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Sovereign Debt and the Promotion of Neoliberal Economic
Policy
Suzanna Dennis,
Columbia University
List of Acronyms:
HIPC: Heavily Indebted Poor Country Initiative
PPME: Iniciativa para la reducción de la deuda de los países
pobres muy endeudados
PRSP: Poverty Reduction Strategy Paper
DELP: Documentos de Estrategia de Lucha contra la Pobreza
SAP: Structural Adjustment Program
PAE: Programa de Ajuste Estructural
PRGF: Poverty Reduction Growth Facility
Introduction
The purpose of this paper is to raise awareness and contribute to the
dialogue on the impacts of sovereign debt and neoliberal economic policies
around the world. It is only meant to be an introduction to the topic,
and therefore will not be exhaustive in detail. I will refrain from
using problematic dichotomies such as developed and developing, Third
World and First World. For lack of better terms I will use 'the global
South' to describe countries in the warmer regions of the world, and
'the global North' to describe the United States and Western Europe.
It is my contention that the global debt crisis has been
primary mechanism through which neoliberal economic policies are promoted,
and thereby maintain the dominance of relatively a few corporate elites
around the world. The opening up of the market through structural adjustment
programs by the World Bank and stabilization programs by the IMF are
the primary apparatus through which these policies are imposed. The
unrestrained dominance of the market economy has led to uneven economic
growth and has hurt the lives of many people (Gilpin, 1987: 54).
I will begin by outlining the rise of neoliberal economics,
briefly describe the history and magnitude of the debt crisis, then
go on to discuss structural adjustment. I will quickly outline the impact
these policies have on the lives of people around the world, describe
current debt relief efforts, and discuss some of the challenges for
the future.
The Rise of Neoliberal Economic Policy
Following the Second World War, there was a great opportunity
for a relative equalization of power relations between countries in
the global North and the global South. The newly independent former
colonies exercised their right to self-determination through the establishment
of diverse forms of governance including socialism and communism. The
state government had relative control over the economy.
The Reagan administration in the United States during
the 1980's ushered in a neoliberal backlash which was imposed on the
global South primarily by multilateral development banks. By neoliberal
policies I mean policies whose primary focus is on economic growth through
the liberalization, or "opening-up" of the market and the
reduction of government intervention. Walden Bellow terms this era,
"rollback:" a global strategy initiated by powerful political
and corporate elites in the North who worked to consolidate global economic
hegemony (1994:2). In many cases Southern elites were complacent or
instrumental in promoting neoliberal policies because they benefit (Rowden,
2001).
The Debt Crisis
The debt crisis was primarily the result of two factors.
First, in 1972 and 1979 the Organization of Petroleum Exporting Countries
(OPEC) drastically cut back in the production of crude oil, causing
a scarcity in the market. The oil crisis increased the cost of oil in
the newly independent and industrializing nations and enriched OPEC
elites. Consequently, Northern banks filled with OPEC "petrodollars"
indiscriminately lent huge sums of money to the governments of Southern
countries.
Second, the United States (U.S.) increased the practice
of strategic geopolitical lending (Bellow, 1994: 10-12). Foreign aid
was promoted by the Reagan administration as an instrument to bolster
the power of countries that were allied with the West, and to fund opposition
to leadership that allied itself with the Soviet Bloc. This aid primarily
took the form of private loans and government-to-government, or bilateral
loans. The U.S. government funded extremely corrupt regimes such as
the Marcos' in the Philippines, Mobutu's Zaire, Pinochet's Chile, and
the Contra's in Nicaragua. Much of the money ended up in the pockets
of the wealthy or in bank accounts in the North (Rowden, 2001).
The 1980's were a time of global economic recession. Many
Southern countries were unable to repay their loans. Facing the prospect
of bankruptcy, indebted countries were forced to restructure their debt
by taking out a loan from the International Monetary Fund. Many also
used loans from the World Bank to fund development projects.
Today most low-income nations depend entirely on loans
and other forms of foreign aid just to service the interest payments
on loans that are decades old (Rowden, 2001). In 2001, the total debt
for the Third World was US$2.6 trillion. Much of the debt that countries
owe is from interest accrued on principal loans (Rowden, 2001). Some
low-income countries are spending 20-25% of their export earnings on
interest payments, while social services receive very little funds (Rowden,
2001). Poverty levels and health indicators continue to fall, while
20 percent of the world's inhabitants control 80 percent of its wealth
(Rowden, 2001).
Adjustment and Market Dominance
Multilateral loans come with structural adjustment packages
(SAP) which are now known as Poverty Reduction Growth Facility (PRGF).
A SAP is a set of economic policies designed to cut government spending,
reduce the role of the government in market affairs, and promote economic
growth through increased incorporation into the world market (Rowden,
2001). Adjustment has become the primary means through which indebted
countries are brought into the neoliberal economic system and large
corporations are able to take advantage of unrestricted market access.
The main elements of an SAP are outlined as follows (Bellow, 1994:27):
· A radical reduction in government spending
which is designed to reduce the need for assistance and increase
the government's ability to pay off debts. In practice this generally
means cutting spending in social services including education, health,
and welfare.
· Devaluation of local currency in order
to make exports cheaper. This reduces the purchasing power of the money
that people have and tends to hurt lower-income families the most.
· Liberalization of import restrictions
to increase local efficiency and institutionalizing incentives for export
market promotion.
· Cutting wages in order to make imports more expensive
and exports cheaper.
