Some time ago I met with leaders of several NGOs from a ‘Debt and Development Platform’. The quality of our exchanges gave me the idea to continue our discussions on debt here with you.
The current situation essentially repositions this issue at the forefront: large waves of debt cancellation at the bilateral (HIPC) and multilateral (MDRI) level; the emergence of new sovereign lenders, particularly China; the renewed activity of the so-called “vulture funds” (investors who bought the debt of poor countries on the secondary market to recover its nominal value). At the same time, the renewed attention on the duties of creditors with respect to domestic consumers, brought by the subprime meltdown, is reminiscent of debates about the responsibility of developed countries during the Third World debt crisis of the 1980s.
Without access to long-term financing, there could be no public investment with positive externalities – in infrastructure, human capital, and health – and thus no long-term growth
Today, the issue of developing country debt is raised in a very different context. Current circumstances call for reviving a policy of loan financing, drawing on lessons from history and using new tools. In my view, the real issue is the definition of rights and duties of each stakeholder, within a context of both desirable and responsible borrowing. Three major pillars can provide a solid foundation for such a policy.
The first pillar concerns debt cancellation programs, which have allowed for the restoration of solvency in most countries. African debt was reduced to one-third of its original value, freeing up resources for social policies. The success of these debt cancellations – which were necessary – should not lead us to discard loan-financed assistance, as loans remain useful instruments in the diversified pallet of financial tools that should be placed at the service of developing countries.
Take the example of Africa. Business on the continent is developing and its economy is growing (more than 6% on average since 2003). And this emerging Africa has a crucial and pressing need to invest. Without access to long-term financing, there could be no public investment with positive externalities – in infrastructure, human capital, and health – and thus no long-term growth. Clearly, given the current volume of development, the financing of the infrastructure projects that African economies need (ports, airports, dams, water systems, etc.) cannot be limited to grants. I am therefore convinced that our role as stakeholders is to offer new financing mechanisms to African countries while addressing their vulnerabilities. In view of the opportunities available to them, African states will not hesitate to look elsewhere for the resources required to support this renewed growth. New donors offer attractive and significant financing opportunities but the conditions they impose are often less than clear. That’s why it is urgent to offer responsible propositions to African countries that allow them to measure the comparative advantages of each partnership.
The second pillar is forged on the memory of past failures – the best means to prevent their resurgence. During the 1970s-80s, the international community demonstrated a lack of foresight. It allowed developing countries to be engulfed in the so-called “scissors crisis” – that combination of a drop in commodity prices (which proved to be lasting) and rising interest rates that has fostered spiraling, unsustainable debt. To confront the problem of budget-gouging debt, donors had recourse to Structural Adjustment Programs, a form of shock therapy that, although it allowed the return of a balanced budget, constrained investments in African infrastructure and social capital. But what was true yesterday is not necessarily applicable today. The sources of African growth -beginning with its demographic weight – are considerably more stable and sustainable than in the 1970s. As for commodity prices, as noted earlier in this blog, it’s a good bet that they will remain high in the years to come. The question today is not so much whether we should reject the loan instrument but how to promote sustainable and responsible borrowing.
The third pillar stems from current developments. There are two major lessons learned from the debt crisis that are well illustrated today: the need for international coordination, and the need for better diagnosis of credit problems. The first requires greater cooperation between all stakeholders within a clearly defined framework. The establishment of an international monitoring tool, the Debt Sustainability Framework (DSF), is based on that logic. As I am writing, the Accra conference on aid effectiveness just took place. This gathering dealt with, among other issues, the problem of collective discipline – a major and timely issue as we intend to offer a new loan packages to Africa, since transparency, mutual responsibility, and collective discipline are the three conditions of our success in this area. The second lesson calls for finding appropriate instruments for a new type of debt governance. These tools already exist. My agency has introduced a “countercyclical loan”: this instrument includes an insurance mechanism in the event of exogenous shock – the financial translation of force majeure – which reduces debtor vulnerability. In order for these innovative instruments to come to fruition, however, they must be applied on a larger scale.
These developments thus point to a convergence toward the concept of shared responsibility between debtor and creditor. In order to carve “in stone” the rights and duties of each, would it not be possible to identify an international corpus of debt practices or customs, based on past and present experience, both good and bad? By demonstrating that they are able to both learn from their mistakes and develop instruments to avoid the recurrence of future crises, donors could build the foundations for a type of international debt law. It would be based on the three pillars mentioned: analysis of the failures of the 1970s-80s, the practice of debt cancellation, and current borrowing practices, proposing reliable mechanisms and using responsible instruments.
It would not be the first attempt to bring sovereign debt into the realm of law. Anne Krueger, then number two at the IMF, proposed in 2001 a mechanism for restructuring sovereign debt, based on the model of U.S. bankruptcy law – an interesting initiative, but one that was not followed up.
Initiating a debate on this subject would help fill the international void on this topic – and provide useful discussion, particularly in view of the Doha Financing for Development conference to be held in November.
I would appreciate hearing your views on this issue, which seems to have reached a new turning point in its evolution.