Jubilee 2000: News: Kicking the Habit Full Report

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Poor country elites have often borrowed unwisely and have corruptly diverted funds. But western creditors and banks have also made mistakes, and have pushed corrupt and ill-judged loans, at a very high cost to the poorest countries.

This may seem like history, but it is directly relevant to the present because the same institutions continue to control the lending process. They are like cigarette manufacturers who keep admitting that cigarettes used to cause cancer, but newer “mild” smokes or more sophisticated filters will resolve the problem. Just as the cigarette companies sold “cancer sticks” knowing they would kill, and drug dealers push heroin knowing it is destructive, so the big lenders gave loans knowing they would be misused. And the victims – the smokers with cancer, the trapped addicts, and the corrupt borrowers – often bear most of the blame instead of the pushers of drugs and money. In this chapter, we ask why the loan pushers should be trusted now, any more than we would trust cigarette companies who claim to have found a safe smoke.

Perhaps the highest costs relate to the debts incurred when the poor fought the Cold War on behalf of the rich. President Bill Clinton and Secretary of State Madeleine Albright recently forthrightly acknowledged the United States' Cold War “complicity with tyrants and warlords across Africa”.(Endnote 3) Now that the tyrants are gone, the men, women and children of Africa carry the heavy burden of debts. The debts include those incurred by Liberian Samuel Doe for US $1.3 billion; Somalia's Mohammad Siad Barre for $2.4 billion and Sudan's Gafaar Nimeiri for an astonishing $16.7 billion. (4)

Liberia's current annual budget is just over $60 million. This is expected to pay for law enforcement, a judicial system, a civil service, infrastructure as well as education, vaccination programmes, clean water and sanitation. But this budget is only a fifth of the $333 million owed to the US. (5)

The largest single debt of the Philippines is the Bataan nuclear power station. Completed in the mid-1980s at a cost of $2.3 billion, it was built on an earthquake fault at the foot of a volcano, and has never been used. “Filipinos have not benefited from a single watt of electricity,” said the national treasurer, Leonor Briones. “It's a terrible burden which never fails to elicit feelings of rage, anger and frustration in me. We're talking of money that should have gone to basic services like schools and hospitals.” The nuclear power station was financed by the US export credit agency Ex-Im Bank, Union Bank of Switzerland, Bank of Tokyo and Mitsui & Co, all of whom are still being repaid. To this day the Philippines pays $170,000 per day for the power station. The debt will not be repaid until 2018. (6)

The nuclear power station was built by US multinational Westinghouse, in spite of a much lower bid from General Electric. The then president Ferdinand Marcos over-ruled the choice of General Electric; Westinghouse admitted it paid a commission to a Marcos associate, and the New York Times estimates Marcos was given $80 million by Westinghouse. (7) The International Atomic Energy Authority noted that attempting to build a nuclear power station in an area of such high seismic activity was “unique in the atomic industry”.

We can all be grateful that the plant was never put into operation and never became an Asian Chernobyl. But who was responsible for the $2.3 billion white elephant? Who is responsible for the loans which Ferdinand and Imelda Marcos used to buy Mercedes and build palaces and white elephants?

Transparency International notes that although in many countries bribes are no longer tax deductible, there are no restrictions in Germany and most other countries to prevent the government export credit guarantee system providing insurance for contracts obtained through bribery. “Every year, hundreds of millions of DM are spent covering such risks. Companies exporting to countries where corruption is most prevalent make particularly frequent use of export credit insurance.” (8)

Marcos was not alone. In the 1970s and 1980s, banks were giving loans to countries and then helping their leaders steal the money. For example, in the late 1970s, when Britain was supporting the Argentine military dictatorship (before it attacked the Falklands/Malvinas), British banks made multi-million dollar loans to Argentine parastatal companies – knowing that the money never went to Argentina, but remained in accounts in London. In other words, they knew the loans were fraudulent. (9)

In some cases, banks lent money to poor country governments and literally sent men with suitcases to bring back dollars from the leaders of those countries. More than a decade ago, Karin Lissakers quoted a New York banker who said “there is no debate in [my] bank over the dual role of lending money to a country and accommodating flight capital.” Lissakers recommended that banks stop sending “guys with suitcases” to poor countries, and instead press some of their private clients to use some of the flight capital to pay their country's debts. (10)

Karin Lissakers is now the US Executive Director at the IMF, and she has not only failed to stop flight capital, but the IMF of which she is a director has been lending money to Russia that has gone into Swiss banks. The US Central Intelligence Agency reported as long ago as 1995 that money from International Monetary Fund loans was going to Swiss banks, but nothing was done except to approve the second largest loan in IMF history to Russia; at least $20 billion has gone astray. (11)

Nigeria estimates that former military governments have stolen billions of dollars, and deposited these in British, US and Swiss banks. Nigeria's foreign debt is now $34 billion.

The US-based Citibank has a special “private banking division” which was set up to deal with just this sort of money. On 8 November 1999, it gave the US Senate Governmental Affairs Committee details of accounts of four wealthy developing country leaders that had been frozen by Swiss courts due to illegal payments: Raul Salinias, brother of a former president of Mexico, $80-$100 million; former Pakistan Prime Minister Benazir Bhutto, $40 million; Gabon President Omar Bongo, $130 million; and the sons of Nigeria's former dictator Sani Abacha, $110 million.

The problem is there is no real impetus for change because the people who are paying the price for this reckless lending and borrowing are the ordinary, poor citizens who are often unable to raise their voices in protest. The lending institutions can keep rescheduling the loan and adding interest; the contractor gets paid, the borrowing government gets its cut and will probably be long gone when the people find out what has really been going on. The system works very well for elites in both countries, and unless a new open, transparent system is established, it is likely to continue.

The World Bank's own evaluation of project performance in the 1990s showed that in the poorest countries, and in South Asia and Africa, between 60% and 70% of projects failed. (12)

In Nigeria, at least 61 development projects financed by more than $5 billion in foreign loans have either failed or never opened, according to a government commission. (13)

Because exporters and poor countries are keen to gain the lucrative contracts, bribery is unnecessary, and inappropriate projects are pushed through by exporters. Tanzania owes the World Bank more than $575 million for 26 failed agricultural projects, according to the Tanzania Coalition on Debt and Development. The World Bank's own Operations and Evaluations Department admitted in 1998 that it failed to involve Tanzanians in appraising the projects before they went ahead, and that “pilot projects went to the Board as proven undertakings; early warnings of failings by World Bank technical staff and co-financiers were ignored; and pricing issues were neglected”.

In Bolivia a lead and platinum refinery was built using untested technology and requiring more ore than could be produced by local mines. The project doubled in cost to $250 million and was built with $100 million in Belgian and German export credits plus German bank loans. The project has never functioned but the loan is still being repaid.

A person sent to evaluate a $5 million soft loan to Peru to buy 575 Landrovers contacted Jubilee 2000 to say that the project was promoted by the British embassy, and the vehicles were supposed to improve health services, but the evaluator concluded they would receive little use and were not “relevant to basic health needs”. In fact, he concluded, “the main object was to ensure that British Leyland could set up a complete assembly line, thereby making more jobs for British workers.” (14 )

Peru also is still paying a $70 million loan for boats worth $18 million and which never worked properly, and for aircraft engines which were never delivered. (15)

The list of loans for bad or foolish or unwise projects seems endless, and often results from “loan pushing” – exporters and export credit agencies that want contracts and banks (including the World Bank) that want to encourage borrowing. But who is responsible when these projects fail?

The conservative and cold war politics of the 1970s and 1980s was often directly linked to corruption. We will look at three cases: big dams, Indonesia and Zaire.

In the mid-1980s as the anti-apartheid sanctions campaign was gaining global force, conservative forces were looking for ways to support apartheid South Africa. The European Community (now European Union) and World Bank agreed to back a $2 billion dam in Lesotho (totally surrounded by South Africa) to supply water to South Africa. (16) In 1999, there was a court case in which 12 of the construction companies building the dam were charged with bribing the head of the project. Six of the companies – from Sweden, Switzerland, France, Italy, and Germany – were linked to previous dam corruption scandals, yet they still won contracts for the World Bank-funded project, according to the International Rivers Network.

