The Jubilee Debt Campaign - Essay Example

Examine the validity of the Jubilee Debt Campaign claim that much of the debt crisis in developing countries was caused by ‘reckless or self-interested lending by the rich world. The Jubilee Debt Campaign is an international campaign whose primary advocacy is the cancellation of debts from rich countries to poor countries, so that funds otherwise used as debt payments can go to public services like poverty alleviation, education and health1. At the core of its advocacy is the notion that much of the debt crisis in developing countries was caused by reckless or self-interested lending by the rich world. It was brought to the fore in 1982, when Mexico announced that it would not be able to pay its debt obligations. (Sachs, Huizinga and Shoven. 1987) This paper suggests, however, that while reckless or self-interested lending by the rich world is indeed a factor, one significant aspect that must be neglected is the weakness of the developing countries with regard to its democratic institutions and regulatory mechanisms. In many, if not most, instances, it is the leaders of the developing countries themselves that subvert the development trajectory of the respective nations and compromise the well-being of their citizens. Domestic policy has played a big, if not key role, in the debt crisis of the third world. Leftwich (1993) suggests that official Western aid policy and development thinking is dominated by a new orthodoxy that good governance and democracy is not only desirable but also necessary. In many aid and loan agreements however, precisely what is being taken advantage of is the dismal lack of democratic structures and glaring issues of governance. The point is that it is impossible to work out an economic recovery program while following the debt-repayment schedule of the creditors. Despite two decades of death relief efforts, the problem still remains. (Easterly 2002). Hardships are evident, and many mass protests have taken place as a result of these hardships. (Walton and Regin, 1990). A very good example of this is when precious government resources are channeled to debt restructuring instead of capital expenditures. We take a look at the example of Asian countries during the period of 1985 to 1995. Contrary to doctrinaire free-market economics, institutional economists argue that government financial resources devoted to building physical or social infrastructure or shoring up domestic demand “crowd in” rather than “crowd out” private investment, including foreign investment. For instance, one key study of a panel of developing economies from1980 to 1997 found that public investment, complemented private investment, and that, on average, a 10-percent increase in public investment was associated with a 2-percent increase in private investment (Bello, 2008). Now, the key explanation for why Asian countries flourished in the period 1985 to 1995 is that they were deluged with Japanese investment that was relocating from Japan to make up for the loss of competitiveness of Japan-based production owing to the drastic revaluation of the Japanese yen relative to the dollar under the famous Plaza Accord in 1985.  This flow of Japanese investment to these c outnries was not accidental.  Nor was it accidental that the Japanese bypassed the Philippines. For while external creditors of the Philippines were busy stripping its government of resources for investment in infrastructure, its neighbors were frantically devoting resources to financing infrastructure to attract or crowd in Japanese direct investment.   Indonesia, for instance, attracted $3.7 billion worth of Japanese direct investment between 1985 and 1990.  A key reason was the high level of government capital expenditures, which came to 47 percent of total expenditures in 1980, 43 percent in 1990 and 47 percent in 1994. Or take Thailand.  It pushed down interest payments from 8 percent of government expenditure in 1980 to 2 percent in 1995 and raised capital expenditures from 23 percent to 33 percent. In the late ’80s and early ’90s, Thailand received $24 billion in foreign direct investment from Japan, Korea and Taiwan, or 15 times the amount invested by the three countries in the Philippines, which came to a paltry $1.6 billion. There is no doubt that government capital spending crowded in foreign investment in Thailand and the lack of it crowded out foreign investment in the Philippines.  Like all clear-thinking investors, the Japanese were not going en masse to a place where infrastructure was decaying and where the market was depressed and poverty was increasing owing to a political economy shackled by structural adjustment and battered by the priority given to repaying foreign debt. They were, in short, not stupid. This trend of continuing outflow of government resources in the form of payments to creditors and the shrinking of capital expenditures continued into the first years of this decade. In 2005, according to the World Bank, 29 percent of government expenditures by the Philippines was devoted to interest payments to both foreign and domestic creditors and 12 percent to capital expenditures. Calculations by the Freedom from Debt Coalition put servicing of foreign and domestic debt (most of which is said to be owed to locally based foreign entities) at 51 percent in 2005, 54 percent in 2006 and 41 percent in 2007. It cannot be denied that a debt crisis can also cause an investment crisis. (Warner, 1992) Another issue is corruption. Says Jain (1993): In most cases, corruption, unless extreme, is accepted as a way of life. We do, however, find that corruption among the political elite, broadly