by Lidy B. Nacpil,
Secretary General
Freedom from Debt Coalition of the Philippines, and International Coordinator of Jubilee South

The Jubilee Coalitions have raised the profile and underlined the urgency of action on international debt. The UN-initiated Financing for Development process, leading to a proposed “high-level event” in 2001 offers the opportunity to take the issues from the Millennial year into the 21st Century. Lidy Nacpil suggests what can be done with this opportunity.

Using this moment

The Financing for Development process is an opportunity not just to discuss how to mobilize more financing for urgent as well as strategic development goals. It should equally be an opportunity to take a critical look at how financing and financial policies, structures and processes have worked against development. It should result in actions which will transform policies, structures and processes to ensure that they are consistent with development principles and actually contribute to achieving development goals.

To mobilize domestic resources, for example, let’s not only look at improving the tax system and tax collection in order to increase revenues, but at how the tax system can be made more progressive and equitable. Even more basic is the question of allocation of these resources and actual spending.

On the question of external capital inflows, let’s look not only at how economies can be made more attractive to foreign investments but be reminded of the impact of short term international capital on South countries and the dangerous vulnerability of economies dominated by foreign capital. The process should focus on controls of international capital flows and consider the Currency Transaction Tax (CTT) as a first important step.

Debt in the way

We’re not really free to address the opportunity and to fully deal with financing development, unless we confront the continuing urgency of the debt for countries of the South.

The burden of heavy debt servicing and the urgency of freeing up resources for development is not a problem of the ‘highly indebted, poorest’ countries alone. Debt cancellation is needed and by all countries of the South.

Debt service continues to take up a large percentage of public spending of all South countries. Interest payments alone take up from 30% to even more than 60% of the budgets of national governments. In the Philippines, there is a law that requires automatic appropriations for debt service, thus guaranteeing that debt service is prioritized above any item in public expenditures.

In the face of poverty and deprivation, it is unjust to spend massive amounts of public funds on debt interest and principal instead of on badly needed services – housing, health, education, water and infrastructure.

An inadequate frame of reference

The categories and measures used by the World Bank and the IMF to indicate debt sustainability and identify who should be the beneficiaries of debt cancellation do not reflect the actual conditions of the majority of the people in the South. These measurements have been uncritically accepted by many governments and even some NGOs and have dominated the debt discourse.

GNP growth and per capita income do not tell us much about the poor, marginalized and excluded, and the impact that heavy debt servicing will have on them. Even World Bank and UN data show that the growth years of some called middle-income South economies have also been characterized by widening gap between the rich and the poor. The growth of the wealth of the elite in South does not automatically lead to increase in government revenues and increased capacity for debt service. Other Bank and Fund policies actually prevent the governments of the South from extracting more tax contributions from big business.

Dividing the poor into the “not-so-poor” and the “poorest” and declaring that only the poorest deserve debt cancellation serves to limit the costs of debt cancellation, serving only the purpose of the creditors.

Using debt to export ratios and debt to GNP ratios as main measures of level and gravity of the debt problem conveniently obscures the complexities of the debt problem. GNP growth can be spurred mainly by external and temporary flows. A high level of export earnings is not necessarily an indicator of the strength of an economy vis-à-vis the impact of indebtedness, especially in economies where domestic production is highly dependent on imported in-puts. Trade deficits and balance of payment deficits can continue to be plague even economies with high exports.

These measures of levels of indebtedness and other measures used to indicate debt sustainability serve to limit the perception of the magnitude of the problem serving the creditors’ purpose of conceding as little as possible. By any ethical standard, the Bank/Fund discourse on debt sustainability is blatantly self-serving.

We believe the United Nations can take a decisive role in challenging and changing the instruments used in defining indebtedness and debt sustainability. An alternate framework is urgently required. It should be rooted in a more profound, critical, scientific, compassionate and just understanding of indebtedness, its extent and impact. We ask the United Nations to direct appropriate agencies to work with civil society groups and grassroots organizations for this purpose.

We urge the United Nations to lead in the formulation of comprehensive debt cancellation programs that will be inclusive of all South countries.

Debt cancellation should not be premised on compliance with economic policies and programs that have been proven to have disastrous consequences for the economies of the South.

The HIPC debt relief program has failed, not only by design (involving too few countries and too little amounts of debt) but also by implementation (covering thus far even fewer countries and even smaller amounts than proclaimed). But, the heart of the issue against HIPC is the linking of debt relief to structural adjustment programs.

Studies by UN agencies and even by the World Bank attest to some of the negative consequences of stabilization and structural adjustment policies implemented under the tutelage of the Fund and the Bank and their regional counterparts. Studies by civil society organizations and testimonies by grassroots communities offer an even more comprehensive and critical picture of the way these policies have led to greater poverty, economic vulnerability and greater indebtedness.