Two of the Lesotho firms were involved in a Kenyan dam in the 1980s, which cost twice what it should but was approved because of bribes to the president and energy minister. (17)

Three firms were involved in the $3 billion Yacyreta dam on the Paraguay-Argentina border, which had $460 million in World Bank loans. In 1990 Argentine president Carlos Menem called the dam a “monument to corruption”. But it was built in the era of northern support for the military dictatorships of Latin America, and the World Bank turned a blind eye. Some of the money went into foreign bank accounts, while some went to the Argentine military. Some World Bank staff call Yacyreta “the dam that financed the Falklands war”. (18)

In 1965 General Suharto overthrew Indonesian President Sukarno and massacred up to 750,000 alleged communists. The next year western creditors rewarded Suharto with an independent assessment of his country's debts. The arbitration was undertaken by Herman Josef Abs, a prominent German banker, who had in 1953 negotiated massive debt cancellation for his country, Germany.

Abs recommended massive debt cancellation for Indonesia. The country was granted a four year debt service moratorium and in 1970 Suharto's creditors agreed to a major reduction in debt service payments. Suharto's appalling human rights record continued, including the occupation of East Timor in 1975. He was rewarded with $120 billion in loans – making Indonesia the third most indebted developing country, after Brazil and Mexico.

One of Suharto's first projects was to move millions of Javanese people to populate the other islands. Many of the militia-members who fought against East Timor independence were migrants sent there as part of this programme. This “transmigration” programme was funded, in part, by nearly $1 billion in World Bank loans – despite complaints about the human rights and environmental problems caused. (19) Many of the migrants were put on marginal land and could not survive, so the World Bank had to put in more money to try to support them. (20)

Corruption was well known from the start, but acceptable because the West was anxious to support Suharto. Corruption inflated the cost of World Bank projects by 10-15% in 1977, but this had risen to 30% by the early 1990s. (21) The Bank Bali case in 1999 exposed further corruption in World Bank projects, and also exposed World Bank efforts to conceal the fact that they knew about the corruption.

“Donor institutions like the World Bank have turned a blind eye to the corruption because they were afraid to offend Indonesia,” said Binny Buchori, executive secretary of the International NGO Forum on Indonesian Development. She said Suharto and his cronies had embezzled 30% of the country's debt. Suharto's family is listed in Forbes magazine's dozen richest families in the world, with an estimated $30 billion in stolen wealth. (22)

As the crisis grew in Indonesia, the IMF stepped in with $43 billion, the largest bail-out in Asia, which continued on political grounds until, as Alex Brummer commented in The Guardian (22.9.99), “the sensibilities of the western democracies were offended by the brutality of the militias in East Timor.” And as the economic crisis increased, Britain was forced to reschedule £130 million ($200 million) in export credits for 40 Hawk military aircraft which had been used to attack independence fighters in East Timor. (23)

The circle that brings together political support, bad lending, and corruption is nowhere clearer than in Indonesia.

When the former Zaire's ruler, Mobutu Sese Seko, died in 1998, he was of the world's richest men, with a personal fortune estimated at $4-$10 billion and palaces in Europe and Zaire. Mobutu's government was the one for which the word “kleptocracy” was first coined. The Financial Times (24) called it a story “about personal enrichment and the plundering of the nation, and the international complicity that made it possible”.

The West backed Mobutu as a loyal ally in the Cold War. As early as 1974 there were warnings of loans being stolen. (25) Karin Lissakers reported that in 1978 the IMF appointed its own man, Erwin Blumenthal, to a key post in the central bank. He resigned in less than a year saying that “the corruptive system in Zaire with all its wicked and ugly manifestations” was so serious that there is “no (repeat: no) prospect for Zaire's creditors to get their money back”. (26) After Blumenthal's report to the IMF, it tripled its lending to Zaire. (27)

In 1984, Wall Street Journal reporter Jonathan Kwitny concluded that “almost none [of Zaire's foreign debt] arises from anything that much benefited the Zairian people who are being slowly starved to pay for it.” (28) In 1987, when Mobutu made his territory available for US covert action against neighbouring Angola, the US pushed through yet another IMF loan to Zaire – this time over the objections of some IMF officials. (29)

Nor was it just governments. The US Ex-Im Bank helped to fund a useless $1 billion electricity transmission line. Mobutu is said to have pocketed a 7% commission, (30) and Ex-Im Bank was left with the unpaid debt.

When Erwin Blumenthal wrote his report, Zaire's debt was $5 billion. When Mobutu was overthrown and died in 1998, the debt was over $13 billion. Today, Mobutu's legacy is a country mired in civil war, as economic degradation leads to social and political disintegration.

Rich country politicians and bank officials argue that because dictators like Marcos, Suharto, and Mobutu were kept in power with western arms and were given loans to squander on ill-judged and repressive schemes, that the people of those countries – who often fought valiantly against those dictators – cannot be trusted not to waste the money released by debt cancellation. This may seem confusing to people not familiar with the logic of the IMF and World Bank. In summary:

• Creditors colluded with, and gave loans to dictators they knew were corrupt and who would squander the money.

• Creditors gave military and political aid to those dictators – knowing arms might be used to suppress popular opposition

• Therefore, successor democratic governments and their supporters, who may have been victims of corruption and oppression, cannot be trusted.

To many people in the South, this seems irrational and illogical – the logic of blaming the victim. It is the logic of power rather than of integrity, and is used to benefit the rich rather than the poor in developing countries.

A similar logic argues that if the World Bank and government export credit agencies promoted inappropriate and unprofitable projects, then southern governments proved their inability to control money because they accepted the ill-advised projects in the first place. Thus, if money is released by debt cancellation, it must be controlled by agencies which promoted those failed projects.

This is the logic that says if people were stupid enough to believe cigarette advertising, then they are too stupid to take care of themselves and the “reformed” cigarette companies should be put in charge of their health care.

The same institutions who made the corrupt loans to Zaire and lent for projects in Africa that failed repeatedly are still in charge, but their role has been enhanced because of their success in pushing loans. Can we trust these institutions to suddenly only lend wisely; to not give loans when the money might be wasted?

Preventing new wasted loans and new debt crises, and ensuring that there is not another debt crisis, means that the people who pushed the loans and caused this crisis cannot be left in charge.

The creditors or loan pushers cannot be left in charge, no matter how heartfelt their protestations that they have changed. Pushers and addicts need to work together, to bring to an end the entire reckless and corrupt lending and borrowing habit.

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The debt “habit” is a cycle of lenders “pushing” loans on borrowers and turning a blind eye to their misuse, and in response to criticism for their behaviour, adding more conditions to new lending. These conditions sometimes seem (and indeed sometimes are) sensible, but all too often they only serve the interests of the lenders rather than the borrowers. Part of the cycle is that as countries get deeper in debt and grow more impoverished as they try to repay, the lenders impose a whole new range of what they say are anti-poverty and anti-corruption conditions, but which most often have other agendas, such as opening up poor countries to multi-national companies. Even when the conditions are sensible, they are like the health warnings on cigarette packets – they are there to satisfy the critics, but the cigarette makers hope to counteract them through ever more aggressive advertising.

So when campaigners and politicians demand that “something must be done” to reduce corruption and end poverty, new conditions are added like new health warnings on cigarette packets. But the old rules and old drug pushing continues. In this chapter, we show how the lending agencies have been guilty of totally misleading the general public with the health warnings – right up to today. And we argue that they cannot be believed when they promise still stronger health warnings. Further conditions are simply reinforcing the old habit. And in the next chapter we will show how to kick the habit.

The Economist (18.9.99), not a magazine noted for radicalism, calls the IMF “an overbearing organisation with a well-thumbed book of macro-economic policy nostrums”. It goes on to argue that “the Fund and [World] Bank have been hijacked by their major shareholders for overtly political ends. Whether in Mexico in 1994, Asia in 1997 or Russia throughout the 1990s, the institutions have become a more explicit tool of western, and particularly American, foreign policy.”

