepared for the Annual IMF and World Bank Meetings in Washington, September 26-29, 1999

September 7^th, 1999

THE CASE FOR AN INTERNATIONAL INSOLVENCY COURT (IIC)

SUMMARY

The establishment of an IIC to deal with countries in extreme cases of sovereign debt is urgently required and would make a significant contribution to tackling the scandal of growing world poverty. Existing mechanisms in operation over the past twenty years have failed to reduce the burden of debt, and the human suffering it causes, with the scope and urgency required. One of the main problems with these mechanisms is that they fail to ensure that the needs of the people most affected by the human cost of paying the debt are adequately represented. The most recent mechanism, HIPC, is also deficient in this regard.

JDRAD reiterates the call of the worldwide Jubilee 2000 movement for a 'fair and independent process' for debt cancellation. We believe that an independent structure is required where the concerns of both debtors and creditors will be voiced and considered. The principle that individual and corporate debtors should not be left to the mercy of creditors is widely accepted. We strongly believe this principle of justice should be extended to sovereign debts. In this context we advocate the establishment and ratification of an International Insolvency Court (IIC) by the international community.

We propose that the IIC be composed of a conciliation panel and an arbitration panel, both of whom would not be subject to political control nor influenced by any participant. The role of the conciliation panel would be to facilitate negotiated settlements and, in cases where parties failed to reach such a settlement, the arbitration panel would make a final ruling which would be legally binding.

The advantages of such a structure over existing mechanisms include :

It satisfies the ethical imperative for bottom line protection for debtors. This goes some way towards restoring the rights and dignity of nations and their peoples.

It provides a single forum for dealing with various kinds of foreign debt - official and commercial.

It is more democratic in that it allows representation by government and civil society of both debtor and creditor states. This is consistent with the stress the IFIs and G7 have been placing on democratic governance.

As a result there will be an improved communication and decision-making process.

It provides a forum for the development of poverty-oriented debt relief plans. The international support for these programmes may well lead to a renewed sense of international solidarity to collectively move forward towards the achievement of poverty reduction targets.

Enhanced ownership of debt relief plans by debtor nations and citizens will increase the likelihood of adherence to them.

The IIC tackles head on the injustice which has allowed the debt problem drift on for years. Once established the institution should deal with the problem with the urgency required.

The debt crisis has endured for over two decades. That this has been allowed to happen is an indictment of the international community. The speedy establishment of an IIC would, we believe, be an important step in achieving a lasting and just solution to the current crisis.

1. Introduction: An Opportune Time to Tackle Global Poverty

At the dawn of the new millennium, the international community is faced with enormous challenges. Foremost among these is the fact that nearly one and a half billion people live in absolute poverty. As many government leaders, international organisations and the Secretary General of the United Nations have all recognised, such a situation is unacceptable.

But the arrival of the new millennium is also a time of great opportunity. Ambitious targets have been agreed for global poverty reduction. There are encouraging signs that some important lessons have been learned about the limitations of present strategies to achieve these targets as well as a sharper awareness that development is not something that can be imposed from outside. The Asian financial crisis and its impacts worldwide have stimulated a great deal of reflection on the need for a new international financial architecture. An increasing recognition that the market alone cannot solve the problems of global poverty makes clearer the need for truly representative political leadership and the establishment of adequate mechanisms and institutions for effective global governance.

2. The Need to Develop Fair and Effective Institutions and Procedures

The challenge to develop institutions adequate to the task of tackling global poverty is particularly evident in relation to the problem of international debt. The informal mechanisms used over the past twenty years for dealing with this problem, whereby initiatives are largely determined by creditor states, (both themselves and within the International Financial Institutions, (IFIs)), have so far failed to reduce the burden of debt and the human suffering it causes, with the scope and urgency required.

One of the main problems with the present approach to tackling the debt problem of severely indebted poor countries is that mechanisms fail to ensure that the needs of the people most seriously affected by the human cost of paying the debt are adequately represented. This is likely to continue as long as debt policy and its implementation continue to be based on the interests of the creditor nations rather than on those of debtor nations. Whilst JDRAD acknowledges the positive features of the HIPC initiative, particularly the moves being made to review and improve it over the last few months, we consider this to be one of its core weaknesses ^[1]. We believe that the overall disappointing and frustrating experience of the last three years with regard to what the initiative has actually delivered, in terms of poverty reduction, highlights the fundamental need to reprioritise commitment towards people's needs, and to do so through the establishment of and official support for more democratic structures.

