7 Limited Achievements of the Debt Relief Process[1]


Marika Hildebrandová


7.1 Introduction


The question of debt burden and debt relief is still one of the important issues of international
relations despite the fact that it is probably less prominent now than it was in the 1980s.
Although “new” topics such as terrorism, proliferation of weapons of mass destruction or
environmental agenda have become foremost and may seem to dominate current discussions, the problem
of debt is still far from being solved because it continues to have impact on a given group
of states. It influences their internal situation: the ability to service external debts,
long-lasting deficits of current accounts, lack of money to finance development projects or
problems caused by the requirements of multilateral institutions such as the World Bank[2] or the
International Monetary Fund; as well as their position in the world: their status in international
relations, their bargaining power and participation in various organizations or in negotiations
about trade and economic connections with other countries.


The aim of this chapter is therefore to analyse progress and present-day situation of debt relief.
It may be argued that developing countries have not been very successful in promoting debt
forgiveness or a substantial reduction of debt stock, and arguments to prove this statement will be
presented on the following pages. The reasons for this belief are that a lot of states, especially
in the region of sub-Saharan Africa, are still struggling with scarce resources to service their
debts, and that there has been a number of different proposal and initiatives to improve
the situation the helpfulness of which is disputed by a lot of the authors. The industrialized
countries, mainly the G-8 states, have also made a lot of promises which were kept only
to a certain extent. Moreover, given the amount of money owed to the developed world, multilateral
institutions and private banks, states of the global South are limited in their campaigning efforts
by bargaining power of the creditors who can influence the situation by conditions of and
approaches to debt relief, rescheduling and forgiveness.


In short, despite rhetoric of the developed world and statistics of the international financial
institutions, debt relief so far has been granted only to a limited number of countries in need.
This means only a partial success if all the promises made till present are taken into account. For
a lot of the countries in the developing world there is still a long way to go to achieve
the desirable result of their efforts which is debt forgiveness or at least by a substantial
reduction of debt still to be paid.


As argued by Wiarda (1990:411) the problem of indebtedness of developing countries may be viewed
from a number of different angles: there may be moral perspectives as well as humanistic, financial
or economic, the last approach being used most widely according to the author. Given the limited
length of this text, it is not possible to take all these viewpoints into consideration, and the
aim will therefore be to show that the problem of debt relief and its partial success may be also
seen as caused by the given state of the international system: by relations between the relatively
wealthy developed world and the developing one that lacks resources, which has an impact on its
bargaining power. Yet another issue is also connected with the debt crisis, and that is a strong
position of the Bretton-Woods institutions (BWIs), the World Bank (WB) and the International
Monetary Fund (IMF), in process of finding adequate solutions to it.

There are a lot of criteria available for assessing success of debt relief such as the number
of countries debt of which has been forgiven or reduced, long-term trends of the debt situation in
selected countries (e.g. debt proportion to GDP, debt per capita or debt service to exports
ratio[3]), speed of improving/worsening the debt servicing problem or the number of negotiations
about rescheduling. Some quantitative analysis of debt statistics is inevitable to describe the
situation of the debt crisis properly, and there is therefore need to present some data relevant to
this issue. On the other hand, as this is not an economic analysis the space provided for numbers
will be limited. The main reason is possibly problematic nature of the debt statistics issued by
the World Bank or the International Monetary Fund. Given the amount of resources needed to do the
research, these two organisations have nearly monopoly in providing data. This poses a threat
discussed e.g. by Wade (2003:139), Raffer and Singer (2001:181-2) or Simon (1995:24) that the
numbers are not unbiased as the institutions need to prove their success and there may be therefore
a tendency to “improve” the published information. To illustrate the limited success of debt
relief, more time will be thus devoted to analysing the problematic achievements of its main
initiatives.


For better orientation of the reader, the chapter is divided into six parts. The introduction is
followed by a description of the origins of the debt crisis and its development so far where roles
of the important actors and the main proposals of managing the situation will be discussed. The
third part is devoted to analysis of achievements of the three most important initiatives connected
with debt relief: the structural adjustment programmes (SAPs) of the 1980s, the Heavily Indebted
Poor Countries Initiatives (HIPCI) started in the 1990s and the Multilateral Debt Relief Initiative
(MDRI) announced after the summit of the G-8 states in Gleneagles in 2005. The aim of the fourth
part is then to present the reasons of why debt relief has been limited so far. The role of the
Breton-Woods institutions and states of both the developed and the developing world will be
addressed. The conclusion will summarize the main arguments of why the debt problems cannot be
considered as being solved for good.


7.2 The Debt Crisis: its Origins and Development from the 1980s till Present


The debt crisis broke out in August 1982 when Mexico, one of the largest debtors, announced that it
was no longer able to service its debt. Although this may have taken the international community by
surprise, during the 1970s there were attempts such as by Garg (1978) or Pearson Report (see Raffer
and Singer 2001:158) that tried to point out to the coming difficulties. But as Mulhearn (1996:169)
argues debt problems started to attract widespread attention only when the situation got to the
stage of threatening stability of banks in the developed world.



Before analysing development of the debt crisis and relief between the 1980s and present,
the origins of the problem need to be described.


7.2.1 The Reasons of the Debt Crisis


Developing countries experienced substantial economic growth in the 1960s (average of 6.6% between
1967 – 1973, see Todaro 1994:459) which continued to the first oil shock. In 1973, after the Yom
Kippur War, the OPEC countries decided to increase oil prices. They rose four times (Pilbeam
1998:290), which started to cause problems in both the developed and the developing world as oil
was needed everywhere. The import prices had risen and influenced the balance of payments of a lot
of the countries. While non-OPEC states experienced deficits of their current accounts, the
oil-exporting countries earned large sums of money which they were not able to spend, and they thus
deposited it largely in the European and the US banks.


The period of relatively fast growth in the 1960s supported the traditional approach to development
as being equal with rising economic standards, and seemed to prove the theory of Walt Whitman
Rostow that all countries have potential to develop along the same trajectory, the only obstacle
being delay due to the lack of resources to promote rise of economic capacities of the “backward”
states. Developing countries were thus eager to maintain the rates of growth and borrowed heavily
to be able to afford oil imports and to finish the development and industrialization projects
initiated in the previous decades. As large sums of so called petrodollars that could not be spent
in the industrialized countries were available, commercial banks were prepared to invest in the
developing world.


The loans, even though very large, did not seem risky at first because of the relative strength
of primary commodity prices in the 1970s (Mulhearn 1996:170). In addition, surplus of money on the
international markets meant higher levels of inflation; interest rates were thus relatively low,
which made borrowing even more attractive. Commercial lending boomed as countries were reluctant to
borrow from institutions such as the IMF or the WB due to the required conditions. A lot of the new
loans were agreed on terms of shorter maturities and variable interest rates (Todaro 1994:463)
which proved to be disadvantageous at the beginning of the next decade. Since money was available,
there was no pressure on proper development planning. A large number of projects were thus
ill-prepared and did not generate expected return of capital.


Debt service payments tripled between 1975 and 1979 (Todaro 1994:463) but debtor countries managed
to maintain the growth which made debt servicing possible. After the second oil shock in 1979, oil
prices increased from $13 per barrel in mid-1978 to $32                in mid-1980 (Pilbeam
1998:297). The governments of the industrialized countries imposed strict monetary policies in
order to stabilize the economy and to lower inflation levels. Interest rates had risen dramatically
causing economic slowdown and a substantial increase of debt burden of a lot of the countries.
Global recession at the beginning of the 1980s initiated a new wave of protectionism in the
developed world which meant deteriorating terms of trade[4] for developing countries. This
coincided with falling primary commodities prices, a trend which continues till today. If compared
with prices in 1980, the export earnings from cotton fell by 47%, in case of coffee by 64%, from
cocoa and sugar by 71%, 77% respectively (Commission for Africa 2005:109).


