Summary of Conference at Seton Hall on the Ethical Dimensions of International Debt, October 1998

Sponsored by the U.S. Catholic Conference,
Seton Hall University,
and the Pontifical Council for Justice and Peace

October 22-23, 1998

DISCUSSION SUMMARY

Prepared by Elizabeth A. Donnelly, Ph.D. candidate
Department of Government, Harvard University
email: eadpep@prodigy.net

Introduction

More than sixty leading officials of the Roman Catholic Church, debtor and creditor country governments, international financial institutions (IFIs), non-governmental organizations (NGOs), foundations, private sector financial institutions, and universities gathered for a unique and unprecedented meeting at Seton Hall University in South Orange, New Jersey on October 22 and 23 to discuss the ethical dimensions of international debt owed by heavily indebted poor countries (HIPCs). Its purpose was to consider the ethical framework that should inform policy deliberation, determine the priority that debt relief should be given in poverty alleviation, and evaluate the extent to which current debt relief initiatives offer a viable solution. The gathering was organized as a response to Pope John Paul II's consistent appeal to policy makers to address the debt burden of the poorest countries.

Archbishop Theodore McCarrick, Chairman of the U.S. Catholic Conference's International Policy Committee, opened the conference with these words:

Your presence here is an acknowledgment that the debt burden of the world's poorest countries is a problem that demands a solution. If we cannot move forward with fair and equitable solutions soon, there is a serious danger that the most impoverished countries will be relegated to permanent second class status. In focusing our discussions on the debt of the poorest countries, we are painfully aware of a much wider and deeper global economic crisis that must be addressed if we are not to replicate in other countries the suffering and poverty that has become so pervasive in places like Zambia, Honduras, and Uganda, on which we will focus particular attention in this conference. . . . This meeting will enable us to continue and deepen a candid and constructive dialogue on how we forgive debt, how the life and dignity of the poor and vulnerable might benefit from debt forgiveness, and how the burdens of debt forgiveness might be shared equitably.

The format of the conference solicited an unprecedented exchange of views. There were individual speakers, panel discussions, case studies, and a roundtable discussion. Three speakers, Monsignor (now Bishop) Diarmuid Martin of the Pontifical Council for Justice and Peace, Fr. Bryan Hehir of Catholic Relief Services and Harvard University, and Archbishop Medardo Mazombwe of Lusaka, Zambia, spoke about the ethical principles that should be taken into account when analyzing the debt issue. They also addressed the responsibilities of the major stakeholders -- national and international, private and public -- as well as the pastoral challenges of living in a very poor and indebted country.

James Wolfensohn, President of the World Bank, Michel Camdessus, Managing Director of the IMF, and Lawrence H. Summers, Deputy Secretary of the U.S. Department of the Treasury (now Secretary), spoke about the problem of international debt, the Heavily Indebted Poor Country (HIPC) Initiative, and how their respective organizations view its progress. In panel discussions, representatives of IFIs, the Catholic Church, and academia offered different analyses of the relationship between debt relief and poverty alleviation and the adequacy of existing debt relief policies.

Finally, there were three case studies on Honduras, Uganda and Zambia. In each workshop, finance ministry officials made presentations about the impact of debt in their countries. These were followed by responses from a local Church official, an NGO representative, and a specialist from the World Bank. Later, Monsignor Martin and John Carr of the U.S. Catholic Conference facilitated a round table discussion in which they called on participants to comment on the topics summarized below, evaluate their respective institution's contribution to debt relief and poverty alleviation, ask questions of other participants, suggest what further steps are needed, and report what they would take back from the meeting.

The discussion was off-the-record in order to foster open dialogue and debate. With the exception of publicly released speeches, the comments in this summary are not attributed. This report summarizes the major points of the discussion, roughly following the order of the conference agenda:

1. The current plight of HIPCs;
2. Ethical dimensions of debt and the changing global context;
3. Catholic social teaching on debt;
4. Causes of the debt overhang;
5. Previous efforts at debt relief;
6. Debt relief in relation to poverty alleviation;
7. Evaluation of the HIPC Initiative;
8. Conditionality and debt relief; and
9. Needed additional action.

1. The current plight of HIPCs

The conference focused on the particularly urgent situation of the 41 countries classified by the World Bank as HIPCs. Most of these countries, whose external debt overhangs have represented serious drains on their economies for over a decade, are in Sub-Saharan Africa; however, they also include Bolivia, Cambodia, Guyana, Honduras, Myanmar, Nicaragua, Vietnam, and the Yemen Republic. These countries owe a total of $214 billion in debt to foreign creditors, according to the International Monetary Fund (IMF.) Officials from debtor country governments, the churches, and NGOs have long argued that the poorest segments of these countries' populations have been disproportionately harmed by: a) the large percentage of export earnings and government budgets devoted to meeting payments on the debt, with meager resources left for education, health and other needed social services; and b) certain elements of structural adjustment programs (SAPs) recommended -- some would say imposed -- by creditor governments and IFIs in conjunction with past debt rescheduling and reduction arrangements (e.g., cuts in food subsidies, public sector jobs, and wages).

Unlike the middle-income debtor countries which absorbed international attention in the 1980s, HIPCs tend to owe a much higher percentage of their external debt to multilateral institutions, principally the IMF and the World Bank, than to commercial banks. In the 1980s, commercial banks and many industrialized country governments which were part of the Paris Club of creditors helped to restore the ability of some middle income countries to re-enter private financial markets. HIPCs, however, have continued to rely most heavily on bilateral and multilateral lending, as very few commercial banks have been willing to make loans to them. Thus, the HIPC Initiative, which was launched in 1996 as a coordinated and comprehensive response to reduce the bilateral, multilateral, and commercial debt of the HIPCs, was discussed extensively.

