Debt Forgiveness: Why Should Developed Countries Forgive the Debts of Undeveloped Countries?

Debt Forgiveness: Why Should Developed Countries Forgive the Debts of Undeveloped Countries?

Washington : DC : USA | May 21, 2011 at 9:40 AM PDT
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May 21, 2011--Video--John Perkins Economic Hitman--

In President Obama’s Arab Spring Speech he outlined a plan for debt forgiveness to Egypt of one billion dollars. To many of us this is an incredible sum of money. Taking President Obama’s lead other developed countries holding debts from impoverished nations might consider similar magnanimous offers. But then you might ask why should we?

The indebtedness attributed to developing countries is a cause whose time has arrived. To illustrate this, debtor countries have been unable to pay off their debts, which have grown to unmanageable sizes. Many of these countries struggle to repay debts that are larger today than the amount originally borrowed as unpaid interest payments continue to accrue. To illustrate, as of 2005, Nigeria still owed approximately $34 billion on an original loan of only $17 billion. On top of this, Nigeria had made payments on this loan totaling $18 billion.

Altogether, developing country debt doubled from $500 billion to $1 trillion between 1980 and 1985 and doubled again between 1985 and 2000, according to The University of Iowa Center for Finance and Development.

“Debt forgiveness, commonly referred to as "debt relief," is the act of excusing heavily indebted developing countries from all or part of their "unsustainable" debts. The World Bank and IMF consider a country's debt unsustainable if either 1) the size of the country's external debt exceeds the value of its export by a ratio of 150%, or 2) the ratio of the country's debt-to-government-revenues ratio is above 250%. Simply put, these ratios are indicators of a debtor-country's inability to repay its debts without exposing it to excessive hardship, both social and economic. For instance, countries such as Uganda spend an average of $3 per person on health care while spending $15 per person on debt service. Liberia, one of the world's poorest countries, has a total external debt of $3.7 billion and can only afford to allocate $7 million of its $120 million annual budget to fight the HIV/AIDS epidemic, which has infected almost 8% of the country's population. Many of these poor countries believe that their welfare and survival are contingent on the forgiveness of their heavy debt burdens.”

Who Was the First Political Leader to Forgive Debts?

The history of debt forgiveness begins in ancient Greece in 594 BCE. Like today, many factions were dissatisfied with the government. The people of Athens were unhappy. The aristocrats feared someone might try to become a tyrant, and new laws of Drakon had not helped. The newly rich had no share of political power, and peasant farmers were suffering from debt and in danger of being made slaves.

Solon, called “The Great Lawmaker of Athens,” was elected archon giving him complete power to change everything as long as he could prevent a crisis. One of the main problems facing Athens was debt. One of Solon’s first orders was cancellation of debts. While the details of the action are incomplete, it came to know by the name seisachtheia which means “shaking off of burdens.” In addition, Solon set free anyone who had been enslaved because of debt. He also brought home those who had been sold to foreigners or sent into exile because of debt.

U.S. National Debt Relief

Article I of the Constitution grants Congress the power to enact uniform laws on the subject of bankruptcy. In other words, relief from debt through bankruptcy law sits at the core of this nation’s principles and is available to all U.S. citizens.

The Bankruptcy Reform Act of 1978, codified as title 11 of the U.S. Code, eliminated the need for an order declaring bankruptcy and remains in effect today. Instead, the petitioning individual must satisfy certain broad criteria, and in most cases the individual need not appear in court at all. Among many other things, the 1978 law added additional “chapters” that enabled relief to individuals beyond the selling of assets to pay creditors. One of the new chapters (chapter 13) provided for working people who needed to keep essential assets, such as a house and car, if they qualified.

Causes of Debt in Developing Countries

The causes of debt are a result of many factors, including:

  • Legacy of colonialism — for example, the developing countries’ debt is partly the result of the transfer to them of the debts of the colonizing states, in billions of dollars, at very high interest rates.
  • Odious debt, whereby debt is incurred as rich countries loaned dictators or other corrupt leaders when it was known that the money would be wasted. South Africa, for example shortly after freedom from apartheid had to pay debts incurred by the apartheid regime.
  • Mismanaged spending and lending by the West in the 1960s and 70s.

Some of the current levels of debt were amassed following the 1973 oil crisis. Increases in oil prices forced many poorer nations' governments to borrow heavily to purchase politically essential supplies. At the same time, OPEC funds deposited in western banks provided a ready source of funds for loans. While a proportion of borrowed funds went towards infrastructure and economic development financed by central governments, a proportion was lost to corruption and about one-fifth was spent on arms. From Wikipedia

There is historic precedent from 1898 when Cuba claimed it was not responsible for debts incurred by a "despotic regime" when it uses finances for purposes "contrary to the interests of the nation." This was at the end of the Spanish-American War which saw the liberation of Cuba from Spanish rule; Cubans repudiated the debt they owed to Spain. Cubans said that its people had had no say in the Spanish-colonial decision to borrow the money, and the colonial power had spent the money that harmed Cuba. The new Cuban republic successfully repudiated its debts.

A century later, Russia stunned the world by declaring default. It happened at a precarious time, soon after the Asian economic crisis of 1997. Two Harvard economists, Michael Kremer and Seema Jayachandran, proposed the creation of an international body that can be authorized to declare particular regimes "odious". Given the current state of international trust and cooperation, that seems unlikely. But there is virtue in such an institution: it could persuade lenders that if they lend to "odious" governments, they might not get repaid. Lending, after all, should include an element of risk. What economists call the moral hazard posed by the IMF acting as a lender of the last resort, would vanish. It is purported that some governments could try to misuse the defense under the odious debt doctrine and attempt to renege on their commitments. Every successor government clearly cannot repudiate debt contracted by its predecessor, however unpopular it may have been.

In conclusion, it is incumbent upon countries that participated in colonization and odious debt creation to revisit those countries with the 21st century concepts and ideas for democratization encompassing the precepts of self determination for their citizens, freedom of speech, religion and assembly, preservation of indigenous peoples’ culture, and social justice and equality that preserves and celebrates diversity.

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John Perkins interview on Democracy Now about his book and his life as an economic hitman.
Dava Castillo is based in Clearlake, California, United States of America, and is an Anchor on Allvoices.
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