Exclusive to the International Socialism website: Gavin Capps updates his article looking at Gordon Brown’s pronouncements following the meeting of the G7 finance ministers. The original version of this article that appeared in the print issue in summer 2005 can be read here: http://isj.org.uk/redesigning-the-debt-trap/
On Saturday 11 June 2005 a meeting of the G7 finance ministers in London reached agreement on multilateral debt relief ahead of the July Gleneagles summit. The proposed scheme is a compromise between the rival British and US positions and a third plan put forward by Germany, Japan and France at the last minute.1 Brown and his press have hailed the deal as a “historic breakthrough” and the “largest debt write-off ever”. Although the detail has yet to be spelt out, it is clear from the finance minister’s communiqué2 that the new scheme is nothing of the sort and will further strengthen the debt trap. This update pulls together the available information to show why.
A handful of countries
Multilateral debt relief will apply to an outrageously small number of countries. Only those that have gone through the entire HIPC process will qualify. A mere 18 countries have reached ‘completion point’ so far3; together, they represent just 5% of the total population of the Global South.4 Poor and indebted countries like Angola, Kenya and Nigeria will continue to be excluded. The colossal debts of ‘middle income’ countries like Brazil are completely off the G8 radar.
A further nine HIPC countries5 may reach completion point and hence qualify for the new scheme in 18 months’ time. But this is entirely dependent on their ability to fulfil their neo-liberal reform programs to the World Bank and IMF’s satisfaction. In the meantime, tens of thousands will continue to die from lack of basic healthcare.6 A final 11 countries7 stuck at the first stage of the HIPC process could theoretically qualify in the distant future. But there is considerable scepticism that most of these will make it.8 Even if they do, the total population of all the HIPC countries is only 11% of the Third World total.9 Salih Booker, Executive Director of the American NGO Africa Action, is, then, quite right to argue that the G8 debt deal “will make no difference to the majority of African countries, and other countries in the Global South, who are excluded [from it] and will be required to continue servicing illegitimate debts at the expense of their own urgent needs. The continued theft of these countries’ resources is completely immoral and this is made all the more apparent by this debt cancellation for the few”.10
Small money and reduced resources
A portion of the multilateral debt of the qualifying countries will be written off, but the amounts involved are small and will lead to reduced aid disbursements for the ‘beneficiaries’. The eighteen eligible HIPC countries are due to have $40 billion worth of debt held by the World Bank, Africa Development Bank (AfDB) and IMF cancelled in full. If the other nine HIPC countries manage to qualify by reaching ‘completion point’, the total multilateral debt cancellation could rise to $51 billion and, in the least likely scenario, $55 billion may be written off if but only if all of the final eleven make it.
At one level, anti-debt campaigners have achieved a small but significant victory by forcing the G8 to establish the principle of ‘full’ multilateral debt cancellation in the new scheme. Brown was proposing no more than a ten year moratorium on debt service payments and Germany, France and Japan were opposed to even this. Likewise, the inclusion of IMF debt represents a partial retreat on the part of the US, which was adamant that the Fund’s debt should remain untouched. However, pressure from below was not the only factor at work in the London deal. Imperialist rivalry also significantly shaped the debt compromise the outcome of which is reflected in both the scope and means of the write-off. To make sense of this, it is useful to briefly outline the different strategic relationships between the G7 states and the International Financial Institutions, and how these manifested in the debt negotiations.
The World Bank, IMF and other multilateral institutions should of course be understood as instruments of the West’s collective domination over the Global South. But they are also arenas of the competitive struggle between the major powers as they pursue their distinctive economic and geo-political interests. The broad shift towards US unilateralism under Bush has in part been expressed through a strategy of reducing the role of the World Bank while reinforcing that of the IMF and establishing more bilateral aid and trade agreements with key regions in the Third World. In particular, the Bush administration has increasingly pushed for the World Bank to phase out loans in favour of making grants (aid) and devolve its lending responsibility to regional multilateral banks, like the Inter-American Development Bank, in line with the recommendations of a Congress Commission headed by the conservative academic, Alan Meltzer, which reported in February 2000.11 The aim is to erode the Bank’s centralised creditor power over the Third World and, with it, the leverage of its other major shareholders – like Japan, Germany and to a lesser extent Britain – who are at once America’s major competitors. The appointment of arch-neoconservative Paul Wolfowitz to the World Bank is the most obvious expression of the drive to transform the Bank from the general representative of the advanced capitalist states into a narrower tool of US imperialism.12 At the same time, America has been strongly opposed to any attempt to weaken both the creditor status of IMF through the sale of its gold, or its bilateral and heavily conditional aid scheme, the Millennium Challenge Account, through Brown’s proposal for the multilateral International Finance Facility.
