Cancellation of Debt of Poor Countries - Research Paper Example

? Cancellation of Debt of Poor Countries Cancellation of Debt of Poor Countries Introduction The research question that this paper aims to analyze is: Should the World Bank and IMF cancel all the debts of poor countries? This is an issue that has generated heated debate and controversy for quite some time now. The issue stems from the fact that many developing countries have external debt that is too high for them to pay considering the low proportion of their gross domestic product. The external debts of many of these developing countries accumulated to unmanageable levels for a variety of reasons. A good example is the oil crisis of 1973 whereby oil prices escalated forcing governments of many developing countries to borrow heavily from the IMF, the World Bank and other creditors to procure much needed oil supplies. Much of this borrowed capital was spent on noncapital generating ventures or was lost through corruption. This means that these countries were mostly unable to channel these borrowed funds into their economies to fuel economic growth that would in the near future generate the capital necessary to pay off the debt (Palley, 2003, p. 83). Review Proponents of debt abolition have been advocating heavily for cancellation of all debts of poor countries. The most prominent of these is the Jubilee Debt Coalition, a UK-based coalition of local groups and organizations calling for the cancellation of heavy debts owed by developing countries. The issue of debt cancellation is important because heavy debts which are not payable prevent the eradication or reduction of poverty in the third world. The World Bank and IMF are party to the Millennium Development Goals one of the main aims of which is to significantly reduce the number of the world’s people living below the poverty line (Pettifor, 2003, p. 71 – 73). It is now evident that the world is nowhere near to achieving this goal as millions of people have continued to slip into poverty every year. One of the reasons for this counterproductive development is burgeoning debts which developing countries are unable to manage. Heavy debt leads to poverty, which causes insecurity. Both the citizens and visiting foreigners suffer for this insecurity. In addition, the experiences of countries such as Nigeria, Afghanistan and Iraq indicate that this general lack of insecurity provides a conducive environment for the growth of terrorist organizations with a global reach. These terrorists pose a serious threat to the national security of all countries, including developed countries. The arguments proposed by both proponents and opponents of debt cancellation have their strengths and weaknesses. Proponents include organizations such as the Jubilee Debt Coalition, experts such as renowned economists in the US, and policy makers in the US and the European Union. They have put forward a number of good arguments. Firstly, they argue that many of the loan deals have terms that are unfair to the borrowing poor countries. According to Palley (2003) the interest rates are usually set very high because many of the developing countries are desperate and they borrow on short notice (p. 86). For this reason, the loans end up being very expensive, an unfortunate situation considering that the developing countries are the poorest yet they often receive loans that are more expensive than those received by developed countries. In fact, many countries have already paid the amounts they owed several times over because the debt grows faster than they can pay due to high interest. Therefore, it is only fair that the World Bank and the IMF cancel these debts while it is working on a solution to ensure that in future, terms of loans consider the state of a country’s economy and its rate of economic development. Secondly, proponents argue that debt needs to be cancelled in order to harmonize goals of the United Nations with those of the World Bank and the International Monetary Fund. The UN’s Millennium Development Goals heavily emphasize the reduction of poverty. According to Pettifor (2003) developing countries will never be able to reduce poverty and raise their standard of living if they are struggling with heavy debts that they will never be able to fully repay (p. 74). It is only fitting that the funds used to repay these debts be instead diverted to development projects that will empower citizens economically. Therefore, the IMF and the World ought to align their goals with those of the UN by cancelling debt of poor countries. The World Bank and the IMF have already cancelled the debt of some countries under the Heavily Indebted Poor Countries (HIPC) Initiative and the Multilateral Debt Relief Initiative (MDRI). However, their efforts are not enough since the MDRI only cancels debt owed to the World Bank, the IMF and the African Development Bank leaving poor countries still heavily indebted to other creditors. Furthermore, it is only the MDRI which allows for complete relief of debts. The HIPC mostly undertakes only partial debt relief. Thirdly, some of the loans were given out to corrupt and oppressive governments who proceeded to squander the money on projects not beneficial to their people. Many of the governments were also corrupt and it was quite obvious to the IMF and the World Bank that a huge portion of the money would be embezzled by corrupt government officials. Therefore, the IMF and the World Bank bear the liability for the inability of some of the poor countries to repay their debt because they lent money to oppressive and corrupt regimes knowing full well that this money would not be spent on infrastructure and development projects. For example, South Africa still owes a debt of $22 billion incurred by the apartheid regime which used the money to finance apartheid programs. Therefore, it is only fitting that the World Bank and the IMF cancel these debts and relieve the people of these countries of debt burdens they had no control over whatsoever when the deals were signed (Palley, 2003, p.91). These arguments are quite strong, but those of opponents are also equally strong. Although the governments of most western countries, especially the G-7, the World Bank and the IMF have now committed themselves to debt relief for heavily indebted poor countries, there are still staunch critics in many quarters who oppose this stand. According to Aggarwal (1991) they mainly include experts such as economics professors in major universities, various organizations such as the American Economic Association, and a number of policy makers in the US and Europe, especially those in the opposition (p. 