The World Bank development committee, meeting in Singapore in mid-September, noted with alarm the increase in lending by new creditors, particularly China, to sub-Saharan Africa. It is concerned that countries granted debt relief under the Heavily Indebted Poor Countries Initiative and the deal negotiated by the G8 in Gleneagles last year should not fall into new debt by borrowing beyond their means again. More specifically, the bank is concerned that certain pariah states, notably Sudan and Zimbabwe, are able to access finance from China. This drastically reduces the power of the financial sanctions that the West can apply.
The bank’s concerns are real but it is difficult to see how it and its major shareholders can express them with any moral conviction when they refuse to acknowledge the mess in their own backyard.
Sub-Saharan Africa is desperate for finance to help meet the Millennium Development Goals to halve poverty by 2015. The World Bank’s ‘debt sustainability analysis’ is designed to restrict access to credit beyond certain limits, so sub-Saharan nations desperately need grants to replace the loans withheld. Yet countries of the Organisation for Economic Co-operation and Development consistently fail to meet their stated target of 0.7% of GDP as aid. In 2005, the aid delivered was less than half of that amount – a shortfall of $125bn a year. These desperately poor nations are trapped with insufficient funds to meet the needs of the poorest. World Bank lecturing does nothing to reduce the shortfall.
Into that vacuum have come new sources of lending.
Protests ring hollow
Protests by the World Bank that odious regimes should not receive finance from new lenders ring even more hollow when seen alongside the loans knowingly made to regimes as oppressive and corrupt as those in Sudan and Zimbabwe. It seems inherently unjust if corrupt and dictatorial regimes, such as that of Mobutu Sese Seko in Zaire, can take out loans without the consent of the people, steal the proceeds and leave the citizens to face the consequences without the creditors taking any responsibility.
In one of the most blatant examples, the IMF seconded a senior official to the Zaire Central Bank. While there, he wrote a memo stating that corruption was so serious that there was “no (repeat no) prospect for Zaire’s creditors to get their money back”. Nevertheless, Zaire’s foreign debt was allowed to grow from $4.6bn to $12.9bn after that – and in spite of the fact that the country had practically stopped repaying its debts in 1982.
In Debt relief as if morals mattered, I examined 13 such cases to gauge the impact of odious lending. Based on the principle that a successor government should not be worse off than if an odious loan had not been granted, I included debt servicing and any loans subsequently taken out to manage the odious loans. The results are striking. In 10 cases, the impact of odious debt was to render all outstanding debt odious. In effect, these countries are ‘overpaying’ their debt service, often to an enormous extent.
Calls for change
The new economics foundation (nef) is calling for a fair and transparent arbitration procedure to deal with past lending to odious regimes, with members appointed by creditor and debtor, and a mutually accepted chair. Presently, all debt work-outs are run by the creditors, who act as judge, prosecution and jury. An independent body should also be set up to pronounce on the legitimacy of regimes, as proposed in an article by Seema Jayachandran and Michael Kremer, ‘Odious debt’, published on the IMF website. This would mean creditors would have no excuse that they were unaware of the nature of the regimes to which they were lending.
Creditors may be starting, finally, to take responsibility for the loans they make. On October 2, Norway became the first country to break unspoken creditor rules by cancelling the debts of five countries on the grounds of creditor responsibility. “As a creditor country, Norway has a shared responsibility for the debts that followed… from a failed development policy,” the Norwegian minister for international development, Erik Solheim, announced.
Stephen Mandel is a senior economist at nef and author of Odious lending: debt relief as if morals mattered, nef, 2006.
