Island Mentality - The Okinawa G8 summit and the failure of leadership

 Jubilee 2000 Coalition

 

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Island Mentality

The Okinawa G8 summit and the failure of leadership

July 2000
Jubilee 2000 Coalition

Written by: Adrian Lovett
Produced by: The Creative Element

Jubilee 2000 Coalition,
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Contents

 

Executive Summary

The world's most powerful leaders meet this summer on the Japanese island of Okinawa. After years of meeting in major cities, increasingly besieged by campaigners calling on them to cancel the unpayable debts of the poorest countries, the G8 leaders are retreating to an island.

Okinawa is a very long way from anywhere, the epitome of a faraway island. But the G8 cannot escape the reality of their mounting failure to show leadership and cancel debts in the millennium year.

Relaxing on their island, the world's most powerful men will be able to pretend, if they want to, that they are dealing with the great issues of the moment. Or they can choose a different path. They can cast off their island mentality and face the single issue that most demands their attention as they meet in this millennium year. The world's leaders could leave behind their fantasy island and agree to cancel the debts of the poorest countries now.

The betrayal of Cologne

Ten countries will have begun to receive debt relief promised at last year's G8 summit in Cologne by the time of the Okinawa summit, though only one will actually have had debt cancelled. The ten countries' total debts will eventually be reduced by 34 per cent, with annual debt payments falling on average by 27 per cent. The ten countries will continue to pay over a third more on debt than they are spending on health.

Of the $100bn debt cancellation promised in Cologne, by the end of 2000, just $15bn will have been cancelled. By 2005 or later, the total will reach $90bn, 42 per cent of those countries' debts. The remaining $10bn promised will never be cancelled.

The fate of those countries that do not even qualify for the Heavily Indebted Poor Countries (HIPC) initiative is worse still. Nigeria has so far been ruled out from receiving HIPC relief, despite having income per head less than $300 and a debt to export ratio of over 250 per cent. Nigeria's fragile steps to full democracy remain undermined by the lack of resources the government has available to spend on its people, many of them among the world's poorest. In Latin America, Haiti, the poorest country in the Western Hemisphere, also urgently needs debt cancellation.

The 100 per cent club

It is very possible that the G7 will use their meeting in Okinawa to announce the cancellation of 100 per cent of the debts owed to them by countries qualifying for the HIPC initiative. This announcement is not new. The broad commitment by the G7 to cancel 100 per cent of their bilateral debts is welcome – but it is tied to the discredited HIPC initiative with its IMF economic austerity programme – and also fails to cover the World Bank's and IMF's own loans.

Political leadership and the lessons of history

The world's leaders face a choice. They must decide whether to do nothing, or to act. The case for political action is made simply:

History shows that at similarly significant moments in the past, the price of political inaction has been high. Three case studies illustrate this:

This is the moment

  1. The world's leaders now face a choice not unlike those historical examples: to do nothing or to act. There are three reasons why action is necessary and urgent:
  2. Debt creates a human catastrophe that is getting worse – three million children have already died as a result of the debt crisis in the new millennium.
  3. The wealth of the rich world and inequality between rich and poor is unprecedented – for example, the amount Nintendo expect to earn this year on sales of Pokemon products in the United States could write off the entire debts of Rwanda and Niger.
  4. The millennium moment is a one-off opportunity that will not be repeated – a huge coalition is assembled in support of action this year.

The world's leaders should therefore take three steps:

  1. Stop taking payments from the poorest countries immediately and ringfence the money for the poor.
  2. Commit to the cancellation of 100 per cent for all the poorest countries from all the creditors, including the World Bank and IMF, this year.
  3. Agree to find a new process to deal with lending and borrowing to prevent another debt crisis in the future.

Action of this kind would be a fitting way to mark the millennium. Further inaction by the world's leaders would risk the high costs of inaction and impotence that have been seen in the past. Children in the poorest countries of the world cannot wait while the leaders of rich countries sit on their island. The world's leaders must step out into the real world – and drop the debt now.

Acknowledgements

I am indebted to the following people who have helped to bring this report to fruition: Stuart Croft, for research on Rwanda and the Falklands; Sarah Clarke, for work on Germany after the First World War and a wealth of other information; Colin Ellesmere, for his work on the chronology of the debt crisis and statistics relating to present levels of wealth and inequality; and most particularly John Garrett, for collating, verifying and correcting the figures in chapter two and for maintaining a broad and reliable base of information on which this report draws. I am grateful also to my colleagues at Jubilee 2000 in London who commented on the early drafts of this text. The responsibility for any errors rests with me.

Adrian Lovett, Jubilee 2000 Coalition, UK.

1. Retreat to Okinawa: the world's leaders leave the world behind

“We thought it possible that Okinawa might get the summit for foreign or finance ministers, but then we got the top slot. When I heard that, I was lost for words.”
Keiichi Inamine, Governor of Okinawa

The world's most powerful leaders meet this summer on the Japanese island of Okinawa. After years of meeting in major cities, increasingly besieged by campaigners calling on them to cancel the unpayable debts of the poorest countries, they have had enough. This year, the G8 leaders are retreating to an island.

Okinawa is a pretty place. Its relaxed pace and scenic coastline are an attraction. So are its people: friendly and hospitable. But for the G8 leaders, it has one major attraction above all. It is a very long way from anywhere. 7,000 miles from Birmingham in England, where two years ago 70,000 people formed a human chain around the G8 leaders to urge them to drop the debt. Almost as far from Cologne, which saw similar scenes when Germany hosted the summit last year. Thousands of miles too from Washington and Seattle, where thousands have taken to the streets in recent months whenever the world's leaders are gathered.

Okinawa is remote even for most Japanese, who must fly for two and a half hours from Tokyo to reach the island. No wonder the Japanese government is hopeful that few of those millions calling for the cancellation of the poorest countries' debts will make the trip. And if they try? The Japanese negotiator at the Paris Club of creditor nations remarked to his colleagues that Okinawa had been chosen for the summit because of the deterring effect on unwanted visitors of its shark-infested waters!

The island of Okinawa is perfect for getting away from the reality of everyday life. The view from the hotels on Busena Beach, where the world's leaders will stay in July, is one of palm trees and sandy shores – the epitome of a faraway island. But the G8 cannot escape the reality of their mounting failure to show leadership and cancel debts in the millennium year. Because of the inaction of leaders in the last year, the promise they made a year ago – to cut the debts of the poorest countries by $100bn – is now virtually impossible to keep. Bill Clinton, Tony Blair, Yoshiro Mori, Gerhard Schröder and the other G8 leaders appear impotent in the face of the inertia and foot-dragging of officials and bureaucrats – and their own lack of will to see to completion what they began in Cologne.

In the past year, a series of Jubilee 2000 UK reports have documented the progress made towards the achievement of the campaign's goal – the cancellation of the unpayable debts of the world's poorest countries by the end of 2000, under a fair and transparent process. In the weeks before the G8 summit in Cologne in June 1999, Crumbs of Comfort showed how the announcement expected – and eventually agreed – at Cologne would do little more than cancel debts that were not being serviced, making the average person in the poorest countries only $2 better off each year.

