Forgive us our debts: the Third World's financial crisis

Christian Century, Jan 22, 1997 by Jo Marie Griesgraber

THIS PAST YEAR the government of Uganda spent only $3 per person on health care, but it spent $17 per person on repaying its foreign debt. Meanwhile, one in five Ugandan children will not reach their fifth birthday as a result of diseases that could be prevented through investment in primary health care. Such economic conditions, which threaten people throughout the world's poorest countries, have drawn many Christians' attention to the problem of Third World debt.

Since the onset of the Third World debt crisis in 1982, many Christians have advocated clemency for severely indebted countries. As we near the end of the second millennium A.D., churches in Europe and the U.S.--including voices from within the Vatican and the World Council of Churches--are calling for a Year of Jubilee to free hopelessly indebted countries from all debt without condition.

Whether or not an updated version of Israel's Year of Jubilee will prove a practical solution, it's . clear that the problem of heavily indebted poor countries is serious. Uganda's inability to pay for primary public heath measures or Tanzania's inability to pay for basic education are both tied to their seemingly interminable foreign-debt obligations. This makes the debt crisis one of the principal social justice issues of our time. We should understand its causes and possible solutions.

While complete debt forgiveness for poor countries remains for many people a goal, activists have also been seeking incremental changes in the structure of Third World debt. One such measure is the HIPC Initiative involving the World Bank and the International Monetary Fund. In late September the governors of the World Bank and the IMF approved this groundbreaking measure to reduce the overall foreign debt of heavily indebted poor countries (HIPC).

The HIPC Initiative is justly termed "groundbreaking" for at least three reasons. For the first time the multilateral creditors will be reducing poor countries' debt, not just rescheduling it or lending new money to cover old debts. Also, when considering which countries' debt will be reduced, the international lenders will for the first time use as a criterion the debtor government's commitment to reducing poverty. The HIPC Initiative is also uniquely comprehensive in that it attempts to coordinate the actions taken by all the debtor country's creditors.

While the measure is groundbreaking, its impact will not be earthshaking. The World Bank and the IMF still require debtor countries to implement many of the restrictive economic policies, such as draconian budget cutting, that are currently in place--the kind of policies that critics say only further harm the poorest of the poor. Because the initiative is also extremely complex, its many points of "flexibility" will leave implementation subject to political manipulation.

The full import of the HIPC Initiative can be appreciated only if it is seen as a decisive stage in the history of a financial disaster. The debt crisis of Third World countries hit the headlines in 1982 when Mexico declared itself incapable of servicing its foreign debt. A number of conditions paved the way for that dramatic event. Before 1982 governments in the Southern Hemisphere were borrowing a lot of money; their growth rates were high, and the real cost of borrowing money was low. At the same time, creditors, especially commercial banks flush with newly invested oil monies resulting from the 1973 hike in oil prices, were eager to lend.

This conjunction between borrower and lender collapsed, however, with the second OPEC oil price hike in 1979 and the onset of "stagflation" in the North--inflation without growth. Paul Volcker, head of the U.S. Federal Reserve, took steps to squeeze inflation out of the U.S. economy by raising interest rates well above the rate of inflation. Inflation dropped, but the move pushed the economy into a severe recession.

WHAT WAS AN economic cold for the U.S. was full-blown pneumonia for countries of the South. Most loans by U.S. banks to foreign governments had floating interest rates pegged to the rate the Federal Reserve charged banks for short-term loans. Raising the U. S. interest rates automatically raised the cost to foreign borrowers of servicing their loans. The recession in the North also shut down the markets for southern products, so southern producers could no longer earn the hard currency required to pay the higher interest rates.

In the fall of 1982, Mexico announced it could not pay its foreign debts. A house of cards had been built on the faulty assumption that countries could not go bankrupt. The unthinkable had happened, and no contingency plans existed to meet the crisis.

Eventually, the various creditors developed mechanisms to address their outstanding loans within the southern governments' debt portfolio. Each segment of the debt--commercial, bilateral and, more recently, multilateral--was addressed separately, depending on the creditor. No one worried about the needs of the debtors.