A good example of political ends are the cases of Nigeria and Mauritania. Nigeria was originally on the list of 41 countries that could potentially qualify for debt relief under the World Bank/IMF Heavily Indebted Poor Country (HIPC) Initiative. At the time the military dictator Sani Abacha was in power, the country had no formal agreement with the IMF, and had an appalling human rights record. It was clear that under those conditions, Nigeria would never qualify for relief. But Abacha died, a new democratic regime began to emerge, and Nigeria was pushed off the HIPC debt relief list. The reasons are secret, but the facts surrounding the case are mystifying. A country qualifies for HIPC by being so poor and uncreditworthy that it can only obtain World Bank loans from its subsidised (IDA) arm and not from its commercial arm (IBRD). Nigeria does qualify for IBRD loans and this is the reason given for excluding it from HIPC. But this has always been the case and does not explain why at the beginning it was on, and later it was off the list. There are two possible explanations:

• Nigeria was about to become democratic and resume relations with the IMF. Therefore, it was looking like it might qualify for debt cancellation. Nigeria was by far the largest debtor in the HIPC programme with debts of more than $34 billion; 15% of the total debt of the 41 countries. Its initial inclusion magnified the sums that the IMF and World Bank claimed could be cancelled, but when it became a possibility, it may be that it was too much money for the rich countries to write off.

• The creditors made a mistake in including Nigeria in the first place. But given the extreme poverty of the country, and the number of lives at stake, this level of incompetence would be astounding.

By contrast Mauritania was leap-frogged to the front of the queue and become one of the three first countries to receive, in February 2000, more generous debt cancellation under the `enhanced' HIPC debt initiative agreed at the Cologne G8 Summit. Mauritania won high praise from the US when, in the presence of US Secretary of State Madeleine Albright at a public ceremony in October 1999 in Washington, the country broke the Arab boycott and established full diplomatic relations with Israel. Mauritania has come under heavy criticism for its human rights record, including press censorship and being one of the few countries until recently to still have slavery, but it has won IMF praise for its structural adjustment programme. Mauritania was granted debt relief without producing a full Poverty Reduction Strategy Paper or consulting with its population on how the money should be spent, as is required under HIPC.

Not only is debt cancellation itself overtly political, but the process is as well. And the main means of imposing “political ends” has been through conditionality. To gain any aid, loans or debt relief, Western public and private creditors insist that a country must have IMF and World Bank programmes. Most creditor countries, including Britain, withhold aid from countries which do not have agreed IMF and World Bank programmes. “International agencies typically insisted on a large list of `conditions' in return for the provision of funds,” explained Joseph Stiglitz, (31) until recently Vice President and Chief Economist of the World Bank. These conditions are based on what he calls “the Washington consensus of US economic officials, the IMF and World Bank” and are not primarily about poverty and governance. (32) Instead they are about following a particular economic programme known as “structural adjustment”. The conditions “often were quite broad [and] often entailed trade liberalisation, privatisation and macroeconomic stability – all the elements that were central to the Washington consensus reforms,” continued Stiglitz. (33) These are the “nostrums” referred to by The Economist, and Stiglitz specifically argues that in pushing so hard for privatisation, trade liberalisation, and very low inflation, the Washington Consensus has overestimated the benefits and underestimated the costs, especially of increased unemployment which can cause “real impoverishment and family hardship” as well as increases in crime and demoralisation. (34) Stiglitz recognised the failings of such heavy conditionalities and called for a new consensus which “cannot be based in Washington”. He called for “a greater degree of humility, the frank acknowledgement that we do not have all the answers”.(35) And he called for an end to conditions imposed by “experts who are not disciplined by having to be accountable to the citizenry.” (36) But he failed to convince the World Bank, and was forced to resign from his post at the end of 1999.

Instead of changing the basis of the consensus, creditors simply add more conditions. Thus at Cologne in June 1999, the leaders of the Group of Seven (G7) most industrialised countries offered some additional debt cancellation and said that more consideration must be given to poverty reduction and to participation, but they stressed this had to be linked to continuation of present “structural adjustment programmes”.(37)

Structural adjustment programmes cover most of a country's economic governance. For example, to qualify for HIPC debt relief, Tanzania has to satisfy 78 separate conditions including:

• the introduction of a Value Added Tax (VAT) at a higher level than in neighbouring countries,

• an end to restrictions on imports and exports (and thus a ban on protecting new local industries),

The World Bank and IMF admit that social spending has been savagely cut under structural adjustment, from 4.8% of GDP in 1994/5 to 2.9% of GDP just three years later. Washington requires a continued cap on government spending, and suggests only that social spending “should not fall” any further. Health spending is not expected to reach more than two-thirds of 1994/5 levels; education spending will also remain below 1994/5 levels.

Despite these austerity measures, the World Bank and IMF expect Tanzania to carry out a major education reform, which includes training and upgrading of teachers and a major restructuring of the school system. The World Bank and IMF have set Tanzania “health performance targets” which require only that child (under five) mortality not get any worse. In both health and education, the World Bank and IMF says that extra funds will be obtained by charging higher fees, especially in rural areas where the poorest people live. Primary school fees were introduced for the first time in 1999, and private schools are to be encouraged. (38)

Tanzania has “severe budgetary constraints” which means in crude terms, that teachers and health care workers often do not receive salaries; there are few medicines in hospitals; and teachers have very few books or other teaching materials. How therefore, are the government meant to ”build and maintain quality public services”? If, at the same time, public sector workers are not being paid, or worse still being made redundant, how are they supposed to provide “greater financial contributions” for primary education for their children?

Tanzanians were justly proud of their health and education systems, which raised literacy and life expectancy above sub-Saharan African levels despite a below average GDP. Tanzanians are bitter and angry when they see services slashed under IMF austerity measures. They do not understand; but they have no choice but to accept the World Bank and IMF saying that the same number of children should continue to die each year.

In response to the pressure to increase poverty measures, the World Bank and IMF introduced the Poverty Reduction Strategy Paper (PRSP) to replace the IMF's previous Policy Framework Paper (PFP). To gain debt relief, countries in the past had to have IMF Enhanced Structural Adjustment Facility (ESAF) loans, which will now be provided as part of the Poverty Reduction and Growth Facility (PRGF).

Joint World Bank/IMF papers (39) on the PRSP stress “poverty reduction” and that the paper must be “country-driven with the broad participation of civil society”. But the IMF in its own papers stresses that this is in addition to everything that was required in the past; none of the old “Washington consensus” policies have been removed. In a paper for a meeting of African finance ministers, 18-19 January 2000, to explain the new PRGF, (40) the IMF stresses that it will demand of all countries “a more rapid privatisation process” and “a faster pace of trade liberalisation” – the conditions criticised by Joseph Stiglitz when he was chief economist of the World Bank.

In this section, we show that present conditions are hotly contested, do not work, and have been harmful. We argue that present attempts to impose conditions to prevent waste are bound to fail, and may be counter-productive. They do nothing to prevent the situation recurring, but do delay debt cancellation. Clare Short, British secretary of state for international development, told an UNCTAD summit in Bangkok on 16 February that poor countries and the World Bank were becoming bogged down in the paperwork generated by all the conditions. “What is happening in Washington is a delay looking for the perfect poverty reduction strategy, which means that the timetable for debt relief won't be kept,” she said. “If you ask for perfection, you'll be kept waiting for decades.” (41)

The most striking aspect of IMF/World Bank conditionality is that the civil servants of these institutions, the staff members, have virtual dictatorial powers to impose their whims on recipient countries. This comes about because poor countries must have IMF and World Bank programmes, but staff can decline to submit programmes to the boards of those institutions until the poor country accepts conditions demanded by IMF civil servants.

There is much talk of transparency and participation, but the crunch comes in final negotiations between ministers and World Bank and IMF civil servants The country manager can say to the Prime Minister, “unless you accept condition X, I will not submit this programme to the board”. No agreed programme means a sudden halt to essential aid and no debt relief, so few ministers are prepared to hold out. Instead Prime Ministers and presidents bow to the diktat of foreign civil servants. Joseph Stiglitz (42) also notes that “reforms often bring advantages to some groups while disadvantaging others,” and one of the problems with policies agreed in secret is that a governing elite may accept an imposed policy which does not harm the elite but harms others. An example is the elimination of food subsidies.

The Bank and Fund make clear that this process is to be reinforced for the new PRSP, (43) which must be approved by both boards. Bank and Fund staff will “participate” in the development of the PRSP and “offer advice”. The PRSP will only go to the IMF and World Bank boards “when managements would recommend its endorsement”.

