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G7 Summit Disappoints With Another Deadly Delay

G7 Summit Disappoints Poor Nations With Another Deadly Delay


00.24 Immediate Release Tuesday, August 1, 2000

G7 Summit Disappoints Poor Nations With Another Deadly Delay for Debt Relief

* World leaders at Okinawa retreat from promises made at last year's Cologne summit

* "Faster, broader, deeper" - enhanced HIPC initiative goes nowhere

The G7 industrialized nations, meeting in Okinawa, squandered yet another opportunity to accelerate the Enhanced Heavily Indebted Poor Countries (HIPC) debt relief initiative and finally fulfill their individual financial pledges made at the Cologne summit a year ago. Rather than deal with hard numbers and set schedules with meaningful deadlines, the gathering's participants merely equivocated, preferring a rhetorical vibrato of stressing their renewed commitment to the program. This is unsurprising, considering that the HIPC initiative, launched by the World Bank and International Monetary Fund in response to growing criticism of their hard-hearted lending practices, has accomplished pathetically little since its conception in 1996; as of now, only nine countries have been admitted to the program, and only one, Uganda, has actually been accorded any debt relief.

Sitting in the lap of luxury (the Japanese government spent US$750 million on the summit in Okinawa, 100 times more than on any previous summit), the heads of the wealthiest nations demonstrated a collective lack of resolve to comply with earlier pledges regarding world poverty reduction. In their report, the G7 leaders "noted the progress" (perhaps, more accurately, the lack thereof) made in securing the required financing for the initiative and reaffirmed their determination to make these funds available as quickly as possible. But the total multilateral commitment of $100 billion in relief funds promised at Cologne for release this year has been slashed to only $8.6 billion in net present value and the goal of multilateral debt cancellation for forty of the most indebted countries by the end of 2000 has been cut in half. According to UN figures, every day that relief funds are delayed, 19,000 children die of malnutrition and preventable disease in HIPCs due to the crushing burden of their foreign debts.

The constant struggle to pay off unsustainable debts owed directly to the rich nations as well as to the international financial institutions (IFIs)--which the former run as their dominating shareholders--ensures that the world's poorest nations will remain mired in the abyss of negative balance sheets. As the mainstay of the international creditors, the U.S. bears much of the responsibility for the costly delays surrounding the implementation of the HIPC initiative. Its portion of the funds for debt cancellation was whittled down and then held up in Congress, infecting other G7 countries with a similar lethargic reluctance to contribute their pledged share to the Trust Fund.

Before taking their summer recess, in a 216-211 squeaker, the House of Representatives unexpectedly approved US$225 million for the HIPC Trust Fund, the total amount requested for the year 2001 by President Clinton. The funds are to be reserved to cancel a portion of the debts held by Mozambique and Bolivia, two nations that have completed the HIPC process, but for whom no money has been available. Though heartening, this sum is only a fraction of the total US$600 million promised at Cologne and is still not guaranteed, as the amount provided by the House vote will not be finalized until the Foreign Aid Bill emerges from the House-Senate Conference Committee which will occur, at the earliest, when Congress returns from its recess in September.

The debt explosion The seeds for the growth of multilateral debt were planted during the oil crisis of the 1970s when western banks, glutted with petrodollar investments from the then-thriving OPEC nations, aggressively sought out borrowers for loans throughout Latin America and elsewhere in the Third World, selling the credit at attractive interest rates. With the full knowledge of banks like Citibank and the Chase Bank in New York, many of these loans were imprudently made to bad credit risks--for poorly planned development projects that never functioned or caused environmental damage, to ruling military juntas who used the funds to shore up their regimes with expensive military hardware, or to corrupt senior members of the armed forces who habitually padded bills and pocketed the difference.

