Response to the Liberal Democrats International Development Consultation Paper

By Jubilee Debt Campaign

Who we are

 

Jubilee Debt Campaign is part of a global movement working for full cancellation of unpayable and unjust poor country debts, by fair and transparent means. Jubilee Debt Campaign is a UK coalition of national organisations and local groups, supported by thousands of individuals. It is a company limited by guarantee and a charity registered in England and Wales. See www.jubileedebtcampaign.org.uk for more details.

 

 

Introduction

 

Jubilee Debt Campaign is pleased to enter this submission for consideration into the Liberal Democrats International Development Consultation. Over the last 10 years, the Liberal Democrats have provided support to the campaign for the cancellation of unpayable and unjust developing country debts. Most recently, we are delighted with the support we have received from Liberal Democrat MPs to our End the Vulture Culture campaign.

 

However, we are disappointed that the current consultation paper does not include any policy proposals to mitigate the ongoing scandal of developing country debt. We feel that this is particularly important given that:

 

• developing countries have been badly impacted by the financial crisis - a crisis they did not cause - which has proved that debt relief schemes to date have not provided a once-and-for-all solution to developing country debt;
• the solutions to that crisis have largely taken the form of new lending through old, and unreformed, institutions;
• lending is increasingly seen as a means of developed countries meeting their climate change commitments;
• radical, long-term solutions to the inequities of international lending are being discussed at high levels of international decision-making.

 

 

Debt cancellation has worked...

 

In the 1980s it became apparent that vast quantities of irresponsible lending in the decades before had led many developing countries into a debt trap they were unable to climb out of. As interest, rescheduling plans and new loans built up, scores of countries were effectively rendered insolvent - unable to meet their responsibilities to their people because of enormous repayment schedules. This injustice underlay the ‘lost decades of development' in which human development indicators became worse in many of the poorest countries. 

 

Debt cancellation schemes in the form of the Heavily Indebted Poor Countries (HIPC) Initiative (1996, enhanced in 1999) and the Multilateral Debt Relief Initiative (MDRI, 2005) have substantially alleviated the debt distress of many low income countries. These schemes are open to 40 countries (hereafter known as HIPCs) of which 35 have reached decision point (i.e. have received some interim relief and need to stay ‘on track' to reach completion point) and 26 have reached completion point (i.e. received full debt relief). The total amount of irrevocable debt cancellation to date stands at $92.7billion. An additional $24.1billion is not subject to servicing. Poverty-reducing expenditure in countries which have received relief has increased by 2% of GDP, on average, between 2001 and 2008.

 

The UN Human Development Report calls debt relief "A highly effective form of development assistance", while the World Bank has reported that countries that have received debt cancellation increased their social spending by an average of 45% between 1999 and 2003.

 

This translates into concrete impacts on people's lives, including:

 

• Improved school enrolment. In Uganda, primary school fees were abolished which doubled school enrolments and increased the number of girls in schools dramatically. In Tanzania, school enrolments increased from 4.4 million in 2000 to 7.5 million in 2005.  
• Improving healthcare: Bolivia and Mauritania both directed funds from debt cancellation towards improving healthcare. Before debt relief, only around 40% of births in each country were attended by a health professional. Now it is nearly 60% in Mauritania and 70% in Bolivia.
• Recruiting teachers: Malawi has used funds from debt cancellation to train nearly 4,000 new teachers each year. Benin has used it to recruit teachers for vacant posts in rural areas, and Mali to pay 5,000 community teachers.

 

While the short-term effects of debt cancellation are impressive, the long-term contributions towards economic growth and enhancing democracy, accountability and empowerment are even more important.

 

 

... but there's a long way to go

 

Despite these extraordinary successes, debt remains a huge problem, holding back the fight against poverty and inequality in many countries. The problems have been greatly exacerbated by the financial crisis (see below), which threatens to make debt a major issue once again. However, it also relates to problems with the design and implementation of the HIPC and MDRI schemes:

 

The schemes do not cover enough debt or enough countries

 

Today, the outflow of debt repayments from many developing countries remains far in excess of international aid they receive - around £5 of debt repayments are made for every £1 of aid the developing world receives as a whole. We do not believe that all of this debt warrants cancellation, as many countries have develop economies capable of absorbing large amounts of debt, which they can use for development. However, we have calculated that somewhere in the region of £400 billion additional debt does need to be cancelled in order to allow 100 countries to meet their people's basic needs.

