Erick Frazier

 

From Debt to Development

 

Alternatives to International Debt Crisis

 

Introduction:  Concerned about existing trends in the mid 1980s, representatives of religious organizations, unions, environmental groups, hunger and development organizations, researches, and other citizens groups gathered in September of 1984 to address the international debt crisis at the time.  United around the commitment to social justice and to more just, equitable and long-term solutions to the debt crisis, they launched the Debt Crisis Network in April of 1985.  This paper outlines the Networks approach to an alternative solution by first establishing some core principle by which they strive to uphold, current schools of thought that are circulating as pertains to the international debt crisis, and then finally their own solution to dealing with the worlds enormous level of debt.

 

Without welfare improvement, the world economy as a whole will never be healthy or stable.

 

Crisis cannot be resolved as long as:

• Countries’ debt burdens are growing faster than their economies;
• IMF medicine further debilitates the patient, rather than offering assistance to meet specific economic problems and development needs;
• Policy responses to the debt crisis adversely affect the living standards of workers, farmers, and others in the developed world; and
• An inordinate amount of power in the international financial system remains in private hands, outside the domain of public concerns.

 

The Debt Crisis Network proposes an alternative framework for solutions that:

• In the short-term, alleviates the debt burden of the least developed nations, and redefines rigid IMF conditionality toward more developmental forms of adjustment for all developing countries;
• In the medium-term offers a global package for debt relief; new criteria for bilateral aid, and outlines regulations for private banks; and
• In the longer-term, reverts to a more democratic IMF to a more modest role of providing short-term balance of payments support in a reformed international financial system.

 

Short-term and long-term goals are equally important and must act in accordance with one another.  The short-term goals allow for survival and provision of basic requirements while the framework for the long term is laid.  In other words the short-term goals are set in a direction so as to meet the long-term.

 

I.  UNDERLYING PRINCIPLES - Any reforms in established institutions and rules governing the international financial system, or defining new ones, should be based on certain principles.

 

1. Democratic Representation and Decision Making - Power derives its ultimate legitimacy from the consent of the governed.  International financial systems need to be democratized.
   1. Voting Power - IMF is based on “one dollar one vote”, this leaves poorer countries with little to no influence.  In accordance with democratic principles, voting power in these institutions should reflect the basic UN principle of “one nation one vote”.
   2. Management - Should reflect more equitable distribution of national representation to replace dominance of western personnel.
   3. Participation in decision-making - Institutions like the IMF and informal fora like the Paris Club should be reshaped to ensure that non-governmental organization of debtor countries, such as peasant and workers unions, have input into fashioning their countries adjustment programs.  Large amounts of development funding should be shifted to national development foundation.
   4. Democratic treatment - Implies greater equity in sharing burden of adjustment in financial crisis.           
2. Accountability – International financial institutions must become more accountable to public in North and South:

·        Far greater public knowledge of, and involvement with, these institutions;

·        Mechanisms whereby U.S. citizens, for example, can make their concerns heard by the these institutions and by the stronger governments that dominate them; and

·        Regulatory mechanisms to insure more socially responsible operations by bank, which are currently accountable only to their shareholders.

3. Universality – All countries should be members of major international financial institution.
4. Guarantee of Fair Reward for Labor – the world economic system should guarantee fair and remunerative prices to the developing country producers of raw material.
5. Priority to Meeting Basic Human Needs – exported growth is currently promoted by international financial institutions, and has carried as a corollary the erosion of basic human needs.  Encouraging developing countries to become self reliant in food production is a key component to insure that countries can weather balance of payments storms with peoples welfare intact.
6. Equity in Sharing Losses – costs of the $895 billion third world debt will be paid by someone.  The debt needs to be lifted from the poorer majorities and shared more fairly.  Creditor as well as debtor countries should bear some of the costs as well as bank lenders

 

II. EVALUATION OF CURRENT PROPOSALS – Four major schools of thought:

• Solutions framed within the existing international financial system;
• Solutions which provide for the expansion of existing financial institutions or the establishment of new ones that help reform the system;
• Proposals from developing countries; and
• More long-run solutions which provide for structural reforms in the international financial system.

 

1. Solutions framed within existing financial system - developing countries suffer a short-run liquidity problem.

Proposals - Three assumptions: continued lending to developing countries, stronger IMF requiring strict conditionality; and a sustained world economic recovery.

Evaluation - Debt moratoria and dramatic breakdowns have so far been avoided, but from a development standpoint, the situation continues to deteriorate.  If solutions framed within existing international financial system continue to be the major response of governments and banks to the crisis, development prospects will continue to erode.

Reflects none of the six principles for international financial systems that advance development and needs of poorer majorities

 

2. Solutions that extend the role of financial institutions – Some investment bankers, liberal economists, and political leaders are convinced that the debt crisis is more that a temporary liquidity shortage and believe that existing methods may not be able to resolve it.

Proposals – Two assumptions: major portion of these loans will never be repaid, and that the world economy will not recover until the debt burden is reduced.

·        Brandt Commission Report – focused on supplementary financing for the third world through an increase in IMF resources and more use of co-financing with private lenders.

·        Felix Rohatyn – convert developing country short-term debt into longer-term obligations by means of a new public international creditor agency that would exchange present-short to medium-term debt for its own long-term, low interest bonds.

Evaluation – (pro) Take problem of debt out of case by case, crisis managements made, and put into an institutional channel where rules are clear.  (con) Tax payer funds would have to be used to bailout banks for mistakes largely of the banks’ own making. (con)  Criticized as a mechanism that would allow private banks to shift least prudent loans to IMF.

Lacks to advance public authority, accountability, or equity.