By the same token, the other advanced capitalist states have to varying degrees resisted the downgrading of the World Bank, which remains their favoured vehicle for opening up the Global South to their multinationals and retaining a check on US power. This is the main reason why Japan, France and Germany on the one hand, and Britain on the other, formulated debt relief proposals that would keep some, if not most, of the World Bank’s multilateral debt stock intact, contra the US position of writing off all the Bank’s HIPC debts. However, in now familiar fashion, Blair broke rank by flying to Washington to strike a much publicised pre-emptive deal with Bush the week before the G7 finance minister’s meeting. The resulting London-Washington agreement was predictably much closer to the US position, but contained enough of a compromise on IMF debt and reimbursing the World Bank to isolate and hence weaken the alliance between the other Western states, to their evident frustration.13 The Euro-Japanese position was thus reduced to holding out on which of the regional banks would have their debts cancelled and, as will be seen below, the degree of conditionality attached to any such write-off.
With these points in mind the range and limits of the proposed multilateral debt cancellation deal can be better understood. First, some nineteen multilateral creditors hold Third World debts. Ghana, for example, is indebted to nine such institutions.14 However, the Africa Development Bank will be the only regional multilateral to have its eligible debts written off. HIPC country debts held by the Inter-American Development Bank (Latin America) and Asian Development Bank won’t be touched. These are, of course, the regional banks that fall under the respective spheres of influence of the US and Japan. As a result, immediately qualifying countries like Bolivia, Nicaragua and Honduras will retain significant multilateral debts. It is estimated that the debt service obligations of the five lowest income Latin American countries to Inter-American Development Bank will amount to $3.3 billion over the next decade.15 Many of the 18 HIPC qualifiers will also remain indebted to bilateral and private creditors16: Zambia will continue to pay an estimated $53.9 million per year in debt service after the proposed multilateral debt deal, Ethiopia $38.4 million and Bolivia $261.6 million.17
Second, the debts held by the eligible International Financial Institutions are relatively small and the estimated savings to the HIPC countries smaller still. The headlined $40 billion write off for the eighteen HIPC qualifiers is only a nominal figure. It represents a highly concessional debt with a long maturity, and the relief on it is to be delivered over a 40 year time period. According to the NGO, Eurodad, the net (ie real) value of the deal will therefore only be around $17 billion. This means that, on average, the eighteen beneficiaries will each save just $1 billion a year for the next ten years. However, Eurodad calculates that at least 62 developing countries need immediate and full debt cancellation if they are to begin moving away from poverty by 2015. As these countries currently pay over $10 billion a year in debt service to the multilaterals, the G7 deal only cancels 10% of the debts that most urgently need to be written off.18 Likewise, Blair’s Commission for Africa conservatively recommended a resource increase of $25 billion a year to begin uplifting the continent out of poverty by 2015, and Make Poverty History a more realistic $50 billion per year. The $1 billion a year saving in debt service payments is thus somewhere between $24-$49 billion short of what is required and will be virtually meaningless without a massive increase in aid.19 In the meantime, the total debt service payments of the developing countries are around $370 billion a year and that of Sub-Saharan Africa $14 billion a year; in total, the London deal bears on only 2% of the total external debt of the Global South.20
Third, the cost of financing the scheme will be minimal. A key issue in the debt negotiations was ‘additionality’, i.e. the provision of additional resources to compensate for the eligible multilateral institutions’ lost debt service revenues. The US opposed paying any additional money to the World Bank or African Development Bank – which would have forced the ‘beneficiaries’ to pay for their own debt relief through reduced aid disbursements – and blocked Brown’s efforts to sell off IMF gold to finance the cancellation of its eligible debts. The alleged ‘triumph’ of Blair’s shuttle diplomacy was to force an American u-turn on both of these sticking points. In reality, the outcome revealed the immense misanthropy of the capitalist powers.
