Tim Jones: The invisible debts
Thank to Keanu Reeves stealing historical figures for a history project in 1989, the one quote I think I remember from philosophy is from Socrates: ‘wisest is he who knows what he does not know’.
At a World Bank and Swiss government organised debt conference in Berne, there seemed a need for more acknowledgment of what we do not know.
Now that 32 countries have had some of their debts cancelled there is an emphasis on monitoring government debts to help prevent new crises in the future. Not that this monitoring has necessarily achieved its aim. We are told how 6 out of 25 African countries which have received some debt cancellation are at “high risk of debt distress” and a further 18 at “moderate risk”. To put this in context, a government can be spending 20 per cent of its earnings on debt repayments and still be considered at “low risk”.
One government official tells me he is outraged that some countries which had debts cancelled a few years ago are now seeing increased debts again. Especially as, in his view, the top lenders to these countries are the IMF and World Bank. He says when he challenged one World Bank official on this fact the response was “Are we really the largest lenders, I didn’t know that.”
A key reason for rising debts is the global economic crisis, caused by reckless private lending and borrowing in the US and Europe. Yet these very same private debts are not even monitored in impoverished countries. I spend two days asking IMF, World Bank and UN officials what the level of private-to-private debts owed by low income countries is beyond their borders, and no-one knows.
The IMF say they are reviewing how they monitor debts. I ask them whether they will include private lending? They agree it could be a problem in the future, but say there is little appetite to investigate now.
This matters for two reasons. The history of the current debt crisis in Europe, and past recessions such as the Asian Financial Crisis, is that private lending between countries can create debt crises, and then the public end up footing the bill. Private debt has to be monitored and kept under control.
Private debt is also a mechanism to keep taking money out of countries and avoiding tax. For example, a multinational company setting-up a mine in the Democratic Republic of Congo will set up a subsidiary in the African country. It then ‘lends’ the Congolese version of itself all the capital to develop the mine. The Congolese part of the multinational makes interest payments on the debt, which can conveniently transfer money out of the country untaxed. If the multinational company lends itself enough money at a high enough interest rate, it could prevent any profit being made in Congo at all. Job done, tax avoided.
Governments can try to tackle such schemes, but not when no-one has any idea of the private debts being created across borders.
Another debt which is starting to cause concern should be familiar to readers in the UK: public-private partnerships, (or the ‘private finance initiative’). Say a government wants to invest in a railway. Public private partnerships allow it to get a private company to build and manage the railway, for which the government pays a fee for the next say, 40 years. In the UK, the Labour government used this as a convenient way to invest in infrastructure such as hospitals, without the numbers appearing in the UK’s debt figures. Even though, if the government had borrowed the money and built the hospital itself, it would have been far cheaper than using the private company.
Apparently the same story is now being replicated across the world. Governments can keep debt off the books by entering high cost contracts with private companies, driven on by the propaganda of private sector efficiency. The decades long payments on these contracts are effectively government debt. Yet none of this is recorded in the figures, no one is watching.
The cynic might say the pushing of the private sector and ignorance of their debts comes from a crude ideology of private sector good, public sector bad. Surely it would be wrong to think clever, powerful people would have such a simplistic view of the world? On the other hand, a bit more philosophical cynicism – questioning whether we have really seen the full picture – might be just what the doctor ordered.
The first step is knowing what we do not know. The second is finding out. The third is not just monitoring, but acting to ensure new debt crises are not created.