 

The HIPC and MDRI schemes judge debt sustainability far too narrowly. They look at the ratios of debt-to-exports and debt-to-government-revenue, but they take no account of the needs of the people of the country concerned for food, shelter, development, etc. Hence, poor countries like Bangladesh and Kenya are not eligible for debt cancellation because they have relatively high export earnings - regardless of the need for those earnings to be spent on development.    

 

Loopholes remain in the schemes.

 

Debt relief schemes have primarily focussed on multilateral debt, with large amounts of commercial debt and non-OECD bilateral debt being unaffected. Infamously, this has led to poor country debts being bought by so-called vulture funds on the secondary debt markets. ‘Vulture fund' is a name given to a company that seeks to make profit by buying up cheap defaulted poor country debt and then attempting to recover the full amount immediately, often by suing through the courts. Such companies often describe themselves as ‘distressed debt funds'.

 

At least 54 companies are known to have taken legal action against 12 of the world's poorest countries, for claims amounting to $1.5 billion. The majority of cases are heard in US or UK courts. Some of these companies are the original creditors but many are secondary purchasers - vulture funds whose sole aim is to make as much profit as they can from the debts, interest and fees that they add on. In 2007, a vulture fund called Donegal won £15 million against Zambia in the UK, for a debt it had acquired for £3 million (it tried to seize £55 million). In November 2009, two vultures won £20 million against Liberia in the UK High Court.

 

Legislative proposals have been tabled to clamp down on this industry in both the US and UK, by mean of capping the amount such a fund could claim in relation to the price it paid for the debt. This would make the vulture business model unprofitable. The UK Government has also put forward a measure to mandate a HIPC/ MDRI write-down on any vulture case in UK courts, but has not introduced legislation to date.

 

The schemes are controlled by creditor countries

 

HIPC and MDRI schemes - like the Paris Club restructuring schemes that preceded them - are still controlled by creditor countries. Creditors exercise that control very explicitly through conditions they apply to debt relief. Attaining debt relief is a long process of several years, during which countries due to receive relief are subject to numerous conditions that they must fulfil. 

 

Conditions are both structural and macroeconomic. Macroeconomic programmes require HIPCs to quickly and dramatically shrink budget deficits or increase budget surpluses. These targets are often overly optimistic and extremely difficult to meet. For example in 2006, Burundi, Democratic Republic of Congo, Republic of Congo and Sierra Leone had to meet targets for their budget deficits which were lower (in terms of percentage of GDP) than the US and UK managed to achieve that year. Ironically, such measures involve strict restrictions on spending for basic services such as infrastructure, healthcare and education - and this is for the countries and populations that most desperately need these services.

 

For example, the IMF refused to allow Zambia to employ more healthcare workers even when the Canadian government offered to foot the bill for five years, because to do so would have meant exceeding IMF spending ceilings. Similarly, when a drought in Malawi caused food shortages, its government was forced to borrow money from domestic banks to prevent its citizens from dying. The IMF, however, viewed such a measure as irresponsible and declared Malawi ‘off-track' from HIPC.

 

Conditions can also be structural - for instance, Nicaragua had to privatise its electricity sector. As part of the privatisation, Spanish multinational Union Fenosa took over electricity distribution, creating a private monopoly. The privatisation has widely been seen as a failure, with increased power cuts, no extension of electricity coverage, and increases in the average bill of between 100 and 400 per cent. Furthermore, privatisation has focussed investment on oil power plants, rather than viable alternatives to fossil fuels such as hydro-power and geothermal.

 

Debt cannot be solved through a one-time cancellation

 

Debt cancellation schemes are still based on a one-sided notion of responsibility. The international lending system places sole responsibility on the debtor nation. The risk to lenders is almost eliminated by the absence of an international lending framework to mandate responsible lending behaviour; by the non-existence of an insolvency procedure for sovereign states and by an export credit system which guarantees debt and transfers risk back to the sovereign state.   