In this context we strongly advocate the establishment of an International Insolvency Court (IIC). This idea is not new. The call for a 'fair and independent process' to deal with the cancellation of debt has been a key part of the Jubilee 2000 movement around the world. It has been proposed by UNCTAD and several eminent economists. ^[2] JDRAD endorses this. At a time when the international community is taking stock of the effectiveness of the HIPC initiative we believe that an International Insolvency Procedure holds the real promise of providing a more effective longterm solution to the ongoing human tragedy caused by the debt burden.

An Established Principle

In almost all societies throughout the world the principle that individual and corporate debtors should not be left completely at the mercy of creditors is widely accepted. These countries have all developed bankruptcy legislation to ensure that this principle of justice can be effectively protected. All this legislation has in common the principle that debtors are entitled to exclude certain essential resources from any plan with regard to the debt they can pay. There are legal limits to what debtors can be expected to pay, because contracts which result in extreme suffering are no longer considered binding.

This type of legislation has so far been applied to cases of individual or corporate debt. In the context of international lending there is a strong case for extending such legislation to sovereign debt, particularly where the payment of sovereign debt can only be achieved at the expense of the survival and development prospects of millions of people in poor nations. An International Insolvency Court (IIC) would apply this principle in the field of international debt. The main purpose of establishing such a mechanism would be to provide countries with extremely severe debt problems the possibility of independent and thereby fair arbitration on the amount of debt they can afford to pay.

At the same time an IIC would enable creditors - governments, IFIs and commercial - to make their case for certain levels of debt repayment without undertaking the conflicting roles of judge and jury. It is clear that juggling these roles undermines their effective policy-making, a point clearly illustrated by their inability to date to design and obtain broad agreement on a strategy to end the debt crisis. As we will argue further on, establishing a just procedure is a vital part of establishing an effective one.

3. Outline of Model for an International Insolvency Court (IIC)

The Role

The IIC would have two principle roles. The first would be in the area of negotiation. The Court would facilitate negotiated settlements between countries and institutions. In instances where both sides fail to reach a settlement the Court would then employ its arbitration role. The arbitration of the IIC would be final and legally binding.

The Structure

The IIC would be made up a conciliation service and an arbitration service. The function of the conciliation panel (facilitators) would be to facilitate negotiated settlements between debtor and creditor nations. In instances where the two sides could not reach a settlement the arbitration panel would come into effect. Arbitrators would be nominated by both government and civil society within debtor and creditor countries. The final appointments of four successful candidates from these nominations, two from debtor countries and two from creditor states, would fall to the governments. The four arbitrators would then elect a fifth member as chair. The IIC could be overseen by the UN.

The Functioning

Some of the essential features of the IIC would be that:

It would be made up of a small number of independent facilitators and arbitrators representing both debtor and creditor states. Crucially, both the facilitators and arbitrators would not be subject to political control nor would they have to represent the views of any involved participant. They would be able to facilitate negotiations and make final judgements solely on the basis of the information presented to them.

The Court would be able to provide a single forum for dealing with the various kinds of foreign debt, bilateral, multilateral, and commercial. It would also be able to consider all the debt up to the point at which the debtor government appealed to the court.

The Court would only deal with countries in an extreme situation. It would not be responsible for the whole field of global debt, though a case could be made for having a court to address such issues. The narrower focus would enable the process to be established more speedily.

A debtor government would voluntarily enter the procedure by appealing to the Court to be admitted when it judged its debt problem had reached a certain critical level. For example, this could be when a highly indebted poor country was only able to pay its debts at the cost of significant increases in poverty as indicated by various human development indicators, such as deteriorating child mortality rates or declining rates of educational participation.

After a preliminary assessment the debtor country could be granted a stay on its repayments. This would provide the country with an immediate breathing space, and prevent a deterioration in its poverty levels. This stay would also be one reason why a country might take on the risks involved in declaring itself insolvent. There would be no deterioration in its position as its case was being heard.