All these developments meant increasing deficits of current accounts in countries of the global
South which started to lack foreign currency to repay the loans. Moreover, the US tight monetary
policies whereas relatively relaxed fiscal policies led to appreciation of the US dollar between
1980 and 1985 (Pilbeam 1998:298) which further increased debt burden because exchange rates
worsened and more money was needed to service the dollar-denominated debts. This resulted in new
borrowing under at that time more and more disadvantageous conditions in order to meet
the obligations. The debt crisis started in 1982 when Mexico announced that it was no longer able
to pay its debts.


In reaction, the developed countries became very concerned about stability of the international
financial system as debt proved to be threatening a lot of commercial banks which could start to
collapse in case of default of a major debtor. Contrary to this, Pilbeam sees the possibility of
such a scenario as quite unlikely, and he argues that usually everything is done to avoid default
because of the possible consequences of “exclusion from future borrowing, reduced earnings from
trade and seizure of overseas assets” (1998:414-415).


The debt crisis hit hard mainly Latin America and sub-Saharan Africa, and these regions are
therefore focus of this chapter. Yet this does not mean that other parts of the world were not
influenced. For instance, Alami claims (2003) that situation of the Arabic countries is usually not
discussed even though some of them such as Syria or Jordan are experiencing debt problems.
Countries in Asia are usually connected more with the financial crisis of 1997 which also worsened
the debt situation in a lot of these states. Nevertheless, as Latin America and sub-Saharan Africa
are the most “famous” for their debts, it seems logical to concentrate on these two parts of the
developing world.


Before proceeding to developments of the debt situation in the 1980s and the 1990s, it is necessary
to explain the differences between the debt structures in both regions as they are far from having
the same problems. Latin American countries entered the 1980s as much largely indebted than the
sub-Saharan states. At the end of the decade Brazil owed about $120 billion, Mexico $100, Argentina
$70 and Venezuela $50 billion (Wiarda 1990:411). On the other hand, Simon calls the African crisis
as a “silent one” because indebtedness was lower but was “rising quietly but dramatically”
(1995:18). The creditors were also different: the largest amount of money in Latin America was owed
to commercial banks while in sub-Saharan Africa to official creditors such as states and
multilateral institutions.


7.2.2 Development in the 1980s and the 1990s


At first, the debt crisis was seen only as a temporary shortage of liquidity problem not as
something which was supposed to cause difficulties in the international system till the new
millennium. The main concern was to ensure that there would be no collapse of any important banks
due to default of a major debtor. Roles of different actors in the crisis are worth analysing in
more detail at the beginning of this part (according to Pilbeam 1998:416-419, for more in depth
discussion see Herman 2007).


The commercial banks supported the explanation of the problem as a liquidity not a solvency one[5].
Rescheduling with additional interest charged for it was emphasised as a main solution. Lending
continued so that any incentives to default would be avoided.  Debt forgiveness was opposed because
it would be too costly and if relief was granted to only a few debtors, other states would ask for
it as well and pointed to unfair behaviour of banks.


The main concern of the industrialized states was to prevent collapse of their banking system.
However, the governments were not willing to use public funds to help because it could have been
seen as bailing-out commercial banks with tax-payers’ money. The preferred way of dealing with the
crisis was therefore to increase money available for the WB and the IMF which could
provide developing countries with loans and promote reforms at the same time. On the other hand,
debtor countries saw the problem as caused by external factors rather than by unwise domestic
policies, and argued for debt forgiveness.


Role of the Breton-Woods institutions (BWIs) in the developing world was strengthened although
their attitude to the crisis was different. The World Bank could provide more funding for different
plans and programmes to deal with the situation. The International Monetary Fund was not entitled
to do this as it could lend money only to support reform policies not particular projects. Pilbeam
(1998:419) argues that both of the institutions were restricted in their actions by the amount of
possible capital to be lent because the IMF did not have enough resources and the WB had to keep
its AAA rating.


Due to the definition of the debt crisis as being a liquidity problem, providing more loans and
negotiating rescheduling agreements were seen as appropriate solutions. In 1983 and 1984, $126.4
billon of private debts of 25 developing countries had to be rescheduled, $118.1 billions owed by
the Latin American governments (Parkins 1996:60). In 1985 the Programme for Sustained Growth was
announced by the US Secretary of Treasury James Baker. It emphasised growing out of debt by
structural reforms introduced by the BWIs which were supposed to generate capital for repayments.
Increased lending of the IMF and commercial banks was also promised. The plan was focused only on
the countries which owed money to the US banks and it thus did not provide any overall solution. In
addition, private banks refused to continue investing money in the countries where return of
capital was not very likely. Todaro (1994:451) argues that capital flow changed from $35.9 billion
going to countries of the global South in 1981 to $22.5 billion transferred to the North in 1986.


To support management of the debt crisis in developing countries the IMF created the Structural
Adjustment Facility in 1986, renamed to the Enhanced Structural Adjustment Facility (ESAF) a year
later. To borrow money from these funds debtor countries were required to pursue a number of
reforms which are known as the structural adjustment programmes (SAPs) and which were designed to
improve the economic situation. The usual requirements of the SAPs were: cuts in government
expenditure on health, education, employment or food subsidizes, currency devaluation, export
promotion, trade liberalization, privatisation and deregulation. These measures met with strong
criticism in developing countries as well as in academic circles, and they became know as „the
Washington Consensus“[6]. The achievements of these programmes are questionable because they were
followed by declining living standards, rising unemployment and rising inequalities within the
societies so the 1980s are frequently referred to as a “lost decade of development”. A more
detailed analysis of positive and negative aspects of the SAPs as well as other major debt relief
initiatives will follow later.


Although debt management in the 1980s may not be regarded as successful, the collapse of the
international financial system was prevented. The beginning of the 1990s was marked by rising
optimism and hopes for a new development decade. Latin America started to attract investors again
which was interpreted as a signal of improvement, and there were opinions that by the mid-90s
the crisis would be over. Also Africa seemed to have overcome the worst according to the World Bank
and the UNDP and their famous statement of 1989 that “Recovery has begun” (Raffer and Singer
2001:174). But it was not the case. Although economic indicators improved (Cabello, Ortiz
1995:240), the social welfare continued to decline (Potter 2000:16). Furthermore, Raffer and Singer
argue that optimism was caused mainly by toleration of non-payments but the current account
deficits were still increasing e.g. in Mexico the deficit tripled between 1990 and 1992
(2001:178).  There was also a problem with investments as they were volatile and could be withdrawn
very quickly, which happened in 1994 (Raffer, Singer 2001:14). The Mexico financial crisis showed
that the predicted end of the debt crisis was too optimistic. As this state was one of the
champions and model debtors of the BWIs that implemented the required reforms, adequacy of the SAPs
started to be questioned even more.


However, in the mid-1990s attention started to shift from Latin American countries which seemed to
be more or less stabilised to sub-Saharan Africa where the situation was not improving. In 1996
total external debt of Africa was $320 billion which was equal to the region’s GDP per year, making
it the most indebted part of the world as Latin American proportion of debt to GDP was “only” 60%
(Ayittey 1999). In 1996, the IMF and the WB launched a joint programme called the Heavily Indebted
Poor Countries Initiative (HIPCI). The main aims were to reduce the external debt of the world's
poorest states to sustainable levels and to ensure that the countries had enough resources to make
repayments and to finance economic growth at the same time. In order to achieve debt relief, a
country had to implement reforms and go though stages which were monitored by the BWIs reaching
first the decision point and then the completion point. At that moment debt relief was granted. To
support the countries the WB created the HIPC Trust Fund with basic capital of $500 million to
pre-pay debts, to help and cover debt service if a country could not meet it and to purchase debts
and then cancel them. The IMF established the ESAF Trust Fund to provide the poor countries with
grants which were, as argued by Raffer and Singer (2001:185), then used to repay the IMF but it
allowed the institution to maintain reputation that it did not reduce debts.


