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Debate: Cancellation of developing world debt

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Is it ever justified for developed countries to cancel debt of developing countries?

Background and context

The roots of Developing World Debt extend back to the 1970s. During this period, the price of oil rapidly increased; oil-producing countries then deposited their new wealth – so-called ‘petro-dollars’ - in Western banks in order to earn interest.
In turn, the banks had to invest this money in order to make profits and pay interest to their investors. Much of the money was loaned to countries in the developing world, many of which had only recently become independent and were seeking backing for large infrastructure and prestige projects. Loans were made at very low interest rates, and with little scrutiny as to the viability of the projects they were to support. In the 1980s, the economic situation worsened in many of the developed countries, and interest rates – including those on loans to developing nations – rose sharply. At the same time, the economies of the debtor nations were under-performing, with the benefits which were supposed to emerge from the major projects of the 1970s often failing to materialise due to poor planning or mismanagement. Developing countries suddenly found themselves earning less than before, and yet having to pay more interest. This situation has now reached crisis point in some countries. Every year, developing nations pay nine times more in debt repayment than they receive from developed countries in aid. Latin America owes ?365 billion (around $530 billion) in debt, some 36% of its total GNP; Sub-Saharan Africa owes ?140 billion (around $200 billion), 83% of its GNP. Groups such as the IMF and the World Bank, with their HIPC (Heavily Indebted Poor Countries) initiative, are working towards a partial reduction or rescheduling of this debt, but demand obedience to strict economic reforms. Others, such as Jubilee 2000, are pressing for more immediate and more substantial action. The main thrust of the proposition in this debate is that the burdens of debt are unfair, and that the human cost in debtor countries is too high; the debt of

Contents

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Lives: Does debt cost lives? Is this a reason to cancel debt?

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Yes

  • Debt cancellation would reduce the lives lost to the burden of debt. Some of the most heavily indebted poor countries are struggling to pay even the interest on their loans, let alone the actual capital. This massively distorts their economies and their spending priorities. African nations currently spend four times as much on debt repayments as they do on health. The Structural Readjustment Programmes demanded by the IMF (International Monetary Fund) in return for rescheduled debt make this problem even worse. Since the SAP began in Zimbabwe, healthcare spending has dropped by a third; in Tanzania, school fees have been introduced to raise more money. Progress made in health and education over the past 50 years is in some countries actually being reversed. It is obscene that governments are cutting spending in these vital areas to pay back debts: the debts must be cancelled now.


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No

  • Debt usually cannot be attributed as the cause of deaths in poor countries. There are many reasons for the current problems in the world’s poorest nations; often they also have heavy debt burdens, but the debt is not necessarily the cause of the problems. Many countries spend huge amounts of money on weapons in order to fight local wars, instead of investing in their people. Many are led by dictators, or other corrupt governments, whose incompetence or greed are killing their own population. The money to pay for healthcare and social programmes at the same time as repaying debt may well exist, but it is instead being wasted in other areas.
  • Even if debt does cost lives, this is not necessarily a reason to forgive it. Many things cost lives in the modern world. Many of these things are the responsibility of individuals or countries that accumulate debt. It is not the world's responsibility to bail countries out of these problems that they themselves brought on.
  • Forgiving debt may teach the wrong lessons and cost lives in the long run. Letting a country deal with their debt can teach them to never accumulate debt in the first place. Bailing them out can teach that it is acceptable to accumulate debt, which could cost more lives in the long run.


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Famine: Is debt cancellation important in fighting famine?

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Yes

  • Debts forces countries to produce "cash crops" that don't help famine. In order to raise the cash for debt repayments, poor countries have to produce goods which they can sell around the world. Often this means growing so-called ‘cash crops’ such as coffee, instead of food to support their population. People in fertile countries can find themselves starving, as they cannot afford to buy the food which then has to be bought from other countries, while their own fields produce coffee for the developed world.


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No

  • Famine is the result of many things, not just debt. Again, there are many potential causes for starvation – famines are caused by war or by freak weather conditions, not by debt. While growing cash crops can seem to be counter-intuitive, the money they bring in helps to boost the country’s economy. The idea that a nation could and should be self-sufficient is out-dated; if (for example) a country is well-suited to growing coffee, it should grow coffee, and buy food crops (for example corn, or wheat) from other countries suited to growing them.
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Responsibility: Are nations responsible for historical debt?