Thus, after a government has consulted civil society and reached a “near final draft” of the PRSP, the IMF and World Bank will send a joint mission to the country to “discuss with the authorities any modifications to the strategy that might be considered necessary to allow managements to recommend to the Boards that the PRSP be endorsed.” Thus the staff veto and ability to impose conditions is retained.

The power of staff and the limits of civil society participation were made clear by Stephen Pickford, the British executive director to the IMF and World Bank, when he gave evidence to the House of Commons International Development Committee on 28 October 1999. Chair Bowen Wells asked if the IMF and World Bank had a veto. What would happen if a country wanted to spend more on health and education than the IMF thought was acceptable?

Pickford replied that the IMF and World Bank had to approve the plans, but that he did not expect any problems when plans were submitted to the boards in Washington, because the strategies must “be developed by the governments in close co-operation with, and using the assistance of, the Fund and Bank. I would not expect for those papers to come to the board in a form which we would have difficulty with”. (44) In other words, IMF staff will continue to ensure that PRGF/ESAF plans meet traditional IMF limits and the Washington Consensus.

James Wolfensohn, president of the World Bank, commented that “it is also clear to all of us that ownership is essential. Countries must be in the driver's seat”. The theory is fine, but the practice distorts the meaning of these words. Countries are in the driving seat only as the chauffeur of the Washington Consensus limousine. And as Angela Woods and Matthew Lockwood comment, all too often “ownership relates to persuading the public that reforms are necessary and good in order to minimise political opposition to them”. (45)

Staff dictatorial power has also been reinforced by the new concept of “selectivity”. If the World Bank and IMF staff cannot persuade a government or the public that policies they want to impose are “good”, the staff refuse to present a PRSP to their boards. The argument is that aid and debt relief should go preferentially to those countries with “good” policies. But this proves to be even more coercive; poor countries may have more space to design their own policies, but they are forced to compete with each other to adopt programmes which correspond ever more closely to what the Bank and Fund staff expect. The implication is that governments wishing to take an alternative economic approach must expect to forgo aid and debt relief. But Wood and Lockwood note that “not only does the Bank define a `good' policy environment very narrowly, the consensus on what defines `good' policies is subject to change. What may have been regarded as a good policy yesterday may not be today.”

It is impossible to ignore the sweeping critique, by the second most important man in the World Bank, of policies still being imposed on poor countries as a condition of debt cancellation and aid. And it must be remembered that these are being imposed in the names of “good governance”, “sound policies” and “poverty reduction”.

Stiglitz notes that had the US followed IMF policy it would have not achieved its remarkable expansion. (46) China rejected World Bank and IMF policy while Russia followed it to the letter. The result, notes Stiglitz, is that “China represents the greatest success story of the last two decades... If China's 30 provinces were treated as separate economies, and many of them have populations exceeding those of most other low-income countries, then the 20 fastest growing economies between 1978 and 1995 would all have been Chinese provinces.”

Joseph Stiglitz warns that “the institution can actually become an interest group itself. ... This problem becomes particularly alarming when the power and prestige of an international organisation is pitted against the weak position of a developing country.” (47) Stiglitz warns that those who advocate “polices have an incentive to defend them as appropriate” but goes on to note that “when a single car has an accident on the road, one is inclined to blame the driver or his car; when there are dozens of accidents at the same spot, however, the presumption changes. It is likely that something is wrong with the design of the road.”

Virtually the entire group of development NGOs, like Oxfam, WDM and Christian Aid, are highly critical of the policies imposed by the IMF under ESAF. They do not reduce poverty and mainly benefit the better off in poor countries; they seem designed more to benefit large corporations by giving them cheaper raw materials and access to new markets.

The Wall Street Journal has waded in to give support to these views. In a searing attack on the retiring managing director of the IMF, Michel Camdessus, the journal accused the IMF, under Camdessus of “a bias toward devaluation, which is supposed to `revive' exports even as the inevitable, resulting inflation quickly diminishes the resident population's incomes and assets. Impoverishing people in this way is morally indefensible and politically unsustainable.” (55)

In developing countries, organisations such as the International Labour Organisation and UNCTAD (UN Conference of Trade and Development) have come out against Washington Consensus policies.

The Group of 77 and China in its Marrakech Declaration of 16 September 1999 says simply: there is a need to “define a new development paradigm based on sustained economic growth and sustainable development”, and that debt relief should no longer be “attached to performance under the Enhanced Structural Adjustment Facility (ESAF)”.

Rubens Ricupero, the secretary general of UNCTAD, in his report to the tenth UN Conference on Trade and Development in Bangkok in February 2000, notes that the present forms of globalisation and liberalisation are imposed on developing countries. They are being “pressured to liberalise trade, investment and financial flows” at the same time they face opposition to liberalised flows of labour and knowledge. He adds, “the prevailing development strategy ... has tended to neglect the welfare of vulnerable groups, notably women.”

The IMF says it is responding to these criticisms and changing. But it clearly is not:

• In 1999, it put a cap on how much money Nicaragua could spend on reconstruction after Hurricane Mitch. Even though more donor aid was on offer, no more than $190 million could be spent on rebuilding, because the IMF feared that to spend more would be inflationary. This despite Stiglitz's opinion that IMF pressure to cut inflation to very low levels is counterproductive, and his specific view that aid money should be spent on infrastructure if it is available. (56)

• Similarly, in late 1999 the IMF demanded that Mozambique rapidly liberalise its trade rules on sugar, which would have the effect of putting out of work tens of thousands of sugar workers who would not be able to find other jobs.

l• In the summer of 1999, an arbitration panel recommended that Guyana civil servants be given a 31.6% pay award, instead of the 12% offered by government. In a meeting with the President of Guyana, the IMF unexpectedly said the government should accept the arbitration panel decision. Taking the IMF advice meant that the country broke the budget deficit target previously agreed with the IMF. Guyana assumed it had been given permission, but the IMF later said no, and that by breaking the earlier condition Guyana was barred from a second round of debt relief under the Cologne agreement. This poor country is now in its third five-year IMF programme and has received debt relief under HIPC I. But none of this counts. The IMF appears to expect poor countries to see that any seeming concessions to poverty reduction are only window dressing, and that only traditional rigid spending targets count.

The question that begs to be asked is when the entire developing world, most northern based aid agencies, the Wall Street Journal and even the World Bank's chief economist reject the policies imposed, how can unaccountable IMF civil servants be allowed to impose those policies without question, and in the name of “good governance”?

Of course there is a need for economic stability and sound economic policies. But when even the World Bank and IMF cannot agree what they are, is it sensible to impose politically driven Washington Consensus policies despite the opposition of southern governments and civil society?

Joseph Stiglitz (57) comments that “what may be good for stabilisation today may hinder long-term development. The design of economic policy represents a balancing of concerns, and it is up to the country to make the political decisions about how the various risks are to be balanced. These are not just technical matters to be left to international bureaucrats, as competent as they may be. And it is important that there be more than one source of opinion, of information, of advice.”

Debt cancellation and Jubilee 2000 are about new beginnings; about starting with a clean slate. Cancelling debt should be about kicking a habit of repeated lending, paternalism, and conditionality.

A clean slate is particularly appropriate because the end of the Cold War also marked a new beginning. Elections from Indonesia to South Africa point to a new way. Most of the corrupt old dictators have fallen; many have been replaced with democratic and accountable governments. Those who wasted the money are no longer in charge; instead their children, the victims of tyranny and corruption, are setting out in a new direction while carrying the heavy burden of debt on their backs.

Unfortunately, the role of lending institutions is largely unchanged. They have jobs and organisations to defend, and do not want a clean slate. They want to prove that cigarettes are safe so long as there are enough health warnings. And just as cigarettes proved harmful despite repeated claims they were safe, so conditionality has proved harmful and increased rather than reduce poverty. Most importantly, cigarette makers have no interest in reducing smoking, but do have an interest in being seen to be health conscious. Similarly, the lending institutions have no real interest in curbing lending or corruption, although they want to be seen to be acting properly. Their interest is in continuing to lend, in having elites in the poor countries who want to borrow, and in using debt dependence to carry out political changes desired in the rich countries. It is like putting cigarette makers and drug pushers in charge of the health service.