The Initiative was enhanced in 1999 because it was criticised by developing countries and NGOs as
too slow and ineffective. Reduction of poverty became the main target which went in line with the
Millennium Development Goals (MDGs) discussed by the United Nations and agreed on a year later. The
IMF’s Enhanced Structural Adjustment Facility (ESAF) introduced in 1987 was changed into the
Poverty Reduction and Growth Facility. The requirements to qualify for the HIPCI II were lowered
and debt relief is now provided from the decision point, not the completion one. Countries need to
create a Poverty Reduction Strategy Paper (PRSP) where the freed resources are used effectively to
alleviate poverty. The other two key elements emphasised are country-ownership and civil society
participation. Countries can achieve the decision point after three years of economic stability and
an interim PRSP approved by the BWIs. If stability is maintained and the final PRSP gains approval
of the institutions, a country reaches the completion point when a proportion of debt is cancelled
to a level which is seen as sustainable for the given country. In March 2008 thirty-three countries
were receiving debt relief under HIPCI II; twenty-three of them reached the completion point and
ten were benefiting from some debt reductions as they were in the interim period between
the decision and completion points (IMF 2008).


7.2.3 Situation in the new millennium


The total external debt of all developing countries at the end of 2005 was $2,800 billion and debt
service payments over the year reached $511 billion (Jubilee 2000: The Basics about Debt). For
sub-Saharan Africa, which is the most problematic region now, the external debt increased by 175%
from $84.1 billion in 1980 to $231.4 billion in 2003 (African Development Report 2006:13) while its
share of world exports between 1980 and 2001 fell from 4.6% to 1.9% (Randriamaro 2003:121).


The issue of development and debt relief became less prominent after the attacks on the World Trade
Centre in September 2001, and attention of the international community shifted more to the war on
terror and later also to environmental agenda. Despite this, a new debt relief initiative which was
named the Multilateral Debt Relief Initiative (MDRI) was agreed on in 2005 at the G-8 summit
in Scottish Gleneagles. This is again seen as a step further in debt management because it
emphasises debt forgiveness not just relief and focuses on multilateral creditors. Most of the
private banks’ loans have already been repaid with money from the BWIs, and bilateral relief is
granted by the Paris Club[7] so the multilateral institutions were the last ones to be tackled. The
qualification criteria for the MDRI are the same as for the HIPCI II, and after reaching the
completion point debts of the countries which are owed to the IMF, the International Development
Association (IDA)[8] and the African Development Bank (AfDB) are cancelled. On 6 January 2006,
the IMF was the first multilateral institution to cancel the debts owed to it by 19 of the world’s
poorest countries.


The question whether the measures and programmes described here substantially reduced debt burden
of developing countries is a not an easy one to answer and consensus seems to be difficult to
reach. The following part of the text thus focuses on the main initiatives: the structural
adjustment programmes, the Heavily Indebted Poor Countries Initiatives and the Multilateral Debt
Relief Initiative, and tries to evaluate their impact on the debt crisis and its management.


7.3 Has the Situation Improved due to the Main Debt Relief Initiatives?


When analysing the debt relief initiatives and their impact on the debt crisis, there may be a lot
of different answers to the question if they have helped or not. First, it is important
to distinguish between short-term and long-term gains, this means that e.g. at the beginning there
were problems connected with certain programmes or reforms but they could have been beneficial in
the long run. Second, the issue whether the situation has improved or not may be viewed differently
by different actors. For creditor countries the debt crisis may be over because it no longer
threatens their banking systems; for Latin American debtors it may be partially over because their
markets are growing at the moment but for the countries in sub-Saharan Africa the situation has
improved just slightly or not at all because they continue to have problems with servicing their
debts.


Answer to the question whether developing countries have been successful or have failed in their
efforts to reach their goals may also depend on what the original aim was. Was it 100% debt
forgiveness for all indebted countries, debt relief for all countries or just partial debt relief
for only the most indebted countries? In case that the target was the first one, then it can be
said that developing countries have failed in the task. Yet if the objective was to gain debt
relief for as many countries as possible, there may have been progress towards achieving it. This
part therefore tries to answer questions if the main debt relief initiatives were/are effective, to
whom they helped or did not help, and how they changed/may change the situation of the indebted
countries.


7.3.1 The Structural Adjustment Programmes


The structural adjustment programmes were connected with the first plans designed to deal with the
debt crisis in the 1980s, and they are probably the most controversial and criticised ones in the
history of debt management. But before looking at problems connected with the SAPs, it is necessary
to consider the historical background of their creation as this may help to see these programmes in
wider context of the international relations and atmosphere of that time. The main objectives of
the SAPs were cuts in government spending, currency devaluation and policies supporting export,
trade liberalization and privatisation. In the 1980s these steps were viewed as promoting economic
growth and leading to development because the import substitution measures had failed in the 1970s
(Cabello, Ortiz 1995:238). Pro-export strategies, which contributed to the “Asian miracle”, were
thus to be pursued because they seemed to be the only way forward. The end of the 1980s was also a
period when the socialist model of economy was proved unsuccessful, and capitalism was viewed to be
the only system ensuring development and growth (Simon 1995:12). It is therefore not possible to
blame the Breton-Woods institutions for neo-imperialism and for defining strategies which were a
priori designed to harm developing countries. Nevertheless, the SAPs probably made the situation
worse for debtor states, delayed debt relief and caused problems which need to be mentioned here.


First, export promotion meant that a lot of countries started to introduce very similar products to
the world market as agriculture and natural resources were the only areas where they were able
to compete with the developed states. This behaviour led to overproduction, market saturation and
oversupply. Prices started to fall and export earnings shrank (Raffer, Singer 2001:12). Developing
countries were competing with each other on the market; they were exporting more but earning less.
Slower growth in the North was also connected with a wave of protectionism. Any increase in tariffs
was not allowed by the GATT agreements so the developed countries moved to non-tariff trade
barriers such as quotas, anti-dumping measures or negotiating “voluntary export restraints”.
Parkins (1996:64) argues that between 1980 and 1991 the USA only imposed 125 export restraints on
developing countries. According to the SAPs, export was to be supported by devaluation because it
made products cheaper and more competitive. On the other hand, it also meant that debts increased
due to the worse exchange rates between local currencies and the US dollar in which they were
serviced (Eurodad 2006b:6).

The reason behind this model that by increasing exports more foreign currency will be gained to
service debts seems logical and not flawed. Yet it brought another problem which influences
developing countries and welfare of their inhabitants till today. In agriculture, export promotion
led to orientation on cash crops[9]. This disrupted the traditional system of subsistence farming
which was/is a source of income and most importantly food for a large number of inhabitants. A lot
of the sub-Saharan countries are nowadays less self-sufficient in food and production does not
reflect the demographic growth. The problems with hunger and malnutrition have increased and food
imports are rising in order to feed the inhabitants (Simon 1995:122). This again requires money
that could be invested somewhere else. Since cash crops are usually planted in large fields of
monocultures, the impact on the environment is larger, leading to deforestation, soil degradation
and desertification (Eurodad 2006b:7). It is problematic because once established, these patterns
of agriculture are not easy to change as people need the income from cash crops to buy food and
other family needs and cannot return to subsistence farming due to the lack of money.