When banks began to run out of their excess reserves in the 1980s, interest rates skyrocketed and debts ballooned, forcing Mexico, Argentina and Brazil, among others, to nearly default on their loans. Around the same time, the Bretton Woods institutions, created after World War II to correct short-term balance-of-payment problems and finance development programs, were finding that their programs were becoming redundant, if not obsolete. Seizing the opportunity to expand their function and justify their existences, the IMF and the World Bank, in an unprecedented expansion of their missions, stepped in with huge loan packages that allowed indebted countries to restructure their payments and salvage their credit ratings. However, these additional loans were conditioned on the acceptance of Structural Adjustment Programs (SAPs) - macroeconomic neo-liberal reforms regulated by the IMF and meant to provide economic stability by reducing government spending, cutting trade barriers and curbing inflation rates. When applied formulaically, SAPs had a devastating impact on the poor, requiring huge cuts in government social programs in the areas of health care and education, and helping to lead to the strangulation of small farmers and national entrepreneurs due to an influx of cheap western imports.

All too often, a poor nation's already destitute citizens have been the innocent victims of the greed and poor judgment of financial institutions as well as the malfeasance of their former rulers (both civilian and military). They inevitably make up one-third of the population of every Latin American country (two-thirds for Venezuela) and continue to suffer under the enormous debts heedlessly accrued by their past leaders. Today, Third World countries transfer an estimated $60 million daily in debt service to wealthy nations and IFIs. This reverse Robin Hood scenario means that developing nations, where need is greatest, on an average spend two to three times more on debt service than on health care or education for their citizens. An estimated 45% of Haiti's $1.2 billion external debt was accumulated during the brutal dictatorship of Papa Doc, who embezzled most of the funds in the central bank, moving them into his private offshore bank accounts. The poorest nation in Latin America, Haiti now spends $45 million on annual repayments but still does not qualify for debt cancellation under the IMF/World Bank HIPC initiative.

The stillborn HIPC initiative The HIPC program has so far proven to be an inadequate attempt at poverty alleviation, which has failed to provide any real relief, but at the same time, allows IFIs to meddle even further in the affairs of debtor nations, which already are at their mercy. First, a country is not given HIPC status based on any objective criteria concerning the level of poverty, but only according to IMF/World Bank guidelines. These include looking at debt in relation to per capita income, failing to take into account the enormous income inequality in a nation such as Peru, for instance, where 28 percent of total state revenue goes towards paying the interest rates alone on foreign debts. There, the Fujimori government's strict adherence to SAP reforms has devastated the poor, but the profits gained by the few wealthy who have prospered from Peru's opening of markets, have ensured that, under the IMF's distortional criteria, the country is excluded from the HIPC initiative as a "middle income" country with "sustainable" levels of debt.

For the few nations that qualify for debt relief, in order reach the "decision point"(the point at which the approval of such relief is even considered) governments must prepare a Poverty Reduction Strategy Paper (PRSP). This document is meant to be a simple but comprehensive statement drafted in consultation with civil society, outlining how debt relief funds, once released, would be used to reduce poverty. Yet in actuality, the heavy involvement of the IMF/World Bank secretariat in the preparation of PRSPs, has transformed the process into a protracted bureaucratic proceeding that ensures that the IFIs, and not a country's representative institutions, control the pace and direction of the social reform process.

Once the decision point is attained, additional SAPs are piled onto existing regulations, with a three-year probationary period then commencing, during which the IMF monitors macroeconomic indicators and passes judgment on whether or not that nation is capable of maintaining economic stability. If unsatisfied, debt relief is withheld indefinitely. Many of the HIPC nations have been put on hold as a result of some failure to comply with the IMF's exceedingly harsh and inflexible standards. For example, though Honduras has cleared the decision point, the IMF has delayed the release of funds because it disapproves of the slow rate at which the state-owned electricity sector is being privatized.