In terms of the IMF debt, the US neatly strengthened its negotiating position while simultaneously consigning Brown’s gold plan to history by allowing the IMF to reveal a “previously unknown” reserve fund of “several billion dollars available from gold sales in the 1990s” to cover the losses from its portion of the debt write-off.21 That the omnipotent watch dog of the world economy should ‘forget’ that it stashed away the equivalent of a developing countries’ national budget and then conveniently ‘remember’ it when politically expedient is hard for all but the most ideologically blinded to swallow. “It was a little like finding grandma’s forgotten post-office savings”, as Stephen Rand of the Jubilee Debt Campaign put it.22 But not a single bourgeois politician or broadsheet hack raised an eyebrow at the IMF’s dodgy memory or dubious accounting. If an African state had done the same, they would’ve of course been screaming ‘corruption’ from the rooftops.
The trickery with the World Bank and African Development Bank’s ‘additional’ funding was no less cynical. The loss of these multilateral’s debt service payments is meant to be covered by increased rich country contributions to the International Development Agency (IDA) – the concessional lending arm of the World Bank group – over and above their normal IDA ‘replenishments’. Brown assumed the moral high ground by proclaiming that Britain would meet its additional IDA share even if the other G8 states did not cough up. However, the ‘extra’ cash turned out to have been already pledged twice; first as part of the aid programme unveiled at the Labour Party Conference and again in the 2004 spending review.23 When forced to tactically shift on ‘additionality’, Bush likewise committed money from the US aid budget and only for three years, with a ‘political’ commitment to make up the remaining shortfall until 2015. As the Financial Times pointed out:
This is not good enough. The reflows [in lost debt service payments] due to come to the World Bank and African Development Bank run far beyond 2015. And there is nothing to ensure that after 2008 the US pays in any more money than it would have done anyway (it could just cut the new money component to offset the extra for lost payments).24
It seems likely that most, if not all, of the other G8 countries will also cover their extra IDA commitments from existing aid budgets.25 In effect, then, no new money has been found to finance the multilateral debt write-off. What makes this particularly scandalous is that amounts involved are very small. The British share of the scheme is estimated to be somewhere in the region of $700 – $900 over the next decade, while the solid US commitment is only $700 – $960 million over the next three years, and around $1.3 – $1.75 billion if by some miracle it sticks to the pledge to see the scheme through to 2015.26 The Committee for the Cancellation of Third World Debt (CADTM) has put these paltry sums in perspective:
The financial burden of the operation on rich countries would amount to some $2 billion year compared to the $350 billion the G8 devote to farming subsidies or $700 billion they spend in military expenditure. Rich countries would thus be willing to spend every year for the announced cancellation half of the amount the US spend every month on their combined occupation of Iraq.27
A week before the G7 debt deal was announced, the Stockholm International Peace Research Institute revealed that global arms spending in 2004 surpassed $1 trillion of which the US military budget, at $480 billion, accounted for 47%.28 The sick priorities of the G8 could not be clearer.
Finally, the ‘additional’ financing of the World Bank and African Development Bank write-off has been structured in such a way that aid to the ‘beneficiaries’ will be reduced in direct proportion to the amount of multilateral debt cancelled.29 The US has insisted that the extra contributions which are supposed to cover the lost debt service payments do not go back to the country which has had its aid flows slashed in line with the value of its debt write-off. Instead, they will be made available to all 66 countries eligible for IDA assistance and channelled to selected beneficiaries via the World Bank’s Performance Based Allocation system, which is based on harsh neo-liberal criteria. Brown and Co’s claim that the new debt relief scheme will release equivalent resources for health and other social expenditure in some of the world’s poorest countries is thus a complete lie.30 They will in fact lose resources in the form of IDA aid, which will now flow to those states most favoured by the International Financial Institutions. This, as we shall see next, is not the only type of additional neo-liberal ‘conditionality’ built into the debt deal.
A battery of conditionality
The debt deal has been designed to retain World Bank and IMF control, and hence deepen neo-liberal conditionality, in three mutually reinforcing ways.