Second, in years following the introduction of the SAPs the social welfare of the inhabitants
certainly did not improve and for a lot of them even worsened (see e.g. Oxfam 2006a:9). Limited
government spending on health and education had disproportionate impact on the society as the
poorest groups of people could not afford to finance health care and school fees themselves. Also
the expenditure on wages if frozen may support multinational companies to invest in the country as
the labour force is and will stay cheap, on the other hand, when the government needs to increase
the amount of money given to the employees who demand this or threaten to strike, a certain number
of people first needs to be dismissed to make any rise possible. As women are usually first to go
if this happens, inequality rises even further. As argued by Mannin (1996:239) or Garg (1995:351)
negative impacts of the SAPs on the society caused rising levels of repression in debtor states.
Mainly in Latin America (e.g. in Argentina or Peru) there were series of social unrest when
repressive actions had to enforce and maintain the conditions required by the BWIs.


Third, one of the main reasons why the SAPs failed may be seen in what can be defined as
“imposition of the policies”. Stiglitz (2002:242) points out that if reforms are to work, there
needs to be commitment to them. The imposition thus creates a vicious circle because the
governments think that they have no other chance than to accept the requirements. They are
therefore not persuaded about the effectiveness of the reforms and do not care if they are
implemented correctly or not. This attitude may be proved by words of José Sarney, the President of
Brazil, who said in 1987: “Adjustments are demanded on us which the developed countries give no
signs of being willing to undertake in their own economies.” (Todaro 1994:447).


The SAPs are further criticised by e.g. Stiglitz (2002:214-216,220) who focuses on questions of
free market and inflation, or by the Meltzer Commission and Martin Feldstein (Krsek 2004:265) for
limiting the sovereignty of developing countries because they had no other chance than to conform
to requirements of the BWIs. On the other hand, their opponents such as Isard (2005:115) and Cline
(1995:2) argue that the reforms were needed to lower spending and excessive borrowing, and to
promote the outward-orientation because this was a way to avoid risks of being hit hard by external
shocks and crises.


If contribution of the structural adjustment programmes to alleviating the debt crisis is to be
evaluated, it needs to be said that despite having been designed to help, the SAPs did not improve
and in certain countries even worsened the situation. It may be also interesting to look at
different points of view and short/long term achievements. The World Bank report (Bradshaw, Wahl
1991:254) argued that the SAPs meant that there were both winners and losers but in the long run
the way of life would be improved. On the other hand, a lot of the scholars whose arguments were
mentioned here emphasised the declining living standards and social welfare. Wiarda (1990:415) and
Todaro (1994:476) argue that in immediate perspective the programmes in Latin America were
successful: no governments fell, defaults were avoided, there were no severe financial or political
collapses and the ability to service debts improved but in the long run the SAPs caused depression,
economic stagnation, rise of unemployment and decreasing income per capita. The same is true about
sub-Saharan Africa (Simon 1995:19-20). Moreover, the problems caused by the SAPs were crucial
for further development of the states because they could not be overcome in just a few years. The
cuts in health and education expenditure resulted in a lot of people being left with health
problems and no education.


7.3.2 The Heavily Indebted Poor Countries Initiatives


The Heavily Indebted Poor Countries Initiative (HIPCI I) introduced in 1996 was welcomed at first
because it was seen as the first really long-term solution where debt relief and participation of
all creditors including multilateral institutions were emphasised. It undermined the arguments
about the SAPs being successful because it focused on poverty reduction so in fact its aim was to
help people who were influenced by structural adjustment. Yet the first optimism did not last very
long, and the HIPCI I started to be criticised for being too slow and ineffective, and had to be
enhanced in 1999 (HIPCI II). Even then many of the problems were not overcome, and the main ones
which limit the success of debt management are listed here.


First and foremost, the HIPCI II concentrates only on a very limited number of countries in need of
debt relief. Although the eligibility criteria were lowered by the HIPCI II when compared to the
original one, there is still a lot of countries that experience difficulty with repayments, yet
their debt levels measured by purely economic indicators of debt to exports or debt service to
exports ratios are seen as sustainable. On the other hand, if poverty indicators, education
standards or life expectancy are taken into consideration, the situation does not seem to be that
optimistic (Gunter 2002:7) as proved by the examples of Indonesia or Nigeria. Indonesian social
situation worsened substantially due to the 1997 financial crisis after which the percentage of
people living in poverty rose from 11 to over 40% (Thomas, 2001:77) but according to the economic
indicators the country is not eligible for the HIPCI II. Raffer and Singer (2001:192) argue that
Indonesia is avoided as it would prove to be too costly to creditors. Nigeria’s GDP per capita and
human development index rank the country among the poorest ones in the world (UNCTAD 2004:47).
Again, it is not allowed to benefit from debt relief under the HIPCI II because Nigeria is not
classified as an IDA-only borrower due to its oil reserves (UNCTAD 2004:47), and in 1998 it was
removed from the list because its debt-service ratio, counted according to the actual sums of money
paid, was seen as sustainable but in fact the country was unable to pay and accumulated arrears[10]
(Raffer, Singer 2001:192). The same can be said about a lot of other countries such as Kenya where
62% of population live on less than $2/day (UNCTAD 2004:46-47). Peru with 49% of population living
on less than $2/day is classified by the WB as a middle-income country not eligible for the HIPCI
II while Honduras and Nicaragua qualified with proportions of 47% and 44% respectively (Potter
2000:77).


This is connected with the second argument against the HIPCI that it is not closely linked to the
Millennium Development Goals. Even with partial debt relief granted by the HIPCI, projections show
that the poor countries in sub-Saharan Africa will not reach the goals set by the UN till 2015.
According to the Overseas Development Institute poverty will be cut only by 20%, Oxfam estimates
that 50 million children will still be denied access to primary education and the UNICEF argues
that the child mortality rate will equal 13,4% instead of the 5,2% required by the MDGs which means
around 2 million more child deaths per year (all facts from Oxfam 2001:7-8). In addition, despite
receiving debt relief a lot of the countries in sub-Saharan Africa still spend more money on debt
repayments than on health. Zambia and Malawi, countries with high HIV/AIDS prevalence, spend
amounts equal to 130%, 100% respectively of their health budgets on debt servicing (Oxfam; Debt
Relief and the HIV/AIDS Crisis in Africa,  p.1).


Third, the Initiative is argued to be too slow in providing debt relief. Before the decision point
a country needs to implement the required policies, and money is provided to support the reforms,
which increases debt further and makes more debt relief necessary (Raffer, Singer 2001:186).
Furthermore, the period between the qualification for the HIPCI II and reaching the decision point
may be long (Tenuissen 2004:7). For instance, Uganda was originally supposed to reach the
completion point under the HIPCI I in 1997. The date was postponed and calculation of debt
sustainability was done in the period of high prices of coffee which reduced debt relief. Moreover,
prolonging the period prior to relief having been granted negatively influenced planned start of a
programme designed to make primary education of up to four children per family free. Partial relief
was finally awarded in 2000 but the country received $15 billions less which constituted 40% of the
resources planned for the Poverty Reduction Fund for years 2000 and 2001 (Raffer, Singer 2001:187).


Other problems of the HIPCI II include over-optimism. For instance, when it was introduced in 1999,
the estimate was that 24 countries would reach the decision point by 2000, the result was only one
state – Uganda – which should have originally achieved this already in 1997. There are more reasons
why the HIPCI is not considered very successful such as scarce resources, conditionality and debt
sustainability which are closely connected with the Bretton-Woods institutions and which are
significant also for the MDRI. They will be therefore discussed in the fourth part of the text.