In September 1999, Unfinished Business highlighted the work still to be done by the world's leaders – and showed that the cost of cancelling all unpayable debts to the poorest countries would be no more than $4 per year for each person in the industrialised world. In March 2000, Kicking the Habit called for a break in the cycle of reckless lending and unsustainable borrowing, setting out an alternative process for agreeing debt cancellation and ensuring the poorest benefit. Throughout the year, campaigners have maintained the hope that the world's leaders would at least deliver on the promises they made in Cologne, as a significant step towards a genuine solution to the crisis of unpayable debt.

This report shows the scale of the leaders' failure. Chapter two sets out the progress made so far on the promises of Cologne. It reveals the additional hoops and hurdles that have been placed in the path of countries in need of urgent debt cancellation. It examines just how much of that $100bn has been delivered so far and reveals for the first time that – without a dramatic new initiative from the leaders of the G8 – the $100bn target will never be reached.

Political leaders are required to do just that – to lead. While the G8 leaders are lost in the minutiae of detail and obsessed by how to share the tiny cost of the Cologne package, they fail to step back and recognise the historic opportunity – and duty – they face. Chapter three looks at the lessons of history, making clear that at crucial moments in the past when decisions have been required, the cost of inaction has been high.

Stark choice

Chapter four explains why the time for action is now. It shows that for a number of reasons, the world's leaders will never have the same opportunity to act to solve this problem after the end of this year. It sets out the three steps they must take to recognise and respond to the scale of the crisis that kills millions of children every year.

Relaxing on their island, the world's most powerful men will be able to pretend, if they want to, that they are dealing with the great issues of the moment. They will be able to indulge in the minor squabbles that divide them, disagreements that are magnified in importance to themselves, but quite irrelevant to the lives of the majority of the world's people who live in poverty. They can hoard their great wealth and shore up their power, ignoring for now the rising tides of turbulence on the horizon, confident of their unassailable island position.

Or they can choose a different path. They could cast off their island mentality and face the single issue that most demands their attention as they meet in this millennium year. They could acknowledge that the measures taken so far to reduce the debts of the poorest countries are inadequate and have failed. They could open up their doors to hear the voices of those whose lives they most affect by their failure to act. The world's leaders could leave behind their fantasy island and agree to cancel the debts of the poorest countries in this millennium year.

This report does not instil confidence that the world's leaders will act. Its evidence of past failure does not justify high hopes of a breakthrough. Yet, it makes clear that, in spite of the evidence of recent months, there is nothing to stop them recognising the urgency of the crisis and taking the decision to act now. In the face of a crisis such as that of unpayable debt, political leaders are presented with a choice between action, foresight and true leadership on the one hand, and inaction, indifference and impotence on the other.

The choice could not be clearer.

2. The betrayal of Cologne: twelve months of failure

“Since a politician never believes what he says, he is always astonished when others do.”
Charles de Gaulle

“The debt relief initiative is becoming one of the scandals of the twenty-first century. Debt relief is a hoax.”
Zie Gariyo, Coordinator, Uganda Debt Network,
in an open letter to Uganda's creditors, 19 May 2000

The story of the implementation of the Cologne Debt Initiative agreed by G8 leaders in Germany last year makes depressing reading. There is now more than enough evidence to show that the hopes raised by the rhetoric of 1999 have been betrayed. This chapter shows how:

Hope turns sour

When G8 leaders emerged from their summit in Cologne in June last year, the air was thick with promises of historic progress in tackling the debt crisis in the poorest countries. The US President Bill Clinton described the agreement reached in Cologne as “an historic step to help the world's poorest nations achieve sustained growth and independence.”(1) The British Prime Minister Tony Blair hailed the deal as “a huge step forward...We will be writing off literally billions of dollars worth of debt and I believe this summit will mark probably the biggest step forward in debt that we have seen for many years.”(2) The Financial Times resisted the temptation to become caught up in the euphoria and commented: “But as the leaders return to their capitals, the question is whether reality will match up to the self-congratulatory rhetoric.”(3) Jubilee 2000 campaigners calculated the real benefits of the initiative and described it as merely “crumbs of comfort” to the poorest countries. They were clear that a promise of $100bn in debt cancellation was simply grossly inadequate given the scale and seriousness of the crisis. Additionally, the failure of Cologne to tackle the absurdities and injustice of IMF structural adjustment conditions (in fact, further conditions for debt cancellation were piled on at Cologne) caused widespread dismay. Nevertheless, given the immense inertia that had previously dogged progress on the issue, many Jubilee 2000 campaigners acknowledged the deal as a significant step forward.

As the year wore on, what hope they had began to fade. In September, the Pope was moved to complain: “We have to ask ... why progress in resolving the debt problem is still so slow. Why so many hesitations? Why the difficulty in providing the funds needed even for the already agreed initiatives? It is the poor who pay the cost of indecision and delay.”(4)

The Pope's words seemed to inject some urgency into the process as leaders recommitted themselves to the Cologne agreement at the annual meetings of the World Bank and International Monetary Fund in September. British Chancellor Gordon Brown, who chaired the IMF's governing committee, predicted that the first country would begin to benefit from the new initiative “within weeks”.(5) Hopes were further raised when President Clinton promised to cancel the entire debts owed to the United States by the poorest countries – a position soon adopted by the British government and eventually by the rest of the G7, in respect of their own bilateral debts.

In December 1999, the World Bank and IMF were still predicting that 24 countries would reach `decision point' – the time when some interim relief on debt payments is given – in 2000.(6) This would have fulfilled the earlier pledge by creditors that three quarters of the 33 `eligible' countries should have begun to receive relief before the end of 2000. However, as the world welcomed the new millennium, it was becoming clear that the expectations of a fresh start would not be matched by action on debt. At the end of January, when at least four countries should have begun to benefit from Cologne, none had done so. In February, three countries began to receive relief. By the spring meetings of the World Bank and IMF in April, the total had reached five – Uganda, Bolivia, Mauritania, Mozambique and Tanzania – well short of the eleven that had been expected by then. Still no country had actually had debt cancelled, only interim relief on debt payments. UN Secretary General Kofi Annan warned that the “deeper, faster and broader relief promised last year has yet to materialise.”(7) The G7 showed signs that they too were aware of the expectations they had created. French finance minister Laurent Fabius told colleagues at the spring meetings: “We must not betray the expectations created by the Cologne Initiative.”(8)

Finally, in May, Uganda became the first country to reach `completion point', when debt is actually cancelled. Even then, the Paris Club of bilateral creditors disputed Uganda's qualification and delayed their participation. By the time of the Okinawa summit, thirteen months after Cologne, it is expected that ten countries will have begun to receive relief (Honduras, Senegal, Burkina Faso, Benin and Mali joining the first five), while Uganda will remain the only country to have received actual cancellation.