defined to include the leaders and their supporters, is quite common in the indebted countries. Since the debt crisis in the early 1980s, one consequence of the resource misallocation resulting from this corruption has been a decline in the income of wage earners, one group in society which usually has the least control over a corrupt leader. The solution of the debt crisis, therefore, is inseparable from the question of allocation of income within the borrowing countries. The allocation of income is tied to the question of control of the political system. The solution to the debt crisis, therefore, will have to interfere with domestic politics, and involves the question: how are those who make economic decisions to be selected? India is another example where excessive borrowing from the government has caused much harm. While India is the world's largest single cumulative recipient of World Bank assistance, with lending totaling about $60 billion (Rs. 2,40,000 crores) since 1944, current annual borrowing amounts to less than 1% of the country's GDP. The loans, however, have been used as leverage to bring about important policy changes and impose conditionalities in areas such as governance reform, health, education, electricity, water and environment- many of these with obvious political and social consequences. The loans also legitimize substantial additional funding from a diversity of bilateral and multilateral donors such as the Asian Development Bank and Department for International Development (DFID-UK). The Bank's loans have caused extensive social and environmental harm from mass displacement in the Narmada valley to loss of livelihoods of traditional fishworkers in places such as Barwani.  It was noted that such overbearing influence on India's policy making was in violation of the World Bank's own Rules of Association, which mandate it to be an apolitical institution that should not interfere in political processes of any member country. Not to be forgotten is the issue of “tied aid” in the form of official development assistance or (ODA). ODA from other sources such as China, the emerging top donor to Southeast Asia, also contains conditionalities requiring the provision of engineering, procurement and construction services by Chinese companies.   The kind of aid that many countries in the South has overwhelmingly received has largely been oriented toward furthering donor foreign policy interests more than the country's considerable development needs.  Aid from multilateral agencies has also continued to attach explicit and implicit conditions that are inimical to third-world interests. The preferential treatment accorded foreign contractors and consultants as a result of foreign aid as well as attendant conditionalities to liberalize goods and services of government projects, especially on matters of procurement and accountability has marginalized local firms and experts and has proven to be a major source of inefficiencies that bloat up costs of ODA-funded projects. Third-world governments have given their imprimatur to this kind of economic sabotage. (Alternative People’s Development Forum, 2008) Indeed, it requires no special intelligence to realize that the massive amounts of money that have gone to paying our creditors to service our constantly mounting external debt was money that could not go to development. It cannot be otherwise given that resources are finite. Sometimes such truths can only be grudgingly accepted when events occur that force their acceptance. For instance, it can no longer be denied that Argentina’s five-year string of 10-percent annual GDP growth is due principally to President Nestor Kirchner’s courageous act of essentially defaulting on most of that country’s foreign debt and channeling the money saved to domestic investment. Hence, while the contention of Jubilee South is correct that self-interested lending by the first world has resulted in poverty and crisis in the borrower countries, much of the blame should also fall on the shoulders of the governments and most importantly, they are in the position to craft policies that will put less emphasis on debt repayment and more on social services. Political will should inform decision-making, and not acquiescence. References Alternative People’s Development Forum. (2008). Time to Dismantle the Roots of Evil: a Citizens’ Report on Official Development Assistance to the Philippines. University of the Philippines Press: Philippines. Bello, Walden. (2008). “In the Shadow of Debt”. Published in the Philippine Business Mirror. Page C1. April 22, 2008. Easterly, William (2002). “How did Heavily Indebted Countries become Heavily Indebted?” Center for Global Development, Institute for International Economics, Washington, DC, USA. Jain, Arvind K. (1993). 'Dictatorship, Democracies and the Debt Crisis' (Part II). Published in The Politics of Global Debt (ed.) Stephen P. Riley, St. Martin's Press   June 1/1993 Leftwich, Adrian. (1993). Governance, Democracy and Development in the Third World. Third World Quarterly, Vol. 14, No. 3, Democratisation in the Third World, pp. 605-624    Sachs, Jeffrey, Huizinga, Harry and Shoven, John. U.S. Commercial Banks and the Developing-Country Debt Crisis. Brookings Papers on Economic Activity, Vol. 1987, No. 2 (1987), pp. 555-606 Walton, John and Ragin, Charles. (1990). Global and National Sources of Political Protest: Third World Responses to the Debt Crisis. American Sociological Review, Vol. 55, No. 6 (Dec., 1990), pp. 876-890.   Warner, Andrew. (1992). Did the Debt Crisis Cause the Investment Crisis? The Quarterly Journal of Economics, Vol. 107, No. 4 (Nov., 1992), pp. 1161-1186   Read More