First, and most obviously, the new debt scheme will strengthen and expand the discredited HIPC approach. At present, the G7’s proposal only applies to the countries that were arbitrarily identified for the HIPC initiative by the World Bank in the 1990s and by the same token continues to exclude those that were left out of the original selection. It also significantly increases the incentive for struggling participants to see the whole HIPC process through – and thus the heavy programs of neo-liberal reform that accompany it – as completion is now the only way to become eligible for multilateral, as well as bilateral, debt relief. With this new lease of life, the HIPC scheme will be widened to include a new tranche of ‘worthy’ poor and indebted countries. The World Bank is said to be drawing up a new list. The International Financial Institutions, and through them the Western powers, will thus not only continue to be the arbiters of who is ‘fit’ to be relieved of their debt burden, but will also be able to extend this form of neo-liberal control. The Committee for the Cancellation of Third World Debt has summarised the horrors that will be entailed:
Privatisation of natural resources and of strategic economic sectors to the benefit of transnational corporations; higher cost of health care and education; a rise in VAT; free flow of capital, which leads to capital leaving the country as shown by UNCTAD reports; lower tariff protection, which leads to thousands of small and middle producers losing their livelihoods because they cannot compete with imported goods.31
Second, those countries that have passed through HIPC and received multilateral debt relief will be forced to maintain the momentum of neo-liberal reform in order to meet the criteria of the World Bank’s Performance Based Allocation (PBA) system – the new prerequisite for clawing back some of their lost aid. Moreover, the PBA system will itself be enhanced to maintain control over these ‘beneficiaries’. During the G7 negotiations, Germany, France and Japan argued that full-scale debt relief would “encourage corruption”, condone “reckless borrowing” and, above all, “leave the west with few tools to reward countries for good governance”.32 This, of course, was code for their fear that the World Bank would lose its principle means of opening up the economies of the Global South and see a steady erosion of its creditor power in line with US strategic interests. The compromise reached will see the International Financial Institutions report on ways to ensure that the additional finance to the IDA is used for “poverty reduction and does not lead to corruption”.33 The PBA system will also include new “governance and transparency” conditionalities. If ‘corruption’ in a recipient country is deemed to have increased after debt relief, it will be penalised with reduced aid flows. The final communiqué of the G7 finance ministers’ meeting makes clear what they really mean by ‘poverty reduction’ and ‘good governance’:
We reaffirm our view that in order to make progress on social and economic development, it is essential that developing countries put in place the policies for economic growth, sustainable development and poverty reduction: sound, accountable and transparent institutions and policies; macroeconomic stability; the increased fiscal transparency essential to tackle corruption, boost private sector development, and attract investment; a credible legal framework; and the elimination of impediments to private investment, both domestic and foreign [author’s emphasis].34
Adherence to the neo-liberal conditionalities embodied the PBA system is also likely to become the key criterion for scores of other IDA eligible (i.e. poor) countries hoping to qualify for future debt cancellation. The ‘enhanced replenishment’ of the IDA has thus increased the financial leverage of the World Bank and African Development Bank over a whole new range of heavily indebted countries before they even get to participate in a relief scheme.35
Finally, a new mechanism is being devised to ensure that the IMF does not lose control over countries freed of its debts. The US, as we have seen, was strongly opposed to any weakening of the IMF’s creditor power and only conceded to a small, internally funded write-off to bury Brown’s gold sale plan. But this does not mean that America wants to see the IMF’s role reduced after debt relief. On the contrary, US Treasury Secretary John Snow has been working on a new IMF ‘facility’ – the Policy Support Agreement (PSA) – which will allow conditions to be imposed on developing countries even if they are nolonger officially indebted to the IMF or taking loans from it.