Both in plenary sessions and separate workshops, conference participants considered at greater length the cases of Honduras, Uganda, and Zambia. Church officials from Lusaka indicated that in Zambia, 78 percent of the total population and 89 percent of the rural population live in absolute poverty. Life expectancy has fallen to the independence year level of 42 years. Every citizen currently owes $750 in external debt. The government pays more than $200 million each year in debt service payments, more than the combined health and education budgets. The gross inadequacy of the education budget is starkly indicated by the fact that it is more likely for a Zambian teenager to be illiterate than for a Zambian between the ages of 30 and 35.

In Honduras (before the profound devastation inflicted by Hurricane Mitch), per capita income had remained stagnant at $650. In the 1980s the country was considered ineligible for further borrowing on market terms due to its inability to meet debt service payments, and so the government quickly learned that debt servicing had to be its first priority. Thirty-five percent of the budget is currently earmarked for debt payments, with little flexibility for designing programs to meet pressing social needs.

Uganda has been considered a more hopeful case because in April 1998 it became the first country to receive debt relief through the HIPC Initiative. Because the government had previously demonstrated a commitment to structural economic reforms, the timetable was shortened and assistance front-loaded. Multilateral debt relief was linked to increased government spending for primary education, primary health care, and road building. Other important features of the case were: 1) the significant role played by NGOs pressing the Ugandan government for poverty alleviation measures and creditor governments for debt relief; 2) the strong track record of good relations between the government and the IFIs prior to the HIPC Initiative; and 3) the high percentage of multilateral debt, which meant that fewer creditors had to be involved in negotiations, facilitating a more rapid response. While real and substantial progress has been made in poverty reduction, serious problems remain. These include access to industrialized country markets for Ugandan products, ineffective government-sponsored social services, corruption, and excessive exploitation of fish and other exported resources. Some participants asserted that Uganda's treatment under the HIPC Initiative has not reduced its debt to sustainable levels. Participants in the country workshop agreed that a case study of Uganda's experience with debt reduction would be extremely helpful, both as part of the effort to evaluate the HIPC Initiative and as an example that might encourage groups in other HIPC countries to do the same.

2. Ethical Dimensions of Debt and the Changing Global Context

Since the end of World War II, the world has struggled with three major issues: East-West competition of political systems, how to contain that struggle without nuclear war, and challenges in the international political economy, principally the post-war recovery of Europe and Japan and the development of Third World countries, many of them newly independent former colonies. This latter issue represents the most pressing unfinished agenda item at the international level.

Churches and other institutions have taken on the debt question for two main reasons. The first is that the debt overhang poses a grave obstacle to development and the eradication of extreme poverty. The second is that the debt question is symbolic of a larger reality: the place of the poorest countries in the hierarchy of world politics and the international political economy.

In his remarks at the 1998 annual meeting of the World Bank and IMF, James Wolfensohn aptly referred to the HIPCs' debt problem as "the other crisis," as world attention was consumed by the Asian economic crisis. The plight of the poorest and weakest countries is treated as a marginal concern as other problems take center stage. Michel Camdessus called on participants to concentrate on the most persistent crisis of our time, and take the opportunity to tell poor people that the IMF continues to see them as the highest priority on their agenda. It was also suggested that the question of debt is one of intergenerational justice, the extent to which debt contracted and serviced today constrains or enhances the well-being and borrowing opportunities of future generations.

Participants were called to embrace an analytic and moral perspective that treats the international system as not merely a collection of states ranked in importance and voice by their power resources. This "classical realist" view often uses moral arguments to conceal interest-based ones. Although it is not yet possible to speak of an international community of states which consistently cooperate for the common good, an ethical evaluation of debt must begin by recognizing a human community in which each person counts as one. This principle is enshrined in the Universal Declaration of Human Rights, the 50th anniversary of which was celebrated in 1998. Catholic Christians also celebrated the 35th anniversary of Pope John XXIII's encyclical Pacem in Terris, which enumerates basic human rights and correlative duties.

Different actors have different roles in addressing the debt problem. They are co-responsible for both the crisis and its resolution -- for determining effective policies and who should bear the short- and long-term cost of implementing them. The first set of major actors is states. Creditor country governments, while perhaps not the principal movers of capital into less developed countries, play a primary role in financing debt reduction. A major theme of the conference was the expression of frustration with declining levels of official development assistance (ODA) in the post-Cold War period, precisely at a time when studies have shown that well-targeted aid monies are effective at spurring poverty reduction. After the Cold War, the question has become, what are the moral obligations of rich states? The danger is that the world will become even more divided into rich and poor nations. Debtor governments, in turn, are responsible for seeing that budgetary savings generated by reduced interest payments on debt are productively redirected to the good of their citizenry.

Secondly, international institutions were established to be architects of different kinds of relationships at the international level, but in the view of some have not been given sufficient resources to perform their tasks. Others believe they have carried out policies detrimental to the poor. The IMF's mandate as a monetary institution geared toward short-term stabilization means that its practices sometimes conflict with development goals. Member states need to be convinced that the ultimate goal is high quality growth, sustainable over time, with greater equity, poverty alleviation and empowerment of poor people.

Thirdly, commercial financial institutions de facto have public responsibilities; whether or to what extent they incorporate these was open to question.

Fourthly, non-governmental organizations have come to be influential players in international policy making and implementation because of the very failure of states to develop adequate policy responses.