Breaking the habit is hard. Many people never do. With courage and commitment, both pushers and addicts can break the habit.

But just as we would never leave anti-smoking campaigns to the cigarette companies, or ask drug pushers to run the health services, so we can no longer allow the loan pushers to determine how to break the loan habit.

The loan pushers have convinced the world that their paternalism is in the best interests of the poor. Democracy and self-reliance became the key guidelines of the 1990s and they are the alternative now to the habit of self-interested paternalism.

Building democracy and self-reliance is a slow and difficult process. Mistakes will be made. Waste, corruption and incompetence have not been stamped out in the rich countries – even in those with long democratic histories, as recent experiences of corruption by a British defence minister (Jonathan Aitken), and by Helmut Kohl, leader of the CDU in Germany, have shown.

Unaccountable dictators of right and left have often argued that development comes before democracy, and that only “experts” can decide how to reduce poverty. Today, politicians in creditor countries and officials in the IMF and World Bank say that because people are poor and ill-educated, they do not have the knowledge or ability to monitor the use of funds released through debt cancellation; instead aid agency officials and PhD economists must control the use of these funds. The new experts and would-be new dictators say they must solve the problems of the poor before the poor are to be permitted democracy.

“Reforms that are imposed on a country through conditionality (`carrots and sticks') may very well fail to produce lasting change. They will tend to undermine people's incentives to develop their own capacities and weaken their confidence in using their own intelligence. There is a real danger that an external development agency, instead of acting as a catalyst or midwife to empower change, will only short-circuit people's learning activities and reinforce their feelings of impotence,” comments Stiglitz.

Stiglitz remains a lone voice among aid officials and development ministers who retain the view that the only way to prevent waste is for the rich North to develop more and better conditions to impose on the poor South.

But in the South, in debtor countries there is a growing anger at the arrogance in creditor countries, and at the self-serving belief that if people are poor then they must be stupid or corrupt. The poor have more to lose and will be more vigilant – if the rich allow them to be. Ever more detailed conditions imposed by the North make this harder, rather than easier. Money will be wasted; mistakes will be made – but this will be a long-term investment in a learning and empowerment process.

The IMF repeatedly calls for openness and transparency, but fails to practice what it preaches. Criticism of the secrecy of the international financial institutions came to a head over the process for selecting a successor to Michel Camdessus as managing director of the IMF. The process was conducted entirely in secret and as part of embarassing political horse-trading between major industrialised nations. A letter to Gordon Brown, head of the IMF Monetary and Financial Committee, signed by 66 organisations from 24 countries, said it was “disgraceful” that a rich minority was acting in secret “to appoint the head of an institution which has so much influence in developing countries”.

There are no public criteria for selection. There is no public discussion about the experience of the candidates, or about their views on structural adjustment, poverty reduction, and debt cancellation. Although the poor countries are members of the IMF, they are excluded from the discussion and kept in the dark.

So while they preach transparency and good governance, they practice secrecy and cronyism. These double standards undermine the authority of the IMF and marginalise shareholders in developing countries.

The IMF paper on the PRSP (48) says “increased emphasis will be placed on improving governance, particularly as concerns the efficient management of public resources, greater transparency, and increased government accountability.”

But the IMF has an odd definition of “good governance”. The British House of Commons International Development Committee visited Washington to interview IMF and World Bank officials about Rwanda. (49) “When we probed how committed IMF officials were to good governance, it quickly became apparent that by good governance they meant primarily economic good governance, for example, transparent and well-regulated financial markets, rather than human rights and participative democracy,” it reported.

The Committee “requested memoranda from the IMF and the World Bank to find out their policies to Rwanda in the years leading up to the genocide of 1994. ... What is striking is the fact that the memoranda make no criticism of the government's policy towards the Tutsi minority during this period. ... We are entitled to ask what protests were made to the Rwandan government by the IMF or the World Bank about the discrimination against and intimidation of Tutsis during these years. ... Neither organisation recognised the direct link between growing social tension, human rights abuses and the subsequent destruction of the entire economic infrastructure.” Indeed, “one IMF official told us that conflict prevention was not the job of the IMF.” (50)

The unique Danish-funded study of the roots of the Rwanda genocide and the international response is even more critical of the IMF and World Bank. One of many roots of the genocide was the economic slump in the late 1980s caused by the end of the International Coffee Agreement, which brought a sharp fall in coffee prices and in turn caused a 40% drop in per capita GDP in Rwanda between 1989 and 1993. The study found that “the slump hit the peasantry particularly hard” and “the economic crisis introduced yet another element of stress and instability into the Rwandese political and social fabric. The international community, including the World Bank and the International Monetary Fund, overlooked these potentially explosive consequences when designing and imposing economic conditions.” (51) The report goes on to note that the structural adjustment programme contained provisions “that may have fanned resentment”. (52) The report continues there is “ample evidence that the introduction of higher fees for health and education [as part of structural adjustment] added to the already heavy burdens of Rwanda's poor”. (53)

The Rwanda report recommends that “economic conditions imposed by outside actors must be formulated with a view to its likely impact on human rights conditions and conflict in the receiving country.” (54) Yet, as the International Development Committee found, three years later the IMF still did not see conflict prevention as part of its job, and neither the World Bank nor the IMF saw human rights as part of good governance.

The IMF and World Bank are the all-powerful arbitors of debt relief conditions. No country can obtain debt relief without having an IMF Poverty Reduction and Growth Facility (PRGF, replacing ESAF) loan. We have taken space in this report to look closely at Rwanda because it is an extreme case in which the IMF and World Bank have been deeply implicated, and from which they appear to have learned no lessons.

The IMF is prepared to “add to the already heavy burdens of Rwanda's poor” in a genocidal situation, “overlook ... potentially explosive consequences when designing and imposing economic conditions”, not see conflict prevention as its problem, and not see human rights and democracy as part of good governance. It is fair to ask: Is this really the proper agency to be given dictatorial powers by the creditor countries? Is this really the agency to ensure the wise use of money released by debt cancellation?

---> There is no charge to campaigns in debtor countries. <---

Conditionality undermines democratic processes, according to Joseph Stiglitz. (58) “Ultimately, if we believe in democratic processes, the countries must make the decisions for themselves .... Given the weaknesses in the checks on the international institutions ... it is all the more important that different voices be heard. To be sure, the different voices may give rise to a vigorous democratic debate, which may be uncomfortable to those wishing to ensure that their views prevail, but it is one of the `prices' we pay for democracy.”

No one wants the money released by debt cancellation to be wasted or for more reckless lending and borrowing to resume before the ink on the debt relief documents have dried. But we must ask the question, are poor country governments so deeply mired in corruption and incompetence that there is no choice but to pile on ever more conditions, even though we know they will fail? Or can we work together – North and South, creditor and debtor – to create the “uncomfortable” and “vigorous” democratic debate, which will ensure that over the long-term money is not wasted and a more stable, transparent system of international economic relations put in place?

Are the addicts so far gone that only the pushers can be trusted to break the habit? Or do we want to change both addicts and pushers, and create a new, more healthy relationship?

International lenders have an aversion to the word default; instead they speak of debt standstills, temporary illiquidity or moratoriums. But in the last year alone, 28 sovereign debtors defaulted including Russia, the Ukraine, Indonesia, Côte d'Ivoire, Venezuela, Vietnam and Ecuador. (59) Furthermore, most highly indebted countries pay less than 50% of debt repayments due. So default and bankruptcy is a reality that creditors deny, but that exists all the same.

In the absence of a proper arbitration framework for managing default, discrimination occurs. Not only are debtors expected to bear the full brunt of the losses and liabilities; but losses are unequally shared between creditors. For example, in Ecuador, the government defaulted on debt repayments to private creditors; but continued to pay the IMF and World Bank, so-called “preferred” creditors. This is known in banking circles as the unequal treatment of creditors, and is severely frowned upon, especially by those treated unequally.

A major achievement of the international Jubilee 2000 movement has been to expose the injustice, double standards and hypocrisy of relationships between debtor nations and their creditors. Campaigners from around the world, but particularly the South, have called for a more just, independent, accountable and transparent process for managing relations between sovereign debtors and their public and private creditors.

• 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.