 

A one-time cancellation of debt will only provide for a temporary improvement in the position of developing countries if it is not accompanied by a system to improve the quality of lending and to re-balance the responsibilities of creditor vis-à-vis debtor. We can already see that lending habits have changed very little in the last 10 years and that both climate change and the financial crisis are inducing vast quantities of new lending which will only reinforce the dependency of developing countries. 

 

For many years civil society activists and developing world governments have called for an open, independent, impartial, transparent and comprehensive process to resolve debt crises and disputes. This could be achieved through a mechanism known as a Fair and Transparent Arbitration Process. These calls have now been bolstered by the Stiglitz Commission in its report to the United Nations.

 

A Fair and Transparent Arbitration Process would take account of both the origin and the impact of the debts, and would give equal treatment to both debtors and creditors, acknowledging their co-responsibility for the creation of the debts. It would also place the same moral and legal obligations on companies as it does on governments, tackling the current lack of commercial creditor participation, and the activities of ‘vulture funds' (see above). It would incorporate ‘bankruptcy' proceedings for countries when events of sufficient magnitude occur, allowing for an orderly work-out process.

 

Over the years, a number of possible models have been developed. Common elements of such proposals include:

 

• An impartial and independent panel would arbitrate the dispute. This means it could not be based in existing International Financial Institutions.
• The legitimacy as well as the sustainability of debts would be considered.
• The debtor country's need for financial resources to fulfil the basic needs of its population would provide the guiding principle.
• Equal treatment would be given to debtors and creditors, public and private.
• The process would be transparent and would involve civil society.

 

This would have a knock-on effect on the sustainability of future loans. But there is a need to go further to ensure that future loans are responsible and that development financing is sustainable. The G8's 2007 commitment to a ‘Charter on Responsible Lending' must be translated into reality. This should involve a binding legal framework that sets out what responsible lending entails, and fairly allocates the burden of responsibility between both creditors and debtors. As a step towards this goal, we encourage adoption of the Charter on Responsible Financing, developed by the European Network on Debt and Development, with Jubilee Debt Campaign and others.

 

In particular, we urge a very radial shake-up of the Export Credit Guarantee Department. We welcome the Liberal Democrat commitments in this regard. ECGD is the largest public bearer of developing countries' debt in the UK. The ECGD's existing loan portfolio must be audited and those debts found to be illegitimate or unpayable should be cancelled.

 

Moreover, the ECGD should strengthen its regulatory policies to prevent the build-up of unpayable and illegitimate debt in the future. This can only be achieved if the creditor - the ECGD - bears responsibility with the debtor country for the quantity and quality of loans provided. Adequate  standards, enforced through a fair and transparent debt work-out body would ensure lending and borrowing is conducive to sustainable development and protection of basic rights. The current ECGD portfolio  - which focuses on military hardware and carbon-intensive projects - clearly needs a complete overhaul, and mechanisms must include screening procedures that exclude support for harmful exports, parliamentary accountability and a method of insurance which doesn't leave poor countries footing the bill for decades to come.

 

There will always be cases when countries run into sovereign debt difficulties or have serious allegations of illegitimate debt. In the last year policymakers have found

several new ways to address corporate debt. It is now time to propose new approaches for sovereign debt.

 

Debt is only one element - albeit a very important one - of a bigger picture which shows many developing countries still chronically dependent on external credit, which in turn leaves them open to extreme volatility. Changing this picture means more than simply dealing with debt. It is outside the scope of this submission to discuss in detail the types of reforms we believe are necessary to change this long-term, deeply structural problem, but for reference serious thought needs to be given to: 

 

• Preventing illicit capital outflows (such as tax evasion, capital flight and corruption);
• Stopping widespread capital account liberalisation and adopting a different position with regard to capital controls;
• Changing the structure and policy prescriptions of the International Financial Institutions.

 

Illegitimate debt has not been cancelled

 

As we have seen, current debt relief schemes do not deal with an issue at the heart of the debt crisis - irresponsible lending. The notion of co-responsibility cannot be enshrined in the lending system effectively until this issue has been dealt with. We regard it as the biggest single deficit in debt relief schemes to date. 