Lastly, religious communities have an international role to play. Several speakers pointed out the unique position of the Roman Catholic Church. As a transnational institution it plays an active role in shaping policy, represented at the international level by the Vatican, at the regional and national levels by bishops' conferences, and locally by parishes, hospitals, educational institutions, social service agencies, religious orders, affiliated research and advocacy organizations, print and electronic media, and approximately one billion adherents worldwide.

3. Catholic Social Teaching on Debt

The Catholic Church is guided in how it addresses the urgent problems associated with the phenomena of globalization, the increasing disparities between haves and have nots, and the debt overhang in particular, by a well-articulated body of social teaching. The Church is a natural actor on the global scene by virtue of its mission, outlined in the Vatican II document Lumen Gentium, to be a sign and sacrament of the unity of Christians and of all people with God. The Church must concern itself with the care of each individual and society as a whole, examining how economic models serve each individual and society, with particular concern for the poor and marginalized. In the words of one Catholic participant: "When I read Matthew 25, when the Lord tells us He is the poor, therefore the poor will be my Lord and my judge . . . the Kingdom starts now when the poor are being served." Two fundamental theological principles undergird the Church's concern: the unity of the human family – God created humankind as one single family – and the universal destination of the goods of creation – the goods of the earth are created for the good of all.

The principle of action must be one of solidarity: all must act together for the effective realization in this world of the unity of the human family. Solidarity has three aspects, which many conference participants representing a variety of organizations acknowledged. First, in today's world the concerns of an individual region are the concerns of all, and the poor should occupy central attention. This makes good economic sense, because the human community will be fragile if some people are left on the margins. Second, all must assume responsibility and work together; no one has a monopoly on analysis, solutions and concern. Third, the debt question is only a part of the larger solidarity question. Addressing it will be a catalyst, but in the long term, what is needed is the re-establishing of a culture of international solidarity -- especially at a time when ODA is at an all time low (on average, .22 percent of GDP in industrialized countries).

The ethics of solidarity must not only be proclaimed at the level of principle but also must be translated into concrete policy and structures. Solidarity and the suffering caused by a lack of solidarity must be quantified, through both official statistics and stories from the grassroots. The challenge is to combine the real and the ideal, since the true realists are idealists. The Church is not very interested in debt relief unless it can concretely be shown that the poor will benefit. By the principle of a preferential option for the poor, economic policies must be judged by what they do to people, especially the poorest.

The Vatican first formally addressed the debt question in a 1987 statement issued by the Pontifical Council for Justice and Peace. It called on debtor and creditor country governments, IFI officials, and private sector financial institutions to accept co-responsibility for the debt crisis and its resolution. Many national Catholic bishops' conferences from both debtor and creditor countries have issued similar statements. Throughout his pontificate, Pope John Paul II has repeatedly called for debt relief in his meetings with various international officials and national leaders. In his 1994 statement on preparations for the next millennium, Tertio Millennio Adveniente, (51), he drew on the Jubilee theme set forth in the Book of Leviticus, which called for the Jewish people every fifty years to free slaves, redistribute land to its proper owners, and forgive debts as a requirement of justice within the community. According to the pope, "Christians will have to raise their voice on behalf of all the poor of the world, proposing the Jubilee as an appropriate time to give thought . . . to reducing substantially, if not canceling outright, the international debt which seriously threatens the future of many nations."

The pope has described Africa as the wounded person in the parable of the Good Samaritan: people injured, stripped, and ignored by people who pass them by. While some wounds have been self-inflicted through mismanagement, mistakes, and corruption, by far the greater fault is with falling export prices, increasing import prices, and increasing interest payments on the external debt. The debt overhang is a structural block preventing the realization of the sustainable integral human development valued in Church social teaching.

4. Causes of the Debt Overhang

The conference did not thoroughly review the causes of the HIPCs' debt problem; however, several factors were raised in the course of the discussion, including corruption, failed policies, and civil and regional conflicts. Several participants suggested that the debt problem had built up in part because the way bilateral and multilateral aid was given in the past, in the form of concessional loans rather than grants. For a variety of reasons, the loans were not able to generate the returns necessary to make the situation sustainable. In retrospect, they should have been made as grants.

Many pointed to the ill-targeted, inappropriate nature of bilateral and commercial loans contracted in the past. The funds that were provided were often used to purchase military hardware and build boondoggle infrastructure projects, and commercial lenders received incentives from their companies to lend aggressively. Previous lending was characterized by one participant as "stupid loans for stupid projects by stupid bankers to stupid governments."

Some countries have accumulated unsustainable debts from a long process of mistakes by borrowers, creditors, and IFIs. In a process of "inventive lending," more money was lent to assure repayment of past loans so that managers would not look bad. The resulting debt is at extremely unsustainable levels. Reducing the debt in some cases may not cost real resources, but rather a bureaucratic effort to tidy the books. Other countries saddled with heavy debts may want to tackle poverty and will need extra resources to do so. In such cases it makes sense to relieve outstanding debt to send a strong signal of confidence to restore investment, and real resources should be allocated to do so.

Some participants suggested that structural adjustment programs accompanying previous debt restructuring had further harmed the poor, creating profound resentment of externally imposed requirements such as wage freezes in the debtor countries. Heavy emphasis on the promotion of exports has contributed to a transformation of agricultural production in many countries toward that benefitting commercial farmers at the expense of small-scale subsistence farmers -- who comprise the majority of the rural poor. In the negotiation of successive structural adjustment programs, IFIs have begun to attune policies to a country's particular circumstances, learning to be more careful at counseling governments on removing subsidies, among other things. IFIs have also aided in the design of well-targeted safety nets to protect the poor from the short-term deleterious consequences of economic reform. They acknowledged that while the poor in general benefited from structural adjustment programs, specific sectors of the poor may have suffered.

