Of Human Bondage

For more than 700 million people living in the world's poorest countries, overwhelming debt to wealthy creditors is trapping them in lives of misery.

by Sarah Abrams

In 1998, in the small, sub-Saharan nation of Uganda, more than 50 percent of the country's school children weren't able to attend school, many of their families too poor to pay the school fees instituted in recent years. Huge debts owed by Uganda to wealthy creditors meant that, instead of providing free education to its people, Uganda was forced to charge its citizens, a policy creditors have required of nearly all the world's poorest countries.

But Uganda is only one of many developing countries caught in the grip of overwhelming debt — debt so burdensome that poor nations are left with few resources to care for the health and wellbeing of their citizens. Today 42 economies — called Highly Indebted Poor Countries (HIPC) — owe more than $365 billion to wealthy creditors. Unable to pay them off, these countries struggle to merely pay the service on the loans, committing themselves to a downward spiral of mounting debt.

A typical HIPC country spends on average 30 to 50 percent of its budget to keep rolling over its debts. From 1980 to 1990, debtor countries paid $6.5 billion in interest and $6 billion in principal to creditors that included donor countries, the World Bank, and the International Monetary Fund (IMF). Yet despite such Herculean efforts, their debts were 60 percent greater in 1990 than in 1982.

The result, says Harvard economist Jeffrey Sachs, who has been working for more than a decade to help poor countries manage their debts, has been that economic ministers from poor nations spend much of their time trying "to stay one small step ahead of outright default without the time or financial stability to address critical, long-term social problems."

The southern African country of Zambia, for example, spent more than 30 percent of its national budget on debt payments throughout the last decade, spending only 10 percent on basic social services. In sharp contrast to wealthy nations, the government's annual health expenditure per person is estimated to be around $17 per person, compared with the creditors' expenditure of $2,300 per person in Europe and $4,000 per person in the United States.

A Flawed Strategy

The financial bankruptcy of the poorest countries has been evident for at least 15 years," says Sachs, who directs the Center for International Development (CID) based in the Kennedy School, but the IMF, the World Bank, and rich countries have delayed real solutions to this chronic problem.

In truth, many of the debts were incurred by poor, fledgling countries a generation ago, when wealthy countries and monetary agencies used loans as political tools to stop the spread of Communism, often regardless of who might be in power or where the money might be going. Much of the assistance, in fact, has gone to lining the pockets of dictators instead of helping those in need. Today HIPC countries owe more in interest than they do in original debt.

And the strategy for managing these debts, explained Sachs in a statement before the House Committee on Banking and Financial Services last June, has been one of "disjointed negotiations between the indebted country and its major creditors."

The process, most would agree, has been a dismal failure. In 1996, the HIPC initiative was launched by wealthy creditor countries and its monetary institutions — the IMF and the World Bank — to help find a solution for managing the debts. The IMF, World Bank, and finance ministers, however, decided to assess HIPC countries' debt servicing capacity by comparing the debt to export levels. Relief was based on reducing the debt to between 200 and 250 percent of exports, a calculation, says Sachs, that ignored the fact that debts are owed by governments, not exports, or that the ratio of debt to exports does not calculate the high social price paid in servicing debt instead of meeting basic human needs. A six-year waiting period was imposed on all countries before relief could even be achieved.

The current approach, says Sachs, is built around an IMF-World Bank structural program that puts the IMF at the center of the process, making the decisions on the level of necessary relief and on the conditions that should be attached to the relief.

Never set up as long-term development strategists, says Sara Sievers, CID's executive director, the IMF has systematically overestimated what these poor nations can realistically pay back. The IMF does not have the capacity to deal with issues of public health, nutrition, and the HIV/AIDS epidemic, yet, she says, it wields major decision-making power on the welfare of these countries without regard to the country's social condition.

"When the IMF renders a decision on whether a government can or cannot service a debt, it gives little if any attention to whether the health care system has collapsed, whether children are being vaccinated, or whether the HIV/AIDS epidemic is being attended to," says Sievers.

The only winners in all this, Sachs says, are the staffs of the IMF and World Bank, which have "invented a perpetual motion machine for endless missions to these hapless countries."

A Moral Imperative

What would it take for creditors to forgive outright the debt of these poor countries? The moral and practical case for freeing these countries is overwhelming, says Sachs, who describes the protestations by wealthy countries that they can't afford to relieve the debt as a "cruel joke." The sharp contrast between the lives of those living in poor and wealthy countries, say debt relief advocates, makes resistance by creditors "unimaginable."

The average life expectancy in the HIPC countries is 51 years, compared with 76 years in wealthy countries. In the nations of Guinea Bissau, Ivory Coast, Malawi, Nigeria, and Zambia, at least three out of 10 people die before the age of 40, and a third of children under five are malnourished. Malaria continues to kill at least a million people a year in many countries, and in Sub-Saharan Africa, where HIPC countries are concentrated, 20 million people are infected with HIV/AIDS, two-thirds of the world's total. In some sub-Saharan countries, at least one in four people is infected with HIV/AIDS.

"In the face of all that these countries must endure and where the stock market boom has increased the wealth of the United States," explains Sachs, "it is sad to see rich countries claim they are too poor to forgive the poor-country debts."

While the HIPC countries owe the United States approximately $6 billion, the reality, says Sachs, is that the United States has already written down the debt to about $600 million. Forgiveness by the monetary agencies would also be relatively painless, says Sachs. The IMF holds around $7.8 billion of claims on the HIPCs and currently sits on $22 billion of unrealized capital gain on its gold reserves. It could, maintains Sachs, sell one-third of its gold and be unaffected.

