G8 Watch

WHAT IS THE STATE OF DEBT IN THE WORLD?
WHAT DID THE G8 PROPOSE TO DO ABOUT IT?

The sixty countries in the world with the worst conditions for their citizens collectively owe the richest nations about $240 billion. They spend about $8 billion a year repaying these loans and the interest on them.

Why should this debt be thought bad? After all, the United States alone has bigger debts than this!

There are three sets of reasons why it can be argued to be a problem:
1. Money
2. Power
3. Justice

And here's what the G8 debt deal did to address these three problems:
The G8 and the Money Problem
The G8 and the Power Problem
The G8 and the Justice Problem

1. Money
The repayments on the debt leave governments without enough money to
fund their health and education services or develop their country. Also, debt
payments are normally made in dollars, so countries have to focus their economies
on producing raw materials for dollar-generating exports. This causes pollution
and can make it hard for countries to feed their own people as cash crops or mineral extraction take priority over local food production. High debt service also drives away private investors, who do not want to see their investments paid back out again as debt service.

2. Power
Debt cancellation is provided by the G8 (see Jargon Watch, below) and the huge
international financial institutions that the G8 effectively controls (the World
Bank and International Monetary Fund (IMF). Debt provides a way for the G8 to
have power over the economic policies of indebted countries. Debt and debt relief
act as both stick and carrot in the process persuading developing countries to run
their economies in the way that the IMF and World Bank think is best. The poorest
people in developing countries may have very different ideas about how to
develop, but these ideas are not heard.

3. Justice
Many of the debts are the legacy of a history of domination, rooted in the time
of colonialism. The world's most impoverished countries have become
indebted through, for example, the need for reconstruction after independence or
anti-apartheid struggles; from underhand commercial lending practices; from rises
in interest rates designed to fend off recession in the US at the expense of
others; and from strategic loans made to dictators during the Cold War. The debts
of old dictators have weighed heavily on the new African democracies. Many of the debts are unjust, and so justice calls for them to be cancelled; but some people go further and argue that the true debt, the moral debt, is owed from Western countries to the countries that used to be colonies. What the G8 proposed In brief, the G8 debt cancellation proposals meet about a tenth of the
money problems, make the political issues worse, and entirely ignore the history of
injustice.

The G8 and the Money Problem
The G8 proposed that all debts owed to the World Bank, African Development Fund (AfDF) and IMF should be cancelled for a select group of eighteen countries. Twenty more countries are likely to qualify for the same cancellation in the near future and more may qualify at some point. The countries would stop making any payments on their debts as soon as the deal is implemented. This debt cancellation would cost the World Bank and IMF $17bn. On the surface, this looks like a big saving for the eighteen countries that qualify:nearly half (48%) of their debts are owed to the World Bank, IMF and AfDF: so the deal should reduce their total debts by nearly half. However, the real benefit will be much lower than this, as the World Bank will offset the cost of debt cancellation by reducing the aid that it currently gives to the eligible countries by about two-thirds. Jubilee Scotland calculates that the average gain to the countries that qualify for the G8 deal will be just over a quarter of the value of their total external debt. So, in rough summary, the G8 debt deal will provide for the cancellation of under a third of the debts of under a third of the countries that need it. For some countries, this will make a big difference to the problem of money, but it is still about a tenth of what is needed overall.

The G8 and the Power Problem
The deal is only available to countries that have already persuaded the IMF to give them debt relief, and so far eighteen countries have managed to persuade it. If a country wants to persuade the IMF to give it debt relief, it has to "adopt and pursue strong programmes of adjustment and reform" (IMF website). That is, it must show that it is running its economy in the way that the IMF likes. This involves setting up free markets, bringing the private sector into providing services, keeping government expenditure low while raising the government income from taxes. These policies may be fine in the right context. However, after twenty years of applying them in Africa, the situation has become catastrophic. The IMF thinks it has hit on the best way to promote growth and reduce poverty; the evidence shows that it is wrong. The debt cancellation is only available to countries which have already persuaded the IMF to give them debt relief, That is, it is only available to countries which have already made a good start in putting the IMF's economic policies in place. So the G8 deal makes the problem of power worse. By strengthening the gains to be had from satisfying the IMF, the G8's debt deal strengthens the IMF's potential for control.

The G8 and the Justice Problem
Nothing in the G8 deal seems to address the problem of justice. Countries that
want debt relief have to persuade the IMF to give it to them, rather than debts
being cancelled as a matter of what is right.

Last summary
In brief: the G8 debt deal solves about a tenth of the money problem, makes the
power problem worse, and is silent on matter of justice. This does not mean
that the G8 Summit was a failure, though. Compared to what G8 summits normally
yield, the debt deal is a great achievement. But it's easy to imagine a far better debt deal: debt cancellation could just be provided for all sixty countries without any economic policy conditions attached.

Jargon Watch:
The process of persuading the IMF to give it debt
relief is called the Heavily Indebted Poor Country
initiative (HIPC).
The G8 is the group of the world's richest and most
powerful countries: USA, Germany, UK, France,
Italy, Japan, Canada, Russia.
The G8 Debt Deal is now known as the Multilateral
Debt Relief Initiative (MDRI).

click here to go find out more about the facts behind the G8 debt deal
Download the NGO Assesment of the G8 Debt Deal

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