In April this year, British development minister Clare Short warned that it would be “a disaster”(9) if the target of three-quarters of eligible countries were not met by the end of 2000. Yet in the same month, the World Bank was busy downgrading its target to “up to 20 countries”. It is now clear that not only will the creditors fall well short of this target – with less than half expected to be in the process by the end of the year – but that the Cologne deal will not be fully implemented until at least 2005. Furthermore, Jubilee 2000 examination of the new evidence now available shows that no more than $90bn will ever be cancelled under the Cologne initiative – $10bn short of the promised amount. This analysis is detailed later in this chapter.

The evidence to date

One of the problems caused by the slow pace of the Cologne initiative is that evidence of the actual degree of impact on the debt levels of the poorest countries has been hard to come by. Claims by some creditors that two-thirds of total debt was being cancelled, and campaigners' contrary assertions that the cuts were likely to be only around one-third, were difficult to verify in the absence of hard evidence. However, now that ten countries are finally beginning to receive relief, it is easier to judge the impact of the initiative. The evidence shows that the warnings of the campaigners were entirely justified.

As Table 1 shows, the ten countries' debts will eventually be reduced by $9.1bn, in net present value terms, a cut of just 34 per cent in their total debts. This average draws together wide differences: Mozambique's cut of 72 per cent contrasts with Senegal's at just 17 per cent. Annual debt service payments fall on average by 27 per cent, though in the case of Tanzania debt service is likely to fall by only 7 per cent. The reason for this tiny fall is because in Tanzania's case the Heavily Indebted Poor Countries (HIPC) initiative is largely cancelling debt that was not being serviced in any case. Rather than boosting government funds for poverty reduction, the initiative is just tidying up the books of creditors and recognising unpayable debt for what it is. There is almost no benefit to ordinary Tanzanians.

The real outlook for Tanzania may be even bleaker than the World Bank estimates above. The Tanzanian finance minister Daniel Yona warned against over-expectations following the country's entry into the initiative. In a pre-budget speech at the end of May he said that 27.4 per cent of the government's recurrent revenue, projected at about $1.05bn in the 2000/2001 fiscal year, would be spent on servicing the external debt. This would mean payments of $290m in the current financial year, more than it was paying before entering HIPC.

One of the hopes of the Cologne initiative was that it would allow countries to put the needs of the poorest before the demands of foreign creditors, particularly through prioritising spending on basic health and education. On the evidence so far, it is comprehensively failing to do that. The ten countries will continue to pay debt service on their foreign debt equivalent to their spending on education and over a third more than they are spending on health.

To understand why the HIPC initiative fails to bring the poorest countries' debt payments down to a more genuinely sustainable level, it is important to consider the way in which `debt sustainability' has been defined. The measure used is the `debt to exports' ratio – in other words, total debt as a percentage of the revenue from a country's exports in a particular year.(11) Under the original terms of the HIPC initiative, a debt to exports ratio of 200 – 250 per cent was considered to be sustainable. The World Bank and IMF insisted this was based on solid empirical evidence. When the new terms of the HIPC initiative were laid down in Cologne, the `sustainable' debt to exports ratio was suddenly redefined as 150 per cent. This was not as a result of some new research identifying that figure as the correct one. It was the result of a negotiation between the various creditors involved. Nobody claimed that 150 per cent was more technically correct than 200 per cent, 100 per cent or 50 per cent. It was just the level that all the creditors were able to agree on.

Thus after Cologne, the creditors' claim that they had a scientific basis for their notion of `debt sustainability' has been wholly undermined. This has been further demonstrated by the actions of bilateral lenders in the G7, who have each now pledged 100 per cent cancellation of their own bilateral debts – while insisting on a completely different level of cancellation from the multilateral institutions they control. Harvard economist Jeffrey Sachs made this point powerfully in an address to the World Bank in April: (12)

“The current targets of debt reduction are based on an utterly phoney `Debt Sustainability Analysis' that couldn't pass muster in a first-year economics class. Indeed, the phrase `debt sustainability analysis' is truly Orwellian in scale of distortion. The IMF and World Bank procedures for measuring sustainability have absolutely nothing to do with ability to pay, and 100 per cent to do with the arbitrary limits on debt relief laid down by the G7 at the Cologne Summit. The IMF and World Bank documents should be relabelled as “Debt Relief Allowed by the G7,” rather than “Debt Sustainability Analysis.” At least the world would complain less about the roles of the IMF and World Bank in this sham, and turn the spotlight on the creditor countries instead.”

It is this discredited definition of `debt sustainability' that leaves the ten countries above paying more to foreign creditors than they spend on the health of their people. In order to meet the real needs of the people in some of the world's poorest countries, creditors can and should cancel much more of their debts – as we discuss in chapter four.

An initiative that delivers less and less

Another significant fact now evident (as figure 1 shows) is that the second wave of countries coming into the initiative after the initial entrants are getting less debt cancelled and less debt service reduction. The first wave of five countries will see their debts cut by just over 40 per cent; the second wave of four countries will have a cut of 22 per cent. Similarly, debt service payments for the first wave fall by 35 per cent; for the second wave only 19 per cent.

This is in a sense to be expected: it is no surprise that the countries `at the front of the line' in the initiative were among those in need of the deeper cuts in their debts. However, it is further evidence of the limitations of an initiative based not on the needs of the poorest countries but on the willingness (or otherwise) of lenders to accept a loss. It also cannot make us optimistic about the gains that later waves of countries are likely to make under the HIPC initiative.

A million reasons to delay

Table 2 details current expectations of the point at which countries will reach decision points under the HIPC initiative – and explains the reasons for the delay in each case. There are a number of reasons why the process is stalling. In one or two cases there is really no option but to delay – the military coup in Côte d'Ivoire presents obvious problems. However, in virtually every other case the blame for delay rests with the creditors:

$100bn cancellation will never happen

The delays to the implementation of the Cologne agreement, and the limited scope of the initiative in the first place, mean that much less debt is so far being cancelled than the headlines after the Cologne summit last year suggested. In Cologne and ever since, creditor governments declared that they have agreed to cancel up to $100bn. In fact, so far, less than $12bn of that total has actually been cancelled – and most of that had already been cancelled before the Cologne summit. Since Cologne, less than $2bn has been written off. Table 3 (above) shows how the $100bn figure was calculated and how much has actually been cancelled so far. (14)

While the slow progress towards the $100bn promise is deeply disappointing, even more serious is the fact that it is now clear that $100bn will never be cancelled under the Cologne initiative. Our analysis shows that the creditors will fall $10bn short of their $100bn promise – and even the $90bn will not be delivered until 2005 at the earliest.

The failure of creditors to keep their $100bn promise is based on a number of factors. First, the basis of the original $100bn claim now appears suspect. In particular, the assessment that $20bn would be written off through the cancellation of ODA (aid) debt by G7 countries is not backed up by the data available. This suggests that component of the $100bn was overestimated. Additionally, the projected size of cancellation under the HIPC initiative has been eroded by the countries now considered unlikely to qualify and the withdrawal of Ghana and Laos, after creditor pressure.

Neither major creditor governments nor the World Bank or IMF seem able or willing to provide any timetable for the delivery of the $100bn. In the absence of official figures, we have calculated the most likely timing and extent of progress towards the $100bn promise. While our assessment involves a number of necessary assumptions that may be questioned, we have tried in each case to err on the side of assuming larger and faster delivery. We make no assumptions of delays that are not already being made by the creditors. Therefore, if we are wrong, it is likely that the true picture is even worse than we suggest.