After Cologne: Demands for Relief Grow

In June 1999, representatives from the world's eight wealthiest nations ‹ the Group of Eight Industrial Nations or G8 — met in Cologne and agreed to forgive more than $100 billion in debt, out of $365 billion.

Although a step in the right direction, debt relief advocates agreed that the Cologne project — an effort meant to improve upon the original HIPC initiative — fell far short of what was needed. In the HIPC initiative's new guidelines, countries would still need to jump through impossible hurdles in order to qualify for relief.

"These bad debts are kept on the books so as to maintain the myth that effectively bankrupt countries are still able to repay those debts, obscuring the reality that they are bankrupt and the loans are worthless," wrote 1987 Nobel laureate and former president of Costa Rica Oscar Arias Sanchez, after Cologne.

In the fall following Cologne, Sachs proposed more sweeping changes, noting that while the Cologne gathering recognized the HIPC initiative's earlier failings, the initial framework for debt forgiveness remained intact. The revised HIPC program, said Sachs, needs to provide increased support to help countries meet profound unmet social needs and that debts owed to creditors, including the bilateral agencies, the World Bank and the IMF, and creditor nations, should be forgiven.

With Jubilee 2000, a grassroots, worldwide advocacy movement for debt relief, supported by religious groups, development organizations, and artists, CID accelerated its mission to place debt relief in the international spotlight. It was Jubilee 2000 supporter and rock star Bono of the Irish band U2 who first contacted Sachs seeking his advice. A tireless debt relief advocate, Bono has brought the subject to the attention of prime ministers and presidents, even meeting with U.S. Senator Orrin Hatch and financier David Rockefeller to lobby for their support. Together Bono and Sachs have sat with Washington's elite to make the case for debt relief. In September, they traveled with a delegation of Jubilee 2000 supporters to Rome to bring the plight before the attention of Pope John Paul II.

The United States and Great Britain Step Up

In the fall, the campaign got a big boost when President Clinton went before Congress in September and unexpectedly called for the United States to forgive the entire debt of the poor nations. A month later, Congress voted to back Clinton's pledge. By the end of 1999, the British government, which had long been in favor of debt forgiveness, had also agreed to write off all its debt.

In his State of the Union address in January, and at the World Economic Forum in Davos, Switzerland, in February, President Clinton again spoke in support of an expanded debt relief program, stating that "not nearly enough has been done to help debtor countries."

The job now, says Sievers, is to keep the pressure up on the HIPC initiative. The international institutions have it within their ability to do the right thing, says Sievers. The problem, she says, is one that often occurs with developing country issues: grand pronouncements of largesse are made, and then the implementation and follow-through details are left to groups that sometimes do a thorough job, but often the project ends up falling off the radar screen.

When issues important to politically powerful groups start to falter, says Sievers, people start screaming, and that gets the public attention again. That's the role, she says, that the CID, along with organizations like Jubilee 2000, will play for debt relief.

"We want to hold the international communities' feet to the fire," she says. "Our role is to make sure that the debt relief movement promises enough and that it delivers what it promises."

Last June, for example, the HIPC initiative agreed to relieve 30 percent of Bolivia's debt, significantly less than what Bolivia should be receiving, says Sievers. CID will follow up, she says, to be sure this promise is carried out.

"It's quite a travesty if the best the HIPC initiative can come up with is a 30 percent debt reduction for Bolivia," says Sievers. "It's a good-performing country, and it started through the HIPC process very early on. If that's what they're going to give to the stars, that does not bode well for the others."

A Better Future

What if creditors eventually do agree to forgive all the debts? Outright debt forgiveness, says Sachs, is only the beginning. For HIPC countries to move from a state of social and financial deprivation to one of prosperity, they will need an increase in bilateral development assistance.

The debt reduction process will need to be based on the human needs of the countries, says Sachs, a plan that would include a timetable that takes into account social program efforts.

The process, says Sachs, should be one in which debtor countries, in cooperation with creditor countries, present blueprints for progress, and creditors signal concurrence by forgiveness of debt. A key part of any such program, says Sachs, would be a commitment by HIPC countries that additional resources would be targeted for basic human needs, such as immunization coverage, improved mother-and-child care, HIV prevention, and efforts to increase primary school enrollment rates.

Debt relief advocates point to countries where relief programs are already under way as examples of what debt relief can accomplish. Uganda, for example, used the $40 million it received in debt relief last year to cancel school fees. As a result, in 1999, 90 percent of primary-aged school children attended school.

The real goal, according to World Bank President James Wolfensohn, "should be to put the countries back in the driver's seat."

The IMF would be in a position to comment on HIPC plans, says Sachs, "but would no longer be able to dictate to them."

But the barriers to development, says Sachs, are "often more subtle than the current emphasis on Œgood governance' in debtor countries.

"If the poor were just like the rich, but with less money, the global situation would be vastly easier than it is. As it happens, the poor live in different ecological zones, face different health conditions, and must overcome agronomic limitations that are very different from those of rich countries. Those differences, indeed, are often a fundamental cause of persisting poverty."

A much more important challenge, says Sachs, is that of mobilizing global science and technology to address the crises of public health, agricultural productivity, environmental degradation, and demographic stress confronting these countries.

These countries need more than debt cancellation and foreign aid in the coming years, says Sachs. "They need real economic development to lift these societies above the shocking level of poverty they now endure."

Nonetheless, debt cancellation, wrote Sachs in the The Guardian last June is "an opportunity for a fresh start and a vigorous assault on the monumental challenges facing the poorest countries. Just as it would mark a decisive step by the rich countries, debt cancellation should also mark a decisive new commitment by the poorest countries to democracy and social reforms."