Debt burdens on the rise in impoverished countries

Debt burdens on the rise in impoverished countries

Date: 22 May 2012

Guest post by Tim Jones, Jubilee Debt Campaign

Debt payments by the most impoverished countries are set to rise over coming years as part of the fallout from the global financial crisis. The new report from Jubilee Debt Campaign, The state of debt, shows how this threatens to extend the 30-year pattern of debt crises across the globe, from the Mexican debt crisis of 1982 to the Eurozone crisis today.

Thirty-two countries, mainly in Africa, have had $120 billion of debt cancelled in response to the global jubilee campaign. The cancellation came at a cost. To get debt cancelled, countries had to continue following IMF and World Bank economic policies. For example, as the World Development Movement highlighted at the time, Tanzania had to privatise a water company, which failed just a few years later. Malawi had to sell off grain reserves, worsening a food crisis.

However, governments in the 32 countries have seen the amount of their revenue lost to debt payments fall from 20 per cent in 1998 to 5 per cent today. This has allowed an expansion of public spending; the number of children enrolled in primary school has increased from 6 in 10 in 2000 to 8 in 10 in 2010.

But at the same time, there have been big increases in foreign debts owed by private companies. Private sector debt payments out of impoverished countries are now double those of the public sector, a complete turnaround since the year 2000. High private sector debts have been the main cause of the financial crisis in countries such as Spain, Ireland, Iceland and the UK.

It is very worrying that this dangerous private debt is on the increase in impoverished countries. We urgently need a global system for regulating the way money moves around the world, to prevent large debts being created between countries, and bring thirty years of destructive debt crises to an end. Such regulations have existed in the past, for example for over twenty years after the second world war. Between 1941 and 1970 countries only missed payments on debts six times. Between 1971 – when such regulations began to be removed – and 2004 they did so 129 times.

Furthermore, the ‘First World Debt Crisis’ has led to government debt payments being on the rise again in the global South. The negative impacts of the financial crisis – including falling trade revenues, loss of money sent home from migrants and multinational companies sending more money back to the rich world – have seen lending to the most impoverished country governments almost double between 2007 and 2009. The International Monetary Fund and World Bank are responsible for almost half of these loans; money which officially is counted as ‘aid’. 

Three of the countries which had some of their debt cancelled in response to the global jubilee campaign – Mozambique, Ethiopia and Niger – are all soon expected to be spending as much on foreign debt payments as they were before receiving debt relief.

Debt cancellation has led to falling debt burdens, and increased government spending in areas such as education. But too little has been done to prevent debts increasing again, and financial deregulation has left countries vulnerable to the knock-on effects of debt crisis in the rich world. It is time for a new debt jubilee that involves not just one-off cancellation, but measures to prevent large debts being created.

Unjust debts need to be cancelled, wherever they are in the world. But we also need measures to allow progressive taxation and a clamp down on tax avoidance to reduce the need for countries to borrow. And we need the global financial system to be regulated – such as taxes on short-term lending between countries or requiring investment to involve local partners – to prevent large destabilising debts being created between countries. 

Such measures are needed to achieve greater equality and justice for everyone in the world, whether the UK and Europe or Africa and Latin America.