Global Policy Forum

A New Approach to the


By Kevin Danaher

Global Exchange
June 9, 2004

Dozens of countries, large and small, have foreign debts so large that their interest payments on the debt are a crushing burden. The Republic of the Congo, for example, has annual debt service payments equal to 50 percent of its export earnings; Uganda's debt service equals 44 percent of its exports. Not surprisingly many countries cannot keep up with their interest payments, let alone ever hope of paying off the principal.

The situation has gotten so hopeless that even the World Bank and IMF have been forced to admit that debt relief is necessary. With the approval of G-7 leaders, the Bank and IMG approved a plan at their 1996 annual meeting to address the debt dilemma of the heavily indebted poor countries (HIPC). The ostensible goal of this multilateral debt facility is to ease the worst cases while maintaining strict criteria that will reassure the bankers. The requirements a country would need to meet include: having already agreed to a debt reduction plan on their commercial and bilateral debt, and possessing a good record on "economic reform" (i.e., past compliance with structural adjustment). The World Bank assumes that only about two dozen countries could possibly qualify. Critics such as Christian Aid in England have pointed out that the plan fails to provide enough relief: only about 3 percent of total HIPC debt could be written off if all the strict conditions were met.

At best this plan would serve to keep the worst debtor governments on the debt-payment treadmill and therefore under the influence of the overpaid economists in Washington. Yet the mere fact that the debt crisis is so bad that the people in power can no longer ignore it raises important questions for those of us in the movement for progressive change: how do we respond to this issue? Do we point out the flaws of the World Bank's plan and not propose alternatives? Do we call for outright cancellation of the debt as some European groups are doing? Or should we propose an alternative plan that would give us something positive to say and show that we are trying to come up with workable alternatives instead of just criticizing the schemes of those in power?

The problem with simple cancellation of the debt is that it gives a reprieve to third world elites-many of them undemocratic-without requiring any reforms. There is nothing to guarantee that they won't simply get into debt all over again and continue to owe more allegiance to first world elites than to their own people. Cancellation also let's off the hook the World Bank, IMF and commercial lenders who made such stupid loans in the first place. So the question becomes: how can we relieve the pressure of third world debt from the workers and family farmers of debtors countries yet not let elites off the hook?

We should try to come up with a proactive proposal that could meet several criteria:

1. reduce the debt payment burden that is draining much-needed foreign exchange that could otherwise be used by debtor countries for health care, education, housing and other needed services;

2. address the crying need for capital and empowerment at the grassroots in developing countries; 3. provide a class-conscious way to mobilize people here in the North that is based on feelings of solidarity with third world workers rather than pity; [the latter two features would provide a basis for building a transnational coalition of working class forces]

4. interrupt the cycle of debt payments and new debt that links the interests of first world elites and third world elites.

Imposing conditionality on third world elites is not necessarily a bad thing. (Majority forces would like to impose 'conditionality' such as democratization and redistribution of wealth downward.)

It's just that up til now conditionality has been a tool used by first world elites to impose structural adjustment on third world governments to ensure profitable access of global capital to the workers and natural resources of third world countries. If we could build a large transnational alliance of grassroots forces we could force the elites to agree to a form of debt relief that would really address the problems at hand.

The Beginnings of an Alternative

It is time we started developing a positive alternative to elite conditionality. We would rally global support for "people's conditionality." The idea would need significant input from partner organizations around the world and in practice would need to be adjusted for the specific characteristics of individual countries (unlike the dogmatic application of structural adjustment to debtor countries with vastly differing conditions and capabilities). But we in the industrial countries would need to do a significant portion of the lobbying because it is our government's that hold most sway over the policies of the World Bank, the IMF, the bilateral lenders and commercial lenders.

Along the lines sketched by Yunus in the L.A. Times piece, debtor governments would pay local currency into a local People's Development Fund, Micro-Enterprise Fund (or some such name). Once the money was deposited into the account, the government could not touch it. This would prevent the money being manipulated as political patronage. The Fund would have strict democratic requirements: it could be run by a board elected in nationwide free and fair elections with limits on campaign spending; the board would be required to comprise at least 50 percent women; representation of workers and small farmers could be written into the charter; grassroots development organizations would figure prominently; (and other requirements to be specified, all with the goal of ensuring mass democratic accountability and control).

This board would use the money deposited into the Development Fund to issue loans (and possibly grants) to grassroots development efforts. These could include a wide range of small-scale enterprises and empowerment projects: women's production and marketing co-operatives, organic farming projects, craft production, provision of health, education and transportation services, grassroots infrastructure development such as solar power, water purification, and sanitation, and the list could go on.

The Grameen Bank and many other micro-enterprise lenders provide useful lessons on how limitations could be imposed on the size of loans, how the money could be paid back by collectives rather than individuals, and how the process could go beyond mere financial transactions to social organizing. The economic multiplier effect would be great because the poor spend most of their money in the local economy on basic things such as food, clothing and shelter.

For each sum of local currency deposited into its People's Development Fund, that particular government would get their foreign debt written off for an equivalent amount of hard currency at a mutually agreed exchange rate. This stops one of the biggest problems of the debt crisis: the bleeding of hard currency from third world countries. Talk to people about the economic crisis on the streets of Zimbabwe, Nicaragua or Haiti and eventually the discussion comes around to the problem of foreign exchange shortages.

Obviously third world elites and first world elites will initially resist this plan because of its democratic character and its goal of shifting economic resources downward in the class structure instead of upward. That's why it will require a big, transnational pressure campaign. But pushing for simple cancellation of the debt would also require a big, transnational pressure campaign in order to succeed-so why not get more payoff for our efforts?

To the smaller business classes we could make the factual argument that the current stagnation in the global economy is partly due to insufficient demand at the base of society among the majority population. This fact is already admitted by some corporate leaders and they worry about the worsening prospects for the future. We could get some elements of the business classes to support the plan out of self-interest: they could expect to sell more products if the majority classes had more money to spend.

This plan may be thought of as a debt-for-democracy equity swap. The problem with most debt-for-equity swaps is that they fail to transfer ownership to the grassroots. Under this plan there would be (1) a lessening of the debt stranglehold, (2) a transfer of the political accountability of third world elites away from first world elites to the citizens of third world countries (a change that must take place if there is ever to be democracy or development in poor countries), (3) a way to ensure that money is getting to the grassroots base of societies, and (4) establishing the principle that if democracy is in fact a good thing, it should apply to all aspects of society, economic as well as political.

We need a positive issue to build transnational unity around. We can either continue the previous practice of the left and focus on government policies, even though government power is being rapidly eclipsed by the power of transnational capital and free market ideology. Or we can try to directly influence how capital gets invested: a central issue that affects jobs, gender inequality, the environment, immigration, the fiscal crisis of the state and a host of other issues. One good thing about people's conditionality is that it allows us to go to the public with our same critique of the powers that be, yet it gives us something positive to promote: a democratic vision and practice of bottom-up, grassroots development.

More Information on Social and Economic Policy
More General Analysis on Debt Relief
More Information on Debt Relief
More Information on Financing for Development


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