The stated rationale for signing up to the PSA is that it will pre-qualify a country for an IMF loan if hit by a currency crisis. However, a pilot PSA has been run in Nigeria and is now being used to show that it can voluntarily adhere to IMF disciplines as bargaining counter in bilateral debt negotiations with Paris Club. According to Soren Ambrose of the ‘50 Years is Enough’ NGO, the implications of entwining the new scheme with debt relief are dire:
Until now the IMF has relied on a very effective “unwritten agreement” whereby donors and creditors all defer to the IMF in determining which countries are creditworthy. When the IMF cuts off its loan program to a country for non-compliance with its policies, the World Bank, regional development banks, and bilateral agencies generally follow suit. With the prospect of the IMF’s relationship with low-income countries changing – to the point of irrelevance if current practices are followed – it was time to formalize this arrangement so that the IMF could continue overseeing those countries’ policies. That the new facility could also give the IMF a clearer path into middle-income countries not in crisis (e.g. South Africa, Brazil, the Philippines) is a bonus. It is now more likely that donors and creditors will make adherence to a “PSA” an explicit condition of loans or grants to any developing country. The PSA has the potential to sharply minimize the potential benefits of new debt cancellation agreements, since they would be far less likely to free countries from IMF conditions.36
The Perpetual Debt Machine
The net effect of the new multilateral debt initiative will, then, be to entangle developing countries in new and refined forms of neo-liberal conditionality. This in turn ensures that they will remain trapped in perpetual debt. All ready crippled after decades of structural adjustment and confronted with forms of ‘debt relief’ which effectively reduce resource inflows, the Global South is kept on its knees. Ceaseless neo-liberal restructuring means that as soon as poor countries have one set of debts reduced or cancelled they are forced to borrow more. Tanzania, which had $2 billion in bilateral debt written off in exchange for years of wrenching HIPC conditionality, has had to continue borrowing. It now has debts of $8.2 million the service on which accounts for 12% of its tiny $3.7 billion national budget.37 And herein lays the ultimate genius of the G8’s debt trap. It provides the illusion of escape, but only through a route which strengthens its grip. It cannot be reformed, only smashed.
1: The German, Japanese and French proposal was announced in the first week of June. For details see: G Hurley, ‘Debt Negotiations Fraught within G8’, Eurodad Press Statement, 8 June 2005, www.eurodad.org
2: G8 Minister’s Conclusions on Development, London, 10-11 June 2005, www.hm-treasury.gov.uk/otherhmtsites/g7/news/conclusions_on_development_110605.cfm
3: These are: Benin, Bolivia, Burkina Faso, Ethiopia, Egypt, Ghana, Guyana, Honduras, Madagascar, Mali, Mauritania, Mozambique, Nicaragua, Niger, Rwanda, Senegal, Tanzania, Uganda and Zambia.
4: The Committee for the Cancellation of Third World Debt (CADTM), ‘CADTM Outraged at the G8’s Meanness over the Debt’, CADTM Press Release, 13 June 2005, www.cadtm.org
5: Cameroon, Chad, DRC, Gambia, Guinea Bissau, Malawi, Sao Tome and Principe and Sierra Leone.
6: See for example the statement by Mzimasi Makiniki, an anti-debt campaigner from Malawi, one of the HIPC nine: ‘Left to Die by G8 Debt Con’, Socialist Worker, 18 June 2005, www.socialistworker.co.uk
7: Burundi, Central African Republic, Comoros, Republic of Congo, Côte d’Ivoire, Lao PDR, Liberia, Myanmar, Somalia, Sudan, Togo.
8: Jubilee Debt Campaign, ‘Campaigners Force Step Forward on Debt’, Jubilee Debt Campaign Press Release, 11 June 2005, www.jubileedebtcampaign.org.uk
9: The Committee for the Cancellation of Third World Debt (CADTM), ‘CADTM Outraged at the G8’s Meanness over the Debt’, CADTM Press Release, 13 June 2005, www.cadtm.org
10: Cited: Africa Action, ‘Debt Deal: Small Victory for Africa, but Not Enough’, Africa Action Press Release, 13 June 2005, www.africaaction.org
11: For useful overviews of this process and the Meltzer Report, see: W Bello and S Guttal, The Limits of Global Reform: The Wolfensohn Era at the World Bank, 9 May 2005, www.cadtm.org ; and M Engler, ‘Debt Cancellation: Historic Victories, New Challenges’, Foreign Policy in Focus Special Report, May 2005, www.fpif.org/papers/0505debt_body.html
12: A Callinicos, ‘Paul Wolfowitz, Laughing all the Way to the World Bank’, Socialist Worker, 26 March 2005, www.socialistworker.co.uk
13: According to the Financial Times, France was the first to crack: ‘Nations Close to Deal but Differences Remain’, 11/12 June 2005; in a typically glorifying piece, Peter Beaumont of the Observer reported the “irritation” of the “European countries” at New Labour’s trans-Atlantic manoeuvring, ‘A New Start?’, 12 June 2005.
