Third World debt – one world solution?

Stuart Mole

Spiralling debts in developing countries came to a head in the 1980s, after two oil crises and rising interest rates. The Highly Indebted Poor Countries initiative followed, which launched debt relief programmes and brought about the birth of the Commonwealth Ministerial Debt Sustainability Forum 

The year 1983 was one in which the world came closer to nuclear war than at any time since the Cuban missile crisis of 1962. The Cold War had moved into its final and most dangerous phase. Ronald Reagan was in the White House and denouncing “the evil empire” of the Soviet Bloc. His ally, Margaret Thatcher – ‘The Iron Lady’ – had just won re-election in the United Kingdom and was giving short shrift to the protest movements opposing the deployment of Pershing and cruise missiles in Europe. 

A draft speech was prepared for Queen Elizabeth II to deliver in the event of nuclear conflict. She would declare that Britain must “prepare itself to survive against great odds”. The Soviet leader, Yuri Andropov – in ill health and with a fragile grip on power – feared a US first nuclear strike. As NATO simulated a nuclear attack by its forces in the military exercise ‘Able Archer’, Andropov was close to a preemptive Soviet strike. 

The developing world – for long the proxy battleground between East and West – looked on in bewilderment and fear. For them, the real divide was between an affluent North and an impoverished South. 

The 1980 Brandt Report, ‘North-South: a programme for survival’ – and its 1983 sequel ‘Common crisis’ – was the work of an independent commission chaired by the former German Chancellor, Willy Brandt. The commission’s members included the Secretary-General of the Commonwealth, Shridath ‘Sonny’ Ramphal. The two reports provided a stark portrayal of a divided world in which the increasing poverty of the majority threatened the security of all. The commission’s plea to the developed nations “to build a world in which sharing, justice, freedom and peace might prevail” largely fell on deaf ears. But the reports captured the popular imagination, achieving record sales and becoming the rallying cry of numerous demonstrations and public meetings. Many were attracted by the basic message of Brandt: that the countries of the world – rich and poor – had a mutual interest in finding solutions that benefited all, in a new system of global security. 

One issue that exemplified the problem identified by Brandt was the ballooning debt burden of developing countries. Since the oil crisis of 1973, much of this new lending was coming from the banking sector rather than from governments and public institutions as previously. The banks’ balances had been swollen by large deposits from those who had benefited from the hike in oil prices. There was, therefore, eagerness to lend, even if it was apparent that not all this finance was going to support sound macro-economic policies. Up to a fifth of the total was instead going on defence spending. Nonetheless, banks, borrowers and governments alike assumed that such debts could be serviced indefinitely, by yet more commercial or other borrowing. That, after all, was the approach of the countries of the developed world in managing their own domestic debt. 

After the second oil shock of 1979, recession and high interest rates began to paint a much more ominous picture. In 1982, Mexico defaulted on its debt repayments and the unsustainability of developing country debt – as well as the impact of potential default on the global banking system – became increasingly apparent. 

In 1983 Commonwealth leaders, meeting in New Delhi, decided to set up an Expert Group on the debt problem, under the chairmanship of the British politician and financial expert Lord Lever. 

When Lord Lever reported a year later, his warning was stark. “The world’s financial safety is balanced on a knife-edge,” said the group’s report ‘The debt crisis and the world economy’. It warned that “in conditions of vast and growing indebtedness”, rescheduling was “purely cosmetic”. The crisis, it continued, “threatens not only development in developing countries, but also the stability of the banking system in industrialised countries”. The group was not against austerity measures, providing they contributed to growth. As it was, in 1983 developing countries had “a negative net inflow of funds” of US$11 billion. In other words, they had become exporters of capital to the developed world, rather than the other way round. This led Sonny Ramphal to say: “The resultant net transfer of resources from poor to rich… is neither sustainable nor desirable.” 

Even so, for some years there was little movement on the recommendations of the Lever Report. In 1985, James Baker, the US Secretary of the Treasury, proposed a rescheduling plan so that countries could “grow out” of their debts but this quickly proved unequal to the task. Then, in 1987, Nigel Lawson, the British Chancellor of the Exchequer, proposed a three-point plan to assist the poorest indebted countries (providing they were also pursuing satisfactory structural adjustment policies). For the first time, an initiative was floated that involved not merely rescheduling but a genuine element of debt forgiveness. This later became the Toronto Terms, beginning to bring relief to 19 countries, including Guyana, Tanzania, Uganda and Zambia. In 1990, the new British Chancellor, John Major, launched a more ambitious plan at the Commonwealth Finance Ministers’ Meeting in Trinidad and Tobago. This initiative proposed cancellation of two thirds of the entire stock of official bilateral debt, and much easier terms for the repayment of the remainder. The ‘Trinidad and Tobago’ terms would have meant cancelling $18 billion of the $27.5 billion official debt of 19 eligible countries. A year later, with no unanimity in the Paris Club of creditor nations, the UK government announced that it would unilaterally implement the initiative, cancelling the British debt involved. 

Even so, despite eventual agreement in the Paris Club, the Commonwealth recognised that, for the great majority of indebted countries, the advances so far did not go to the heart of the problem. For the poorest countries, in particular, what was necessary was to tackle multilateral debt, which was by far the greater portion of external debt. Once again, a British Chancellor of the Exchequer – this time, Kenneth Clarke – used a Commonwealth Finance Ministers’ Meeting to galvanise support for a scheme to tackle the multilateral debt burden of severely indebted low-income countries. In 1995, at the Halifax summit chaired by Canadian Prime Minister Jean Chrétien, – and with John Major now the British Prime Minister – the G7 agreed to push the World Bank and the IMF to “develop a comprehensive approach to assist countries with multilateral debt burdens”. A year later, the Highly Indebted Poor Countries (HIPC) initiative was born, promising the poorest “an exit from unsustainable debt”. 

In the years that followed, further pressure resulted in improvements. Around 39 HIPC countries are now eligible for an estimated $76 billion of debt relief. Since 2002, ministers from Commonwealth HIPC countries have been meeting twice a year in the Commonwealth Debt Sustainability Forum to monitor progress critically and make recommendations. 

For some, this is too little, too late. The Jubilee 2000 movement, spearheaded by the churches, launched a campaign for the cancellation of all debt by the turn of the millennium. Some countries – including the UK and Canada – responded to the call, though others have not. Yet it has taken the Commonwealth – and some of its most powerful members – to push the world, over many decades, to a more enlightened and beneficial approach to debt, particularly in the world’s poorest nations. 

In that time, the Cold War has ended and the East-West divide dissolved. The Brandt Line, marking the boundary between north and south, is also no longer relevant as the world’s emerging economies challenge the developed nations. Poverty, injustice and social deprivation remain – but many, many millions now embrace the hope of a better life in a world where economic barriers have also begun to crumble. 


About the author:

Stuart Mole is the senior research fellow of the Institute of Commonwealth Studies at London University and former Director of the Secretary-General's Office in the Commonwealth Secretariat


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