Ann Pettifor and Bono of U2, Washington September 1999.

The author would like to acknowledge her debt to Professor Kunibert Raffer, Professor Jeffrey Sachs and Oscar Ugarteche for ideas presented in this article.

25th June, 2001.

Introduction  

As far back as 1776, Adam Smith asserted that "when it becomes necessary for a state to declare itself bankrupt, in the same manner as when it becomes necessary for an individual to do so, a fair, open and avowed bankruptcy is always the measure which is both least dishonourable to the debtor, and least hurtful to the creditor"

There is little that is fair and open about procedures to re-negotiate poor country debts today. For years the secretive Paris Club – a cartel of sovereign creditors - has dominated debt-rescheduling processes, hand-in-hand with the closed and bureaucratic IMF.

The Paris Club began life in 1956, to consider Argentina’s external debt. It is an informal body representing all official and private creditors, including all OECD governments, the IMF, World Bank and other multilaterals. It has no legal status, yet it has tremendous power over poor country debtors. In the words of a former Secretary, Mr. De Fontaine Vive "the Paris Club is not an institution, it’s a non-institution. There is no charter and there is no manual", he says proudly. However there are unwritten rules: and the most important of these is that the IMF and World Bank as official creditors are "preferred creditors" – they must always be paid, above and before other creditors, i.e.individual government (bilateral) and private creditors.
In other words creditors are treated unequally by this "non-institution".

According to a recent report in Euromoney, Paris Club members – representing rich, powerful nations and their private creditors "sit in a windowless conference hall while poor country debtors are crammed into a tiny meeting room downstairs….While the G7 creditors are treated to a grand lunch, the debtors are reduced to pleading with an official to order them pizza….Debtors are so badly prepared that they are beaten almost before they start. One of the creditors describes the experience as "humiliating and colonial".

Today Professor Kunibert Raffer of the University of Vienna, Professor Jeffrey Sachs of Harvard and Oscar Ugarteche, former professor of international finance at the Catholic University of Peru, are in the forefront of calls for an open, fair international insolvency procedure for sovereign states. Ugarteche reminds us of the history of state insolvency; in particular the record of western nations in both writing off politically inconvenient debts, and, in the case of Britain’s First World War debts, effectively repudiating their own debts to other nations.

Raffer points out that "under any insolvency procedure……human rights and human dignity of debtors are given priority over unconditional repayment." He argues that "debtor protection is one of the two essential features of insolvency. The other is the most fundamental principle of the Rule of Law; that one must not be judge in one’s own cause…..like all legal procedures insolvency must comply with the minimal demand that creditors must not decide on their own claims"

Raffer notes that "insolvency relief is not an act of mercy, but of justice and economic reason". The Bretton Woods Institutions (BWIs) he argues "take decisions, but refuse to participate in the risks involved". He demonstrates that decision-making by the BWIs "is not only delinked from financial responsibilities, their errors may even cause financial gains. This" Raffer asserts "is a system absurdly at odds with the Western market system. At a time when riskless decision making by bureaucrats is abolished in the East, there is no reason why it should be preserved in the West. It is the most basic precondition for the functioning of the market mechanism that economic decisions must be accompanied by (co)responsibility: whoever takes economic decisions must also carry financial risks. If this link is severed – as it was in the Centrally Planned Economies of the former East – efficiency is severely disturbed…..The striking contrast between free-market recommendations given by the BWIs and their own protection from market forces must be abolished."

Prof. Jeffrey Sachs calls for an international standstill mechanism, that would provide debtor-in-possession financing and a comprehensive and timely workout of the debts. Sachs notes the parallels between Macy’s in New York and Russia in 1992 – both of which went bankrupt in the same month (January, 1992). Macy’s filed for protection from her creditors under Chapter 11. Russia had no protection from her creditors, on the contrary her creditors moved in, and took over "the shop". Macy’s received an immediate standstill on debt servicing; and within three weeks of filing for bankruptcy was able to arrange a new loan of $600 million from several New York commercial banks as part of court-supervised, debtor-in-possession financing. Russia had no such luck! There was no standstill; and the Russian government had to wait over a year to receive from the IMF and World Bank as much money as Macy’s had been able to borrow in three weeks. As a result the Russian government was politically weakened. By the time financing was arranged, many leading reformers had been ousted and Russia’s stabilization programme thrown off track.