Several participants pointed to the critical relation between the debt problem and the need to press for better terms of trade for the HIPCs. Many of these countries rely on export earnings in commodities, particularly tropical products. It was suggested that justice in trade requires at a minimum that every country should be able to exploit its comparative advantage. In a review of post-war international trade agreements, it was suggested that commodity exporters continue to face high barriers to advanced countries' markets for textiles, processed agricultural products and other goods, continuing the economic disincentives to invest in value-added technology. Even in the most recently concluded Multi Fiber Agreement, tariff reductions by developed countries for textile imports from less developed countries were backloaded to the very last year, raising serious questions as to the industrialized countries' commitment to trade liberalization.

Several participants also signaled the harmful effects of currency speculation, which has exacerbated the current Asian crisis. Capital flight has contributed to the HIPCs' debt problem: according to one participant, forty percent of Africa's wealth is outside Africa. Others noted the need for more effective bankruptcy laws in some of the countries in crisis.

5. Previous Efforts at Debt Relief

Participants examined the HIPC Initiative in the context of previous debt reduction efforts. Creditor countries organized in the Paris Club have rescheduled the debt of lower and middle income countries since the late 1970s. By the late 1980s they realized that rescheduling was insufficient. At the 1988 Toronto Summit, G-7 leaders acknowledged the need for bilateral debt relief to enable debtor countries to get back on a path of growth. In successive annual summits the Paris Club agreed to increasingly comprehensive bilateral debt reduction: 33 percent of the net present value (1988 Toronto Terms), 50 percent (1991 London Terms), and 67 percent (1994 Naples Terms) for qualifying debt. To date, Paris Club debt relief has been three to four times larger than what may be provided by multilateral creditors under the HIPC Initiative.

Debt has also been reduced under the World Bank's IDA Debt Reduction Facility (established in 1989, it finances the buy back of commercial debt at a discount) and through bilateral ODA. World Bank data provided at the conference indicated that the HIPCs as a group had received $6 billion in debt forgiveness (mainly of ODA loans from bilateral official creditors) and $1 billion in debt-stock reduction during the 1980s. In 1990-96, these figures increased to $19 billion and $6 billion, respectively, reflecting the granting of debt-stock reductions by Paris Club creditors beginning in 1995 and the establishment of the IDA Debt Reduction Facility and other mechanisms to support commercial debt buy-backs for poor countries.

The United States has already reduced more than $3 billion, principally in ODA debt, much of it for Sub-Saharan African countries. However, the 1992 Credit Reform Act changed the budgetary mechanisms governing debt reduction, removing from the executive branch the ability to reduce debt without Congressional action. Now, monies for bilateral and multilateral debt reduction must be fully appropriated based on a complex scoring mechanism to calculate the costs. As a result, debt reduction is now more expensive and politically difficult.

Participants spoke of a severe liquidity squeeze facing the HIPCs. In the post Cold War era, few of the major industrialized countries have maintained a commitment to official development assistance, both bilateral and multilateral. A notable exception is Britain, with a 28 percent increase in real terms pledged over the next three years. Yet, the total amount of net funding by IFIs to poor countries has fallen over the past year, as have net flows on the private, commercial side.

6. Debt Relief in Relation to Poverty Alleviation

Many participants pointed out that debt relief is only one aspect of poverty alleviation, and that consideration of debt reduction must be evaluated in light of aid effectiveness. (It was recognized that the track record of aid has been a mixed and politically divisive one that should be examined.) While participants concurred that the ultimate objective of all economic policies is to increase the living standard and expand the economic opportunities of people, above all the poorest, differing views were offered as to the priority debt reduction should be allocated given the scarcity of aid monies.

In one view, substantial debt reduction, if not complete cancellation, is a necessary prerequisite for poverty reduction or eradication. The high percentage of budget allocation to debt service blocks any government's commitment to poverty eradication and inhibits growth in general. In countries with extreme poverty, government resources are particularly needed to provide public goods and develop human capital, which requires adequate access to health, transportation and education. In such circumstances the debt overhang destroys development, and must be dealt with first in a substantive way.

Others noted that repeated debt restructuring and reduction negotiations have squandered the scarce intellectual resources of debtor country finance ministries. The debt overhang also impedes the flow of private foreign investment. Contrary to the argument that private capital would eschew countries which had not honored previously contracted obligations, officials from the private financial sector indicated that they would indeed take a second look at a country whose debt had been written down. In the case of Honduras, for example, debt relief would enable the government to pursue a more visionary program to convert the domestic economy to one less dependent on commodity exports.

Nearly all the participants agreed that debt relief is ineffective alone. Some argued that what is most needed is the implementation of macroeconomic reform policies. They pointed out as supporting evidence the fact that some 58 countries in the world have been unable to repay concessional loans provided under the IMF's Extended Structural Adjustment Facility, which carry interest rates of less than five percent, for periods of three or six years or more. Countries which cannot productively use and repay such concessional funds must deal decisively with other constraints, especially by putting into place stable macroeconomic policies. The benefits of such policies for the poor are often understated. Hyper-inflation, for example, is a regressive tax. It was suggested that Zambia's current plight was greatly exacerbated by the financial drain of the largest public enterprise, the copper mines, which were estimated by various participants to cost the government $20 million per month.

