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Canceling Brazil and LatAm’s Debts Is No Charity, But an Act of Fairness

At the beginning of July, the G8 nations set forth a precedent-setting “100 percent” debt relief plan for qualifying African and Latin American countries.

However, the majority of Latin American debt is owed to parties not included in the plan. As a result, no more than a third of the face value of the foreign debt was actually waived for any of the four regional countries covered in the agreement, while other needy nations were completely excluded.


Debt relief is an absolute essential for curing the region’s social ills, but in order to qualify, candidate countries are forced to comply with damaging neoliberal conditionalities.


For debt relief to be successful, a new, more generous, more inclusive process must be implemented that allows a Latin American nation to prioritize its socioeconomic needs and dictate the tempo of its own development.


With rock concerts, public rallies and white bracelets alike petitioning world leaders to “make poverty history,” the issue of debt relief has recently arrested unprecedented international attention.


This high-energy advocacy coincided with the annual meeting of the club of rich nations, the G8 Summit, held July 5-8 in Scotland. There, the debt of the developing world was addressed, with a landmark “100 percent” debt cancellation proposal put on the table for qualifying countries.


Nearly all of the fanfare focused on Africa, whose development has been all but paralyzed by its crippling external debt of US$ 333 billion (2004), an alarming 36 percent of the continent’s total GDP.


While 14 of the 18 beneficiary countries included in the G8 plan (devised by financial ministers from member countries Britain, Japan, Canada, France, Italy, Russia, Germany and the U.S.) are located in Africa, also of significance are the four remaining ones from Latin America, a region which has been similarly beset with unmanageable external debt burdens.


At US$ 720 billion, Latin America’s foreign debt is equivalent to 38 percent of the continent’s GDP. The debt has represented a significant drain on development in Latin America since the region’s crisis of the early 1980s, triggered when Mexico defaulted in 1982 on its extreme obligations.


Payments on debt service alone can consume over half of any given Latin American government’s annual expenditures, frequently at the cost of investment in infrastructure and social programs. This misappropriation results in troubled economies, unsatisfied citizenries and unstable polities, all which perennially roil the region.


Too Good to Be True


Given the debilitating impact of Latin America’s debt burden – not to mention the relative lack of progress on the issue – it is no wonder that the G8’s announcement of “100 percent” debt cancellation caused hopes to soar throughout Latin America, as well as among debt relief activists.


Britain’s financial chief Gordon Brown dubbed the deal “the biggest debt settlement the world has ever seen,” and the global media heralded the plan, which would supposedly waive all foreign debt for qualifying countries.


This agreement, unlike its predecessor the Highly Indebted Poor Country (HIPC) initiative, was designed to wipe out not only debt service payments, but also debt principal held by Bolivia, Guyana, Honduras and Nicaragua, presumably leaving the participating countries with ample funds for much needed development endeavors.


The devil, however, lurks incontestably in the details. Only 24 percent of the countries’ debt is owed to the institutions inscribed in the debt cancellation plan – primarily, the International Monetary Fund (IMF) and the World Bank.


The overwhelming majority of debt in the four included hemispheric countries is owed to bilateral and private institutions and to the Inter-American Development Bank (IDB), which were not even included in the original scheme.


In reality, the alleged “100 percent” cancellation plan only signifies roughly 23 percent cancellation for Guyana, 32 percent for Bolivia, 25 percent for Honduras, and a mere 18 percent for Nicaragua, according to 2003 World Bank debt figures.


While partial cancellation, of course, is preferable to none, the figures involved are less than sufficient to meet the countries’ needs.


Conspicuous Inadequacy


Further highlighting the insufficiency of the debt relief scheme, a number of countries with huge debt burdens were not included in the original HIPC plans nor in the latest G8 formula, due to the dogmatic criteria used by the World Bank to determine need.


Haiti, for example, whose debt represents 40 percent of its GDP, spends twice as much on debt payments as it does on healthcare. The poorest country in the hemisphere, Haiti’s debt has more than tripled in the past decade, and its social conditions have correspondingly deteriorated, with its per capita income figure now standing at US$ 355.


Despite its absurdly high debt to export ratio of almost 300 percent, Haiti eluded the World Bank qualification criteria, preventing the country’s much-needed debt relief. Though not as dramatic as the Haitian example, severely indebted countries like Argentina, Brazil, Ecuador, Jamaica and Peru are also significantly hindered by debt payments without any reform in sight.


