Thoughts on Jubilee 2000

L. Emil Kreider

The signers of the Jubilee 2000 statement are well qualified economists with degrees from major universities, several of whom specialize in economic development and have written professionally on development topics. One, E. Wayne Nafziger, is a recognized national authority with a widely adopted text entitled The Economics of Developing Countries (Prentice-Hall) which has gone through several editions. These are obviously experienced people whose views are to be taken seriously, and I do that. I believe that their major point is that the debt reduction process for poor countries should be greatly speeded up with substantially greater amounts of reduction. In fact, most development economists advocate substantial debt reduction for poor countries. It is desirable, it is not controversial, and indeed it is all but inevitable under current circumstances. So on this point I assume we all agree. What I view as unfortunate about the document is that it puts the issue in the context of "jubilee." If all jubilee means is "faster and more" then there is no problem. Jubilee, however, literally means to me and I think even more to most lay people, "reduction to zero and without conditions." That is something else entirely. I would like to use this response to highlight the difference and explain why I believe that although "more and faster" is desirable, literal jubilee is not. The distinction has significant policy implications and should be important in evaluation of the actions of the World Bank, the IMF, the area development banks such as the Asian Development Bank and the Inter-American Development Bank, and other involved parties.

The Mennonite economists state, "Jubilee 2000 . . . advocates all of the debt . . . be eliminated." Then they state, "The primary beneficiaries of being freed from the bondage of this debt would be the low income people in these low income countries." Unfortunately, it is not at all obvious that the second quotation would result from the first. In fact, literal jubilee, without conditions, would probably not help the poor in many countries but would instead help developed country banks and the corrupt and wasteful governments that have been so instrumental in keeping so many of these countries poor. Debt forgiveness will instead have to be hammered out, country by country, with negotiations resulting in conditions that make it at least probable that the condition of the poor will be enhanced.

The first point to consider is that for many countries, debt reduction is basically a bankruptcy proceeding. While the Mennonite economists' statement that "the debt crisis persists because there is no provision in international law for declaring bankruptcy" is correct with respect to law, debt reduction is, nevertheless, often a bankruptcy procedure. The Paris Club and London Club have negotiated reduction of public and private debt of distressed countries for years, and there have been numerous variations on the debt reduction process. Inevitably both "bankruptcy" and "aid" are involved, but they should be conceptually separated. Under "bankruptcy," debt will be reduced down to the level the recipient can repay. Since private banks and other investors are involved in a contract relationship and expect to be repaid, under the bankruptcy rationale only the amounts that cannot be repaid will be forgiven. From a bankruptcy point of view there is no more of a legal or moral responsibility for private banks to provide development assistance than there is for a Dutch food processing company or for a small business in your home town to provide it. These private creditors are involved in a bankruptcy proceeding resulting from their commercial activities, not from foreign aid. They have to accept their losses as any creditor in a bankruptcy proceeding does, but they only need to reduce to where the borrowers can handle repayment.⁽¹⁾

The World Bank, the IMF and other similar lenders do want to reduce debt beyond this point for development reasons. The first complication, of course, is that if they would reduce debt unilaterally it would result in the subsidization of the banks and the other creditors. By reducing, say, World Bank or IMF debt, they enhance repayment for private lenders. That does nothing for the poor countries but does help bail out the private banks. Instead of debt service money flowing to enhanced health and education in poor countries, it will flow from the world organization agencies to the banks. This is clearly unacceptable to the World Bank, et. al., and the parties are therefore forced toward mutual negotiations, in the context of differing objectives.⁽²⁾

Another problem that must be faced is that the creditors are dealing, to a very considerable extent, with regimes that are undemocratic and corrupt. Freedom House, a New York organization that evaluates political and civil liberties, rates only seven of the forty countries the IMF classifies as heavily indebted and poor as "free" (Benin, Mali, São Tomé and Principe, Bolivia, Guyana, Honduras and Nicaragua). According to Transparency International in Berlin, Zambia is the least corrupt of the 12 heavily indebted and poor countries they rated with a low score of 3.5 out of a possible corruption free score of 10. The Canadian Fraser Institute ranks countries on economic freedom, and of the approximately 120 countries rated, most of the heavily indebted and poor fall into the lower third. There is a tendency to view the poor as virtuous. Unfortunately, however, in terms of their governments, the opposite is often true. The majority of the governments involved are undemocratic and corrupt and many are also engaged in civil wars or other expensive military engagements. Examples abound. Côte d'Ivoire's president was recently overthrown by a coup. Only two other Latin American presidents were willing to attend Alberto Fujimori's inauguration since outside observers, critical of how the first round of voting was conducted, refused to monitor the second. In Algeria, 200 people died from Islamic violence in the first two weeks of July 2000, in the Congo the government prints money non-stop to finance the war with inflation rising toward triple digits. In Colombia the Marxist Revolutionary Armed Forces of Colombia and the National Liberation Army are fighting right wing para-military groups, and there is a demilitarized zone within the country run by a non-elected military group. Indonesia is experiencing corruption/crony capitalism in the context of sectarian violence with 3,000 people killed in the last 18 months in the Moluccas, and separatists are trying to detach Aceh and West Papua provinces. And then there are Kenya, Liberia, Zimbabwe, Angola, Burundi, Rwanda, Cameroon, Central African Republic, Eritrea, Sierra Leone, Somalia, Uganda, etc. Even countries as economically advanced as Thailand, Malaysia and the Philippines have very substantial governance problems. In these countries it is an extremely heroic assumption to make that a reduction in debt service alone would benefit "the low income people in these low income countries." The relief would be to the governments, and much of it would flow instead to the financing of civil wars, to oversized payments to relatives of government officials, to Swiss bank accounts and Mercedes for government officials, and to an extremely wide and creative variety of corruption.