As far back as 1986, the United Nations Conference on Trade and Development warned about “the lack of a well-articulated, impartial framework for resolving international debt problems” and called for something similar to the US bankruptcy procedures. (60)

This was taken up again two years ago, when UNCTAD drew attention to Chapter 9 of the US Bankruptcy Code, which deals with public debtors, such as municipalities. Orange County, California, which lost huge amounts of money on an ill-advised gamble on interest rates, resolved its solvency crisis by recourse to Chapter 9. (61) UNCTAD notes that these procedures “safeguard the interests of the debtor” instead of being “designed to satisfy the interest of the creditor at any cost”. In particular, simply by filing a petition with a court, the debtor brings an automatic halt to all debt service payments and stops interest from accruing on the debt, UNCTAD notes. This provides breathing space for a reorganisation. With agreement of the court, the debtor is given access to new capital by a provision that any debts taken on after the filing of a petition are given precedence over debts taken on before.

Kunibert Raffer of the University of Vienna has argued that a transparent arbitration procedure could perhaps be based on the US legal framework for managing relations between municipal debtors and creditors – which works perfectly well for communities in New York and Orange County. (62)

UNCTAD refers to proposals by Kunibert Raffer and others for arbitration panels, an independent international bankruptcy panel, or an international bankruptcy court. In particular, UNCTAD rejects suggestions that the IMF should control the debt standstill process (which might be possible under the IMF Articles of Agreement), on the ground that “the Executive Board of the IMF is not a neutral body which could be expected to act as an independent arbiter, because countries affected by its decisions are also among its shareholders. Moreover, since the Fund itself is a creditor and a source of new money, and acts as the authority imposing conditionality on the borrowing countries, there can be conflicts of interest vis-à-vis both debtors and other creditors.”

UNCTAD recognises that “there are serious difficulties in replicating the insolvency procedures for international debt” but says that “nevertheless, it is possible to establish the key insolvency principles and apply them within the existing international framework.” (63) The basic principles of insolvency are the right to a debt standstill combined with the right to continue operations (know as “debtor-in-possession”). “Under insolvency procedures, the amount of debt and the conditionalities attached would not be determined by the creditors,” UNCTAD stresses. “The application of these principles would dictate an immediate write-off of all unpayable debt in sub-Saharan Africa, determined on the basis of an independent assessment of debt sustainability.”

It must be remembered that this is not the statement of campaigners, but of a United Nations agency.

One way to apply insolvency principles without a new international legal framework is through independent arbitration – which is already widely used to resolve contract disputes at national and international levels.

A fair, open and accountable arbitration process does not require an international treaty, nor the jurisdiction of an international agency. After all the major forum for deciding debt cancellation, the secretive “Paris Club” of government creditors, is not formally constituted and exists outside any international legal framework. It nevertheless exercises great power over indebted nations.

An independent, transparent arbitration process could be similarly informal. All that is required are the conditions that were present when Germany and Indonesia had massive debts written off under an independent process in 1953 and 1970 respectively.

• the political will to restore discipline and justice to international financial relations.

• the establishment of a small secretariat which would provide support to the arbitration body.

• the inclusion, in an observation role, of an international institution like the UN; to act as first port of call in a crisis; and to ensure that arbitration procedures are implemented fairly.

Jubilee 2000 campaigners in Africa and Latin America argue that such an arbitration process, if it were fully open and accountable to local people, could challenge much of the corruption that takes place when loan and debt cancellation agreements are signed in secret – and the funds subsequently abused.

Currently the international financial system places greater emphasis on disciplining debtors, not creditors, for high levels of debt. Growing unease at the reckless policies of export credit guarantee agencies, which both create high levels of debt, and finance environmentally unsound projects, has resulted in calls for more disciplines on lenders. Greater transparency would restrain lenders, which use taxpayer-backed loans to secretly promote arms and other unproductive goods to developing countries. These loans have become increasingly controversial in Britain, where Jubilee 2000 has long campaigned for greater accountability of the Export Credit Guarantee Department (ECGD). This is a branch of the Department of Trade and Industry, and 96% of the debts owed to Britain by the poorest countries is owed to ECGD. Recent revelations about ECGD loans for Hawk jets to Indonesia, and for spare jet parts to President Mugabe of Zimbabwe, have sparked opposition from both parliament and the public.

An independent arbitration process will place the same disciplines on creditors as they currently readily submit to under domestic bankruptcy laws, and will discourage, we believe, the sort of reckless lending that led to the East Asian crisis. Lending decisions will be made more carefully, with greater consideration of capacity to repay and with a more equal share of risk between both sovereign creditors and debtors.

Similarly, reckless borrowers will be restrained by more transparent scrutiny of their actions and by greater accountability to their citizenry.

Jubilee 2000 has suggested one possible structure, with an independent Debt Review Body (DRB) based on the established concept of arbitration, guaranteeing transparency and participation in the process of civil society from the indebted country. This is linked to an agreement on how the money released by debt cancellation should be spent.

Any country with debt problems could apply to the United Nations or the International Court of Justice for an independent review of its debt, and for debt cancellation. There would be a partial or total debt service freeze, and the country could immediately divert all or part of its debt service payments into a UN or the Court-run special fund. The UN or the Court would appoint, with the consent of both debtor nation and creditors, an independent arbitrator(s) to run a Debt Review Body (DRB). The DRB would act as a binding arbitration panel which would defend the sovereignty of a debtor nation, while being fair to creditors.

The DRB would have three or five members – an equal number appointed by the debtor and by the creditors and one other agreed by those nominees. Representatives from civil society within the indebted nation, and, if appropriate, from the creditor nation, would be appointed to the DRB as official observers with rights to attend all meetings, to speak and to scrutinise all documents. The documents, deliberation and decisions of the DRB would be made public.

The process for setting up and maintaining the DRB need not be bureaucratic. It requires only the confidence of debtor governments and organs of civil society on one hand, and creditors on the other.

Its first task would be to commission a full audit of outstanding public debt. It would simultaneously ask for government plans for economic recovery and reconstruction, and support for the poor. It would then hold open, public hearings to assess the proportion of debt which should be cancelled. This would be based not on fiscal criteria, but on human development criteria, and on the costs of reconstruction and economic recovery. The DRB would also be allowed to hear evidence that certain loans should be cancelled because they are odious or were knowingly given improperly or corruptly, for example to prop up a dictator during the Cold War. The DRB would publish its binding conclusion on what debt is to be cancelled.

The Debt Review Body would then work with debtor and creditor representatives and civil society to draw up a agreement or “concordat” between debtor and creditors defining how the money released by debt cancellation would be used. This would include:

• a Poverty Action Fund to facilitate the flow of freed up resources to the poor;

• a stakeholder body, like Christian Aid's proposed “national debt relief committee”, to oversee the use of money in the Poverty Action Fund; (64)

• auditing and monitoring processes to ensure that money released From unpaid debt goes into economic recovery, reconstruction and poverty rduction; and

• a procedure for monitoring and scrutinising new loans, as a way of preventing the country from falling into a new debt trap.

Transparency and participation by local organisations, including opposition parties, trades unions, community organisations etc., must be central to debates and decisions in establishing the concordat and in subsequent discussions of the stakeholder committee. Local organisations would have “a right to be heard”.

The Debt Review Body will, by these means, encourage and strengthen democratic institutions and economic literacy in debtor nations.

Finally, there would be a public and highly publicised signing of the concordat, ensuring a widespread understanding of what has been promised and agreed. Until this point, funds would be managed by the interim stakeholder committee, perhaps with the oversight of the DRB, but once the concordat was published and signed, its provisions would take over.

The DRB would remain in existence to monitor the implementation of the concordat, and periodically audit and report on progress, until the date when all debt service payments covered by the cancellation would have been completed.

The stakeholder committee would make an annual report to the DRB on whether or not the concordat has been followed, and any other body – civil society or creditor – could also make representations if they disagree with the stakeholder committee or feel the concordat has been breached. Through this "right to be heard" local groups will be empowered to monitor the use of money released. Local organisations could invite international institutions like the UNDP, UNICEF, Amnesty International or Oxfam to participate and to be heard by the DRB.