Despite the Initiative’s new and praised features of partial debt relief and more focus on poverty
as opposed to the SAPs, the results are not what the international community fighting for debt
forgiveness expected. As argued by Alby and Letilly (2006:18) in reality it did not bring much of
debt reduction because the countries even before the HIPCI I was introduced “did not pay more than
50% of the debt service due”. Moreover, even if all the possibly eligible countries qualify, the
Initiative will encompass only states that together do not owe more than “180 billion
(the equivalent of the debt of a single country like Brazil or Mexico) out of a total debt for the
developing countries amounting to $2,500 billion.” (Alby, Letilly 2006:18). The authors of the
African Development Report (2006:20) see the HIPCI II as too limited to change the situation
substantially because it does not ensure the sustainability of debt servicing. Similarly the 1999
Latin American Report (Potter 2000:82) showed that the situation in the region was not stabilised
in the 1990s. It stated that unemployment was higher than in the 1980s (e.g. Brazilian unemployment
rate was the 4^th highest in the world), wages had lost 27% of their value between 1980 and 1998,
and inequality in society had risen (female unemployment rate was 60% higher than for men).


Given all the above-mentioned problems of the SAPs and the HIPCIs, it is may not be surprising that
the debt relief process was not seen as very successful. The last few years of the 1990s were
therefore connected with rise of an influential debt relief movement called Jubilee 2000 with
supporters in both the North and the South which campaigned for a new start to the 21^st century
marked by improving debt relief schemes and more debts being cancelled. The main arguments of the
movement were that the structural adjustment programmes failed, debt had already been repaid and
that it was immoral, illegitimate and odious. These three concepts are worth describing in more
detail:

- debt is immoral because it leads to social deprivation as money which could be invested into
education, health and employment is used for debt servicing

- debt is illegitimate because a lot of money was used for ill-designed projects for which
creditors (mainly the WB) are partially responsible. One of the examples may be the Bataan nuclear
power plant in the Philippines which was built on an earthquake fault line with a volcano nearby
and has never been used.

- debt is odious because loans were made to corrupt dictators to support the friendly regimes
during the Cold War. Sharma and Kugar (2002:14) claim that nearly 25% of external debts are odious.
It is argued that portions of these loans ended up in foreign accounts of leaders such as Mobotu in
Zaire (the Republic of Congo) or Somoza regime in Nicaragua who fled with the money after victory
of the Sandinista forces.


7.3.3 The Multilateral Debt Relief Initiative


The Multilateral Debt Relief Initiative (MDRI) was announced by the G-8 states in 2005. It promised
to cancel debts of all the countries that are eligible for the HIPCI II and that owe money to the
IMF, the International Development Association and the African Development Bank. This again means a
step forward as it recognises that debt forgiveness, not just relief, is needed and multilateral
creditors have to be involved in the process. On the other hand, despite the MDRI is still at the
beginning and its progress is not easy to judge, there is already scepticism about its possible
effects. The main reason is its link to the HIPCI. As argued by Raffer and Singer (2001:198) it is
likely to have insufficient results as well due to the connection with the Initiative which did not
prove to be very helpful. The possible difficulties of the MDRI that may hinder debt relief are
considered here, and the analysis should show that these are really similar to the ones connected
with the HIPCI II.


The first problem is again limited number of countries and also creditors. Eurodad (2006b:3) argues
that only 27 out of more than 50 indebted poor countries will benefit from this scheme, and only 3
out of 19 multilateral creditors are involved in the process. For instance, Ghana owes money to as
many as 9 multilateral creditors so the MDRI includes only one third of them (Oxfam 2005:14).
Especially the exclusion of other important regional banks such as the Inter-American Development
Bank and the Asian Development Bank is criticised. This is connected with the issue of real cuts.
It may be argued that the 100% debt forgiveness is only a “rhetoric number”. The real reductions
will be lower. For instance, the exclusion of the Inter-American Development Bank has an impact on
the Latin American countries participating in the HIPCI. According to Eurodad (2006a:6) debt
reduction will equal only 21% for Guyana, 23% for Nicaragua, 28% for Honduras and 31% for Bolivia.
The situation in sub-Saharan Africa is better but far from 100% debt forgiveness as well. The
countries with the lowest amounts of debt cancelled are Mali with 56% and Mozambique with 48%
(Eurodad 2006a:6). Jubilee 2000 (2006:2) argues that in 2007 the reduction equals only $1 billion.
Since as much as $10 billion per year is needed to cut debt-service payments if the poor countries
are to achieve the MDGs by 2015, the current amount of debt reduction is just 10% of the
estimates.


On the other hand, the money released by the MDRI will certainly prove to be beneficial for
developing countries as it may be invested into development. The biggest beneficiaries of the MDRI
will be Uganda with 80% of its debt cancelled, followed by Ghana and Tanzania with 75% (Jubilee
2000 2006:3). The connection of the MDRI with the HIPCI also means that the process of debt relief
is faster as countries do not need to go through a new process of qualification and reforms. The
total amount expected to be forgiven is around $50 billion over 40 years (Jubilee 2000 2006:2).
Even though it may seem to be an achievement, its significance can be disputed when compared with
agriculture subsidizes in the EU which reach $300 billion a year (Lebeda 2005:14).


In order to summarise, it may be argued that the debt relief process has not failed completely if
the results of the main three debt management initiatives mentioned above are taken into account.
There are achievements in overcoming the myth that debts can be repaid and in granting debt relief
and forgiveness to the countries which are most in need of it. On the other hand, as was shown in
this part of the text the progress of various initiatives is too slow and limited in the number of
states and creditors. Even though the debt crisis may seem to be solved for good after Gleneagles,
according to Jubilee Debt Campaign (2008:17) the debt of all the developing countries is $2,742
billion but the promised debt cancellation equals only $100 billion, out of which $88 billion has
been delivered so far. Furthermore, only few commercial creditors such as banks and private
companies are participating properly in the process.


In short, the progress of debt relief so far has been tied to only a few steps. These were divided
by a substantial time gap but each one brought innovations. The structural adjustment programmes
were the first attempts to tackle the situation three years after the break of the debt crisis. Ten
years later the Heavily Indebted Poor Countries Initiative brought real debt relief, and again ten
years later the Multilateral Debt Relief Initiative granted debt forgiveness. But all these steps
are too limited in their impact on alleviating the debt problems in the developing world. It may be
therefore interesting to see if in approximately 10 years’ time a new initiative will be announced
again, going again a step further and meaning more reduction for more countries. It may well be
the case because 2016 will be a year of evaluating the progress of the MDGs, and if the targets are
not met, there will be time for new planning of the way forward.


7.4 The Reasons of Debt Relief Limited Success


The impact of the main debt relief initiatives having been evaluated, this part tries to find
reasons that explain why programmes such as the SAPs, the HIPCIs and the MDRI have not been as
successful and helpful as debtor countries and NGOs such as Jubilee 2000, Oxfam or Eurodad have
hoped. The role of the Bretton-Woods institutions and both developing and developed countries
in the process of debt management will be analysed and the possible causes of slow progress of debt
relief emphasised.


7.4.1 Problems connected with the International Monetary Fund and the World Bank


The main barriers to faster and more effective debt relief connected with the BWIs can be found in
the nature of the WB and the IMF as their original aims were completely different from the
present-day objectives, which limited and limits their scope of actions in the developing world. In
addition, the influence of conditionality, debt sustainability calculations and the moral hazard
issue will be examined.


7.4.1.1 Nature of the Bretton-Woods Institutions

The World Bank and the International Monetary Fund were founded in 1944
at the Bretton-Woods conference which took place in the USA in order to provide forum for
discussions about the post-war economic order and reconstruction. Isard (2005:26) argues that
already at the beginning there was not a clear view of what the new institutions’ role in the world
should have been because the final agreement was a compromise between advocates of laissez-fair and
interventionism. To make the matters more complicated, the IMF was originally supposed to be a bank
(“world central bank”) and the WB just a fund for financing the reconstruction of Europe. Keynes
who was one of the main initiators of the conference regarded the new system ineffective and
criticised the lack of finance approved for the BWIs because according to him this undermined
the institutions’ ability to act in case of a global crisis (Potter 2000:19). He was proved right
by the situation in the 1980s. On the other hand, the conference and its final agreements need to
be viewed in the context of the historical period. At that time Latin American states were the only
“post-colonial” countries and they were relatively stable economies (e.g. Argentina was one of the
richest countries in the world if measured by GDP per capita, see Raffer, Singer 2001:4), and no
one probably dared to expect such a large wave of decolonisation which took place in the following
decades.