 

Many countries are still repaying large amounts of money on the basis of projects that were detrimental to their people or environment, that involved large-scale corruption, that carry extortionate rates of interest or that were illegally transacted in the first place.

 

Under the Suharto regime, Indonesia acquired over $150 billion in debt, for which its citizens today are still paying, a decade after Suharto left office. A 1997 World Bank report estimated that at least 20-30% of Indonesian government development funds were diverted through informal payments to government personnel and politicians, while a high level of ‘leakage' went to the ruling political party and senior government officials. Indonesia's arms debt to the UK from the Suharto era is estimated to be £525 million. It was known that Suharto used such weapons against his people, for example, in East Timor. In making such loans, the UK therefore was knowingly helping a corrupt dictator to oppress and even murder his people. Cancelling this debt is not a matter of charity; it's a matter of justice.

 

Norway has shown global leadership in this regard. In 2006, Norway  unilaterally cancelled $80m in debt owed by five poor countries, on the grounds that the loans were examples of a "development policy failure". This shows that a country

can acknowledge past irresponsible lending and cancel the resulting debts. This has gone hand-in-hand with a more responsible lending policy.

 

Meanwhile, across the developing world, citizens' debt audits, organised by civil society, have sought to examine the nature of debts, and parliamentarians have also been encouraged to become involved in audits and scrutiny of loan agreements that their governments entered into. In 2007, Ecuador became the first government to convene an official debt audit commission, aimed at investigating the legitimacy or otherwise of historical lending to Ecuador. The United Nations Conference on Trade and Development (UNCTAD) is currently engaged in a three-year project examining the question of debt illegitimacy.

 

Although the bilateral debts of Nigeria and Iraq faced very large cancellation on a one-off basis outside the HIPC and MDRI schemes, the arguments used in those cases have not been explicitly extended into international standards and law. To do so would go a very long way to ensure more responsible lending internationally.

 

We believe the UK should show real world leadership on this issue and:

 

• Recognise the concepts of co-responsibility and illegitimacy in lending;
• Support the UNCTAD study into this area;
• Support debt audits in developing countries and agree to cooperate with their investigations and findings;
• Agree to carry out an audit of its debt portfolio to examine the origins of these debts and cancel those deemed illegitimate.

 

The financial crisis

 

The financial crisis has proved that the structural lessons of the ‘Third World Debt Crisis' were not learned. Irresponsible lending by banks and corporations in developed countries have caused another, even more pervasive, crisis. Once again, we fear the costs will be borne most heavily by the poorest countries. The crisis is proof that we need structural solutions to the problems inherent in the international lending system.   

 

A sharp contraction in global demand, volatile commodity prices, lower levels of migrant remittances, uncertain levels of official development assistance, increased spreads on sovereign bonds and lower levels of affordable capital have all combined to significantly worsen the budgetary position of many developing country governments. In 2009 alone, the shortfall in external financing is estimated at between US$350 and US$635 billion.

 

Already there are concerns that some impoverished countries are at moderate or high risk of debt distress mainly due to export and income shortfalls, as well as the impact of currency devaluations. The debt-to-GDP ratios of 28 low-income countries already exceed 60%. This is more than double the number in this situation before the outbreak of the global recession. UNCTAD points to serious concerns over the debt burden in 49 least developed countries.

 

In this situation, we called for a two year moratorium on external debt service payments for 64 of the world's poorest countries. This would have released over US$30.5 billion in extra finance to those countries. However, the solutions adopted by the G20 focussed on new lending - something we fear could greatly exacerbate debt distress in many countries in the year ahead.

 

The G20 agreed to an additional US$500 billion in resources, channelled through the IMF. Since the outbreak of the crisis, the IMF has provided US$170 billion in new loans to 32 countries. The World Bank has also increased its lending activities by 54% over the previous year. At the same time, rich country governments have pressed the World Bank and IMF to re-write their rules on debt sustainability. The Bank and Fund have re-cast the debt sustainability framework for low-income countries to allow countries to take on more debt without them being considered in ‘debt distress'.