If, for example, a new regime takes power, refuses to honour commitments under the concordat and prevents local organisations from giving evidence to the DRB, then there must be harsh penalties. Once cancelled, debts cannot be reinstated. But all countries receiving debt cancellation will also be aid recipients, and if the DRB concludes that the concordat has been violated, it might recommend that some or all new loans and aid payments be withheld.

These ideas are not new, and have been discussed for several years. But they are frequently dismissed by politicians and aid officials as untried and impractical. In the rest of this chapter, we consider examples from Ireland and Uganda to show that such a mechanism is already tried, tested and proved to be effective. Then we look at a number of other countries which have already laid the groundwork for such a system.

In Uganda, the Jubilee 2000 campaign plays a central role in ensuring that new loans are debated openly and agreed democratically. And Uganda's Poverty Action Fund provides a model for how funds from debt cancellation can be diverted to the poor.

Uganda's Poverty Action Fund (PAF) was set up in June 1998, and is expected to handle up to $100 million per year; 80% comes from the savings due to debt cancellation, and the rest from donors. The PAF is managed by the government, but overseen by quarterly public meetings of ministries, donors and civil society. Priorities, set under a Poverty Eradication Action Plan, include rural roads, agricultural extension, water and sanitation, primary school building, and primary health care. Some projects are more decentralised than others; for example, each district is given money to do major repairs of 40 kilometres of road, and can use labour intensive means if it wishes.

PAF sets aside 5% of its budget for monitoring, and all PAF details are published. The Uganda Debt Network and the Jubilee 2000 campaign facilitate a Civil Society PAF Coalition, which monitors the use of PAF resources. After the first year, it said “with the exception of the agriculture extension programme, all the programmes under PAF performed well.” (65) However, a report by NGOs to the July 1999 Quarterly meeting was highly critical of the lack of information about PAF at district level, and in some cases about the lack of local participation. NGOs also say that the government remains more concerned about being accountable to foreign donors than to civil society.

The Uganda Debt Network also co-ordinates the Anti-Corruption Coalition of Uganda. It praised the transparency, particularly of the auditor general's office, but also publicly criticised political interference in anti-corruption cases and with respect to the new Inspector General of Government. The Coalition organised an anti-corruption week in October 1999.

Uganda's constitution requires that all new foreign loans are approved by parliament, and at least three have been rejected or modified. Parliament also rejected an electricity supply contract, which, it said, would lead to increased debt.

The PAF has been in operation for less than two years, and there are still teething problems. But parliament, civil society and the media are active in the discussion of debt and the use of the funds released by debt cancellation. Corruption is being challenged, and tighter control over funds is being demanded. This is a learning process. But Uganda has shown that it can be done.

Ireland was one of the world's largest per capita aid recipients during the 1990s, with European Union structural fund grants of $1.5 billion per year (about $400 per person per year). And it has become one of the most advanced in involving civil society in the use and monitoring of those funds, with a system very similar to that being introduced in Uganda.

The 1994 Irish National Development Plan was set up to allocate the EU money (and the 25% matching share). Community and social organisations played only a limited role in drawing up the plan, mainly through traditional lobbying. But four civil society networks – covering poverty, unemployment, youth and women – were given representatives on the national and regional monitoring committees that meet twice a year and they played an increasingly active role.

Ireland also has a “social partnership” system which negotiates with the government. It has four “pillars” – community and voluntary organisations, farming organisations, business organisations and trade unions – which are now negotiating a formal Partnership 2000 agreement. The negotiation of the new Irish National Development Plan is taking place at the same time, and with the same four pillars of the social partnership. The new Development Plan will be larger than the 1994 one, and will mainly involve government money rather than aid money.

Thus, in the past seven years Ireland has developed an effective mechanism to draw civil society, including trade unions and community organisations, into setting out how aid and development funds are to be used and then monitoring that use. Ireland and the EU have both had major corruption scandals recently.

A number of other countries are moving down this road. Several have poverty action funds of varying degrees of transparency. Some lack adequate civil society participation, but could serve as the basis for a proper poverty or debt relief fund and committee:

• Tanzania has not yet received debt relief, but is one of several countries to establish a Debt Relief Fund. Donors pay some of Tanzania's debt service payments and the government puts matching money into the fund, which is dispersed under a National Debt Strategy for education, health, water, infrastructure and agriculture. The fund is audited and monitored every two months by a joint committee of donors, creditors, government, parliament, NGOs, business and the media. Civil society organisations feel that a good start has been made by giving them an official role, but they would like to play a more active rule in the planning and implementation. Tanzania has also set up a Prevention of Corruption Bureau.

• Peru has set up a Focalised Strategy to Combat Extreme Poverty, which was based on a detailed report setting out the most impoverished districts, based on 11 different indicators. (66) This report and strategy would provide a very clear and transparent basis for a stakeholder committee approach, and the indicator methodology provides a good structure for monitoring. However the entire process is controlled by the Ministry of the Presidency, and there were fears that the funds were being allocated in a way that would promote President Fujimori's campaign for re-election.

• Bolivia has gone through HIPC I and has recently received it's second tranch of HIPC debt relief. Civil society have taken seriously the role of popular participation and, largely unsupported by the government but with the help of the Catholic church, has carried out a forum in nine regions around the country. The regional fora aimed to elicit local views on key areas for improvement in health, education, land and employment. They are holding a national forum to present these findings in April 2000 and hope the outcomes will be incorporated in the government's Poverty Reduction Strategy Paper.

• Nicaragua has a Civil Co-ordination for Emergency and Reconstruction (CCER, Coordinadora Civil para la Emergencia y Reconstruccion), which is a group of 320 civil society organisations. As well as co-ordinating their own activities, they have proposed a national fund for reconstruction and development where civil society would be involved in defining priorities and in monitoring.

• Zambia's Jubilee 2000 movement has proposed an “independent tripartite debt management commission”, composed of representatives of civil society (churches, trade unions, women's groups, NGOs, etc), elected members of parliament, and representatives of relevant government ministries. This body would not only see that money released by debt cancellation was directed toward poverty eradication, but it would also monitor negotiations for new loans. It would be linked to an independent “social audit mechanism” which would review national budget allocations and performance in relationship to meeting the needs of the poor. This social audit would be based on one carried out for the past three years by the Catholic Commission for Justice and Peace. Zambia's government in September 1999 proposed a “debt for development” arrangement with clear principles of financial and programme accountability, independent management, and a Debt Relief Steering Committee that involves both civil society and government and which would not be government-controlled. Zambia's debt campaigners have given it a cautious welcome. (67)

Finally, several organisations have suggested a process similar to that used under the Marshall Plan in Europe in the 1940s, when recipient countries were asked to monitor each other.

Christian Aid conducted a survey of partner organisations in eight countries, published as Curbing corruption: a people's approach to debt cancellation. (68) It “identified two mechanisms that could help ensure that debt relief will be used towards significantly reducing poverty, and will not be wasted through mismanagement, corruption or lack of political will:

• the creation of a national debt relief committee in each country to oversee a national fund which holds the resources From debt relief, and

• an end to the conditions demanded by the IMF in return for loans and debt relief under the umbrella of its Enhanced Structural Adjustment Facility (ESAF).”

The “national debt relief committee” or stakeholder committee would be “comprised of representatives from three areas: local civil society groups, the government and the creditors.” Christian Aid partners argued that ESAF conditionality has undermined democracy by making elected governments accountable to Washington-based institutions instead of to their own people. Therefore, the respondents argued for greater parliamentary control over debt relief and – particularly importantly – over new loans. “In the long run, it is active `watchdog' parliaments, representing the people who elected them, who offer the best safeguard against abuses of power and waste of money by the government.”

These stakeholder committees might wish to use external monitors, for example from foreign NGOs. And they would need to be funded by some of the money released by debt relief, to ensure that they had the ability to monitor, hire auditors, etc. “Good democracy costs money,” notes Christian Aid. Finally, such a committee would need to have the possibility of saying publicly to the international community that the government is violating its agreement with the other two parties, and is misusing debt relief funds.

The most common argument against this sort of approach is that it will take too long – democracy is slow while Jubilee 2000 demands debt cancellation now and wants money to help the poorest quickly.

It must be said that creditors have not shown much haste – it is eighteen years since the debt crisis first broke with Mexico's default in 1982; and it took four years before the HIPC process brought benefits to anyone. However, the question is real and must be answered.