In one year Jamaica paid $17.05 for every $1 received in aid grants, and debt payments constitute a staggering 70 percent of Argentina’s GDP. Countries like Brazil and Mexico struggle with debt despite their large economies and relative prosperity, as debt payments limit their ability to spend their limited resources on social needs, even as a growing percentage of each country’s population may be living in poverty.


The issue is not that these countries have failed to make sincere attempts to reduce their debt. According to the World Bank, in meeting its interest payments, Latin America has paid more than the equivalence of its total debt, shelling out $730 billion between 1982 and 1996 without so much as making a dent in its debt inventory.


Countries are forced to acquire new debt in order to pay off the interest from former loans, a quicksand-like scenario which leaves no easy exit. In light of these staggering facts, it is important to hold the G8 nations fully responsible in the process of debt cancellation; a token 20-30 percent debt cancellation for four Latin countries, regardless of the accompanying rhetoric, is not sufficient.


To fully cancel these debts is not an act of charity, but one of fairness and responsibility, as Latin America’s debt burden and the resultant bleak social conditions in the affected nations, are as much the fault of the avaricious lending practices of financial institutions, as the wanton and often venal spending records of past Latin American military governments.


The G8 is not fully owning up to this responsibility, spending for every one dollar in aid about six dollars in agricultural subsidies for their own economies. This ratio ends up being extremely disadvantageous to the economies of the developing world.


The Ifs, Ands and Buts of Debt Relief


Debt relief in no way is a blank check from the developed world. Rather, qualifying countries pay a high premium for the coveted relief, as cancellation accords historically have been garlanded with neoliberal conditionalities that have proven to be overwhelmingly burdensome to debtor nations.


These terms, often embodied in the notorious Structural Adjustment Programs (SAPs) that accompany most aid packages, force countries to privatize valuable state industries (often for pennies on the dollar), as well as liberalize trade and cut public spending.


In a recent interview, Morrigan Phillips, a fellow at Jubilee USA, an advocacy network in the forefront of the debt relief movement, commented that “fighting those conditions is becoming the most important thing” in the debt relief movement, for they have proved harmful to the continent.


Bolivia and Guyana, for example, both cite an erosion of workers’ income as a result of the SAPs. Further, most countries face decreases in income equality, employment, literacy and living conditions for the average citizen as a result of implementing such required reforms.


According to a 2001 estimate by the UN Economic Commission for Latin America, 45 percent of Latin Americans now live below the poverty line, as opposed to 41 percent in 1980, before the IMF initiatives began. Despite such dire results, conditionalities nevertheless remain a prerequisite for debt relief.


Bolivia, Honduras, Nicaragua and Guyana were required to meet a “completion point” of neoliberal conformity before they could be considered for debt relief by the G8 countries and their financial institutions; any nation hoping for relief must go through the same process.


Candidates seeking debt relief are caught in a classic Catch-22 dilemma: in order to relieve poverty they must institutionalize the circumstances that created it in the first place. This compromise does not end when external debts are finally relieved.


Rather, countries must continue to conform to IMF/World Bank expectations in order to win the good credit ratings that are the password for attracting foreign investments. Success in debt relief endeavors must begin by eliminating these hamstringing conditionalities; as analyst Mark Engler of Foreign Policy in Focus told, “Countries should not have to be invaded in order to have their debts forgiven.”


The Power of Precedence


The news about debt relief – including that from the most recent G8 proposal – is not all doom and gloom. Martin Luther King Jr. once said, “[A true revolution of values] will look across the seas and see individual capitalists in the West investing huge sums of money in Asia, Africa, and South America only to take profits out with no concern for the social betterment of the countries, and say: ‘This is not just’.”


Perhaps such a revolution of values is now beginning to take place, even if debt relief efforts have thus far been unable to solve the needs of the developing world. According to Engler, G8 leaders have, in essence, established that full debt cancellation is “morally just and politically feasible,” acknowledging that relief is both necessary for growth and possible to bring about.


Those involved in the anti-debt movement are in a position to apply further pressure and continue to make demands on G8 leaders, who will find it increasingly difficult to argue against the precedents that they themselves have established.


Continuing on this trajectory, it is not overly idealistic to foresee the cancellation of IDB debts or even private debts, which would further pave the road to true full debt cancellation.


Though partial debt relief has not provided final solutions, it has provided some tangible benefits. According to the World Bank, between 1999 and 2004, countries receiving debt relief have been able to almost double their spending on poverty reduction programs and institute social reforms such as in the areas of education, health care and water purification.


The United Nations Development Program estimates that the lives of several million children could be saved annually if the debt of the world’s 20 poorest countries were cancelled and the money instead invested in health care.