39). The strongest of their arguments is that developing countries will lose security of payment if the World Bank and the IMF cancel their external debt. Lenders would henceforth be unwilling to loan money to the same countries if they know there is a high risk that the countries may in future find themselves again heavily indebted and in need of debt relief. In addition, many of those countries still have oppressive and corrupt governments which used the loaned money inappropriately. In addition, poor countries have weak legal and administrative structures meaning that there is still a high chance that loans would be misused. Therefore, the IMF, the World Bank and western governments would shy away from giving loans to poor countries fearing that oppressive, corrupt, or weak governments in place will misappropriate the funds. In future, the same arguments would be raised that the lenders loaned money to oppressive or corrupt governments knowing very well it would be misappropriated; As a result, proponents of debt relief would again have a strong argument for cancellation of debt. Secondly, heavily indebted poor countries should not have their debt cancelled because the developed countries also have their own economic problems. They need the loan money to rebuild their economies which have been badly damaged by financial and economic crises since 2007. Therefore, the developed countries are not so rich that they can afford to write off large amounts of money owed to them by poor countries. The developing countries should simply fulfill their obligations to pay loans they committed themselves. Thirdly, opponents of debt cancellation argue that relief will encourage poor economic policies in developing countries. Poor countries will borrow without considering their ability to pay. In the end, they might end up in the same situation of having debts they are not able to manage. In addition, it may even encourage misuse of funds by officials knowing that they will not have to pay back the loans (Pettifor, 2003, p. 77). With regard to the arguments of the proponents of debt cancellation, the one regarding loan terms that are unfair to the developing countries is the most compelling. As much as the World Bank and IMF simply adhere to economic policies when they provide high interest loans to developing countries that request for loans at short notice, the practice is inappropriate because it ends up hurting the same countries that the two financial institutions were set up to help. The two financial institutions should operate with moderation and consider exceptions to their policy when dealing with vulnerable poor countries. They should provide loans with terms that are favourable to the developing countries such as low interest even if they have low negotiating power. It beats the purpose when loans provided to poor countries to help develop their economies end up damaging their economy due to high interest rates that cause the loan to burgeon out of proportion. The second proponent argument is also compelling because developing countries have no option but to borrow money in order to provide basic services. Therefore, it should be a matter of grave concern when the burden of paying these much needed loans becomes a constraint to the elimination of poverty. UN goals of poverty alienation should not clash with IMF and World Bank goals of upholding their economic policy. Such policy should be reviewed. The third argument is not compelling because governments are representative of the people even if they are oppressive and corrupt. They only reflect the situation in the wider society if they are corrupt. Furthermore, citizens always have the option of replacing oppressive or corrupt governments, whether this is accomplished through legal means or by force. According to Palley (2003) this is evidenced by the Arab Spring movement which led to the overthrow of many oppressive governments in North Africa and the Middle East (p. 89). For the arguments put forward by opponents, the first one is very compelling. It will cause the World Bank and the IMF to impose strict requirements for the extension of loans to poor countries in order to prevent similar situations in future. Therefore, poor countries will lose their security of payment and will have a difficult time procuring loans in future. The second argument is also not compelling because developed countries, which mostly fund the World Bank and the IMF, extend loans to poor countries with the expectation of some form of return such as rights to extract natural resources such as oil. Therefore, the fact that the economies of the developed countries are also struggling is not a good reason not to cancel loans as they have already received more than enough payment by extracting resources in the poor countries (Aggarwal, 1991, p. 37). The third argument is also weak because there is strong evidence that countries that receive debt relief can strengthen their structures and policies and prevent misuse of funds by corrupt governments. A good example is Rwanda, a country which has received considerable debt relief but is not taking advantage of this move by misusing loans. In fact, Rwanda now has one of the highest economic growth rates in the world due to productive use of loan funds. Conclusion Evidently, the issue of cancelling debts owed to the World Bank and the IMF by heavily indebted poor countries is a contentious issue. Both the proponents and opponents have strong arguments. However, the arguments of the proponents have more weight than those of opponents. All the three proponent arguments are compelling as opposed to the opposition arguments, of which only one is compelling. This is also the reason why the HIPC Initiative and the MDRI came into effect. The World Bank, the IMF, and governments of developed countries yielded to the demands of the proponents because of their strong arguments and agreed to relieve poor countries of debt, albeit only partly. In my opinion, debt should be cancelled because poor countries have to borrow money in order to provide their citizens with basic services. The reason why this debt becomes unmanageable is because the interest is too high. Therefore, it is not their fault that many poor countries are unable to clear their debt. References Aggarwal, V. K. (1991). "Debt Forgiveness: Dangerous Trend or Absolute Necessity?" World Link, 4 (5). pp. 37-39. Palley, T. (2003). “Sovereign Debts Restructuring Proposal: A Comparative Look”. In Ethics and International Affairs. 17 (2). 80 – 94. Pettifor, A. (2003). “Resolving International Debts Crises Fairly”. In Ethics and International Affairs, 17 (2). 67 – 79. Read More