Raffer’s call for a system of independent arbitration between sovereign debtors and their international creditors – widely amplified by the Jubilee 2000 movement - has recently been supported by the Secretary General of the UN, who in September, 2000 submitted a report to the General Assembly, calling for "an objective and comprehensive assessment by an independent panel of experts not unduly influenced by creditor interests, while the existing processes are under way. Such an assessment, he argues, should not be restricted to HIPC countries, but should also encompass other debt-distressed low-income and middle-income countries. It should include debt sustainability, eligibility for debt reduction, the amount of debt reduction needed, conditionality, and modalities regarding the provision of necessary funds, including those for the multilateral financial institutions affected. There should also be a commitment on the part of creditors to implementing fully and swiftly any recommendation of this panel regarding the writing-off of unpayable debt."

Limited Liability

Mediation or arbitration in the event of effective bankruptcy are not the only, or main ways in which our domestic legal systems balance the interests of economic development against those of creditors. The key instruments in law are (a) corporate personality and (b) limited liability of the corporation. The earliest corporations were in fact governmental bodies, especially towns. The idea of a legal personality that continued beyond the life of the individuals running its affairs arose with the church, but by analogy was applied to municipal life. The corporation was then later seen as a useful vehicle for commercial life – the joint stock company.

Countries are not, of course, commercial enterprises, and citizens are not simply shareholders. But countries – deemed still to be sovereign states – are like corporations, going on beyond the life of the current office-holders – and binding their successors.

The original corporations, set up by charter, probably had limited liability, i.e. their members or stock-holders were liable only to a specified extent. But this included very few traders, who were normally liable personally to the full extent of their own, or their partnership’s debts. In England, it was not till the mid 19^th century that the protection of limited liability was granted for most trading purposes. In 1852 a Mercantile Law Commission was set up to consider permitting limited liability. Views were sharply divided. There were those who feared, in effect, moral hazard, and an increase in the risk of fraud. The Commission was cautious, but supported limited liability for two purposes:

1. for those "many useful enterprises calculated to produce benefit to the public and profit to those who engage in them" which are "of such magnitude that no private partnership can be expected to provide the funds necessary….of which docks, railways, and extensive shipping companies may be taken as examples:
2. "there are others of a more limited character, from which benefit to the humbler classes of society may be expected to accrue….such as baths and wash-houses, lodging-houses and reading rooms, to the establishment of which by large capitalists there is little inducement."

The relationship between state and citizen

Partly as a result of legal protection and IMF financial protectionism, the international financial system operates well for corporations, shareholders and investors, who despite much rhetoric about markets, are protected from risk and the "wrath of market forces". Shareholders and investors have fought hard over centuries, to achieve protection from the unlimited liabilities that may be incurred by the directors of companies. There are of course, exceptions, but they are few. All over the world shareholders now enjoy the legal protection of "limited liability".

Not so the citizens of indebted nations.

This is particularly unjust in light of international commitments on human rights; and because there is a social contract between every nation state and its citizens. Debtor sovereign states, like all states, are there to serve their citizens. They cannot remove, sell or give away their fundamental human rights. Though the state can require citizens to pay taxes, the liability is limited – limited to such tax payments as do not abrogate their human rights. Thus the country as a whole has a limited liability – limited to such tax payments as do not abrogate the human rights of their citizens. Clearly these concepts still have to be worked out and agreed internationally; but we assert that it cannot be ethical, just or fair for states to be paying out more in debt servicing than in spending on the health, clean water, sanitation and education that are the fundamental human rights of their citizens.