Debt cancellation clearly has been found to be a powerful tool for promoting growth and social investment, and as such, it deserves higher prioritization in any dialogue involving G8 leaders as well as those from the developing world.


A Little Initiative, Anyone?


In spite of debt relief’s powerful potential good in the development process, the G8 has shirked from the full leadership its members should be taking on the issue.


Engler described the HIPC debt relief initiatives leading up to the July agreement as “kicking and screaming compromises,” conceded to by the G8 only after years of relentless pressure by those involved in the Jubilee debt relief movement and others.


As a result, some countries have chosen to take their own course of action instead of waiting for G8 debt relief to kick in.


In December 2001, Argentina defaulted on a portion of its bonds worth US$ 81 billion, a move that eventually, if reluctantly, was accepted by 70-75 percent of the country’s bondholders and subsequently forced the IMF into a bruising renegotiation process.


In June 2005, Ecuador announced that it would divert resources traditionally used to pay off its debt into capitol infrastructure and social investment, a decision which initially caused creditors to raise an uproar, but eventually they resigned themselves to accept the proposal.


The IMF is only as strong as countries allow it to be, and when debtor nations like Argentina and Ecuador come forth with their own initiatives, pressure mounts, and the IMF is forced to enter into the negotiation process if it wants to maintain some degree of control over its outcome.


This type of self-determination is relatively rare in a region that usually succumbs to IMF neoliberal mandates, but it may be necessary if debtor nations are to ever rid themselves of crushing debt burdens and the social ramifications that normally accompany them.


Still, prospects of greater self-determination do not obliterate the considerable significance that further G8-initiated relief could represent. Argentina, in spite of its monumental default, still owes $13.8 billion to the IMF and over $15 billion to other multilateral institutions; its debt payments continue to claim upwards of 75 percent of the country’s annual GDP.


Although Nicaragua was included in the recent “100 percent” deal, remaining debt payments represent two and a half times what is spent on health and education combined, and 11 times its primary health care spending. The evidence is clear that further relief is needed to solve the residual debt-related woes of Latin America.


Breaking Outside the Mold


If debt cancellation initiatives are to be successful, they must be fundamentally altered, allowing countries to dictate their own development. Instead of imposing a “one size fits all” mandate on affected nations, relief-granting institutions must acknowledge the wide-ranging diversity of individual Latin American nations in their reform plannings.


Implementing economic policy should be expected to proceed very differently in Haiti than in places like Brazil and Mexico, which have much larger economies but nonetheless struggle with immense poverty.


As Engler commented, “It’s really a question of allowing countries to experiment and create their own path to development, for no other model has been allowed to develop.” Approaching debt relief and development from this perspective would probably do a lot more for Latin America’s poor than misleading labels.


This analysis was prepared by COHA Research Associate Alicia Asper.


The Council on Hemispheric Affairs (COHA) – www.coha.org – is a think tank established in 1975 to discuss and promote inter-American relationship. Email: coha@coha.org.

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  • Show Comments (4)

  • pastor john benny lingam

    sholam
    Dear brother greetings to you in the name of our Lord Savior Jesus Christ. This is from Bro. John Benny Gospel Preacher in Gudlavalleru and its surrounding villages I am doing Gospel Service in Gudlavalleru a remote village in India from 1998. We have four churches in the ministry. Church in Gudlavalleru is the main church. We have 30 congregations. They all accepted Jesus Christ is their own savior. They got baptised. But they are very poor people. They depend on their daily wages. I was born in a Hindu family .I was called as Rama Krishna before I came to know about Jesus. I lead a sinful life up to 18 years. I wasted all my youthful 18 years. I faced my problems which includes my family matters. At the age of 18 I came to know by a Pastor that Jesus is the real God who c Dear brother greetings to you in the name of our Lord Savior Jesus Christ. This is from an solve problems and gives peaceful life and wipes away all the sins and gives salvation to mankind. Then I prayed Him for salvation and accepted my sins. I was touched with the Holy Spirit. I was baptised on June 15th 1994. Later I completed my CTH in icthoos Bible College. Present I am aged 29 years and was married in the year 1998. God has given me a good wife and two children. My wife name is Aruna and she is 26 years old. When I went to Chittor about 400 Kms far from my residence to preach. On 10th of February 2001, my wife when she was a pregnant met with an cooking stove explosion. Then doctors rejected her to get admitted in hospitaland stated that she will not live and the child would be handicapped. But God miracle to us is she was safe. God gave a son to us with good health. It was a great miracle to us. I pray obediently, faithfully and extend his word until the end of my life. Please remember my work in your daily prayer.
    We are very poor family I am depending upon my Church members and God. But financially inconveniences, we are requesting you as a bother in Christ. If youˢ۪re praying for me. I will do more Gospel Services for our Lord. I will get many souls for our kingdom of God. Please visit my Church Ministry and observe my work. If God showers his blessings on you to help our Ministry, Please continue to pray for my ministry.Recently I purchased a land for church by gods grace and registered it recently. So lpace pray for us it is estimatimated nearly for 7000$ s . To construct the
    church in that place. So please prayer for us and also kindly help in church construction.
    Greetings in the nameof lord to you and your family.Once we faced so many struggles for land to run a church. We run our church in a rented house and so on.But by the gods grace and with some members support we bought a land for our church and registered it
    recently before a few days ago.So I wanted to construct a church in that place. I prayed a fasting prayer for 6 days to god help me for our church construction. God heard my prayer and raised some persons . one person promised me to give 100 bags of cement wich costs about 15000 Rs (300$s) . Nearly it is estimated for 3lakhs (7000$s) to construct the church. So please pray for us and also help us in the church construction.

