Break the chains

In the world of international finance, the creditors hold all the cards.
Ann Pettifor argues that there’s a need for a Debt Review Body
and a new ‘concordat’ for debtors and creditors alike.

When delegates from Jubilee 2000 Coalitions from 40 countries met in Rome in November 1998 they were adamant that tough conditions should be imposed on debtor nations in return for debt relief.

However, they made it clear that these conditions had to be monitored and controlled by citizens of the debtor nation itself. By ensuring that the voices of women’s organizations, opposition parties, trade unions and other non-government bodies are heard, Jubilee delegates stressed that debt relief could be doubly effective: first, as money to benefit the poor; second, as empowerment of the poor.

My contribution to the debate is to push for a mechanism that would help to ensure this. Because there is no international insolvency law – in fact, no international financial law at all – creditors dominate by default. The International Monetary Fund (IMF) acts as their agent and representative. IMF funds are used to bail out private and public creditors threatened with losses and to set conditions for new loans to pay off old ones.

photo by VANESSA BAIRD

These conditions are biased in favour of creditor interests and oblige debtors to make repayments before any other spending. As a result, creditors play the role of plaintiff, judge and jury in the court of international debt. These creditors use loans to promote their own interests and then use negotiations as a way of exercising leverage over sovereign economies.

This arbitrary, biased and highly protectionist system has worked for years without any real challenge. My proposal (which owes much to the ideas of Professor Kunibert Raffer of the University of Vienna) is for a new mechanism to guarantee independent arbitration.

The core of this proposal is for an independent Debt Review Body (DRB) that would act as a binding arbitration panel. The appointment and work of the DRB could be overseen by the UN. The process for setting up and maintaining the DRB need not be bureaucratic or cumbersome. It requires only the confidence of the debtor government on the one hand and creditors on the other.

An independent Debt Review Body would defend the sovereignty of the debtor nation, strengthening democracy and accountability whilst also being fair to creditors. Its first task would be to commission a full audit of outstanding public debt. It would simultaneously ask for government plans for economic recovery – and support for the poor. Open, public hearings would then be held to assess the proportion of debt which is unpayable. Decisions would be based on human-development criteria and on the costs of reconstruction and economic recovery. Next it would publish its binding conclusion.

The Debt Review Body would then work with debtor and creditor representatives to draw up a plan or ‘concordat’. This would outline how much debt can be defined as ‘unpayable’ and is to be cancelled; set up auditing and monitoring processes to ensure that money released goes into economic recover and poverty reduction; and establish a Poverty Action Fund to facilitate the flow of freed-up resources to the poor.

Transparency must be central to debates and decisions about the concordat. Local organizations should be given a ‘right to be heard’. By these means the Debt Review Body would contribute to democratic debate, growing economic literacy and the strengthening of democratic institutions in debtor nations.

If the government of a debtor nation defaults on its obligations then there must be harsh penalties – for example, if a new regime takes power, refuses to honour commitments under the concordat and prevents local organizations from giving evidence to the DRB. In particular, if the DRB concludes that the concordat has been violated, then new loans and aid payments should be withheld.

The point of an independent arbitration process is that it could impose discipline on both the lender and the borrower. The lender could face serious losses from loans made to sovereign governments. The borrower would be disciplined too, not just by local democratic forces but also by greater caution from Western creditors about making loans to governments that borrow recklessly, without the obvious capacity to repay.

Tackling debt cancellation without tackling the flawed process of international lending will never permanently break the chains of debt and let the impoverished world get off its knees. Thousands of Jubilee 2000 supporters travelling to Cologne in June will not be satisfied with a band-aid approach. They want to see genuine political will to find a lasting solution.

Ann Pettifor is Director of the UK Jubilee 2000 Coalition.

photo JUBILEE 2000 COALITION