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Society, Politics & Law

Deeper In Debt: How the Poor Aid The Rich

Updated Tuesday, 25th January 2005

In this 2005 article, senior Open University lecturer Joe Hanlon asks 'How does debt cancel out the positive benefits of aid?'

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Dawn French presents Tony Blair with a Make Poverty History petition Copyrighted  image Icon Copyright: BBC

Every hour of every day, the poorest people in the world give the richest people in the world $7 million (about £4 million). Even though we give "aid" to developing countries, they still give us much more than we give them. This is because the developing countries owe the rich countries more than $2 trillion. Although they are desperately trying to repay this, the debt keeps getting bigger.

The British chancellor Gordon Brown has called for a doubling of aid to poor countries - but that money will all come back to us in debt repayments. For example, Comic Relief's Red Nose Day in 2003 raised an incredible $59 million, a huge outpouring from a generous British public. But the money came back faster than people gave it - it took a whole day to raise, yet it was only enough to cover 8 hours of debt payments. And Red Nose Day happens only once every two years.

At their summit in Cologne in 1999, the leaders of the group of eight most industrialised countries (G8) promised to cancel $100 billion dollars in poor country debt. Although that is only 4% of developing country debt, it would have been useful. But more than four years later less than half of that has been cancelled.

'Mozambique's debt service is larger than than the health budget'

Mozambique has probably received more debt relief than any other country. Prime Minister Luisa Diogo is pleased that whereas Mozambique was paying $169 million a year in debt service (that is, interest plus repayment of principal), after two debt cancellations it is now paying $55 million per year. This is a huge saving, but she points out that debt service is still larger than the health budget ($32 million a year), or the education budget ($50 million). "So we know that something is still wrong", she concludes.

Why does Mozambique have a debt? The debt dates back to the 1970s and 1980s. After independence in 1975, the new nation was encouraged to borrow money to build clothing factories and to develop plantations to export cotton and bananas. In the 1980s, Mozambique was attacked by apartheid South Africa in a brutal war in which more than a million people died and much of the infrastructure was destroyed. To "help" the people of Mozambique, the country was given loans. White minority rule (apartheid) in South Africa ended 15 years ago, but Mozambique is still paying the price - repaying loans that were given to help it feed people after South Africa destroyed farms and factories. Meanwhile, interest rates were increased, while the money Mozambique earned from exporting cotton, tea and cashew nuts decreased as world prices fell. Instead of rebuilding after the war, Mozambique had to concentrate on paying debts.

Nearby is the Democratic Republic of Congo (DRC). Throughout the 1970s and 1980s it was called Zaire and ruled by a brutal dictator called Mobutu, who supported the West in the Cold War. The World Bank and IMF lent $13 billion to Mobutu, despite many suspicions that the money was being mis-used, and that he would never repay the loans, and that he was killing anyone who opposed him. Today Mobutu is dead and the DRC is struggling to rebuild a country destroyed by the Western-backed Mobutu. Does the West feel responsible? Not at all. Instead it is demanding that Mobutu's victims repay the money he borrowed to suppress them. In 2002 four countries - France, Belgium, South Africa and Sweden - lent (not gave) $522 million to the DRC so it could repay its debts to the International Monetary Fund, ensuring that it would be eligible to borrow more money to repay other debts.

This is the debt treadmill. Countries borrow more and more money to pay off old loans, but somehow fall deeper in debt. Take the six years between 1998 and 2003. According to the World Bank, in those six years the developing countries paid an incredible $2,153 billion in interest payments and principal repayments. How did they do it? Mostly by borrowing another $1,692 billion. In addition they received $177 billion in aid which could be used to pay off debts. But poor countries were still out of pocket. They still had to find $366 billion of their own money to give to the rich north. That is $60 billion per year, or $7 million per hour. And the total debt actually increased, from $2,122 billion to $2,433 billion.


Dawn French presents Tony Blair with a Make Poverty History petition Copyrighted  image Icon Copyright: BBC



To repeat the basic point: At the end of 1998, developing countries owed $2.1 trillion dollars. In the next six years, they paid exactly that amount to their creditors. Yet at the end of the six years the debt had increased to $2.4 trillion. Campaigners argue that the debt has already been repaid many times over.

This has been going on for 25 years. In the 1970s, international banks were desperate to make loans and they urged poor countries to borrow more money than they needed by offering very low interest rates – less than the rate of inflation, which meant that real interest rates were negative. But with the second oil price increase of 1979, the rich north suddenly needed money, so interest rates were pushed up dramatically, reaching 12 per cent. Poor countries could not afford to pay, so they borrowed more and more to simply pay the interest. And they had to pay interest on the money they borrowed to pay the interest – and so on, as the debt mountain grew ever larger.

It is often said that repaying debt is a moral responsibility. But the creditors also have a moral responsibility. Even today, after two debt cancellations, many children cannot go to school in Mozambique because the government cannot afford to hire enough teachers. Of course Mozambique needs more aid. But would it not make sense to simply cancel Mozambique's debt and let it use that $1 million per week to pay teachers and nurses instead?

At home, we would never give loans to very poor people and expect them to repay; instead we give them a job or give them money. Britain's Consumer Credit Act 1974 defines what it calls "extortionate" debt and which can be cancelled by the courts. This includes cases where a debtor must make payments "which are grossly exorbitant" or if the loan contract "contravenes ordinary principles of fair dealing." This definition is extremely broad, and the courts have wide powers to cancel the debts or change the terms. British courts have ruled that a loan could be considered "extortionate" when the borrower had no choice in their financial circumstances but to accept the terms of the loan, and have also found that failing to assess the credit-worthiness of the potential debtor contravenes ordinary principles of fair dealing. Yet countries like the Congo have no choice to accept loans and they are clearly not credit-worthy because they are too poor to repay.

'These loans would be unacceptable under British Consumer Credit law'

The Consumer Credit Act 1974 stresses lender responsibility and liability, and this needs to be extended to international lending. Britain has a director of both the World Bank and the IMF, yet these organisations are making loans which would be totally unacceptable under British law. If we want to really help very poor countries, we should give them grants instead of improper loans which they have no hope of repaying.

Many believe that it is also immoral to ask the people of the DRC to pay the cost of oppressing and impoverishing them. Indeed, that it is backwards. We should pay them damages for the harm we did during decades of backing Mobutu. More than one quarter of all international debt was given by the West to prop up tyrants, and we now demand their victims repay.

Similarly, large amounts of money were lent by the World Bank and governments to support failed policies such as structural adjustment or failed agricultural and dam projects. The projects were unprofitable, but the borrowers still have to repay.

There is no question that it would help the poorest people if the rich countries increased their aid. But aid can only do so much. For example, Comic Relief has given more than £6 million to Ethiopia (about $10 million) since 1997, but during this same period Ethiopia made $800 million in debt service payments. Six years of Comic Relief's money came back in just one month. For Zambia, six years of Comic Relief money covers just 15 days of debt service payments.

More aid is essential. But it would help the poorest people more if developing countries were able to reduce the $7 million an hour in aid they give to the rich countries.

This article was originally published on 03/02/05





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