Most participants agreed that it is essential that debt reduction and poverty alleviation be pursued simultaneously in a mutually reinforcing fashion. Complex choices must be made on a case by case basis. Donors must consider whether the marginal utility of allocating one dollar for debt reduction is greater than allocating it to development assistance. Both provide budgetary support toward the same goal: more sustainable growth, which should lead to poverty alleviation. In some countries, debt relief should be given priority. It was pointed out that in the last seven to eight years, Honduras has paid $780 million in interest payments on its debt, but received less than $160 million in aid. One participant likened sustainable growth policy to a chair with three legs, all of which are necessary: reasonable debt relief, reasonable bilateral financial assistance targeting social sectors, and reasonable policies in the debtor countries themselves.

Several participants suggested that the problem was not only one of scarce resources but of misallocation and waste of resources. For example, many countries allocate a disproportional percentage of their education budgets to universities to the detriment of primary education. It was also suggested that monies for social services are more effective if channeled through non-governmental agencies, such as the churches.

Some argued that donor countries can more effectively exert leverage year after year for better use of aid monies through bilateral ODA appropriations than through debt reduction, which may offer less leverage. One creditor government official resisted calls for debt cancellation, arguing that promises of debt reduction provided leverage to ensure debtor governments "do the right thing."

IFI officials pointed out that multilateral debt represents only a quarter of total debt, and that they are constrained in their capacity to make grants and loans by contributions of member governments and money they can borrow on the markets. The World Bank has roughly $110 billion in loans outstanding, plus $70 billion in concessional loans to the poorest countries made through the International Development Association (IDA.) Each supplemental funding of IDA has proven a tough political battle; the U.S. Congress approved $800 million in the 1998 Omnibus Reconciliation Act. Lending to IDA countries also depends on the $2.5 billion in annual interest payments made to the World Bank on outstanding loans by borrowing countries. World Bank officials indicated that there are important trade-offs to consider. Absent the recycling of loan payments or substantial new financial support from donor countries, there is a limit on how much of the Bank's own resources they can devote to debt relief without reducing contributions to other developing countries which may not qualify as heavily indebted or low income.

Given funding constraints, a lively debate ensued as to which countries should receive debt relief. Some participants suggested that only those countries most committed to helping themselves, as evidenced by the implementation of stable macroeconomic policies, should receive debt relief. (The IMF's recent review of the Enhanced Structural Adjustment Facility (ESAF), completed in March 1998, suggested that substantial progress has been made in the last five to ten years by those countries which have maintained macroeconomic discipline.)

Others argued that preference should be given to those most in need. Another suggestion was to target those countries in which it would be cheapest and most efficient to pull people out of poverty. Three quarters of the world's poor live in countries with deep poverty and "reasonable policies," and it is to these countries that aid and/or debt relief should be directed. The unit cost of poverty reduction is shockingly low in countries such as Uganda that are both highly indebted and working toward poverty alleviation.

Others questioned the definition of success, if it is acknowledged that 20 to 25 percent of the poorest segments of society have not benefitted from IMF and World Bank-mandated economic reforms. Participants were urged to continue to assess whether those who live in extreme poverty have been helped. To measure effective poverty alleviation, joint efforts should be made to formulate specific poverty reduction targets for the year 2005, e.g., the enrollment of X number of children in school. Efforts should then be made to seek policies to achieve the objective, put a price tag on it, and utilize the range of financing mechanisms – IDA as well as the HIPC Initiative -- to accomplish it.

7. Evaluation of the Heavily Indebted Poor Country Initiative

The HIPC Initiative, launched by the World Bank and the IMF in 1996, recognizes the premise that there is a debt overhang that cannot and will not be repaid, and that rescheduling alone is not productive. Going beyond the previous bilateral approach to a comprehensive assessment of both bilateral and, for the first time, multilateral debt, it seeks to identify what portion of the debt is unsustainable and then reduce it.

IFI participants acknowledged that unprecedented interest on the part of church groups and NGOs contributed both to the launching of the initiative and its reform in progress. One official reported receiving more than 15,000 postcards on the HIPC Initiative. Opinions differed as to the sufficiency of the current track, goal, pace, and requirements of the HIPC Initiative. Its critics suggested that the Jubilee 2000 campaign's call for debt cancellation for all would represent a more "realistic" approach to poverty eradication, the stated goal to which many governments committed themselves at the 1995 UN World Summit on Social Development in Copenhagen.

A. Objective. Participants disagreed as to whether the objective of the HIPC Initiative should be debt sustainability or poverty alleviation. As one Church official put it, "Do we have sustainable debt or sustainable poverty?" The HIPC Initiative's advocates suggest that it properly aims to reduce a country's debt to a level which the country could sustain in the future with a reasonable degree of confidence.

Critics of the HIPC Initiative argued that it continues to give priority to repaying creditors rather than to poverty alleviation or eradication and to considering what resources a debtor government could realistically commit to repayment. They argued that the two ratios which presently define the level of sustainability -- a net present value of debt-to-exports ratio of 200 to 250 percent and a debt service-to-exports ratio of 20 to 25 percent -- are too high. Furthermore, these definitions of sustainability are calculated solely on the basis of export earnings, not on the level of poverty. Instead, the ratios should be determined according to the country's fiscal capacity to devote funds to social spending for basic human needs. Debtor countries, they insisted, must be allowed to set aside revenue for the provision of basic human needs before debt servicing. Debt reduction policies (before the HIPC Initiative) have not prevented a continual accumulation of arrears; one-third of debt repayments are on arrears on past debts.

IFI participants acknowledged that given current funding constraints, establishing debt reduction targets which might give a higher degree of confidence in debt sustainability may not be achievable, and that the objective of poverty alleviation may be too big for HIPC.

