July 30, 2014 · 3 Av

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Background
Learn about the origins of the global debt crisis

In the 1970's, the banks in the United States, Europe and Japan were flooded with deposits — the so-called "petro-dollars" made by oil exporting countries after the rapid rise in oil prices. The banks became desperate to find new clients to take these deposits and started lending heavily to middle and low-income countries. At the same time the World Bank and the International Monetary Fund (IMF) increased their lending to the poorest countries particularly in Africa. The conditions of these loans were very attractive, with low interest rates.

Much of this money was used responsibly to fund social reconstruction projects. But some of the money was used to fund ambitious and ill-conceived projects, to buy armaments, or to build up the wealth of the richest politicians, landowners, contractors, and manufacturers. In the early 1980's interest rates rose rapidly and the world entered a recession. The prices of many raw materials — the main exports of most poor countries (such as sugar, cotton, tin and copper) — collapsed dramatically.

Many countries began to run out of hard currency to pay the interest on their large foreign debts. Most tried to postpone default for as long as possible by borrowing more heavily. But the bubble burst in 1982 when Mexico announced that it could no longer service its debt. Many other countries followed.

Essentially, poor countries have gone bankrupt. But there are none of the provisions for these nations that there would be for an individual or company who goes bankrupt and is, thereby, protected from creditors. The IMF and World Bank stepped in to make more loans to ensure that the financial institutions would not collapse, but these new loans have also been eaten up in interest payments. At the same time countries were forced to accept "structural adjustment programs." These packages of measures focus on control of inflation and reduction of public expenditure while the cost of living is allowed to rise to market levels.

The whole approach was based on the assumption that the debtor nation brought the crisis on itself and must find its own solution to the problem. The poorer nations were being punished for the results of international factors completely beyond their control.

The bankers and lending governments saw structural adjustment as a success, as it averted a world-banking crisis. But, the results of the structural adjustment programs have been the abandonment of health, welfare and education spending in many countries. According to Oxfam International, in 2000, upon receiving debt relief, the Ugandan government abolished user fees for primary health care, giving poor people free access to clinics. The result: health units reported an increase of between 50 and 100 per cent in attendance almost overnight. Immunization rates more than doubled. As a result of the 2005 debt deal, Tanzania eliminated out-of-pocket costs for HIV testing services and Benin invested 54 percent of money saved from debt relief on health including primary health care and HIV programs.

In 2003, Zambia spent twice as much on debt repayments as on health care. Now the 2005 G-8 debt deal has allowed the country to invest in free health care for all citizens living in rural areas.

Before the deal, Zambians had to pay between $5 and $10 per visit to the clinic due to IMF-imposed user fees, even though the average citizen lives on less than $1 a day. The country's leaders have also committed to providing free anti-retroviral drugs to 100,000 citizens, which is vital in a country where 1 in 5 people are HIV positive.

Debt cancellation is a critical tool because we know that debt cancellation works. Debt cancellation now has a ten year track record of freeing up resources to fight poverty. Also thanks to the limited debt relief to date:

  • Social spending across countries that have received debt relief has risen by about 75 percent.
  • Zambia has hired 4,500 new teachers and abolished fees for rural healthcare.
  • Ghana has made large investments in basic infrastructure, including rural feeder roads and has increased its spending on education and health care.

Debt cancellation is an excellent tool for supporting development because it provides direct and predictable budgetary support to impoverished countries, avoiding the costly processes that accompany the application for, granting and monitoring of overseas aid. Likewise, money saved from debt cancellation can be used to plan for long-term projects as it is not subject to the whims of annual funding cycles and political will in donor countries.



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