14: Eurodad, ‘Devilish Details: Implications of the G7 Debt Deal’, Eurodad NGO Briefing, 14 June 2005, p5, www.eurodad.org
15: As above.
16: The Committee for the Cancellation of Third World Debt (CADTM), ‘CADTM Outraged at the G8’s Meanness over the Debt’, CADTM Press Release, 13 June 2005, www.cadtm.org
17: Eurodad, ‘Devilish Details: Implications of the G7 Debt Deal’, Eurodad NGO Briefing, 14 June 2005, p5, www.eurodad.org
18: As above, p4.
19: Guardian, ‘£30 Billion Debts Write-off Agreed’, 11 June 2005.
20: The Committee for the Cancellation of Third World Debt (CADTM), ‘CADTM Outraged at the G8’s Meanness over the Debt’, CADTM Press Release, 13 June 2005, www.cadtm.org
21: Guardian, ‘£30 Billion Debts Write-off Agreed’, 11 June 2005.
22: Cited (with no journalistic comment!) in the Guardian, ‘Debt Deal Praised but More Help Wanted’, 13 June 2005.
23: Guardian, ‘Deal Praised But More Help Wanted’, 13 June 2005.
24: Financial Times, ‘Debt Dynamics: A Bad Debt Forgiveness Deal is Worse than None at all’, 11-12 June 2005.
25: Financial Times, ‘Caution Over G8 Debt Relief Plan for Poor Countries’, 13 June 2005.
26: Guardian, ‘Brown Urges Rich Countries to Act Now’, 13 June 2005; and Financial Times, ‘Caution Over G8 Debt Relief Plan for Poor Countries’, 13 June 2005.
27: The Committee for the Cancellation of Third World Debt (CADTM), ‘CADTM Outraged at the G8’s Meanness over the Debt’, CADTM Press Release, 13 June 2005, www.cadtm.org
28: Stockholm International Peace Research Institute (SIPRI), SIPRI Year Book 2005: Armaments, Disarmaments and International Security, 7 June 2005, www.sipri.org
29: Eurodad, ‘Devilish Details: Implications of the G7 Debt Deal’, Eurodad NGO Briefing, 14 June 2005, pp6-7, www.eurodad.org
30: This should be immediately apparent to anyone who bothers to read the G7’s end of conference communiqué, which states: “For IDA [i.e. World Bank] and AfDB [African Development Bank] debt, 100% debt stock cancellation will be delivered by relieving post-completion point HIPCs that are on track with their programmes of repayment obligations and adjusting their gross assistance flows by the amount given” (my emphasis), G8 Minister’s Conclusions on Development, London, 10-11 June 2005, www.hm-treasury.gov.uk/otherhmtsites/g7/news/conclusions_on_development_110605.cfm
31: The Committee for the Cancellation of Third World Debt (CADTM), ‘CADTM Outraged at the G8’s Meanness over the Debt’, CADTM Press Release, 13 June 2005, www.cadtm.org
32: Financial Times, ‘Nations Close to Debt Deal but Differences Remain’, 11/12 June 2005; and ‘Caution Over G8 Debt Relief Plan for Poor Countries’, 13 June 2005.
33: Financial Times, ‘Caution Over G8 Debt Relief Plan for Poor Countries’, 13 June 2005.
34: G8 Minister’s Conclusions on Development, London, 10-11 June 2005, www.hm-treasury.gov.uk/otherhmtsites/g7/news/conclusions_on_development_110605.cfm
35: Observer, ‘A New Start?’, 12 June 2005.
36: Soren Ambrose, ‘IMF Adding a New Tool to its Bag of Tricks’, Pambazuka News, 2 June 2005, p3, http://www.pambazuka.org/index.php?id=28419
37: Financial Times, ‘Africans Welcome Decision as First Step,. 13 June 2003.