 

3. Proposals from the South and regional cooperation – The various cooperation schemes call for sharing the burden of responsibility for the debt crisis and recognizing that both internal and external factors were as its root.  According to the schemes’ proponents:

·        Third World countries have already made extraordinary adjustments in their economies in order to meet international obligations;

·        It is now the turn of the banks, creditor countries, and the IMF to do the same;

·        Economic growth is to take priority over servicing of foreign debt; and

·        The social costs of future adjustment programs should be minimized.

Prominent among the proposals is to pay debt service only up to a fixed percentage of export earning.

 

4. Long-term solutions for structural reform – Establishment of new international economic order.  Declaration called for fundamental changes in operations of international economy, including major changes in role and practices of private international banks and IMF.

Proposals – “Outline Program of Action on International Monetary Reform”

·        The expansion of developing country quotas in the IMF from 30 to 50 percent of the total voting power;

·        An expansion of balance of payments support on low conditionality terms for developing countries;

·        A medium-term IMF facility providing finance on concessional terms; and

·        An increased allocation of Special Drawing Rights (SDRs) to developing countries.

SDRs should replace U.S. Dollar and other western currencies as main form of “hard currency”

Evaluation – Two types of reform advocated:  Provide IMF with substantially more resources to lend to developing countries, and grant developing countries greater scope in choosing among development models.

Lacks principles of accountability, universality, equity in sharing losses, and labor rights.

 

III. A NEW ALTERNATIVE

 

Short-term measures- three groups of developing countries with different needs and requiring different treatment.

1.      Most Seriously Affected Countries - UN has identified 36 which, by its criteria, are the “least developed” in the world.  Most are suffering food crises and are badly in need of debt relief.  Collectively these 36 countries owe only $26.2 billion (1982), 2.9 percent of the Third World debt.  In order to save tens of thousands of lives, Western governments should transform outstanding debt into grants, and new credit should be made on easier terms to ease the immediate suffering.

2.      Flagrant Development and Human Rights Violators - Includes few countries where government disregard for the development conditions of the country and the basic needs of the majority is so blatant that the world community advocates a halt to all new loans to their governments and emphasis should be placed on channeling assistance to non-governmental groups in these countries.

3.      Remaining Debtors – includes majority of developing countries which fall between the first two categories.  IMF and World Bank should support new conditionality for these nations that would guide the use of resources to assure that they do not go down the drain.

 

Medium-term measures – U.S. should adopt policies which discourage the kind of lending that fueled the debt crisis and should address ways to decrease the overall level of debt.

Debt relief and loss sharing – Negotiations among banks, developed country governments and developing country governments will be necessary to work out how losses will be shared among the three groupings, as these proposals involve large losses as portions of the debt are written off.

 

Bilateral Aid

·        Aid should be channeled to institutions that encourage greater self-reliance in developing countries and among the poorer majorities.  U.S. should support developing countries efforts to diversify economic activities away from reliance on trade towards those that provide employment opportunities in areas that benefit the local population.

·        Aid policies should support better representation and involvement of the poor in economic decisions and development activities affecting their lives.

·        Reduce military and security-related assistance and raise development assistance.  “Security assistance” accounted for 69 percent of foreign aid authorizations in the 1986 budget.

·        End use of the U.S. aid for political and domestic economic aims.

·        Oppose linking aid to a country’s acceptance of IMF conditions.

 

Policy toward Banks – Banks have added to the crisis in recent years by charging high interest rates on new loans that have essentially been used to service old loans.  70 – 80 percent of new loans to many of the largest debtors since 1979 have been used to pay interest on old loans, having nothing to do with development.

Proposals – Make it forbidden to report profits on any foreign loans on which the banks are lending borrowers the money to pay interest.  This will reduce the rewards for loaning money to pay back loans giving banks an incentive to lower their interest rates.  Others measures might be requirements on banks to cap loan renegotiation fees and interest rates charged to the poorest countries.

Longer-term Measures – Once the immediate crisis is over, we would urge that a reformed and democratized IMF be reduced to a far more modest task of coordinating the foreign exchange policies of its members and of responding to their truly short-term liquidity needs.

Fiscal and Monetary Policy – U.S. budget deficits could be reduced by cutting defense spending and by restoring taxes on corporations and persons with higher incomes.  By reducing the deficit and therefore government borrowing, the U.S. could more easily reduce interest rates reliving some of the Third World’s debt servicing burden. 

           

Trade – A socially “managed” trade system which is integrated with a national industrial policy, instead of the current version managed by the Fortune 500 largest corporations.  Such an alternative needs to be based on a version of what the U.S. economy will look like 10 years from now.

 

Transnational Corporations – The freedom of transnational corporations to shift capital and jobs as will is often detrimental to U.S. workers and communities and also to the Third World.  A well thought out series of regulations are needed to insure accountability to workers, communities, and the national government.  A foreign investment review board and strong regulations on exports of dangerous drugs and hazardous materials by U.S. corporations would improve accountability.

 

Agriculture – Solutions to the “farm crisis” of rural America involve many of the same issues of fiscal, monetary, and trade policy that are central to Third World debt.  Policy that would reverse the growing control by non-producers over producers and guarantee renewal of the family farm system; an equitable policy of world food security; a system of resource conservation; and a sound domestic food assistance policy.  As with the Third World debt in the short-term, a system of emergency credit for the most seriously debt-ridden farmers is essential, coupled with a debt restructuring plan for the remainder of family farmers.  In the medium- and longer-term, U.S. tax policy toward family farms should be reexamined to reduce the tax burden, and interest rate relief for farmers.

 

Conclusion: None of these measures will be accepted without substantial public education and political struggle.  Such a struggle can only occur if there are local, regional, and national debates on these issues by an informed citizenry.  That’s us!