Why and how to cancel the debts of the poorest countries

François Hollande, First Secretary of the French Socialist Party, explains the urgency of a global task

Issue 3, Volume 49, 2000

The dramatic terrorist attacks on New York and Washington, which mark a new phase in the history of international relations, pose more urgently than ever the need to regulate the process of globalisation, which boosts the world's wealth production but which sharpens the frustrations of those who are excluded from it. That is certainly the case in sub-Saharan Africa but also in certain countries of Latin America and Asia, not forgetting the palpable declines in the territory of the former Soviet empire and the growing pockets of poverty in Northern societies. The present tragic situation underlines the extent to which North-South relations have become a compelling priority for socialists and social democrats who base their internationalist approach on the demands of peace, democracy and social justice. Even before the actions which hit the United States, the conference in Durban on racism had revealed the demand for a relationship of greater solidarity with the countries of the South.

From Seattle to Genoa, via the Porto Alegre forum held under the banner "Another World is Possible", North-South relations have been at the heart of civil society's demonstrations which are pushing states to adopt more decisive measures on this issue. The Durban meetings, among NGOs as well as among states, have highlighted the question of the historic debt represented by the practice of slavery which is the crudest expression of racism. Today, at the dawn of the third millennium, one of the first tests of this global solidarity is the resolving of the issue of the debt of developing countries.

Every modern state contracts debt in order to invest and develop. It is not therefore a case of depriving any state in this world of the opportunity of contracting debt, a step which would exclude it for ever from the world's economic and trade relationships, but of ensuring that debt is not an obstacle to lasting development. This supposes a treatment which varies according to the economic situation of the countries in question. All the states of the OECD are in debt but they are masters of that situation. In the case of emerging countries, policies of restructuring are imposed so that such debt is tenable and the process of take-off is not hampered.

But that is not the case for the forty so countries recently re-christened HIPCs (heavily indebted poor countries) who are not able to escape from the financial and economic impasse into which they are locked except purely and simply by means of debt cancellation. It is the second case that we consider here. We must work out the mechanisms and conditions which allow this option and define the means whereby these countries can assure themselves of a place in the world economy and really participate in economic and political decisions. These were the ideas behind the meeting of 5 October which the Socialist International organised in Paris with non-governmental organisations from the North and the South.

Despite the different methods of debt reduction by the Paris Club and the debt relief or cancellation agreements reached since the end of the 1980s by France, originally the largest creditor, and by other countries of the European Union, the problem of the debt of those which are termed poor countries remains unsolved. In Africa, in the 1990s, on average 43 dollars a year per head have been spent on debt repayment while only 35 dollars went on education and health!

There is a shared political responsibility at the root of the debt problem. It lies with the lenders who pushed developing countries to contract debt from the 1970s onwards so as to recycle petrodollars and who went on to impose monetary policies unfavourable to the debtors. It lies too with the governments of the HIPCs who administered them unwisely or put them to other uses. The second responsibility is always being emphasised while the first is often forgotten.

The procedures for cancelling debt must always take into account this shared responsibility and build on shared criteria, avoiding favouring the bad managers at the expense of those who adopted more rigorous policies. It is conceivable to think of a ‘no debt-development’ contract for beneficiary states which would envisage public policies giving priority to health and education. In working out the details, the installation and the overseeing of such a contract it is vital to associate actors from civil society alongside state representatives.

The political ambition which should move the Socialist International is that of contributing to creating conditions which would allow new generations of politicians coming to power in the framework of the democratisation process to avoid seeing their development agenda brought down by the burden of the debt. It is clearly a matter of putting the question of the removal of debt in terms of financing development and not of the "sustainability of the debt".

The decisions about debt must link up with the global policy of public development assistance (PDA), which is a necessary but not sufficient element for the HIPCs’ development. One must not start cancelling debt to the detriment of PDA. Let us remember that the Social Summit in Copenhagen in 1995 repeated the commitment of OECD countries to devote 0.7 per cent of their GNP to development finance and that the tendency of countries - with the exception of Northern European countries whose determination deserves praise - is to fall short of this figure. The idea of an international tax on speculative movements of capital whose proceeds would be put to the development of HIPCs still has to be explored with a genuine political will.

It was at the 1996 Group of 7 meeting in Lyon that a so-called HIPC initiative was launched by France. Taken up by the international financial community, it resulted in, at the G7 Summit in Cologne in 1999, the adoption of forgiveness of bilateral and multilateral public sector debts (covering 70 billion dollars out of a total of 210 billion) for 41 HIPCs. In January 2000, in Tokyo, the forgiveness initiative was broadened for these countries to include eligible commercial Paris Club debts.

Because of the conditions which were sought, that is, the establishment of a strategic framework for the fight against poverty agreed by the beneficiary countries with the Bretton Woods institutions, there are only 22 of the 42 countries today eligible for this plan of debt cancellation. The cost of this plan is today no more than 52 billion dollars (28.6 billion dollars in net value added), very much less than under the initial scheme.

The solution of the debt problem is eminently political. The HIPC initiative, as it is unfolding today, reduces the debt servicing of the beneficiary countries by no more than a third, while they are paying back today only a little more than half of it. The mechanism of cancellation must be seen in the clear political perspective of financing development and not of making the debt "sustainable". This evaluation requires a search for an alternative, bolder and more decisive, mechanism.

One could straight away propose to the debtor countries a cancelling of debt by means of a moratorium graded with reference to efforts towards good management and the will for political openness. The alternative method of cancellation of debt could thus be summed up as 2002 debt service being changed into assets for the 2002 budget of the beneficiary state. Those assets would have to be reserved essentially for the strengthening of the basic functions of the state, in particular public education and health policies. The initial period of this moratorium combined with debt forgiveness, for example from two to six years, policies would depend on the quality of political and economic management registered at the time of the taking of the decision. It would be subject to renewal on the basis of an evaluation carried out between the partners.

The states benefiting from the cancelling of these debts should be able to continue borrowing and not be reduced to a situation of assisted countries authorised only to receive donations on penalty of being excluded once and for all from the world stage.

On the basis of an agreement with the authorities of the partner countries, non-governmental actors would be associated with the process of defining and concretely applying the contract for debt relief and development. One part of this budgetary asset yielded by the cancellation of debt service could be managed by representative non-governmental actors in the beneficiary countries (local assemblies, economic and social groupings, trade unions); this would contribute to the strengthening of the dynamic for democracy by favouring the emergence of civil societies.

Conceived in this way, the plan for the cancellation of guaranteed commercial and public debt would take careful account of national sovereignties but also of the rights and duties of all the actors, both states and civil societies, and would give a new political content to the North-South partnership.