Kenya is a recent case in point. Daniel arap Moi runs an extremely corrupt government. The Economist magazine explains it this way:

Mr. Moi has long condoned grotesque levels of looting by his top politicians and civil servants. But for many years donor countries and Kenya's government had been engaged in a complicated minuet. The government would make extravagant promises about reforming itself. The donors and IMF would persuade themselves these were genuine. The aid would flow. But once the flow had started, the government would forget its promises. The money would be stolen. The donors would issues threats and then, at the last moment, the government would come up with new promises.(3)

Conditions in Kenya are very bad. There has been a two year drought and people have lost livestock, water is rationed, and many businesses are suffering and in some areas people are dying. The IMF felt it had to resume aid under these conditions. It apparently has basically dictated some stringent reforms which amount to almost day to day outside monitoring of the funds. It may work this time or it may not. But the point is that without the negotiations and conditions, further aid, whether direct or in the form of debt service forgiveness, would be practically useless in terms of making the primary beneficiaries "the low income people in these low income countries." That is, Jubilee without the reform might have almost no impact at all. Not every country is as corrupt as Kenya. Circumstances vary, but almost no low income, heavily indebted country is without very serious problems relating to war, despotism, corruption, and substantial misuse of government money by any reasonable evaluation. I suggest that serious students of this issue make a list of the countries and then research current events in each related to the governments. The point would become apparent.

Finally, providing development assistance via debt reduction is only one way to approach the problem. Making the amount of assistance a country receives dependent upon its debt level may preclude more effective and equitable methods. To draw an analogy, it would be like helping solve the problems of poor people in the U. S. by forgiving all their credit card debt. Such an action would be likely to help them, but a little creativity might find a more just and more effective way to improve their long run situations. Those also poor who didn't own a credit card or those who had sacrificed to pay off their charges might have an even more valid claim to assistance. It is important to see that aid money goes directly to projects that in turn have a significant impact. That is one reason we have free public education and why the poor receive food stamps and Medicaid instead of credit card relief. Of course, if the credit card load gets too great, something has to be done about it. But it need not be the focal point of policy for the poor. Jubilee, at least without fairly stringent conditions set by the IMF, World Bank, et al., is too much like credit card relief. It needs to be converted through effective conditionality into resources for health, education, infrastructure and other needs of poor people. A policy which gives blanket relief to the honest and to the thoroughly corrupt alike without considerable further thought is not attractive.

To me, these arguments are compelling. As I stated in my opening, I realize I am arguing with some people who have credentials exceeding my own. I ask myself, why did they sign? Several possibilities occur to me. They may feel that the World Bank, the IMF, and the regional development banks are themselves not to be trusted. My response to that would be that although all large bureaucracies are candidates for reform, these organizations do a good job via a multinational governance structure and seem preferable to bilateral assistance organizations which have a much harder time escaping the narrow and more selfish strategic and business interests of their governments and constituents. Criticism is easier than tool building or institution building, and I would want to know what sort of aid agencies are contemplated before we give up on those which I believe have done a considerable amount of good in very difficult environments.

Perhaps the signers believe that Jubilee is not to be taken literally, but just does mean "get a move on it." Then we are close to agreement. But I would still prefer not to use the term because it will be used to criticize the World Bank, IMF, et al. when they only reduce debt part way, even though reducing it substantially, but not completely, may be the best policy. The test should be whether the organizations can effectively implement projects on the ground -- whether they can create, in negotiation with the recipient countries, agreements which will get the resources to the problem. I am afraid that an appeal to expand assistance via Jubilee will be ineffective. Jubilee, as a call for more aid, is too easy for the decision makers to ignore because of its flaws. What we need is ringing support for the stated objectives of the World Bank and IMF and strong support for any specific reforms that would improve these organizations and make them even more effective with much wider financial support. One big danger I see today is that the constituency for aid, let alone increased aid, is shrinking. Jubilee has the danger of exacerbating this problem by turning into an attack on the aid agencies rather than into a reform and support of them. Given the politically possible alternatives and the needs of poor people in poor countries, that would be unfortunate.

1. In the most desperate situations, there is not likely to be much private debt. That tends to concentrate in countries that are well on the road to industrialization and may be more relevant in IMF negotiations.

2. In his textbook, Nafziger advocates a wider Debt Reduction Consortium to amalgamate consultative groups chaired by the World Bank, the Paris Club, London Club, and roundtables chaired by the United Nations Development Program, at least partially on grounds that the debtor countries would have a better opportunity to present their case and creditors a wider perspective on the debt question. He addresses the "free rider" problem I am addressing here, but nowhere in his discussion does he advocate or even mention a jubilee approach. His summary of many of the debt issues is very helpful for trying to understand the "external debt crisis."

3. The Economist, August 5, 2000, p. 43.