Debt cancellation is a one-off action, but its impact extends over decades. This is because the benefit comes from the diversion to productive uses of money which would have been used for debt service payments – this year, next year, and so on for as long as it would have taken to repay the debt. To repeat: debt cancellation is not a one-off handover of money, but an agreement that money need not be paid during a long period.

Thus, there is ample time to put into place democratic mechanisms that ensure that in future years, the money released is well used and future lending is transparently monitored. But cancellation and the needs of the poorest are urgent, so there must be an interim mechanism that might incorporate:

• a poverty or debt fund into which debt service payments would instead be made; and

As we have seen earlier in this chapter many of these mechanisms are already in existence. A debt payments freeze has been placed on countries in special circumstances (eg Honduras and Nicaragua after Hurricane Mitch); Uganda has a fully functioning debt fund and Zambian civil society has carried out detailed research on debt committees. All it takes to carry this further is political will.

'Kicking the habit of paternalism and moving to conditionalities from below'

For those who died in Rwanda and East Timor, northern imposed "good governance" had fatal consequences. For those in the Democratic Republic of the Congo still fighting to salvage something from the wreckage of Zaire, claims that the IMF, World Bank and the US hold no responsibility for the economic degradation caused by Mobutu's debts, seem untenable.

The lenders who backed Mobutu, Suharto, and Latin American dictators are now the ones controlling debt relief and anti-poverty programmes. Yet they cannot claim any moral authority to tell the poor of those countries how to use their money. Their paternalism rings hollow.

If we assume – as western politicians and financial agencies officials do – that:

• the fact that Third World leaders in the past misused foreign loans means that the present generation cannot be trusted to use debt relief money,

• the fact that donor officials and politicians made politically motivated loans and encouraged corruption, means that they too cannot be trusted to administer debt relief money.

Do we blame the addicts for their weakness and their addiction, or do we blame the pushers?

That leads down a useless blind alley, down a cul de sac of mutual recrimination. We cannot be paralysed by history.

We must move forward. Unjustified paternalism must be firmly put aside, and replaced by a new partnership. Civil society in the south has firmly taken on the issue of corruption; it knows that the poorest are hurt when money is wasted or diverted. But that is precisely why civil society in the south has grown so angry at the unjustified paternalism of the north, which continues to lead to the imposition of wrong-headed and misguided policies designed in London, Paris or Washington.

Politicians and aid officials in the rich countries and highly paid officials of the international financial agencies, in their arrogant paternalism and motivated in part by a desire to protect their own jobs, have chosen to ignore the dramatic democratisation in the south and the explosion of civil society, and instead demand ever-more conditions for aid and debt cancellation.

Corruption and waste are at the top of the agenda, but so are misguided policies and demands imposed by donors and lenders, and so is correcting the doleful history of past political lending.

Real democratisation, genuine good governance, and tighter controls on corruption and waste can be promoted if we shift control of money released by debt cancellation to stakeholders represented on a Debt Review Body or poverty action committees, with representatives of parliament, civil society the debtor government and its creditors. We know they work, and can be put into action quickly. Of course, democracy is messy and takes time to develop; mistakes will be made. But paternalism and Washington central planning have failed, and must be replaced by a real shift in power – to the South and to democracy.

Both donor agencies and the citizens of indebted countries need to be “confident that the money newly available does not go to the purchase of Mercedes Benz for party leaders, building political re-election campaign funds, or projects that benefit only a very few,” says Zambia's Jubilee 2000. But this can only be accomplished by going beyond simple poverty alleviation to poverty “eradication efforts that build a solid basis for the future” based on “people-centred development.” This, in turn, will only be brought about with “condition-alities from below, not from above”. (69)

“Conditionalities from below” means, first, accountability and transparency. “The debt campaign of [Zambian] civil society says very clearly: no to any debt arrangement, no matter how attractive it might be, ... that is not scrupulously accountable to the citizens of Zambia, as well as to donors. 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.” (70)

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,” says Jubilee 2000 Zambia. Creditors should have the right to place only one condition on debtor countries: “establish a debt management mechanism that includes a poverty eradication fund.” After that, it is “conditionalities from below”.

That will allow us to kick the addictive habit of reckless lending, corrupt borrowing and never- ending conditionalities.

In 1996, under intense pressure from popular movements in the North and South, western government creditors buckled. They launched a half-hearted debt cancellation initiative – the Heavily Indebted Poor Countries (HIPC) Initiative – under the World Bank's aegis. This Initiative mandated World Bank officials to unite, cajole and bully the Bank's fellow public and private creditors into agreeing debt cancellation. This has been an unenviable task, with public creditors resisting inclusion, and private creditors refusing point blank to co-operate.

The World Bank led long and tortuous negotiations amongst these reluctant creditors to agree which debtor nations were eligible. There followed an even longer set of negotiations to develop an intellectually unsound set of criteria by which creditors could determine (and limit) the amount of debt relief on offer.

Finally, 41 countries were identified as effectively insolvent; heavily indebted poor countries or HIPCs. Then the creditors began squabbling. Three and a half years later, at the beginning of June 1999, only 2.6% of the debts of 41 countries had been written off; and only four countries had received some debt relief (Uganda, Bolivia, Mozambique and Guyana). The rise in interest payments made by HIPCs wiped out any benefit gained by the four. The total debt of 41 HIPCs remained unchanged. $216 billion in 1996; and $216 billion in 1998. Even more disturbing, under the debt relief scheme, debt service paid by the poorest most indebted nations of the world, rose from $25 billion a year to $28 billion in 1998.

In 1996 debts owed to Britain by the 41 HIPCs stood at $2.59 billion. By the end of the first HIPC experiment, in 1999 these had risen to $2.65 billion. In that year debt repayments to Britain from those countries had risen by 13% from $63 million in 1998 to $71 million in 1999.

In Cologne in June 1999, world leaders were embarrassed by protests at their behaviour. Thousands gathered at their annual Summit and demanded that they cancel debts. The call was taken up by millions of Jubilee 2000 supporters around the world. After much haggling, the G7 leaders responded with a pledge to write off $100 billion of poor country debts and in September the Times reported that UK Chancellor Gordon Brown had promised countries could see benefits “within weeks”. HIPC II was born.

$100bn is not, in global terms a large sum of money. It represents the debt that creditors themselves never expect to be able to collect. It is less than a third of the debt of $356 billion owed by 52 countries that Jubilee 2000 has defined as burdened by unpayable debts.

By 1 February 2000, not a single country had benefited from even this limited commitment, and western governments, the IMF, World Bank and private creditors were still bickering behind the scenes about “burden-sharing”. The World Bank president expressed his apparent frustration and talked of hold-ups in debt relief as “delay for delay's sake”.

Finally on 8 February 2000, three countries were announced as having reached `decision point' and therefore qualifying for HIPC II debt relief. They were Bolivia, Uganda and Mauritania. Whilst this modest announcement was welcomed, campaigners were amazed that Mozambique and Guyana, who had already qualified and received relief under HIPC I, did not automatically qualify for the second tranche of relief, but were being delayed for technical reasons. This became even more shocking when it became apparent that floods in Mozambique had devastated crops in many parts of the country and left thousands homeless. Equally shocking was the case of Madagascar, also hit by hurricanes and floods. Madagascar is on the HIPC list and, despite the floods, is not due to receive debt cancellation until 2001 at the earliest, and will have to pay $233 million in debt service while it tries to rebuild its country.

The current system for qualifying for debt relief (under HIPC II) requires that countries have carried out an IMF austerity economic programme for at least 3 years. These conditions are exhaustive and often contradictory. For example, Tanzania's current list of conditions demand that it “limits public spending” whilst also “building and maintaining quality public services”.

In response to criticisms from campaign groups and UN agencies that IMF conditions concentrate too much on austerity measures, and not enough on poverty reduction, the World Bank and IMF introduced in September 1999 a new set of economic hurdles for indebted nations to jump. These take the form of Poverty Reduction Strategy Papers (PRSPs). The PRSP is supposed to be put out to wide civil society consultation. But the IMF told Mozambique and Mauritania that they could obtain rapid approval for debt relief under HIPC only if they did not put the PRSP out for public consultation.

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