Castles in the air The G7 leaders reaffirmed in Okinawa the commitment originally made at Cologne, to "reduce the proportion of the world's population living in extreme poverty to half its 1990 level by 2015." But these promises are likely to remain castles-in-air until the debt burden of the most impoverished countries is lifted, thereby laying some foundation for economic growth. Critics maintain that at Okinawa, the assembled leaders tried to divert attention from the pitifully slow progress of the HIPC initiative by focusing on improving education, ensuring free school lunches for all children, providing improved health care for AIDS victims and bridging the "digital divide" between wealthy and poor countries. These are worthy yet perplexing goals considering that the reason millions of children cannot attend school is because their parents are unable to pay the user fees indirectly imposed on the educational system by the IMF and World Bank. The focus on technology is also mystifying. Many developing nations cannot provide adequate food, electricity or running water for their populations, let alone accommodate computers and Internet access. Activists argue that debt relief must be a first step in the alleviation of the structural poverty that plagues the third world, and until cancellation is accomplished, other initiatives can hardly be expected to have any real impact.

Dodged duty As the richest and most powerful nation in the world, the U.S. stands in a position of predominating influence, bound by an undeniable moral obligation as well as by past commitments to lead the way in funding debt relief. The other G7 nations have made it clear that they will not authorize any contributions to the HIPC Trust Fund until Washington moves on this issue.

Provisions for debt relief have faced strong opposition on Capitol Hill. Only one half of one percent of the U.S. national budget is presently dedicated to foreign aid, yet Congressional conservatives have repeatedly argued that this country cannot afford to fulfill its financial commitment to the HIPC initiative. These cries encourage a mistaken public perception that U.S. national interests do not sanction more funds to be allocated to the world's poorest peoples. In fact, according to a Cafod poll, half of the U.S. public is convinced, after the fanfare of the Cologne announcement of the G7's commitment to 100 percent debt cancellation, that debt is no longer a problem. But it is. Beneath all the rhetoric, 1.1 billion people live on less than one dollar a day, and the truth is that funding the mere four percent of the project's total budget which the U.S. agreed to shoulder at Cologne last year, would only cost the American taxpayer one ice cream sundae a year for the next three years.

Another argument being made in Congress would demand comprehensive IMF and World Bank reforms before any funds are delivered to cover the HIPC initiative. While there is no doubt that these reforms are necessary, it is senseless to punish impoverished nations in desperate need of debt relief because the IFIs need serious restructuring, a process that even if attempted could drag on for years. Instead, Western leaders might well consider practical proposals from NGOs such as Oxfam, which advocates the immediate establishment of transparent "poverty funds," the dispensing of which would be monitored by the media and outside pressure groups, thus ensuring that HIPC funds were used efficiently for the direct benefit of the poor. In an angry reaction to what is seen as the politicization of the debt relief process, some countries have shunned the HIPC program all together. Nicaragua, a country desperately in need of the cancellation of its $6.3 billion debt inherited from the Contra war as well as the devastation caused by Hurricane Mitch in November of 1998, is still servicing multilateral debts with funds that it cannot afford to spare. But even in the face of such desperate times, after repeated delays in qualifying for debt relief, including outside accusations of corruption in his administration, President Arnoldo Alemán has declared that his country will no longer participate in the HIPC initiative, claiming that Nicaragua's economy, which grew seven per cent last year, is strong enough to survive the withdrawal of outside support. In his words, debt relief had become a "political game."

Thus, while the G7 and the IMF and World Bank have exuded a stream of "anti-poverty" rhetoric, the HIPC program has fallen far short of fielding the inclusive, pro-active measures that any fundamental change in the status of poor countries requires. The bureaucratic overload and foot dragging that have plagued the process have transformed the optimistic goals set at Cologne into sheer fantasies. Until Washington takes a decisive lead in contributing to the HIPC Trust Fund, it is unlikely that any substantial progress will be made toward easing the debt-servicing obligations of developing nations or significantly alleviating their poverty.

Jennifer Landsidle and Karen Juckett Research Associates

The Council on Hemispheric Affairs, founded in 1975, is an independent, non-partisan and tax exempt research and information organization. It has been described on the floor of the Senate as being "one of the nation's most respected bodies of scholars and policy makers."


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