Our analysis, presented in figure 2 and Table D (page 29), shows that by the end of 2000, the millennium year, under $15bn of the $100bn will have been cancelled. By the end of 2001, a further $13.6bn will take the total cancelled to just under $28.5bn, one third of the promised amount. A year later, the total will reach $69.4bn and will edge up over the following two years to reach a final total of around $90.1bn by the end of 2005. The remaining $10bn of the Cologne promise will never be delivered.

It should be remembered that this is the progress we expect to see towards a total that Jubilee 2000 always regarded as insufficient to meet the needs of the poorest countries. Figure 2 also shows the amount cancelled as a percentage of the total debt owed by the HIPC countries. By the end of 2000, only 7 per cent of these debts will have been cancelled – and even in 2005, the percentage written off will be just 42 per cent. The claim of campaigners that the Cologne initiative would write off little more than one-third of HIPC countries' debts – which is already in line with the evidence of the first ten countries – may prove to be very close to the truth. However, few could have imagined it would take quite so long to deliver so little.

Out in the cold

  1. While the prospects for the countries eligible for the Cologne initiative are not great, the fate of those that do not qualify is even worse. Jubilee 2000 has long argued that the HIPC list is too restrictive. Even on the basis of the `debt sustainability' targets set by the World Bank and IMF, there are many additional countries that have unsustainable foreign debt. Most of these countries are ruled out on the basis that they are middle- income, or not following the necessary IMF structural adjustment programme. Two of the most obvious cases for debt cancellation are Nigeria and Haiti.
  2. Nigeria has been ruled out of HIPC relief, despite having income per head less than $300 and a debt to export ratio of over 250 per cent. The country was originally listed as one of the HIPCs but was removed from the list by the World Bank and International Monetary Fund in early 1999. The reasons for this remain unclear – the World Bank says it is because Nigeria is eligible to borrow from its non-concessional lending arm (IBRD) as well as its concessional facility (IDA), but Nigeria's status as a borrower had not changed since it had been originally included on the list. What had changed in Nigeria was its political climate, as a transition administration prepared the way for free elections and a return to democracy. Suspicions remain that Nigeria's removal from the HIPC list was a reaction to the sudden realisation that – because Nigeria was at last returning from political and diplomatic isolation – the creditors would have no excuse not to grant the country relief in line with the HIPC initiative. Rather than face the cost of cancellation for such a large debtor, they simply took it off the list of potentially eligible countries.

In the current year the country is due to pay its foreign creditors a total of $3.6bn. There is only $360m in the budget to pay for poverty reduction, a tenth of the amount that creditors are demanding. Meanwhile the stability of Nigeria's fragile steps to full democracy remains undermined – first, by the lack of resources the government has available to spend on its people, many of them among the world's poorest; and second, by the impact of unbending structural adjustment conditions that are forced upon Nigeria in order for it to have any hope of debt reduction or future aid. The widespread unrest in the country as IMF fuel price increases are imposed is an ominous sign and the failure of Nigeria's creditors to offer debt cancellation now is extraordinarily short-sighted. If there were ever a case of debt cancellation being in the clear interests of the creditors as well as the debtor, Nigeria is it.

In Latin America, Haiti also urgently needs debt cancellation. It is the poorest country in the western hemisphere and its debt to export ratio is 171 per cent, significantly above what the IMF and World Bank consider to be sustainable. 40 per cent of the country's debt was incurred by the dictatorships of Papa Doc and Baby Doc Duvalier, who were lent money in spite of the obvious evidence that the Haitian people would be the last to benefit. The Duvaliers are believed to have embezzled $900m from public funds – almost as much as the $1bn currently owed by Haiti to foreign creditors.

Haiti is another country whose exclusion from the Cologne initiative is almost impossible to explain. The British development minister, Clare Short, acknowledged that Haiti should not have been left off the HIPC list, arguing it was an “exceptional case” that requires “special consideration”.(15) However, despite this, the country appears no nearer inclusion for debt cancellation.

The 100 per cent club

It is very possible that the G7 will use their meeting in Okinawa to announce the cancellation of 100 per cent of the debts owed to them by countries qualifying for the HIPC initiative. This announcement is not new. In fact, following Norway's lead, the United States, Britain and Canada adopted this position before the end of 1999 and the others followed in the first four months of 2000. All the G7 creditors are now committed to 100 per cent bilateral cancellation of their (eligible) export credit debts. If the G7 were to use their Okinawa meeting simply to recycle old promises about cancelling 100 per cent of these debts, they would have underestimated both the seriousness of the debt crisis and the intelligence of those around the world calling for a real solution to it. Okinawa ought to be a place for action at last, not words yet again.

All had previously committed themselves to cancel 100 per cent of ODA (aid) debts for around thirty countries, except Japan, which deals with ODA debts through a complex and bureaucratic process called the Grant Assistance for Debt Cancellation scheme. This has the benefit (to Japan) of ensuring that the resources transferred to debtor countries must be used to buy goods and services from OECD countries – usually Japan. A further concern is that four of the G7 countries are refusing to cancel `post-cut-off date' debt, which leaves a small portion of the debt untouched by the 100 per cent commitment (USA, Canada and Britain are the exceptions to this).

The broad commitment by the G7 to cancel 100 per cent of their bilateral debts is a welcome step. It nevertheless has two considerable flaws:

 

Some bilateral creditors outside the G7 have shown signs of joining the 100 per cent club. Norway declared its intention to cancel 100 per cent of eligible debt for HIPCs before any of the G7 and in April, the British Chancellor Gordon Brown indicated that he expected other Scandinavian and European countries to join the G7. So far, only the Netherlands has added itself to the list.

The World Bank and IMF have so far shown no intention of cancelling 100 per cent, despite a growing crescendo of appeals for them to do so. The US Congress Meltzer Commission and the United Nations Conference on Trade and Development (UNCTAD) have called on the World Bank and IMF to cancel 100 per cent of their claims on HIPCs, and have been joined by the UN Secretary General, Kofi Annan.

We have demonstrated in this chapter that on its current path, the deal agreed at Cologne will never deliver a genuine fresh start for the poorest countries. The agreement:

for the first nine countries, is reducing debts by one third on average, and annual debt payments by one quarter;

The evidence is now clear: without political leadership to agree a new and far better deal for the poorest countries, the world's leaders will fail. The need for a political decision to be made – and the evidence of the cost of indecision and inaction in the past – is set out in the next chapter.

Chapter Two Footnotes

1 Financial Times, 21 June 1999.

2 Times, 19 June 1999.

3 Financial Times, 21 June 1999.

4 Papal statement, 23 September 1999.

5 Independent, 24 September 1999.

6 World Bank/IMF, Update on Costing the Enhanced HIPC Initiative,

7 December 1999.

7 The Commonwealth Lecture, London, 14 March 2000.

8 Statement to World Bank/IMF Spring meetings, 16 April 2000.

9 House of Commons, 3 May 2000

10 Benin debt reduction is Jubilee 2000 estimate. Debt service after HIPC are Jubilee 2000 estimates in the case of Senegal, Benin and Honduras. Burkina Faso estimate is taken from Modifications to the HIPC Initiative, World Bank and IMF paper, 23 July 1999.