Repackaging these policy directives as “poverty reduction programs” doesn’t change the fundamentals. While some modifications have been made (as a result of lessons paid for by people of the South), these changes do not represent a significant departure from the neoliberal framework. The enhanced HIPC program puts forward the Poverty Reduction Strategy (PRSPs) as an improvement over earlier conditionality. But close scrutiny of new PRSP documents reveal that they retain the same thinking that has guided their policies for years.

That these PRSPs shall supposedly be designed by national governments with participation from civil society gives no reassurance. Many economic managers in the South have already so internalized the framework that they cannot be expected to come out with anything different. We have had enough experience with “consultations” with our governments and the Bank not to expect that our participation will affect actual changes. Whatever the outcome of national processes, the IMF and the WB have the final word.

It is not that our economies of the South do not need structural changes. They require profound systemic and structural changes so that these economies may become equitable, sustainable, gender-responsive, internally strong, self-driven and able to support full human and social development. But the stabilization and structural adjustment policies promoted by the international financial institutions have the opposite effect.

It is a tragic irony to condition debt relief and debt cancellation on the same policies that increased indebtedness, that will keep a country perpetually indebted. We thus urge the United Nations to lead the call for the de-linking of debt cancellation from economic conditionalities imposed by and identified with the IMF and the World Bank.

At the same time the UN must monitor and ensure compliance of member states and international financial institutions with existing Human Rights norms and mechanisms. External debt and imposed “solutions” have led to gross violation of civil, cultural, political, social and economic rights, including the right to self determination and development.

We urge the UN to form a global commission (with more than 50% membership representing civil society) for a critical review of the work of the IMF, the WB and other international financial institutions, to determine whether they should continue to exist, and if so to redefine the role they should play, and if not to examine ways to de-commission these institutions.

The fundamental issue of legitimacy and illegitimacy of debt

Who owes these debts and why? What is the nature and purpose of the debt? Debt cancellation is seen by creditors as an act of charity and forgiveness. They deem it their right to decide what level of “generosity” that they will exercise. From this point of view it is easy for them to presume that creditors have a right to impose conditionalities. But if legitimacy is in question debt cancellation is not an act of charity, but an issue of justice.

Illegitimate debts are debts that do not serve the interests of a people, which are hostile and detrimental to their interests and welfare. They should not be recognized as the people’s obligations, and therefore not paid. This definition and assertion has support in the spirit and principle of an international law called the “doctrine of odious debt.” Interpreted profoundly, this doctrine means that much debt cannot be considered legitimately the debt of the people of the South. The indebtedness and the “need” for borrowing were created by creditors through a long history of colonization and exploitation and the consequent impoverishment of South countries and their peoples.

Further, debts were incurred without the participation and assent of the people. Many debts were loans to private corporations and relatives and cronies of government officials but guaranteed by governments. In numerous cases, the processes and loan transactions were rife with fraud, bribery, anomalies, and irregularities. Many loans also involved onerous, usurious and unfair terms.

The loans were not used for the benefit of the majority of the people. The monies were either stolen by corrupt officials, spent on unproductive and harmful purposes, wasted on over-priced and ill-designed projects, spent by private entities, used for projects and policies meant to primarily benefit big business, etc.

Debt has been an instrument of further exploitation and domination, an instrument of subversion of the rights and capacities of nations and peoples to define and direct their development programs and processes:

• The loans were not humanitarian offerings but brought significant profit to the creditors.
  
  
• Loans supported corrupt and authoritarian regimes which ensured an economic climate favourable to external investors and the creditors themselves.
  
  
• Debt is used as leverage to impose economic policies that serve the interests of creditors but often have devastating effects on the economies of the South and the people.

International action is urgent. The UN should begin by decisively declaring the right of countries not to pay odious and illegitimate debts and ensure enforcement of an international law on odious and illegitimate debts. Further, we urge the UN to initiate an immediate international inquiry into past and present illegitimate debt.

Debt cancellation and non-payment are not enough.

We must address the more strategic issue of ending the vicious cycle of indebtedness. We need a critical historical understanding of the creation and perpetuation of the problem, and a comprehensive analysis of the linkages of debt to trade and globalization.

The UN can lead this broader study of debt. It can build a foundation not only for solutions to end the debt cycle and prevent its recurrence but also for alternatives that will democratize the economic and political structures of society, and ensure development that is truly people-centered, equitable and sustainable.

The Freedom from Debt Coalition of the Philippines is a coalition of grassroots organizations, women’s groups, trade unions, social movements, students, professionals, church groups and NGOs. Jubilee South is a network of debt campaigns, social movements and people’s organizations from 35 countries in Asia/Pacific, Africa and Latin America and the Caribbean.

FDC, 34 Matiaga St., Central District, Quezon City, Philippines fdc@skynet.net