Critically evaluate the case for granting debt relief to LDCs (10 marks)

Intro:
- Heavily Indebted Poor Countries scheme established to reduce debt in LDCs
- Multilateral Debt Relief Initiative launched in 2005 to grant 100% relief to 35 eligible countries
- The argument for granting debt relief is controversial:

• relieve poorest countries of financial difficulties --> can develop economically
• effect on other countries-? sceptical
• how well will it actually benefit the country-? Different areas of society-?

Debt relief largely beneficial to receiving country:

• money saved  by not paying back loans --> investing more money into healthcare --> life expectancy and infant mortality rates will improve --> country = healthier
• no debt = government can plan its expenditures better
• government in Guyana decided to promote free healthcare after debt re-structured - population's low income meant they couldn't afford private healthcare
• reduced interest payments by $60 million a year allowed Guyana to increase social spending by >25% --> now over 20% of GDP is spent on health, education, housing, water and sanitation
• now more likely to reach MDGs --> increase in spending on education means that more children will be in primary education ('achieve universal primary education')

Countries able to combat growing numbers in poverty: another MDG making progress as a result

• in response to HIPC scheme - poverty reduced in Uganda from 51% in 1992 to 35% in 2000
• although poverty starting to rise again - 38% in 2002
• suggests that impact from debt relief only short term

No guarantee that country will improve its economic management

• countries may contract further debt with the belief they will also be forgiven
• Ethiopia - debt almost back at 'pre-MDRI' levels
• Ghana - used advantage of debt reductions to take out more loans at interest rates 10x higher than leading providers

Concerns that money gained will go straight to government and not reach the poor, or money used to enhance wealth and spending ability of the rich and not trickle down to the poor

• disproved by Uganda - building better roads that benefit agricultural workers --> farmers with small incomes can bring produce directly to markets - generates more income - improves welfare of people
• pressure from MEDCs to meet criteria for MDRI force them into more stable government

Disadvantages other countries:

• system only benefits LDCs who are in debt --> encourages other LEDCs to over-spend so they get debt relief in the future
• 35 countries had their debt wiped - 'lenders' do not get their money back

Conclusion:

• more advantageous to receiving countries
• certain areas of society benefitted more than others
• agreement disadvantages other countries
• although it allows LDCs to develop country as opposed to using GDP to pay off debt --> more sustainably developed in the future

Debt Relief

Heavily Indebted Poor Countries scheme

- In 1996, the IMF and World Bank (with help from NGOs and other organisations) produced the HIPC programme
- Its aim was to ensure that no poor country faces a debt burden it cannot manage
- It provided debt relief and low interest loans to 39 eligible countries to reduce debts to manageable levels
- The countries, in return, had to meet a number of economic management and performance targets

• To decide whether countries are eligible for debt relief they must pass the “decision point” - countries have met stringent qualifications, including income thresholds.
• The countries then receive debt relief, but must achieve certain reforms and take concrete steps to reduce poverty - these are known as 'Structural Adjustment Policies' (SAPs) and include:

           - cutting public spending
           - removal of import/export barriers
           - opening up to FDI
           - removing subsidies (money to help industries given by government)
           - privatising state industries and services (water supply, healthcare and energy)

Critics argue that these are just another way for LEDCs to be controlled by OECD countries (Organisation for Economic Co-operation and Development)
Or that the Washington consensus (the economic reforms above which were advised to be undertaken as a part of an SAP) opens up countries and workers to exploitation by TNCs

The Multilateral Debt Relief Initiative

- In 2005, the G8 countries proposed to cancel the entire debt of the countries under the HIPC programme under the MDRI
Countries would be eligible for debt cancellation if they met more conditions:

• satisfactory economic performance under an IMF poverty reduction and growth facility programme
• satisfactory progress in implementing a poverty reduction strategy
• an adequate public expenditure management system, meeting minimum standards for governance and suitable use of public resources

As of January 2012, 36 countries have benefitted from full or partial debt relief
Combined, HIPC and MDRI have cancelled $95 billion worth of debt


Debt reduction positives:

• Boosting public spending - before the HIPC Initiative, countries were spening most of their GDP on debt relief and less on healthcare and education. Now, on average, spending on health, education and other social services is about 5x the amount of debt service re-payments
• Reducing debt service - for the 36 countries receiving debt relief, debt service paid has declined by about 2% of GDP between 2001-2011
• Improving public debt management - debt relief hugely improved level of debt and vulnerability to debt for countries which have completed the scheme. To completely reduce vulnerability, countries need to be aware of different borrowing policies and strengthen public  debt management

Debt Relief Case Studies: Guyana and Uganda

Guyana

Problems before debt relief:

• The low income of the population meant many couldn't afford private healthcare - due to large amounts of debt the government was unable to fund free healthcare 
• $2.1 billion of debt by the late 1980s 
• Investment in social services impossible - almost all of revenue went to servicing debt 

Solution = Guyana, Uganda and another 33 countries receiving >$117 billion of debt relief

Benefits of the debt relief:

• Freed up budget resources for government - able to plan it's expenditures better
• Guyana reduced interest payments by $60 million a year and increased social spending by >25%
• Over 20% of GDP on health, education, housing, water and sanitation - more modern and efficient education/healthcare system
• The government in Guyana decided to provide free healthcare after the country's debt was re-structured

Uganda

Problems before debt relief:

• Had to typically spend >20% of export revenues on falling debt a year - now, due to debt relief, it is around 5%
• Unable to sustainably handle debt

Solutions = Guyana, Uganda and another 33 countries receiving >$117 billion of debt relief

                = Receiving >$3.7 billion in multilateral debt relief

Benefits of debt relief:

• Able to spend more in agricultural sector
• Biggest benefit = upgrading of roads to 'all-weather' standards - farmers able to bring produce directly to markets to get more money (able to rent a small truck and bring goods to cities where they will be in higher demand) - generates more income and improve welfare of the people
• Uganda's rural transport budget has doubled over the past decade to $15.5 million a year 
• Poverty reduced from 56% in 1992 to 38% in 2002

The 1980s 'Debt Crisis'

- Falling demand in the 1960s coupled with the Arab/Israeli war caused the price of oil to rise by 500% by OPEC countries in 1973.

- Huge profits from oil sales (petro-dollars) were made in OPEC countries.

- These countries couldn't spend the profits fast enough so they deposited much of the money into western banks, where the interest rates were higher.

- Banks needed to lend the money out in order to make more profit, so they lent it to willing borrowers in LEDCs.

- Economic recession in MEDCs led to a reduced demand for loans due to economic uncertainty.

- The banks faced a problem as neither individuals not industries were inclined to borrow money, so they lowered the interest rates dramatically to encourage borrowing.

- Money was invested in large-scale prestige projects and infrastructure schemes (dams, industrialisation programmes, transport networks), especially in LEDCs who couldn't afford them before.Corruption was widespread, as was economic mismanagement.

- In the early 1980s, Reagan and Thatcher, in the USA and UK, introduced a neo-liberal monetary policy which increased interest rates in order to reduce inflation. High interest rates initially reduced demand for borrowing in the West.

- LEDCs who had borrowed large sums of money  in the 70s were hit by huge rises in interest rates. Added to which, the markets they had been exporting to collapsed under economic recession, so they couldn't sell their goods and pay back loans.

- Prices of raw materials dropped in response to reduced demand.

- Many debtor countries had no choice but to accept new loans from institutions like the IMF and World Bank in order to pay back the initial loans. However, strict conditions wee imposed called Structural Adjustment Programmes (SAPs).