11 The debt to exports ratio and other ratios used in the HIPC initiative define debt in Net Present Value (NPV) terms. This can be understood as the amount a debtor would need to have in a bank account today, earning interest at market rate, so that all principal and interest payments could be made from that account as they become due. If debt is concessional (eg. aid loans) the NPV is lower than the lump sum (the `nominal' amount) owed.

12 Keynote Address to the Annual World Bank Conference on Development Economics, Washington DC, 19 April 2000.

13 Statement on behalf of IMF Africa Group 1 Constituency, International Monetary and Financial Committee (IMFC) of the IMF Board of Governors, 16 April 2000.

14 The process of calculating the amount that has been cancelled so far is complex. If we consider the total cancelled under Naples terms for the HIPCs that have passed through the Paris Club since 1995, together with the additional HIPC relief under HIPC 1 for the four that reached completion point and the HIPC 2 relief for Uganda we arrive at an estimate that less than $13bn of the $100bn has been cancelled. By 1998 there had been seven stock of debt operations – Uganda and Bolivia in 1995, Mali, Guyana. Burkina Faso and Benin in 1996 and Senegal in 1998 – covering more than $3bn (Global Development Finance 1999, volume 1, page 129). In 1999 Mozambique and Guyana received stock of debt operations on Lyons terms with Guyana $0.2bn and Mozambique $1.9bn (Global Development Finance 2000, volume 1, page 72). There is then the debt cancellation agreed under HIPC 1, which is $650m for Uganda, $760m for Bolivia, $3.7bn for Mozambique and $410m for Guyana. Finally there is the additional $1.3bn of HIPC 2 relief for Uganda together with an estimated $90m in ODA. The total of this is $11.9bn. There is some double counting as some of the Paris Club relief is also included the HIPC relief, but there is also cancellation of ODA that has been going on unilaterally by creditors on a non-systematic basis. A fair estimate would be that no more than $12bn has been cancelled of the promised $100bn.

15 House of Commons, 21 May 1998.

3. From Versailles to Kigali: political leadership and the lessons of history

“But what of the roads not taken? Or those that still remain open? Choices are the essence of history, and while different historians will emphasise different turning points, it is important to think about the possibilities not pursued as well as those that were followed.”
William Chafe, The Unfinished Journey

One of the successes of the Jubilee 2000 movement is that in a short period, millions of ordinary people around the world have become experts on the finer points of the debt relief debate. Nuns in southern India have wrestled with Japanese finance ministry officials on the merits of Japan's Grant Assistance for Debt Relief scheme. The British Treasury routinely receives lengthy correspondence from elderly citizens in the English counties raising the significance of the post-cut-off date issue in bilateral write-off proposals. Villagers in Bolivia challenge their government representatives over the terms of consultation with civil society in the preparation of a Poverty Reduction Strategy Paper. As a jargon-buster, Jubilee 2000 has achieved a lot.

However, while the arguments over detail go on, they cannot detract from a greater and more urgent need. Faced with a serious problem that has not been solved, what is required is for the world's political leaders to make a choice: to do nothing, or to act. Politicians make such political choices every day. Once in a while, they make choices that are a matter of life and death. Choices like these are not easy to make. They require leadership, vision and courage. Ultimately, they are what politics is all about. They are what led the British Prime Minister, Tony Blair, to announce on his election to office in 1997, after years in opposition: “Enough of talking. It is time to do.”

Jubilee 2000 argues that the world's leaders face such a choice now. The island mentality they have developed has obscured their sense of perspective: relatively inconsequential matters are magnified in importance, while problems of fundamental importance, because their immediate consequences are far from view, are ignored. If they are not ignored, the response considered appropriate by the leaders is grossly insufficient. And most importantly, even when action is intended, the low priority attached to the problem means that the drive for action peters out before the desired result is achieved.

The debt burden of the poorest countries is one such issue, and the case for political action is made simply:

A political choice is therefore required – to do nothing, or to act. On that decision rests not just the life chances, but the lives, of millions of the world's children.

This chapter looks at a number of historical moments on the international stage when enlightened political action has been required. On each occasion, leaders have failed to take such action. From these case studies, we learn two lessons:

The examples chosen here are deliberately diverse. The point is to demonstrate the critical importance of political action or inaction at key moments, regardless of the context. With this in mind, we consider the Rwandan genocide of 1994; the treatment of Germany following the First World War; and the build-up to the Falklands War between Britain and Argentina in 1982.

Rwanda: the appalling price of inaction

One of the most blatant and disturbing examples of costly inaction by the world's political leaders is also one of the most recent. The massacre of one seventh of the population of Rwanda in 1994 is a deep scar on our recent history. In barely four months, the entire governmental structure of the country and its army was used to mobilise or compel thousands of people to join in the killing. It is widely accepted that the international community's failure to act in the face of the genocide dramatically increased the human and economic cost of the carnage.

The failure of politicians to act in Rwanda can be attributed to a number of factors. Perhaps most importantly, the US was desperately keen to avoid a repeat of its experience in Somalia in 1993, when American lives were lost in an apparently hopeless mission to restore order in the troubled state. The impact on American public opinion, as slain servicemen's bodies were dragged through Mogadishu's streets under the horrified gaze of US television networks, was devastating. The US also used the huge increase in United Nations peacekeeping costs – 370 per cent from 1992 to 1993 – to review its support for such operations. Contributing 31 per cent of this budget, the US was determined to keep costs of the Rwandan operation as low as possible. This meant limiting the size of the force.

Other leading nations were also unable or unwilling to acknowledge the need for action. Rwanda was not seen as strategically important compared to other UN priorities, such as Bosnia and the Persian Gulf. Whatever the cause, there was apparently no lack of information to warn the international community of the emerging genocide. The then head of UN peacekeeping, Kofi Annan, is reported to have seen a fax warning of genocide plans in January 1994.

The turning point, the moment of possibility before Rwanda descended into deadly chaos, appears to have been shortly after this. The commander of the UN mission in Rwanda, General Romeo Dallaire, suggests that the moment for action was in the first few months of that year. Reflecting on that moment some months later, he said: “If I had had the mandate, the men and the equipment, hundreds of thousands of people would be alive today.”(3) Dallaire and other military experts claimed that an international mission of five thousand experienced soldiers could have halted the killings.

However, decisive political action to authorise such a mission failed to materialise. Instead, a series of diplomatic and humanitarian measures were taken, all of which underestimated the scale and speed of the crisis. The United States closed its embassy and evacuated its citizens, but did not immediately break relations with the interim Rwandan government that was sponsoring the genocide. Arthur Jay Klinghoffer calls the American position “one of regret and non-partisanship, with no intimation of strong action.” Meanwhile, a humanitarian relief effort was launched but with no attempt to halt the increasingly transparent genocide.