An assessment of the debtor's situation would be carried out. This would involve debtor governments, creditors and civil society. The aim of this would be to reach an accurate assessment of how much debt is owed, and how much is payable, following a subtraction of the sum required to meet basic needs following an agreed framework. At this stage, the question of the legitimacy of debts, for example the question of 'odious debts', could also be considered by the court.

On the basis of this assessment, debtors and creditors would be facilitated in negotiating a debt relief plan. This would (i) include an assessment of how much a country could afford to pay, (ii) include elements of rescheduling, reduction and outright cancellation, and (iii) agreement on how the money made available would be targeted for poverty reduction. Ways in which this could be done have already been proposed by Oxfam and Jubilee 2000 among others. Concrete examples have been provided by the Uganda government's Poverty Eradication Fund, as well as being developed in Tanzania and South Africa. The process for the implementation of the plan should be as open and transparent as possible. Groups within civil society representing affected parties - unions, NGOs, church groups etc. - would have the right to make representation both at the negotiation and, if it came to it, arbitration stages.

Where the various sides could not reach agreement the court would ultimately have the authority to arbitrate between the various sides. Its decisions would be binding. Some appropriate penalties could be established for failures to implement the debt relief plan in order to allow the court to enforce its decisions. Debtor governments who failed to use their debt relief to support poverty eradication would lose the benefits of insolvency protection.

While the emphasis would be on negotiated settlements, the efficacy of the IIC relies in the end on its power to make and implement these decisions. This power is what gives each side the incentive to make the best case possible. Obviously, the wider the number of countries which ratify the Court, the greater its power and efficacy.

4. Advantages of an International Insolvency Court

JDRAD believes that the establishment and ratification of an IIC deserves to be supported on ethical grounds, on practical grounds, and on the grounds of its potential effectiveness:

On Ethical Grounds

The Precedence of Bottom Line Protection : The widespread existence of individual and corporate bankruptcy law, and the experience and thinking from which it originates, provides grounds for supporting efforts to develop a better legal framework and procedures to deal with the international debt of very poor countries. Such law demonstrates that most societies realise that there must be a bottom line protection for people who fall into debt. Such legislation aims to protect debtors from being required to sacrifice everything in order to pay their debts.

Involvement of the Payees in the Process : Individual and corporate bankruptcy legislation also crucially acknowledges that protection must be independent. It recognizes the inappropriateness and injustice of allowing creditors to determine how much debtors can afford to pay and takes into account the almost inevitable creditor tendency to overestimate what can be afforded. In terms of sovereign debt it is the poor who are paying the price of the debt burden - with their livelihoods, their health, their education and their development. As the payees and therefore indisputably those most directly impacted by the burden, they have a right to a voice in negotiations concerning debt relief. The IIC would provide a formal means to allow payees the kind of adequate participation which is their right, and which is increasingly acknowledged by all concerned to be an essential element of any real development.

Restoration of the Rights and Dignity of Peoples : Many countries are now effectively insolvent. In ways which are, in fact, quite similar to the cases of individual and corporate bankruptcy, many people in these countries have little prospect of their essential human rights and dignity being respected if a mechanism is not established to protect their essential needs.

A Lasting Solution : An IIC provides the possibility of tackling the injustice which been committed by letting the debt problem drift on over the years. This itself has been a significant factor in the increase in the size of the debt, with all of its negative impact, and in the fact that many countries find themselves in such a worse position now. If such a procedure were in place many of the costs of the failures to deal with the debt crisis over the past number of years could have been avoided.

On Practical Grounds

Opening the Door for Development of Indebted Nations and the International Community : There is widespread agreement that the burden of foreign debt is placing a major obstacle in the way of the development prospects of many poorer nations. No society gains when people are forced into absolute poverty. The same is true of the international community. Bankruptcy law is based on the clear realisation that those who go bankrupt today can become significant contributors as producers and consumers in the future if they are enabled to once again contribute to their economy and society. This provision clearly applies to today's indebted nations which can only become active participants in the global economy if they escape quickly from the present debt crisis.