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Yes

  • Debt repayments often punish those not responsible for creating debt. In a number of poorer countries huge debts were amassed by the irresponsible spending of dictators in the past, who have now been overthrown; yet the new government and the people of that country have to pay the price for the dictator’s actions. This is clearly unfair.


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No

  • Nations are responsible for repaying historical debts. This thinking has dangerous implications on an international level. Governments are always changing in democracies, but nations are expected to honour their debts. A crucial element in lending money is ‘contractor’s promise’ – the promise that the debt will be paid back. If every new government could decide that it was not responsible for its predecessor’s debts then no-one would ever lend money to a country, as there would be little chance of repayment. Developing countries in particular still need loans in order to invest in infrastructure projects. Cancelling debt now would make lenders far less likely to provide loans on good terms in the future, and would retard economic growth in the long term.


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Reform: Reform needs to come before debt cancellation?

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Yes

  • Poor countries need a fresh start with debt cancellation. While their economies are dominated by the need to repay debt, it is impossible for them to truly invest in infrastructure and education, sowing the seeds for development in the future. By cancelling debt, we would give them a fresh start, and the opportunity to build successful economies which would supply the needs of generations to come.


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No

  • Reform has to come before debt cancellation. Many poor countries are crippled by corrupt and incompetent governments and economic systems. Cancelling debt would therefore make no difference: it would simply be the equivalent of giving a one-off payment to dictators and crooks, who would siphon off the extra money and become rich while the people still suffer. Even worse, there is nothing to stop them spending more money on weapons and palaces and building the debt back up to its current level in the hope that it would be cancelled again.The economy and the government must therefore be transparent and accountable before debt reduction or cancellation is even considered.


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Costs: Are the costs to lender-countries of debt cancellation bearable?

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Yes

  • Rich countries will still earn off of poor countries following debt cancellation. "Expanded Debt Cancellation: A Key Tool to Fight Global Poverty". Jubilee USA Network. January 2008 - "the reality is that even after the debt cancellation provided to date, the world’s most impoverished nations continue to send $100 million each day to the United States government, other wealthy nations, the IMF, the World Bank, and other creditors.1 It is time to extend the promise of debt cancellation to additional countries that require it to fight extreme poverty, provided these nations can demonstrate their ability to utilize released funds well."
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No

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Argument #5

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Yes

The developed world has a moral duty to the developing world because of the historical background of Developing World Debt. In the rush to invest ‘petro-dollars’ in the 1970s, many banks made hasty loans, pouring money into pointless projects without properly examining whether they would ever make a profit. Because of these bad investments, some of the world’s poorest countries are so burdened with debts that they can now no longer realistically expect to pay them off, and are instead simply servicing the interest. An important parallel may be made with bankruptcy. If an individual is unable to repay their debts, he or she is declared bankrupt; they are then allowed to make a fresh start. This means that banks are also more careful about lending: they know that if they finance a project which is unlikely to succeed, they may well not get their money back. The same system should be used with countries. If they are unable to repay their debts, they should be given the opportunity to start again: in the long term, it is better for everyone for that country to be a viable contributor to world economy than to be a debt-slave. At the same time, banks would be discouraged from making unethical bad loans as they did in the 1970s.

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No

The parallel with bankruptcy cannot work on a national scale. First of all, when a person is declared bankrupt, all their assets and possessions are seized in order to pay back as much of their debts as is possible – this is why banks find it an acceptable option. In national terms, this would mean the total loss of sovereignty: foreign governments and banks would be able to seize control of the infrastructure or the resources of the country at will. No government could, or should, ever accept this. Second, the difference in scale is vitally important. Whereas the bankruptcy of a single individual within a country is unlikely to cause major problems for that country’s economy, the bankruptcy of a country in the world would have a significant effect on the world economy. The economic plans of banks and nations currently include the income from Developing World Debt; if this substantial revenue were suddenly cut off, it could have a catastrophic effect. Even if this debt relief would be helpful to the ‘bankrupt’ countries in the short term, a world economy in recession would be in nobody’s interest.


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Pro/con resources:

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Yes

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No

See also

External links and resources

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