While nobody can know exactly what might have happened if a decisive international response had been agreed, Dallaire's judgement of the effectiveness of a small but experienced international force seems entirely plausible. Operation of the genocide was highly centralised, so stopping the killing in Kigali would have quickly quelled violence elsewhere in the country. Additionally, a serious challenge by the international community would have signalled that the government was considered illegitimate and therefore unlikely to receive the support needed to survive. This may well have discouraged those Rwandans who joined the killing campaign and stimulated others to oppose it.

An international force of the kind Dallaire envisaged would have cost around $400m. Instead of bearing this small cost, political leaders chose not to act. What was the cost of this inaction? First and most profoundly, the human cost of this failure was some 800,000 dead, mostly Tutsis, as well as many more injured and two million people left homeless as they were displaced within Rwanda or to neighbouring countries. This human cost is immeasurable in financial terms.

However, the direct economic costs are just as clear. Rwanda's Gross National Product plunged from $1832 million in 1993 to $723 million in 1994, and has only just returned to pre-genocide levels. The 70 per cent living below the poverty line became more economically vulnerable as many families were headed by women or children. The distribution of food supply has remained poor resulting in chronic malnutrition (a 1999 survey found 56 per cent were chronically malnourished in the north western area of Ruhengeri, for example). Massive population movements since 1994 and the subsequent resettlement of 3.5 million people have further exacerbated economic problems, not only in Rwanda but in neighbouring countries. The health and education of those Rwandans who survived the genocide has unsurprisingly been affected, signalling costs that will continue for many years. Trauma and psychiatric illnesses have been much more prevalent and primary school attendance fell considerably from 1994 to 1996. Added to all that is the huge cost of bringing hundreds of thousands of suspected perpetrators to justice.

Even setting aside the appalling human cost of the genocide, the economic costs alone would run into billions of dollars. How much of this cost might have been avoided for an investment by the international community of $400m or so? And how many lives would have been saved if political leaders had had the courage and foresight to act? No one can know the precise answers, but the refusal to act in Rwanda at that critical moment in 1994 ought to shame the world's leaders for many years to come. Never again should an entire people be abandoned to an appalling fate through inaction and neglect.(4)

Germany: no winners

The statesmen who gathered to make peace in Paris in 1919, at the end of the First World War, had the opportunity to give Europe a fresh start. The war had been on a scale previously unknown. Its impact was enormous – 8.5 million servicemen and five million civilians were killed and much of Europe was directly affected. The leaders of the Allied powers wanted to punish Germany for the aggression which sparked the war and drew up a punitive list of reparations to be paid. As well as losing much of its territory, Germany was to be charged around $33bn, with a 6 per cent interest rate attached. In addition, a variable payment of 26 per cent of the annual value of Germany's exports also had to be made.

The British economist, John Maynard Keynes, was a member of the Reparations Commission and urged his colleagues to rethink. He wrote: “Germany's capacity to pay will be exhausted by the direct and legitimate claims which the Allies hold against her.” Keynes offered alternative proposals to the commission which would have reduced the reparations to a level that would have been much more likely to yield payment, without pushing the German economy into dangerous instability. The commission refused to act and reduce the claims against Germany. Keynes was defeated and resigned his position. Germany was told it would have to pay.

Throughout the early 1920s the German administration repeatedly requested a moratorium on its payments, but this was always refused. After a revised payments plan was agreed in 1924, Germany did manage to keep up payments until 1929, but only by borrowing massively from abroad. Its internal industrial and financial systems remained in a state of collapse and when foreign lending dried up in 1929, the financial collapse that followed was inevitable. One last attempt to solve the reparations issue through the Young Commission in 1929 failed to produce a working solution, before Germany was engulfed in financial and then political crisis in the early 1930s.

There appear to have been a number of potential turning points, when action by political leaders could have turned events on to a different course. The first and most important was when the Allies refused to hear the warnings of Keynes and others in the deliberations of the Reparations Commission. A much later moment when decisive action could have made a difference came in 1929 with the Young Commission.

The Allies' refusal to act by waiving or reducing the reparations they imposed cost them, as well as Germany, dearly. While they recovered probably less than a quarter of what they demanded in reparations, they helped to create a climate of instability and hostility in Germany that led to the rise of Adolf Hitler and the Second World War. The cost of that war – $13 trillion in direct military costs and 60 million lives lost – far outweighed the small amount the Allies received in reparations.

What would have been the cost of the Allies taking action in the early 1920s to avoid extracting excessive reparations? If the Allies had not taken the amounts that Germany did pay, they would have foregone around $5-8bn. The ultimate cost of their failure to act, in the form of the Second World War, was some two thousand times that in direct military costs alone.

While no-one can say for sure whether events would have been different if Germany had not been required to pay so much, the evidence from after the Second World War is interesting. By this time, the Allies were ready to try a new, more enlightened approach. The cancellation of much of the debt owed by Germany to the US and Britain, along with the huge effect of Marshall Plan aid, played a central part in the establishment of a peaceful and prosperous West Germany in the post war years. The benefits to the Allies of this are as unmistakable as the costs of their failure to take similar action in 1919.(5)

The Falklands: reading the signs

The dispute between Britain and Argentina over the South Atlantic territory of the Falklands had rumbled for many years prior to the attempt by Argentina to take back the islands by force, in pursuit of its historic claims, in April 1982. Since then, historians have pored over accounts of the build-up to the conflict to judge whether the Argentine military action could have been avoided. Many believe it could, had action been taken by British politicians at a crucial turning point. Hugo Young writes that the war “was the result of a great failure in the conduct of government: arguably the most disastrous lapse by any British government since 1945 ... Britain's indifference, indecision and lack of foresight were accessories before the fact of Argentinian aggression”.(6)

The basis for Young's assertion lies firstly in the British government's failure to win support for a `leaseback' compromise deal with Argentina over the sovereignty of the Falklands; and secondly in the government's 1981 Defence Review which recommended the withdrawal of a survey ship, HMS Endurance, from the South Atlantic region. The first of these two factors is described by Young as “the first point at which a better-organised deployment of government energy might have produced a result which avoided ultimate war.” The second, according to intelligence reports, sent the signal to Buenos Aires that Britain was not serious about its defence of the Falklands – and triggered the 1982 military action. The withdrawal of Endurance proceeded despite pleas from the Foreign Office for a rethink, and was defended by the Prime Minister, Margaret Thatcher. Meanwhile, British political leaders seemed unaware of the developing Argentine plans, to the extent that four days before the arrival of Argentine forces, the Defence Secretary was dismissing a House of Commons question about the withdrawal of Endurance as unimportant. After the subsequent war, the inquiry into the conduct of the British government concluded that it was “inadvisable” to withdraw Endurance, and that the decision should have been taken to keep it in place.

The cost of the subsequent war between Argentina and Britain over the Falklands includes the human cost of nearly one thousand lives lost. The direct military cost to Britain alone was over £3bn. What would have been the cost of the action that might have avoided the war? HMS Endurance cost £3m each year – one thousandth of the cost of the subsequent conflict.