B. Number of countries. IFI officials indicated that in the first two years of the Initiative they have reviewed the situation of ten HIPCs which would grant more than $6 billion in debt reduction. They characterized two of the countries as now able to sustain their reduced level of debt. (At the end of 1996 the net present value of these ten countries' debts was $31 billion. With HIPC debt relief -- primarily Paris Club and commercial debt buy backs -- their debt should fall to $19 billion by the year 2000.) The IFIs indicated their hope to have looked at the majority of the 41 HIPCs by the year 2000 and to have qualified a good number of them for debt relief.

Other conference participants complained that too few countries have been and are scheduled to be considered, and that those countries which have received relief, e.g., Mozambique, have received too little to make a credible difference in their capacity to alleviate poverty.

C. Timing. Many participants expressed dissatisfaction with the six-year timetable of the initiative. Uganda's expedited treatment, they suggested, has proven the exception rather than the rule. Countries which have undertaken substantial economic reform at great cost to their people expressed frustration that the process had taken too long.

IFI participants insisted that there must be a period during which debtor countries demonstrate that they are committed to reform. The HIPC Initiative gives unconditional debt reduction at the completion point, as opposed to up-front as some participants advocated. IFI officials argued that the initiative has been flexibly implemented. In practice, the interim period was shortened for countries in at least six cases that had demonstrated a previous track record of commitment to reform. And, bilateral debt relief was available through the Paris Club during the waiting period (a reduction of 67 percent of qualifying debt during the first period and 80 percent during the second period.)

In the past year there has been an effort to address the situation of post-conflict countries more expeditiously, but there is a tension between moving faster and the reality on the ground. IFI participants expressed the desire to address 15 cases quickly; however, there have been cases of countries that have fallen back into war, had questionable elections, or substantially increased their military spending. These issues create problems with the implementation of effective debt relief.

D. Flexibility. Again, some critics felt that the Initiative is too rigid because eligibility depends on strict adherence to structural adjustment programs which, they believe, are now discredited. Some participants responded that the internal and external ESAF reviews indicated that on the whole poor people benefit from such programs but particular sectors of the poor have been adversely affected. Others noted that reforms do not affect the often substantial part of rural populations that do not even participate in the market economy.

E. Transparency. Some criticized the IFIs for not being sufficiently transparent with information on the HIPC Initiative, calling for clearer standards for fair reporting of data on, e.g., the net present value versus the nominal value of debt. IFI officials acknowledged the need for greater openness to provide information and receive the input of outside groups, pointing out that most HIPC documents are available on the web. However, they indicated that there is sometimes a tension in that creditors – 25 multilateral development banks, the Paris Club, and commercial banks – want confidentiality prior to decision-making. IFIs are seeking the broadest-based support to ensure comprehensive debt reduction while maintaining the confidentiality of private conversations with government officials. They indicated that they do encourage governments to involve civil society.

F. Possible sources of additional funding. IFI officials reported their limited success at efforts to raise additional monies from creditor country governments for both bilateral and multilateral debt reduction. In the last two years, the HIPC Trust Fund has raised $350 million in bilateral contributions and pledges from 15 countries, in large part due to the work of staff who travel the world to solicit contributions. The Nordic and Benelux countries have been particularly generous in their contributions. World Bank officials indicated that they had committed $2 billion out of the $10 billion estimated for multilateral debt relief. They have already contributed $750 million to the HIPC Trust Fund from World Bank profits on loans to non-IDA countries.

Many participants nevertheless expressed frustration with funding constraints, pointing to the need for additional resources if the Jubilee is to make a genuine difference. Many called on the International Monetary Fund to sell some of its gold holdings, estimated at between $30 billion and $40 billion. Michel Camdessus cautioned in his luncheon address that, "We think it is still a highly controversial move to sell part of the family jewels," pointing out that the gold is the Fund's capital base, and if that is shrunk so is the IMF's leverage to mobilize capital.

8. Conditionality and Debt Relief

Conference participants considered several dimensions of the highly contested notion of tying debt relief to economic, political and/or social reform. As to the ethics of conditionality, one Church official contrasted the issue with that of human rights. Over the last twenty years it has been judged necessary to place limits on a country's sovereignty and exert external coercion to stop and/or deter human rights violations. Yet, it may also be necessary to protect a country's sovereignty so as to give the government and its citizenry the space to deal with questions of equity and growth. As such, sovereignty can be viewed as a shield enabling people to make their own choices.

A. Economic conditionality. IFI representatives argued that the recent independent review of ESAF as well as a conference sponsored by the IMF on macroeconomic policy and equity clearly indicated that structural adjustment and the implementation and maintenance of sound economic policies are essential for poverty alleviation. For example, a country may be maintaining an artificially low interest rate, borrowing abroad at ten percent and lending domestically at three percent, thereby causing a balance of payments problem. Or a government may be borrowing excessively from the central bank to finance projects with a view toward the next election rather than the needs of the poor. Strong fiscal policies are needed to prevent hyperinflation. While some countries have learned to fend off the loan salesmen of old, the problem of over-borrowing still exists.

Participants were reminded that many impoverished Egyptians rioted in the 1980s when, at the IMF's recommendation, the government lifted subsidies on bread, thereby increasing its price. And yet, bread had become so cheap (one could buy 100 pieces for a dollar) that local producers had little incentive to grow the grain and bake and market the bread. Bread had become so scarce that the government had to import extensively to meet the demand.

B. Governance conditionality. Secondly, it was argued that good governance, consisting of such elements as sound financial institutions, an efficient tax system, a transparent foreign trade and exchange rate regime, a non-corrupt legal system, and respect for human rights, were also essential to durable poverty alleviation and therefore a legitimate area of concern for bilateral and multilateral donors.