The agenda of the Breton-Woods conference included one more interesting feature. Keynes’s
four-pillars proposal[11] contained also the International Trade Organization (ITO) which was
supposed to be created along the two existing BWIs. Its main aim was to ensure stability
of commodity prices which was and still is crucial for developing countries’ exports. Nevertheless,
such agreement was impossible to achieve. Raffer and Singer (2001:5-6) speculate that had the ITO
been created, there may not have been the oil crises and such fall of commodity prices, which would
have prevented the current accounts deficits and the debt crisis of such extent.


The original task of the IMF was promoting global economic and exchange rates stability,
international monetary cooperation and providing resources for members who experienced deficits of
their current accounts. This should have helped to stop countries trying to gain trade advantages
by currency devaluation[12]. The aims of the International Bank for Reconstruction and Development,
from which the WB developed, were to assist the European countries in post-war reconstruction.
However, its role was undermined by the Marshall Plan which was announced in 1947. In the 1970s
also the IMF lost its main duty after the system of fixed exchange rates collapsed. The
institutions were therefore made to find a new position in the world if they were to survive the
changes.


The new focus became the developing world which was in need of capital to finance its development.
Yet, the BWIs were founded with completely different original purposes and their involvement in
development agenda could not therefore be without problems and limitations because they were not
prepared for the new functions. For example, the new activities went beyond the traditional format
of negotiations between finance ministers or central banks. Suddenly the BWIs found themselves in
position of negotiating and supervising the SAPs with policies affecting health care or education
with which they did not have any experience, and it is thus not surprising that some of the
decisions made at the beginning were not the best ones (Woods 2001:89). Lack of expertise may also
be one of the reasons of inflexible behaviour of the BWIs which is criticised e.g. by Krsek
(2004:267) or Marková (2002:88) who argue that especially the IMF often uses schematic and
simplistic solutions without any regard to country specifics, which causes more harm than good such
as in case of the Asian financial crisis. The traditional approach of treating the current accounts
deficits as failures of state policies which can be overcome by temporary loans also influenced
the policies pursued by the BWIs at the outset of the debt crisis when the institutions agreed with
the liquidity as opposed to the solvency problem argument and supported rescheduling and further
lending, which delayed debt relief.


The Bretton-Woods institutions were not founded as banks that will be supposed to finance debt
relief of developing countries, and their resources are therefore insufficient to play this role
successfully. Contrary to individual countries, the IMF and the WB do not have annual budgets to
support the debt relief initiatives and they depend on capital provided by the member states, and
also on debtor countries’ capacity to repay their debts (Alby, Letilly 2006:19). The BWIs can thus
make promises such as debt forgiveness under the MDRI but the final decision is often
in hands of the developed countries and their willingness to contribute. The success of such
initiatives which require long-term involvement of bilateral donors can thus be threatened by
decisions of the industrialized countries’ governments about staying committed to the promises
which were made e.g. by previous governments (Alby, Letilly 2006:22).


7.4.1.2 Conditionality

There is a number of ways how conditionality can hinder debt relief. For example, it may undermine
governments’ decision-making and priorities and increase their resistance to the required reforms,
which results in poor monitoring of their effectiveness (African Development Report 2006:56).
Contrary to this, Isard (2005:96) claims that the specific conditions are always negotiated by both
parties of the contract so the argument about imposition of policies is not accurate.
Conditionality may also increase transaction costs especially when more actors need to be involved
in the process, and frequently required macroeconomic reforms slow down the process of debt relief
because first they must be implemented, second macroeconomic stability needs to be maintained and
only then the promised money is granted. Furthermore, economic conditionality connected with the
SAPs is believed to have helped to introduce political conditionality of aid (Parkins 1996:67)
since its provision started to be linked to reports by the IMF about meeting the macroeconomic
standards (Oxfam: The IMF and the Millennium Goals, p. 5).


The impact of conditionality on debt relief can be illustrated by an example of the HIPCI II. Its
required preparation of the Poverty Reduction Strategy Papers is criticised by countries such as
Brazil or India because they see the compulsory civil society participation as a new barrier which
slows down the process (Potter 2000:28). Moreover, this demand is not always very easy to fulfil.
The NGOs from Bolivia, Uganda or Tanzania claim that they were invited to participate too late, a
lot of the key players were excluded and almost all the major documents were in English (Potter
2000:34). The current requirement to spend all savings from debt service only on social
expenditures is also seen by most of the debtor countries as highly inappropriate and inflexible
(Tenuissen 2004:6).


The World Bank argues that the number of conditions decreased from average 32 per loan in 1999 to
11 in 2006 (Oxfam 2006a:11). Yet the situation is different if policy benchmarks that are linked
with aid provided by the institution are taken into account. These are not considered as being
conditions because failure to adhere to them cannot stop the aid inflow. On the other hand, Oxfam
argues (2006a:11) that progress in implementing the benchmarks is discussed by the Executive Board
before a loan is granted, and that recipient countries see these as conditions. If benchmarks are
included, the number of conditions required by the WB rose from 20 per loan in 2000 to 38 in 2006
(Oxfam 2006a:11).


Beside opponents of conditionality, there are also its supporters. Rogoff (2003) argues that the
governments usually ask the IMF for help when it is already too late and when they are in great
difficulties. Only strict policies may thus change the problematic situation, and the BWIs are
often blamed for steps the government would have to take anyway to overcome the difficulties. Isard
(2005:110) supports this argument and adds that the IMF funds are limited, which means that such
measures need to be imposed that will decrease borrowing and enable repayment of debts.


7.4.1.3 Debt Sustainability

The concept of debt sustainability was first introduced by the HIPCI I in 1996. It was welcomed
because of the focus on the ability of debtor countries to service their debts. Despite its
innovative approach to the amount of debt relief required, the HIPCI is often criticised for
failing to deliver what it promised by NGOs such as Oxfam, Eurodad or Jubilee 2000 and also the
Commission for Africa. Some of the main arguments against the accuracy of debt sustainability
provided by the HIPCI will be summarised here.


First, there is a problem with calculating the real sustainability of debts[13] mainly because the
used methodology lowers the debt burdens (Raffer, Singer 2001:189). As shown by Edwards
(2003:520-521) on the example of Nicaragua in 2000 the real proportion of debt to GDP was 280% not
the BWIs projection of 180%. Another fact which according to Raffer and Singer (2001:176) leads to
flawed results is that the ability to pay which is crucial for judging debt sustainability for a
given country is counted according to the payments made not due, which makes the debt situation
seem to be less troublesome than it may actually be because the calculation will produce the same
result if the government is able to pay all obligations but also when it is not able to pay at all.


Second, the BWIs are believed to be too optimistic in projections of future debt sustainability of
the post-completion point HIPCI countries. For example, forecasts for Zambia for the period between
2000 and 2003 estimated the export earnings to reach $1.3 billion but the reality was $1.1 billion
(Eurodad 2006b:13), a difference of around 15%. The sustainability target which is debt to exports
ratio of 150% was not achieved, instead the number was 184% (Eurodad 2006b:13). The main reason for
this miscalculation was slower than expected growth of copper prices on the world market which are
important for Zambia’s export income (Eurodad 2006b:13). In 2002 the IMF estimated export growth of
the 24 countries that participated in the HIPCI to increase by 11.6% while the real outcome proved
to be only 5.8% (Oxfam: Debt Relief and the HIV/AIDS Crisis in Africa:19). Additional debt relief
also had to be granted to countries such as Rwanda, Ethiopia, Burkina Faso or Niger so that their
levels of debt were really sustainable. The “topping up” was $243.1 million for Rwanda, $700
million for Ethiopia and $128.6, respectively $142.5 million in case of Burkina Faso and Niger
(Eurodad 2006b:21).