Interestingly, a similar situation had developed five years earlier, when the previous British administration had received reports of Argentinian military planning. British politicians decided to send three vessels to the South Atlantic region. The Prime Minister, James Callaghan, later said that while the deployment was kept secret, he told his intelligence chief that the Argentines should be discreetly allowed to find out. The cost of this action would have been no more than a few thousand pounds.(7)

Of course, this case study does not intend to address or judge the issue of sovereignty over the Falkland Islands. It is included as an example of a moment when decisive political action could have avoided massive costs and, most importantly, saved human lives. The lessons of the Falklands, Germany, Rwanda and countless other moments in history, should focus the world's leaders on their response to the millennium moment now upon us.

Chapter Three Footnotes

1 World Bank, Global Development Finance 2000.

2 UNDP, Human Development Report 1997.

3 Interviewed by Australian Broadcasting Corporation 24 July 1994 (African Rights).

4 Sources on Rwanda are Human Rights Watch, Leave none to tell the story, 1999; African Rights, Rwanda: Death, despair and defiance, 1995; Klinghoffer, The international dimension of genocide in Rwanda, 1998; Economist Intelligence Unit country report, May 2000; Jubilee 2000 country profile.

5 Sources on Germany are Derek Aldcroft, The European Economy 1914-1980 (Crook Helm), 1978; Hans-Joachim Braun, The German Economy in the Twentieth Century – The German Reich and the Federal Republic (Routledge), 1990; Charles Kindelberger, The World in Depression 1929-1939 (Penguin), 1987; John Maynard Keynes, The Economic Consequences of the Peace (Macmillan), 1919; further assistance from the Department of Economic and Social History, University of Glasgow.

6 Hugo Young, One of Us (MacMillan), 1989.

7 Sources on the Falklands are Michael Parsons, The Falklands War (Sutton), 2000; Hugo Young, One of Us (MacMillan), 1989; further assistance from the International Institute of Strategic Studies.

4. This is the moment: why the G8 must act now –
and the three steps they must take

“Never again will we stand
On the threshold of a new age.
We that are here now are touched
In some mysterious way
With the ability to change
And make the future.
Those who wake to the wonder
Of this magic moment
Who wake to the possibilities
Of this charged conjunction,
Are the chosen ones who have chosen
To act, to free the future, to open it up,
To consign prejudices to the past,
To open the magic casement
Of the human spirit
Onto a more shining world.”
Ben Okri, Mental Fight (1)

Ben Okri's words inaugurate a new millennium full of hope and possibility. They are a spur to those who believe positive action can change the world – and a passionate rebuke to those who say nothing will ever change. They challenge us all, but their challenge is most acute to those who lead the richest nations as we enter this new millennium.

This report has shown how the debt initiative launched in Cologne last year has failed and how a clear choice now faces the world's leaders. It has shown how the cost of inaction, in the face of such clear choices facing political leaders in recent history, has been high. This chapter explains why leaders must choose to act now – and outlines the steps they must take. There are three reasons why urgent action is needed:

Hopeless Africa?

Is the world's poorest continent a lost cause? `Hopeless Africa' was the headline chosen by the Economist in May to illustrate the apparently overwhelming wave of troubles facing Africa. It is neither hopeless nor a lost cause – it is such a vast and diverse continent that such generalisations are facile – but its troubles are real. Children born today in Africa will die on average by the time they are fifty, and much earlier in the large number of countries struck by AIDS. Infant mortality is much higher here than anywhere else in the world. While global communications encompass the globe, Africa is in grave danger of being left behind, with 14 telephone lines for every thousand people and – at a much more immediate level of communication – just 15 per cent of its roads paved.(2)

At the heart of this is the crisis of unpayable debt. Africa transferred $105bn to the rich world in debt payments in the 1990s. Despite this, the continent's total debt has grown to $230bn in 1998. 65 per cent of the amount incurred since 1988 has been due not to new borrowing but to capitalised interest and arrears.(3) Furthermore, the increase in debt heavily outweighs any rise in economic growth. HIPC debt increased by 7.4 per cent each year between 1980 and 1997, while GNP for those countries rose by only 1.1 per cent each year.(4)

The series of steps taken on debt over the last two decades has failed to halt this trend. World Bank economist William Easterley, examining the host of initiatives unveiled at conferences and summits around the world, notes how the action so far has failed to deal with the problem: “The necessity to provide continuing waves of debt relief one after another, from UNCTAD to Venice to Toronto to Houston to Trinidad to London to Naples to HIPC to expanded HIPC ... may suggest something is wrong with the implementation of debt relief.” (5)

The United Nations Development Programme estimates that the money spent on debt payments by Africa could, if spent instead on health and education, save the lives of seven million children each year.(6) This means that despite the words spoken by leaders on this issue, because of their failure to take real and immediate action, more than three million children have died in this new millennium already.

The world's richest nations have committed themselves to ambitious targets to reduce this poverty dramatically. In 1996, the 21 OECD Development Assistance Committee (DAC) members agreed a set of six goals, which they described as “ambitious but realistic”. The central goal is to reduce by half the number of people living in extreme poverty. Joseph Hanlon calculates that in order to have a chance of meeting these targets, the creditor countries would need to cancel around $500bn owed by 93 countries – and increase aid as well. (7) Yet, as chapter two shows, the creditors seem unable to cancel even one fifth of this amount. Their commitment to their own poverty reduction targets is hard to take seriously without a new approach to debt cancellation.

Unprecedented wealth

The wrangling over the speed and scale of necessary debt cancellation is taking place against a background of greater wealth in the `developed' world than has been seen in human history. It is also a time of phenomenal inequality in wealth:

The claim by some of the creditor nations and institutions that they cannot afford to cancel debt rings hollow against this reality. In fact, the cost of cancelling debt is small. The debts of the 52 countries Jubilee 2000 considers most in need of debt cancellation could be written off completely for an approximate cost of $71bn. This is not an `up front' cost but is spread over 20 years or more. Thus, the true cost is about $4 per year – or a penny a day – for each person in the industrialised world. (12)

An unrepeatable opportunity

There is one further reason why the world's leaders should act now on debt. Since the early 1990s, a groundswell of support has been building for the idea that this crisis should be resolved as a way of marking the arrival of the new millennium. From the Pope to pop stars and millions of people in every continent of the world, the year 2000 has been identified as a time to restore economic order and moral justice by writing off the unpayable debts of the poorest countries.

The passing of the year 2000 means different things for different people. For many, the first months of the new century have already proved a disappointment. The leaders can add meaning to this somewhat arbitrary date, but their moment of opportunity is running out.

Three steps

The outstanding objections to comprehensive debt cancellation have been dealt with. In particular, the claim that the rich nations cannot afford debt cancellation is absurd and offensive. In the light of the failed efforts of the past year (and the two decades before it), the need for action is now urgent. The world's leaders should therefore take three steps:

1. Stop taking payments from the poorest countries immediately

This is the easiest and fastest way for the G7 leaders to have an impact in the millennium year. Full cancellation may take time to be delivered – but the rich nations and institutions could stop taking payments from the poorest countries immediately. Those countries would have an instantly expanded capacity to reduce poverty and the loss of human life caused by the debt crisis.