C. Social conditionality. IMF officials pointed out that existing ESAF programs provide concessional loans linked to explicit social objectives such as increased spending on health, education, immunizations, access to safe water, effective social safety nets, and attention to income distribution. IFI officials acknowledged that there was too little on the social sector side in the first HIPC programs. This has been changed in more recent documents in order to give the HIPC Initiative a stronger poverty focus. Given limited resources, it is the proper role of the IFIs to convince governments to devote funds to education, health care and adequate nutrition for the poorest segments of their population. The relevant role of government vis-a-vis the rest of the population is to assure equitable access to such goods.

Social conditionalities, some cautioned, should be effectively targeted. If social conditionalities are to include required additional spending on education, for example, it would be important to see that primary school children actually benefit and money not simply go to increasing officials' salaries.

Some endorsed OXFAM's proposal that the IMF and World Bank introduce a structure of incentives for debtor governments to obtain earlier and better debt relief by taking the initiative on poverty reduction, e.g., by building hospitals and schools. However, others objected to the idea of mandating e.g., 80 percent of debt savings to social sectors because of the difficulty of identifying whether the money was really going to the poor and not to middle income sectors. Others expressed uneasiness with the strict dichotomy being suggested between economic and social policy, suggesting for example that the real plan in Brazil has tremendous social benefits, evidenced by the large electoral majority gained by those who had introduced it.

While most participants agreed on the need to move beyond the Washington consensus of fiscal and monetary targets to concerns about institution building, civil society involvement, and the establishment of strong judicial systems in debtor countries, doubts were expressed as to whether specific social sector targets should be imposed. It was suggested that conditionality has been given a bad name because it has been poorly implemented in the past and has been seen as a way to model other economies after the United States, and that is not necessarily so. There is much evidence that reasonable conditionality has worked, for example, by getting rid of protective marketing boards that hurt poor farmers because they had no access to them. In addition, substantial progress has been made in getting Paris Club creditors to take an interest in social concerns.

Some participants opposed the imposition of conditions, arguing that the record of the last 15 years has indicated that other governments and/or IFIs cannot coerce governments into implementing better social policies; conditionality has not worked, nor have harsh conditions led to betterment for the poor. What does work is broad-based ownership of and active commitment to sound development policies. Donor policies have in the past undermined such movement by being too intrusive, imposing too many conditionalities. Change should come instead by engaging in constructive dialogue and providing financial support for governments that have demonstrated the willingness to implement sound macro-economic policies and pro-poor growth policies.

Other participants, mostly representing NGO and church groups, argued that the key question is who urges or imposes economic, political, or social conditionalities. Conditions should come from below. Civil society groups such as NGOs and church groups, supported by external groups such as aid agencies, other NGOs, churches, and UN agencies, should make sure that monies saved from debt reduction will go to social programs, and not, for example, to increased military expenditures. Externally imposed conditionality should only be that necessary to free up space for civil society to set other conditionalities. Some questioned whether it was reasonable to expect that many governments would be responsive to such pressure. Those advocating the monitoring by civil society responded that their "idealistic" approach may be the only realistic approach to monitoring debt negotiation and reduction. Some pointed out that local governments ultimately control which civil society organizations are permitted to dialogue with visiting IMF and World Bank missions. They urged such missions to reach out to a broader range of civil society organizations such as trade unions, NGOs, and business groups.

Differing views were expressed as to whether countries which do not implement such reforms, or where such policies do not work, should receive debt relief, given the enormous needs of poor people living under such governments. Some felt that debt relief would be an effective use of resources if allocated on the basis of good performance by countries committed to improving the lives of people. To simply wipe the slate clean would not automatically lead to growth and equity in the future. Private financial sector participants pointed out that the market conditions actors on a daily basis with regards to the bid and market price, deciding not to send good money after bad. They pointed out that international credit rating agencies such as Moody's act as arbiters and have become more sensitive in recent years to social and economic indicators. Governments try to act in ways that ensure that their bond ratings do not deteriorate.

9. Needed Additional Action

There was considerable consensus as to the need for additional debt relief, a substantial increase in the amount of ODA for debt reduction and other measures geared toward poverty alleviation (with differing views on the relative priority to be given each), policies to enhance conditionality from below, and the need to draw up lessons of successes and failures of HIPC debt reduction to date. However, concerns were also expressed at jumping to an overly facile consensus. Some participants questioned whether concern for the poor does indeed underlie current policies and institutions.

Conference participants called on governments of heavily indebted poor countries to institutionalize a process of dialogue with civil society groups, operating with more transparency as to how any budgetary savings from debt reduction would be allocated to address pressing social needs. They were also called on to address problems of corruption and mismanagement and enact further economic reform. Such measures would help to restore donor confidence. It was further suggested that they should involve civil society in the decision-making process before contracting new loans that would obligate their people and future generations.

International financial institutions were similarly asked to build on existing initiatives toward more transparent operations and institutionalized dialogue with NGOs, churches and local civil society organizations, perhaps meeting at least once a year together. They were asked to press their member governments to approve the sale of IMF gold and generate additional monies for more debt reduction and/or cancellation, to conduct a fundamental review of HIPC, and to consider further reform of the HIPC Initiative, in line with suggestions noted in No. 7 above.

Representatives of creditor country governments were asked to allocate more resources to finance debt reduction/cancellation and to provide more effective leadership in making the case to their respective citizenry for the moral and pragmatic benefits of substantial debt reduction/cancellation for the poorest countries. This would entail destroying the myths about aid dependence and waste of resources. It was pointed out that 20 percent of the world's production comes from the developing world, growing at two times the rate of wealthy OECD countries; in 25 years it is expected to reach 30 percent.