Third, only a few and purely economic indicators[14] are taken into account when evaluating the
level of debt sustainability. A lot of the HIPCI countries struggle with massive domestic
indebtedness which influences their ability to service debts. For example, in 1999/2000 Kenya spent
twice the amount needed for servicing the external debt on repayments of the domestic ones
(Reinhart et al. 2003:32). The private debts[15] of developing countries can also undermine the
forecasts of debt sustainability because the interest rates are usually variable and dependent on
the situation on the world market (Reinhart et al. 2003:32). The fact that the HIPCI debt
sustainability indicators are only economic is paradoxical because the Initiative focuses on
reduction of poverty and the countries are required to create the PRSPs. Yet poverty levels are not
considered when defining whether the debt is sustainable or not. It may thus seem that
sustainability merely means financial capacity to repay debts because if the initiatives were
really designed to change the situation of the indebted countries, they should more concentrate
more on the capacity of a country to reach the MDGs ((Eurodad 2006b:3; Oxfam 2005:10).



7.4.1.4 Moral Hazard

Slow progress of debt relief mainly at the beginning of the debt crisis may also be connected with
the moral hazard argument. Any calls for relief or debt forgiveness were rejected because this was
seen as rewarding the “bad practices” of the states that accumulated massive debts. Any help in
form of even only partial debt cancellation may thus have encouraged the countries to continue
borrowing excessively without proper planning and implementing appropriate reforms to improve the
situation because they would expect the BWIs to bail them out in case of a crisis. This would lead
to constant reoccurrences of financial crises which could develop into being more and more serious.
The countries would get used to the help of the BWIs and would rely on it. Furthermore, debt relief
would disadvantage the governments that managed to keep their debts at sustainable levels and were
willing to take adequate steps to prevent severe fiscal imbalances of their current accounts.


This argument may be valid but the evidence shows that most of the debtor countries repay the money
owed to the WB and the IMF if not in time then late but they do not try to avoid it (Rogoff 2003;
Isard 2005:197). Due to the experience with behaviour of debtor states that were in most cases not
unwilling to meet their obligations, the moral hazard argument slowly lost its appeal and the ideas
of necessity of debt relief and forgiveness started to be accepted by the international community.


7.4.2 Capacity of debtor countries to manage debt relief


The success of various debt relief initiatives depends on the recipient states’ ability and
capacities to manage the process effectively and to make use of the available resources and
advantages in their full extent. Stiglitz (2002:251) argues that it is the developing countries’
responsibility to alleviate debt problems by proper budget management and effective policies of
fighting corruption, increasing accountability and ensuring the democratic rule which are
prerequisites of keeping debts at sustainable levels. Debt reduction also depends on implementing
the economic reforms which will lead to economic growth and development in the long run (Alby,
Letilly 2006:22-23). Yet difficulties with which a lot of the debtor countries have to struggle
every day hinder the governments’ capabilities to devote large proportions of their time
to questions of indebtedness and debt servicing because there are other problems which need more
attention. The most serious ones such as HIV/AIDS, malnutrition, poverty and civil strife will be
briefly described here.


The HIV/AIDS epidemic is one of the biggest challenges that sub-Saharan Africa faces nowadays. In
2004 the number of inhabitants of this region constituted only 10% of the world population but
around 66% of all the HIV positive people lived in sub-Saharan Africa (UNAIDS 2004:6). In 2005 the
highest HIV prevalence of all the HIPCI countries was found in Botswana (24.1%), Zambia (17.0%) and
Malawi (14.1%) (UNAIDS 2007:11). The illness influences multiple aspects of everyday life in these
countries: the life expectancy decreases (e.g. without HIV/AIDS the life expectancy in Botswana
would increase by 34 years, in Zambia by 18 years and in Malawi by 14 years, see UN 2001), the
poverty levels increase as ill people cannot work and families need money for medicine. The
epidemic causes social problems because women tend to be more influenced than men, puts more
pressure on health and social benefits systems, and hinders the economic growth due to the lack of
workforce.


Malnutrition and hunger are other difficulties. Again, they are more important that debt problems
because they undermine economy of a state by decreasing number of people able to work and
increasing demands on health and food provision. In absolute terms the most serious situation is in
Asia but the worst proportions of undernourished people in total population are found in
sub-Saharan Africa again. In the period between 2001 and 2003 the indicator for the whole region
was 32%, Eritrea, the Democratic Republic of Congo and Burundi being the worst countries with 73%,
respectively 72% and 67% (FAO 2006:32-33). Four countries in Latin America (Bolivia, Haiti,
Honduras and Nicaragua) were also among states with the worst malnutrition statistics.


Poverty levels if defined by income lower than $2 per person per day are the highest in the HIPCI
countries which is obvious as they qualified for debt relief under the Initiative with main aim of
reducing the number of poor people. Between 1990 and 2004 the highest proportion of poor people
lived in Zambia (94.1%), Mali (90.6%) and Tanzania (89.9%). In Latin America it was 82.9% in
Nicaragua and 78.0 in Haiti (UN 2006:293-294).


Other problems that negatively influence debt relief management include widespread corruption,
civil strife and conflicts (both tribal as well as those between the original inhabitants and the
citizens of European origin) and economic stagnation. Especially Latin America has been
experiencing turbulent political changes recently with left-wing leaders and socialist models of
economy becoming more prominent. Furthermore, a lot of debtor countries are not able to use the
available capital (e.g. aid or foreign direct investment) effectively and do not have capacities to
monitor the external debt situation (Adedeji 1985:60-61). Instead of accepting partial
responsibility for slow progress of development, a lot of the governments find excuses in blaming
the developed world and the BWIs for imperialism and neo-colonialism.


7.4.3 Commitment of the developed world


The extent of debt relief and forgiveness also depends on will of the developed world to support
the announced programmes. Unwillingness to do so may negatively influence the debt situation, which
happened in the 1980s when creditor countries tended to see the crisis as a temporary one and did
not support any initiatives that advocated relief as the only long-term solution to the problem.
Although the attitude slowly changed in favour of debt relief proposals, the long-term commitment
of the North to financing development of the South is questionable as it was highly variable during
the last few decades.


There have already been a lot of promises made regarding support of development by the developed
countries but these were not delivered. This is mainly true about development aid. The target of
0.7% of GDP devoted to official development assistance (ODA) was first announced by the OECD
countries in 1969. Since then only a few countries have met the agreed objective. The World Bank
report (2007:149) which analyses the ODA levels also states that the increase in global aid has
stopped. Having reached the peak in 2005, the 2006 figures were 5% lower and they were estimated to
fall further. The aid flows promised in Gleneagles are therefore unlikely to be fulfilled.


Contrary to promises from the G-8 summit in 2005, the MDRI relief provided by the World Bank now
only covers debts that were owed till the end of 2003 instead of 2004. The 1-year difference means
“saving” of $5 billion (Oxfam 2006b:3). The difficulties in keeping the set targets may arise from
changing governments of the industrialized countries. Since most of the ODA agreements are usually
in forms of declarations rather than legally binding contracts, a new government of a particular
state thus does not need to feel obliged by promises of the preceding one.