    Thanking you sir
    Yours faithfully

    Pastor. LINGAM JOHN BENNY
    E-mail : tfwm2005@yahoo.co.in

  • Guest

    Great comments. It´s refreshing to see some semblance of rationality abound. I too whould like DEBT RELIEF for my morgage, it will never happen. I borrowed the money, and now need to repay it. It is as simple as that.

    I think the first poster fingered the problem perfectly. Whether an African country or a Latin American country in debt, check private off shore accounts before doing anything stupid.

  • Guest

    from Switzerland……
    ……your article is very good and has relevant points of defense. But you dont answer all questions…that we, people of the devolpped world have no answer.
    – What have you done with the money we lent you ??? Some of this money was not lent at absurd high rates…. originally. . !!!! the rates were ok since some of the bonds issued were at first at 8 %…based on the risk and not that high if you look a similar bonds issued by the US government…at the same time !!!
    In view of the inequality of income in your country…it is clear that all that money went to the little elite…..!!!!
    How do you intend to take back of that money to them ?
    Simply….you dont !
    If part of the debt is cancelled…one way or another…it will be agai the minority elite who will profit,first by having lower interest rates, so they can borrow more and invest with more profits !!!!
    As you know better than I do…your interest rates is higher than any equivalent indebted countries…as yours !
    Why ?
    You claim that we subsidy our farmers…and not you !!!!!
    So please tell me how rich and poor farmers in your country can have loans at 8.75 %…sometimes lower for the poors….while your Selic is at 19.75 % and that your commercial spread rate is at a minimum of 20 % which equals to a minimum rate of 40 %. For the individual borrowers the spread is a minimum of 40 % which makes the rate of a loan at 60 %.
    You know as well as I do, that the true rates mentionned are even mich higher that the numbers I stated just above.
    This demonstrates that money goes to the elite…no to the poor.
    Now assuming we cancel part of the debt….who will profit…even if most of the new investments go to social inclusions ??? Again the elite…who has the money…will build ..new corporationss….or develop the existing ones… in this new booming industry that is the social and consumer industry. But that will in no way reduce your social inequity.
    Even if your poors will become slightly less poor…your rich minority will become…much much richer…that they already are !!!!
    So my conclusions are that YES…we should cancel part of your debts, first, see how you reduce not only poverty…but inequality also. And in a few years…we could do a second tranche and later a third tranche…if you fulfill your commitments !!!!!!

    Today your rich peoples are richer than 10 years ago….while your poverty has not changed, at best !!!!

    So my comments demonstrate that a simple debt, in whole or in part, at the present time…would be worthless for your poors….but not for your elite…..!!!!

    Creating new plants and new jobs is ok, provided….the rich and the corporations dont evade taxes…and that workers get a higher share of income.

  • Guest

    Blah..Blah…Blah…COHA B.S.
    Look up the words “loan” and “debt” in the dictionary.

    How many embezzled billions are sitting offshore? Any thoughts? Nope, just hyperbole and excuses.

    Why is it so far-fetched to expect countries to clean theirown house first before blaming others for idiotic and corrupt systemic failures.

    Perhaps one day socio/commie bozos will figure out that honoring debt, no matter how dificult/painful, will help Brazil a great deal in the long run.

    COHA “think tank”: aka arrogant liberal elites who have never worked an honest day in their life but have no problem making social generalizations based on emotion rather than logic so solve the world ills.

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