States cannot hold their people responsible for the unlimited liabilities caused by foreign debts, negotiated in secret, and often corruptly. If debtor nation states could be compared to corporations; if their governments were to be seen as boards of directors, then external creditors could be put on notice that the shareholders – citizens or stakeholders – have limited liability for loans made recklessly.

However, as things stand, just like the unfortunate aristocrats of Britain who invested in Lloyds – the people of debtor nations bear unlimited responsibility for liabilities incurred by their "boards of directors" – sovereign debtor governments, in collusion with foreign creditors. No wonder we encounter resistance in Zambia, demonstrations in Bangkok and strikes in Argentina.

Conclusion:

"Humanitarian intervention" to protect human rights? The example of Kosovo.

The Universal Declaration on Human Rights, Article 3 asserts that "everyone has the right to life, liberty and security of person". Article 22 makes plain that "everyone as a member of society, has the right to social security and is entitled to realization, through national effort and international co-operation and in accordance with the organisation and resources of each state, of the economic, social and cultural rights indispensable for his dignity and the free development of his personality". A similar set of rights are set out in the UN Charter.

NATO went to war in Kosovo in the name of humanitarian intervention. The legality of the armed intervention was challenged; but the fact that massive denials of human rights can undermine a region as well as a country, is not in dispute. A British Foreign Office briefing, posted on its official website at the time of NATO’s air campaign, stated: "The military action being taken against the forces of the Federal Republic of Yugoslavia is legal. It is justified as an exceptional measure to prevent an overwhelming humanitarian catastrophe. Such action is justifiable in international law in support of purposes laid down by the United Nations Security Council, even without the Council’s express authorization."

At the time of the first air action by NATO in Kosovo, 65,000 people were estimated to have been made homeless. This gives us some yardstick by which to judge future action or inaction for "humanitarian intervention" to defend human rights.

The UN estimates that 7 million children die each year, because money that could be spent on health is instead diverted to foreign creditors in the form of debt repayments. The example of Zambia above, demonstrates the direct impact of debt on the life-chances of millions of people infected with HIV. The Food and Agriculture Organisation of the UN has detailed the impact of the debt crisis of 1997 on the people of Indonesia. According to the FAO the proportion of Indonesians who are undernourished almost certainly doubled from 6% of the population in 1995/7 to 12% in 1999. And the current figure could be as high as 18%. Reduced consumption of foods rich in protein and micronutrients led to sharp increases in the numbers of wasted children and anaemic mothers. The debt crisis added 10 to 20 million people to the ranks of the undernourished in Indonesia alone, just one of the five nations affected by the reckless lending decisions of foreign creditors in 1997. These numbers overshadow the 65,000 whose human rights are accepted to have been denied in Kosovo.

Humanitarian intervention to defend the human rights of a billion people in indebted nations would result in a transformation of the global economy. Intervention would challenge the dominance of finance capital – and creditors would invariably be disciplined.

There are many ways of disciplining finance capital – most effectively through capital controls; by extending limited liability to sovereign states; by introducing an international insolvency law, that would allow states to "seek protection from their creditors"; and by the introduction of a Tobin Tax. However the most urgently needed discipline is the massive cancellation of the unpayable debts of the poorest countries. Decisions about what is "unpayable" should not be decided by creditors – but by independent boards of arbitration overseen by, and held accountable to, the citizens of debtor nations.

There will be ferocious resistance to this challenge to international finance capital, in particular by the Anglo American alliance. However finance capital faces even greater challenges from the anarchy caused by the reckless and excessive liberalization of capital flows. While, this anarchy currently parades as prosperity in some parts of the West, there are signs (in Japan, Turkey, Argentina and elsewhere) that the system is sliding into a deflationary depression. Finance capital, which has not learnt the lessons of the 1920’s, may have to be rescued from its own irresponsibility – before economies and societies are once again destroyed the reckless greed that drives liberalization and deflationary policies.

Just as in Kosovo, so there is now a clear, ethical and economic case for humanitarian intervention in indebted nations – to subordinate the interests of finance capital, and restore human rights to at least a billion innocent people.