In respect of the debts owed bilaterally to the G7 countries, this would merely mean bringing forward a promise that has already been made. By committing to 100 per cent cancellation for HIPCs, the G7 have already agreed to cease collecting payments at some time in the future. For a very small number of countries, payments to the G7 have already ceased. The problem with their 100 per cent pledge is that it is tied to the discredited HIPC initiative, meaning that for most countries the cancellation will take years to be implemented, and only after IMF austerity measures. By stopping the collection of debt payments now, the G7 would be ensuring their 100 per cent promise would start making a difference – and saving lives – immediately.

It is not only the G7 that must stop taking debt payments. The bulk of annual payments from the poorest countries go not to individual governments but to the multilateral institutions, particularly the IMF and the World Bank. These institutions have the greatest impact on debt payments because of their status as preferred creditors. Even if countries are defaulting on their payments to other lenders, the World Bank and IMF invariably get their money. Any announcement by the G7 to halt collection must apply to the World Bank and IMF too – institutions which the G7 effectively control with their disproportionate voting power.

Creditors may worry that if they stop taking payments from the poorest countries, they will not know how the money is going to be used. This can be dealt with quite simply. They can insist that the debt payments they forgo are ringfenced for the poor. The detail of such an arrangement would have to be worked out – but there are models established in a number of countries to put `returned' debt payments into a trust fund to be used for priority areas for poverty reduction – most obviously the provision of clean water, basic health care and primary education. It is not beyond the combined wisdom of debtor and creditor countries, together with the thousand or so economists at the World Bank, to find a way to ensure debt payments are applied to these priorities. Where confidence in the debtor government's willingness or ability to do this is very low, the payments can be retained in a trust fund until conditions improve. The most important first step is to stop taking debt payments from the poorest countries in the world. It is entirely within the creditors' power to do this.

2. Commit to the cancellation of 100 per cent for all the poorest countries from all the creditors, including the World Bank and IMF, this year

The case for 100 per cent debt cancellation has now been accepted by the G7, in respect of their own bilateral debts. As noted above, it has yet to be accepted by the multilateral institutions. However, the chorus of voices calling for complete cancellation is now overwhelming. From the conservative Meltzer Commission of the US Congress to the UN trade body, UNCTAD, the discredited World Bank / IMF notion of `debt sustainability' has been discarded and replaced by an understanding based in reality. This is the understanding that if they are to have a hope of meeting poverty reduction targets, and of contributing to greater stability and prosperity in their regions and the world, the very poorest countries cannot afford anything less than 100 per cent cancellation.

The chief opponents of 100 per cent debt cancellation are in the World Bank and the IMF. However, this does not mean that the leaders of the rich nations cannot act in this area too. The G8 together effectively control the voting on the boards of both institutions. They could use those votes to push forward 100 per cent cancellation of the World Bank and IMF's debts (they would be unlikely to face opposition from the much weaker contingents on the boards representing the poorest countries themselves). The G8 could immediately announce their intention to propose this policy and then follow through to ensure implementation before the end of 2000.

3. Agree to find a new process to deal with how money freed by debt cancellation is used and to avoid a debt crisis in the future

The old ways of organising the flow of funds between the world's poorest countries and the richest are not fit for the new millennium. The world's leaders should recognise the need to find a better way to do this in the future. Jubilee 2000's report, Kicking the Habit, outlines the unhealthy consequences of the addiction to reckless lending and borrowing habits displayed by elites in creditor and debtor countries:

The world's leaders should examine carefully and urgently the proposals put forward for a new process to regulate lending and borrowing and to deal with debt cancellation. The proposals advanced by Jubilee 2000 and others for an arbitration-based process, similar to that used in private and commercial economic relations, should be considered seriously. The current process of reckless lending and borrowing cannot be sustained.

Taking these three steps would be a fitting way to mark the millennium. Further inaction by the world's leaders would risk the high costs of inaction and impotence that have been seen in the past. Children in the poorest countries of the world cannot wait while the leaders of rich countries sit on their island. The world's leaders must come off the island – and drop the debt now.

Chapter Four Footnotes

1 Published by Phoenix House, 1999.

2 Statistics in this paragraph are from World Bank, World Development Indicators 2000.

3 UNCTAD, Trade & Development Report 1998.

4 World Bank, Global Development Finance 1999.

5 William Easterley, How did highly indebted poor countries become highly indebted?, World Bank, September 1999.

6 UNDP, Human Development Report 1997.

7 Joseph Hanlon, Cancelling debt to permit development, Jubilee 2000, June 2000.

8 Canada Newswire, “Pokemon Gold & Silver expected to sell one million units”, 10 May 2000.

9 Fortune Global 500 and World Bank, World Development Report 1999.

10 Compiled by Dr Robinson Rojas (www.rrojasdatabank.org/sust2.htm) from Euromonitor 1997, UNDP, UNICEF, UNFPA 1994, HDR 1998, and Research Advisory and Business Intelligence Services 1997.

11 UNDP, Human Development Report 1999.

12 Jubilee 2000, Unfinished Business, September1999.

13 Jubilee 2000, Kicking the Habit, March 2000.

Appendix: Chronology of the debt crisis

1956 Paris Club of leading bilateral government creditors formed; holds the first of more than 280 rescheduling sessions concerning 73 countries between 1956 and 1988, the amounts rescheduled totalling more than $330bn (though no debt actually cancelled).

1979 UNCTAD Resolution 165 recommends the cancellation of all loans owed to government aid departments (ODA).

October 1988 Paris Club introduces Toronto terms. Up to 33 per cent reduction possible on eligible debt.

1989 Brady Initiative, proposed by US Treasury Secretary Nicholas Brady, launched. Initiative offers conversion of commercial debt of middle income countries to bonds backed by the

US Treasury.

December 1991 Paris Club agrees London Terms. Up to 50 per cent reduction possible on eligible debt.

December 1994 Paris Club agrees Naples Terms. Up to 67 per cent eligible debt reduction possible.

September 1996 IMF and World Bank launch Heavily Indebted Poor Countries (HIPC) initiative. HIPC offers reduction on multilateral as well as bilateral debts for the first time, intended to bring about debt sustainability based on the relationship of debt to export levels

November 1996 Paris Club agrees Lyon Terms. Up to 80 per cent eligible debt reduction possible.

April 1998 Paris Club goes beyond 80 per cent Lyon terms in order to give Mozambique sufficient debt relief to meet the HIPC sustainability levels.

June 1999 G8 Cologne summit proposes Enhanced HIPC initiative, with lower levels of debt defined as sustainable.

September 1999 Enhanced HIPC accepted by boards of World Bank and IMF at Annual Meetings in Washington.

April 2000 Uganda is the first country to reach completion point, when some debt is actually cancelled, under the Enhanced HIPC initiative.

July 2000 G8 meet in Okinawa, Japan.

September 2000 Millennium Summit of more than 150 heads of government held in New York.

September 2000 Annual Meetings of the World Bank and IMF held in Prague, Czech Republic.

 


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