The Urgency of the Need for a Response : The present procedures do not provide a mechanism for tackling this problem with either the required sense of urgency or fairness.

Whilst one might speculate that the task of designing and establishing an IIC would be enormously complicated, the international community has already succeeded in establishing institutions with arbitration procedures to deal with enormously complicated and sensitive issues such as international trade (eg. World Trade Organisation). Also, there is in US Chapter 9 bankruptcy legislation a very useful and flexible model illustrating how bankruptcy legislation could be applied to sovereign debt ^[3].

Promoting Democracy : The proposal to establish an IIC is also consistent with the stress the G7 have been placing on the need for good governance and the rule of law as part of a plan to encourage democratic government responsive to the needs of their people as a condition of international support. The call to develop such democratic forms of government will carry much more moral authority and persuasivenss if the value of democracy is not seen to end at each nations borders. Setting up procedures which allow for the proper representation of debtor governments and participation of civil society at the international level would be a vital support to the project of supporting real democracy within nations.

On Grounds of Effectiveness

Improved Communication and Decision-Making Process : The existence of an IIC would bring a welcome new sense of purpose to debt negotiations as it would provide an institutional mechanism for working towards agreed solutions which all would be committed to implementing. Ad hoc mechanisms simply do not work.

Moreover, all those involved would know that they would have to present their case to an independent and impartial IIC with the power to enforce a debt relief strategy. Such a process would constitute a significant incentive for creditors, debtor governments and civil society to present more realistic analyses of debt owed, of debt servicing capacities and plans showing how debt relief would be used and make an impact on poverty reduction.

A Stakeholder Approach : Within a fairer system for settling the debt problem it would also be possible to hope for a better overall response from debtor governments. There would be an increased likelihood of debtors following through on a plan for economic reform and development if they had adequate ownership of it - as governments and civil societies - from its design stage.

Monitoring Future Lending : Debtors and creditors would also be encouraged to commit themselves to procedures that would allow for more democratic monitoring through parliament of future lending and borrowing to ensure that the debt crisis would not recur.

A Speedier Process : Creditors and debtors both lose out through years of protracted and futile negotiations which will go on as long as the debtors are not offered a realistic exit. Much time and expense is wasted as civil servants deal with the lengthy bureaucracy. Once the IIC was established and running it should be able to establish practices which would deliver quicker solutions.

Renewed International Solidarity to Tackle Global Poverty

Within the debt relief plans debtor governments would commit themselves to using the benefits of debt relief to contribute to poverty reduction. The involvement of all actors, governments, parliamentarians, and civil society, in this process would increase the likelihood of adherence to these plans. This involvement could well lead to a renewed international sense of solidarity to collectively move forward towards the achievement of agreed poverty reduction targets.

Conclusion: imagining a better future

One of the greatest challenges facing the international community for the new millennium is to show that it has the imagination and collective will to tackle the scandal of global poverty. One key element of this task is putting an end to the paralyzing effect which the burden of foreign debt is placing on the development prospects of many countries.

There will be no real development unless there is a greater willingness to see international relations regulated by principles of justice. International support for the establishment and implementation of an International Insolvency Court to put into practice these principles of justice would offer a genuine fresh start to the hundreds of millions of impoverished peoples suffering the inadequacies of current strategies.

Footnotes

Our thanks are due to many people for their helpful comments on earlier drafts of this paper. This is not to imply that they are in agreement with any or all of the views expressed. ^[1] See JDRAD's submission to the IMF/WB HIPC Review, June 1999 for a more detailed discussion on this point.

^[2] A very thorough case for the establishment of such an independent arbitration procedure has been outlined by Professor Kunibert Raffer of the University of Vienna in several articles most recently in Raffer, 'The Necessity of International Chapter 9 Insolvency Procedures', in Eurodad, Taking Stock of Debt: Creditor Policy in the Face of Debtor Poverty (1998)

^[3] ibidJESUITS FOR DEBT RELIEF AND DEVELOPMENTJDRAD-Ireland Office: 26 Upper Sherrard Street, Dublin 1, Ireland

Tel: 00 353 1 855-6814 Fax: 00 353 1 8304377. Email: Coordinator: Niamh Gaynor