· Removing restrictions on foreign investments
in industry and capital markets, which can have very damaging effects
on local markets and increase the volitility of the economy.
· Privatization of government enterprises and
deregulation of markets in an overall effort to promote the allocation
of goods according to market forces.
The Human Impact
Debt inhibits the ability for governments to properly
invest in their citizens' well-being (Cheru, 1999). Debt service payments
are prioritized over investments health, education, and social security.
Women and children, who constitute most of the world's poor, particularly
feel the impacts of debt.
Furthermore, local markets are flooded as small and medium
scale local producers are undersold by cheap imports. Lacking proper
educational opportunities and health care, low-income people suffer.
Lack of education, poor health and nutrition also inhibits domestic
economic growth. This leads to a vicious cycle in which debt reinforces
poverty and poverty increases dependence on external aid which increases
debt levels.
Debt Relief?
HIPC
Much of the bilateral debt has already been cancelled
or restructured. What remains is largely multilateral debt. In 1996,
the World Bank and the IMF responded to international pressure, particularly
from the Jubilee Coalition and others, by establishing the Heavily Indebted
Poor Country Initiative (HIPC) (Rowden, 2001). Shortly after, the initiative
was "enhanced" to provide deeper and faster relief. In total,
42 countries are undergoing the HIPC process. 34 of these countries
are on the African continent (World Bank). The HIPC countries in the
Americas are Nicaragua, Honduras, Guyana and Bolivia.
The goal of the initiative is to reduce qualifying country's
debt to a "sustainable level" within four years. Sustainability
is described as a debt-to-export ratio of 150 percent, and assumes annual
growth rates of 9 percent for twenty years (Rowden, 2001). HIPC is not
debt cancellation. Instead, funds from donor countries are put into
a HIPC trust fund which is then used to pay down the debts owed to the
private and multilateral institutions.
In order to be eligible for HIPC, a country must have
an unsustainable debt level. The country must also be eligible for loans
at very low interest rates (concessional lending) and therefore a SAP.
The country must also produce a Poverty Reduction Strategy Paper (PRSP),
which is a document produced by members of civil society, the private
sector, and the government, which is designed to reduce levels of poverty
within a country. It is ultimately approved or denied by a joint assessment
of World Bank and IMF staff (Rowden, 2001).
PRSP
The PRSP is highly problematic. First, participation by
members of civil society can be limited or token. For example, in Cambodia,
available documents had not been translated into English before it was
approved by the Bank and the Fund. In Tanzania and Ghana the organizations
who would represent civil society were hand-picked by the government
(Rowden, 2001). The second problem is sovereignty. The PRSP is a component
of the national budget. Essentially the World Bank and the International
Monetary Fund are approving national budget allocations. Third, the
macroeconomic policies as mandated by the PRGF are fundamentally in
contradiction with the PRSP. The reduction of government spending and
other policies within the PRGF increase poverty, thereby undermining
the efforts laid out in the PRSP.
The PRSP has had some achievements. First, the participatory
process has brought national development into the popular discourse
(if it wasn't already) and the official domain of all stakeholders.
Second, the PRSP represents an acknowledgement by national governments
and the World Bank that pro-poor economic growth is important. Third,
data collection techniques in HIPC countries have been improved.
Evaluation
Overall, it is doubtful that the HIPC initiative will
achieve significant debt relief or reduce levels of poverty (Rowden,
2001). Overly optimistic growth rates, increased dominance of the foreign
corporations and flows of capital, and a reduction of social services
have had negative impacts on debt and livelihoods. For example, Uganda,
the first country to complete the HIPC initiative, has had an increase
in debt levels and overall poverty (BBC, 2002).
Furthermore, instead of alleviating the root causes of
the debt crisis, the HIPC Initiative has extended neoliberal policies
into new territory. HIPC governments are designing budget allocations
with the approval of the Bank and the Fund in mind, while the PRGF further
opens up restrictions to market access by corporate and financial elites.
Prospects for the Future
There are many challenges for activists, academics, and
policymakers in the area of debt relief and the spread of neoliberal
economic policies. There are a few issues that must be discussed, which
I will outline briefly below.
Some debts should clearly be cancelled as soon as possible.
The establishment of an international court to hear cases of odious
debts would be the first step. Odious debts are debts incurred by specific
governments that did not benefit the citizens. For example, debts incurred
by authoritarian governments and used to oppress people should not be
paid for by the people who were oppressed in the first place.
All-out debt cancellation is an option, although it is
problematic. Jubilee organizations have argued that the multilateral
agencies have enough reserves to fund the cancellation and continue
to operate normally. Increased Official Development Assistance could
also fund a total debt cancellation. Most Northern countries do not
meet their commitment of 0.7 percent of Gross Domestic Product. The
United States usually gives between 0.1-0.2 percent annually (Shah).
However, any cancellation must be extended beyond the 42 HIPC countries.
Also, there is no reason to believe that if the debts were cancelled,
oppressive regimes would increase funding in social services. Southern
elites often benefit from the existing structure, such as buying newly
privatized industries (Rowden, 2001).
Viable alternative economic, political and social
models must be developed to replace the existing one. The responsibilities
of the state government and the role of the market must be re-conceptualized.
The primary problem with reducing the government's capacity is that
a government is (at least in name) accountable to its citizens. The
market, foreign investors, large corporations, and multilateral development
banks are not. Shifting power from the market and multilateral banks
will require ensuring that the government will work in the interest
of the majority of their citizens.
Bibliography
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