In addition, any successful solution to debt and economic problems of developing countries in
general is not possible without changing the patterns of the world economy and trade relations
because only aid and debt relief are insufficient measures to allow long-term growth of the global
South. Gaining unrestricted access to the developed states’ markets in areas such as agriculture
and primary commodities production is crucial for further development of debtor countries. After
the Gleneagles summit there were hopes that the Doha round of the WTO negotiations could accelerate
but the talks in Hong Kong at the end of 2005 did not bring any substantial improvement. The
promise that 97% of exports from the least developed countries would be free of duty or quotas may
not be considered as a step further because it left out the key export areas (Eurodad 2006a:10).
The negotiations held in Potsdam in June 2007 ended in stalemate again because of disagreements
between the USA, the EU, India and Brazil about opening the agricultural markets and cutting the
subsidies in the industrialized countries. This shows that commitment to reforming the present
state of international trade and economy is not particularly strong among the developed countries.


7.4.4 Lack of lobbying power


Debtor countries have never been able to create a “cartel” and agree on joint strategy, which
negatively influences their bargaining power. The problem is that the South is far more
differentiated than the North (Ravenhill 1990:731-732) when it comes to economic situation and
other characteristics such as the level of development, common interests and similar history and
values. The status of the big debtors such as Brazil and Mexico was completely different to the one
of states in sub-Saharan Africa. Brazil was the world’s 8^th largest economy if measured by the GDP
(Isard 2005:149), and the largest debtor with potential to cause collapse of several private banks
in case of default. Mexico profited from its proximity to the USA. Both countries thus had better
bargaining position (Wiarda 1990:415), and did not see any advantages in supporting debt relief for
the whole group because it would result in their loss of money.


The creditor countries were able to use all these differences to their advantage. They were unified
in blocs such as the Paris Club, and insisted on case-by-case approach to debtors (Pilbeam
1998:419). Different attitudes to different states were used to prevent any joint action by
developing countries (Ravenhill 1990:753). For instance, Brazil and Mexico gained preferential
treatment (such as in Baker or Brady Plans) so that there would be no incentives from their side to
help the smaller states (Ravenhill 1990:758). Moreover, the pro-export strategies required by the
SAPs increased competition between debtor countries which further diminished any opportunity for
collective action.


The same may be said about the NGOs campaigning for debt relief. Most of them are based in the
North (Potter 2000:125) and they thus have different attitudes to what is really needed. This may
be illustrated by disagreements within Jubilee 2000 between the southern and northern members
(Potter 2000:128-130) the latter being accused of insufficient support to the more radical southern
requirements. Furthermore, despite the increased cooperation in 2005, any NGOs collective campaign
strategy has not been very evident either.


7.5 Conclusion


The aim of this chapter was to evaluate progress of debt management between the 1980s and the new
millennium, to analyse present-day situation of the debtor states in Latin America and sub-Saharan
Africa, and to provide arguments supporting the hypothesis that developing countries have not been
as successful in promoting debt relief as they may seem to be because the process of debt relief
does not depend only on their initiatives but also on other factors such as will of the developed
world and private creditors, capacities of the institutions such as the WB or the IMF, and
abilities of debtor countries themselves to manage the process effectively and to negotiate with
the countries of the global North successfully. The main debt relief initiatives and their
contribution to alleviating indebtedness were assessed and their main problematic features were
described. The last part of the text tried to answer the question what the possible reasons
of relatively slow and limited progress of granting debt relief may be.


The problem with all the three main relief initiatives namely the structural adjustment programmes,
the Heavily Indebted Poor Countries Initiative, and the Multilateral Debt Relief Initiative is that
they did not/do not provide any long-term solution for all the debtor states. The SAPs supported
only changes in countries’ economies, and further lending and rescheduling as a form of overcoming
the crisis. Moreover, in a lot of the states they resulted in increasing levels of poverty and
inequality, and the cuts in governments’ spending made poor people’s access to education and proper
health care more difficult, which may continue to negatively influence the countries for a few more
decades. It can be argued that the HIPCI and the MDRI are more ambitious projects because there is
a promise of partial debt relief or forgiveness to the states that qualify and meet the required
criteria. On the other hand, as explained in detail in the third part of this text the two
initiatives are also not without problems. They are limited in number of both debtor countries and
creditors that participate in the process. It is questionable if the HIPC provides relief which
ensures debt sustainability, and 100% debt forgiveness under the MDRI is an optimistic but an
unreal target. It may be said that that both the HIPCI and the MDRI promise more than it is
possible to accomplish.


The reasons of limited debt relief achievements can be attributed to efficiency of the BWIs
involvement in the debt crisis, other problems that debtor countries need to face every day, and
willingness of the developed world to spend money on the global South. The World Bank and the
International Monetary Fund were founded to perform completely different roles than they do today,
which limits their levels of expertise and financial capacities to help. There is need to
re-consider gains of conditionality which is connected with the programmes, and to change the
negotiating standards so that recipient countries would be more involved and did not understand the
requirements as being imposed on them. Debt sustainability calculations should take into account
not only economic indicators but also question the state’s capability of meeting the MDGs and of
developing basis for economic growth (Eurodad 2006b:5). In order for debt relief to succeed, the
willingness of the developed countries to provide necessary finance, to change the patterns of
global economy and trade and to stay committed to the process is needed. A lot of domestic problems
such as the HIV/AIDS epidemic, hunger, poverty, civil conflicts or corruption and unstable regimes
is what probably hinders debt relief the most, and all of these difficulties are not easy to
overcome in a short period of time. It is therefore possible to ask whether the debt relief process
has potential to be successful and how effective it is but this is a topic for a different text
than this one.


On the other hand, although there have been and there are problems connected with debt relief and
forgiveness, it would be a mistake to resign on trying to find possible ways of alleviating
indebtedness of debtor countries because without any help economic growth and development in
general will be even less likely to be achieved. Furthermore, according to Garg (1995:355) debt
forgiveness is beneficial for both the debtors and creditors. For the first ones, less money
devoted to repayments can result in better prospect of prosperity; for the latter ones, lower debts
of developing countries mean that these can import more goods and attract foreign investment.
It may thus be argued that debt forgiveness is a win-win situation for all but the only problem is
that given the present state of the world and international relations, this is probably such an
idealistic suggestion that it is not going to be followed.


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________________________________

[1] The text of this chapter is based on a bachelor dissertation defended at the Department of
International Relations and European Studies, Faculty of Social Studies, Masaryk University in
January 2008.

[2] World Bank is a general term used for the International Bank for Reconstruction and Development
group.

[3] A proportion of export earnings which is needed for amortization of the debt and repayments of
interest rates.

[4] A proportion between money earned from exports and money spent on imports.

[5] A liquidity problem means that the government does not have enough foreign currency to meet its
obligations but is able to repay them in the long run, a solution may be just rescheduling. On the
other hand, if a solvency problem is the case, the government is not and probably will not be able
to repay debts even if rescheduled, the only solution is thus debt forgiveness

[6] A term first used by an economist John Williamson in 1989 to describe the core conditions of
the SAPs.

[7] It is a group of major creditors set up in 1956 when Argentina’s debt had to be restructured
for the first time.

[8] An agency which belongs to the World Bank group and provides concessional lending for the
low-income countries i.e. loans with long maturities (10 years) and low fixed interest rates of
0.5% per year.

[9] Products such as cotton, sugar cane, tobacco, coffee or cocoa that are grown for export not as
food for people.

[10] Money that is owed to a creditor because repayments of debt were not made in time.

[11] The four pillars were: the WB, the IMF, the ITO and an aid programme provided by the UN.

[12] It is therefore paradoxical that the IMF required developing countries to do this in the SAPs.

[13] The details of the actual mathematic operations are not relevant for this text, and can be
found in literature connected with this topic. The main problem is argued to be the use of net
present value instead of real value of the debt service ratios.

[14] Debt to exports ratio, debt service ratio, and sometimes debt to GDP ratio.

[15] Debts owed to private companies, banks or individuals as opposed to official debt  where the
creditors are governments or multilateral institutions.