 

Rather than use the opportunity of the financial crisis to address some of the structural problems of developing country dependence, that dependence may well have been deepened through the use of new lending.

 

Moreover, there are very worrying signs that rich countries will meet their commitments to climate financing through vast quantities of new lending, again channelled through the World Bank with conditions (see above). We regard this as an inappropriate method of repaying what is in essence our own ‘climate debt', especially given the World Bank's reputation for high-carbon development projects. Though this paper will not set out this case at length, JDC has recently published a report with World Development Movement which explains this in more detail ('The Climate Debt Crisis: Why paying our dues is essential for tackling climate change').

 

Liberal Democrat values

 

We believe the policy proposals set out in this paper accord closely with the Liberal Democrats' principles and values set out in the consultation paper. In particular:

 

"Relationships between aid donors and recipient governments that create external, rather than local accountability are outdated"

 

Debt cancellation provides the ability to overcome traditional donor-recipient relationships through providing predictable, non-conditional, non-debt creating capital. The process of cancellation has empowered citizens to hold politicians accountable. This is why it is so important in the development ‘mix', although currently this positive impact is mitigated against by the conditions still applied to debt cancellation.

 

"We would adopt a rights-based approach to development"

 

This is long overdue in the calculation of eligibility for debt cancellation. The current method - of deciding ‘what is payable' had led to a very narrow interpretation of sustainability.

 

"Our policy would seek to build a fairer world in which richer and more powerful nations do not exploit weaker nations... This will mean taking decisions across all government departments that do not support British individuals' or companies' interests when they conflict with the interest of poor and vulnerable groups"

 

"Greater freedom of investment would be beneficial for both investing and recipient countries, so long as it is balanced by obligations to invest responsibly and sustainably"

 

This is central to ensuring a more responsible and sustainable form of international finance in the long-term.  For too long, business interests have been allowed to trump those of development and environmental sustainability. In order to enshrine these principles in policy, we would strongly urge: auditing and cancelling of illegitimate debts, overhaul of the ECGD and the adoption of the Eurodad Charter on Responsible Lending.

 

"Even for those countries which are likely to need financial support in the long term, we would seek ways to reduce dependency and restore local accountability"

 

We agree that this should be the long-term goal. That's why we have recently called for a moratorium on debt repayments rather than increased lending. Lending can be useful as a tool for development, but it can also create dangerous dependency and can replace local accountability with external accountability. Debt cancellation has generally had the opposite effect - witness the recent debt audit in Ecuador which has encouraged economic participation and accountability.  

 

A new way of dealing with debt:

 

We would like to see the debate around debt changed from one of charity and relief to one of justice and responsibility. The international lending system, including mechanisms of debt relief, enshrine a form of creditor control that fails to incentivise responsible lending behaviour and increases the dependency of developing countries on developed world capital. Long-term development, for many countries, necessitates a lending system in which historical injustices are put right and where creditor and debtor share responsibility.

 

Significant moves in this direction have been made across the world in recent years. Of particular importance are the UN Financing for Development Conference in Doha in December 2008, the UN Conference on the Economic and Financial Crisis in June 2009 and particularly the Stiglitz Commission report and the unity of G77 countries around further action on debt, the UNCTAD study on illegitimate debt and responsible lending, and the plethora of debt audits being carried out in numerous developing world countries. Moreover, the fallout of the financial crisis, the ongoing problem of climate change, and the response of rich country governments to these crises, means that debt will once again become a crucial issue in development discussions.

 

Most important amongst the changes we believe are necessary are: 

 

• Legislation to prohibit the activities of vulture funds.  
• Recognition of the concepts of co-responsibility and illegitimacy in lending, support of the UNCTAD study, support of debt audits in developing countries and establishment of an audit of the UK's debt portfolio to examine the origins of these debts and cancel those deemed illegitimate.
• Support for an international mechanism to adjudicate on payability and legitimacy of sovereign debts: a Fair and Transparent Arbitration Process based at the United Nations with neutral judgement and civil society participation.
• New, binding standards on UK government lending, particularly the elimination of policy conditionality and reform of the ECGD to ensure its lending fuels productive, sustainable growth.