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More debt no answer to crisis in developing countries

Author: Murat Kotan Published: 2009-06-25 Published in: Economisch Statistische Berichten (Economic and Statistical Bulletin) 94 (4562) 12 June 2009: p.381 as Meer schuld geen antwoord op crisis ontwikkelingslanden. The crisis caused in the west does not only impact the rich Western world. New estimates of among others the World Bank indicate that the poverty of the more than 2.5 billion people who already live on less than two dollars per day, will deepen; that between 2009 and 2015 infant mortality will be between 1.4 million and 2.8 million higher than expected; that tens of millions of people more than expect will find themselves in extreme poverty and that the number of people in the world that suffer chronic hunger will increase in 2009 to more than a billion. The governments of richer countries see the solution for increasing poverty in developing countries mainly in more IMF-loans and trade credits. According to calculations by Oxfam (2009), of the 1.1 trillion dollar in measures which the G20 recently has agreed, only fifty billion is expected to be available for Low Income Countries, and then mainly in the form of loans that lead to a heavier debt burden. More debt does not form a solution for the crisis in poor countries. On the contrary, it is rather part of the problem.Between 2000 and 2007 the governments of low and low-middle income countries have paid 1.228 billion dollar in debt service, of which 140 billion dollar to the IMF and World Bank. They will have to continue to do so in the coming crisis years. But with the current economic crisis these countries can not comply with their obligations to creditors without compromising basic provisions for their own populations. This has to an important degree to do with negative export shocks (Cohen et al., 2008). After many years of increasing exports, the export of poorer countries now falls negative as a result of the crisis (IMF, 2009). Moreover, developing countries are now being hit hard by withdrawing investors, a fall of more than seven hundred billion dollar compared to 2007 (World Bank and IMF, 2009), and decreasing bilateral development aid. The IMF and the World Bank may be proud of their plan to make their borrowing conditions more flexible, but this does not prevent that during the current crisis capital in the form of principal and interest payments flows out of developing countries, where it is most needed. IMF-loans and other sources of debt, as the G20 propose, are no solution to the problems of low and low-middle incomes countries. In fact an immediate moratorium on debt service, a freeze on interest and principal payments, and debt cancelation are desirable and justified for poor countries which have insufficient resources of their own to protect their population against the crisis. The measures proposed by the President of the General Assembly of the UN on 8 May 2009, have more eye for a sustainable solution and form a more appropriate response to the crisis. This Draft outcome document of the UN (2009) was to form the basis of negotiations during the UN Conference on the world financial and economic crisis and its impact on development on 1, 2 and 3 June, which now takes place 24, 25 and 26 June. It proposes that the funds agreed in April by the G20 to be channeled through the IMF, do not come in the form of more debt but rather be allocated as grants so as to prevent a further increase in inequality. A moratorium on debt service and partial debt cancelation for countries whose debt burdens threaten to become unsustainable due to the crisis should be considered, according to the document. Other proposals include that international institutions that play a role in reforming the international economic system, must be accountable to democratic and representative institutions such as the UN. This includes supervision of the IMF and the World Bank.

Rich industrialized countries must refrain from protectionism and ensure that bailout and stimulation packages do not distort the economic playing field further and lead to a further increase in global inequality. According to the proposal large investments in environment, food, energy, health and education are necessary; not only to stimulate the world economy, but also to lay the foundation for a new durable economy, based on the needs of people and on human rights. It is estimated that for this an annual amount of three trillion dollar, five per cent of world-GDP, is necessary. An immediate abolition of agricultural subsidies in developed countries to effectively stimulate agriculture in developing countries, and independent supervision by the UN of all for the international system important institutions belong to the proposals put forward. A proposal therefore, which helps fight the increased poverty in developing countries as a result of the crisis, and which can contribute to a less unequal, more democratic and more sustainable world economy. Unfortunately the Dutch government, which has the role of co-facilitator of the UN-congress, and other rich countries, have managed through enormous diplomatic pressure to change the pro poor and green proposals. This before they could be negotiated 1, 2 and 3 June during the UN conference; the conference itself has been rescheduled to later this month. A missed chance, or better said: a large danger for a more equitable and more sustainable world economy in which freedom from hunger and poverty is also enjoyed by those which now lack it. * Translation by author. Murat Kotan coordinator Jubilee Netherlands.

Literature IMF (2009) World economic outlook update, January 2009. D. Cohen, H. Djoufelkit-Cottenet, P. Jaquet en C. Valadier (2008) Lending to the poorest countries: a new counter-cyclical debt instrument. OECD workingpaper nr 269. Oxfam International (2009) What Happened at the G20? Initial analysis of the London summit. Oxfam briefing paper. UN (2009) United Nations Conference, World financial and economic crisis and its impact on development; Draft outcome document 1.0, 8 May 2009. World Bank/IMF (2009) Global monitoring report 2009: A development emergency