Already four million U.S. jobs depend on exports to developing countries, and environmental and health problems in the latter countries will contribute to increasing migration to industrialized countries, as well as pressures on natural resources such as water. Inadequate creation of jobs with decent working conditions and salaries would also increase migration. It was pointed out that studies show that each dollar in aid money raises private investment by $1.90 and that effective aid also attracts the return of flight capital. The U.S. government in particular was asked to launch a dynamic initiative on debt relief.

Creditor governments were called to honor their commitment at the 1998 G-7 summit in Birmingham to reduce substantially if not forgive all remaining ODA related debt. It was hoped that more generous debt reduction terms could be approved at the 1999 G-7 summit in Cologne. Governments were urged to meet the aid targets outlined by the Development Assistance Committee, or at least meet half of the UN's goal for aid that was stated at the Copenhagen Conference on Social Development (.35 percent of GDP). They were also asked to re-examine the issue of international bankruptcy laws.

Private financial sector participants indicated that they have and could continue to play a partnership role by working with the IFIs in the process of debt recycling (e.g., in Mozambique and Bolivia in the early 1990s), as well as on issues of creating a level playing field, fighting corruption, establishing principles by which governments and financiers interact, as well as a code of ethics as to government assistance to the private sector, and effective tax treaties harmonizing treatment internationally.

Many conference participants representing debtor and creditor country governments and IFIs called on churches and NGOs to play a leading role in building the political will in creditor countries among individual voters and legislators to finance further debt reduction and efforts at poverty alleviation, using the Jubilee theme as the rallying cry to pressure donors. The approaching Jubilee year provides an extraordinary opportunity to conduct popular education and mobilize religious and secular voters to press for additional appropriations. Church officials spoke of the need to engender a deeper sense of solidarity at the local parish level that extends across national borders. In the words of one, "The most counter-cultural message of the Church in Washington is that there is still a world out there." As Archbishop McCarrick suggested in his closing remarks, the churches must build a movement so that Christians see debt not as a sign of how high their credit card balance rises but rather whether the poor will be able to eat.

Several of the major church-affiliated and secular development NGOs also described and promised further efforts to strengthen the capacity of debtor country civil society groups to monitor and evaluate the social impact of the debt overhang and their government's use of funds freed up by debt reduction. Proliferation of Internet websites and e-mail communication has facilitated the rise of more effective North-South NGO partnerships on the issue. IFI leaders also welcomed the churches and NGOs' continuing questions and criticisms to help them stay alert and mindful of the priorities raised by Lazarus at our door. Participants expressed their interest in remaining in dialogue, not as adversaries but as active members of institutions which may disagree on the means but are committed to substantial progress in fighting poverty and violations of the human dignity of poor people in heavily indebted countries.

List of Participants

James Adams, Country Director for Uganda and Tanzania, World Bank
Most Rev. Robert J. Banks, Bishop of Green Bay, Wisconsin and Treasurer, US Catholic Conference
Terence Blackburn, Acting Dean, School of Diplomacy and International Relations, Seton Hall University
Most Rev. Stephen Blaire, Auxiliary Bishop of the Archdiocese of Los Angeles
Euric Bobb, Chief, Office of the Presidency, Inter-American Development Bank
Roberto Brauning, Assistant to the Director, External Relations Dept., IMF
Hugh Bredenkamp, Division Chief, ESAF Review Division, IMF
Michel Camdessus, Managing Director, IMF
John Carr, Secretary, Dept. of Social Development and World Peace, US Catholic Conference
Dominique Clavel, Senior Vice President, Chase Manhattan Bank
Paul Collier, Director, Development Research Group, World Bank
Fernando Cossio, Resident Representative for Honduras, Inter-American Development Bank
Marie Dennis, Director, Office of Global Concerns, Maryknoll Justice and Peace
Mauricio Diaz, Director, Foro Social de Deuda Externa y Desarrollo de Honduras, Honduras
Most Rev. Nicholas A. Dimarzio, Auxiliary Bishop of Newark
Sr. Karen Donahue, Justice Issues Coordinator, Institute of the Sisters of Mercy of the Americas
Bernd Esdar, Executive Director for Germany, IMF
Julian Filochowski, Director, Catholic Fund for Overseas Development (United Kingdom)
Daniel Finn, Professor of Economics and Theology, St. John's University (Minnesota)
Msgr. John Flesey, Rector/Dean, Immaculate Conception Seminary School of Theology, Seton Hall University
Gerald Flood, Policy Advisor, US Catholic Conference
Jo Marie Griesgraber, Director, Rethinking Bretton Woods Project, Center of Concern
Barbara Griffiths, Deputy Assistant Secretary for International Finance and Development, Bureau of Economic and Business Affairs, US Dept. Of State
Catherine Gwin, Senior Vice President, Overseas Development Council
Kenneth Hackett, Executive Director, Catholic Relief Services
Rev. J. Bryan Hehir, Professor, Harvard University and Counselor to Catholic Relief Services
Brian Henderson, Senior Vice President, Merrill Lynch International
Rev. Peter Henriot, S.J., Jesuit Center for Theological Reflection (Zambia)
Ethan Kapstein, Stassen Professor of International Peace, University of Minnesota
Justin Kilcullen, Director, Trocaire (Ireland) and President of International Cooperation for Development and Solidarity
Damoni Kitabire, Director of Budget, Ministry of Finance, Planning and Economic Development (Uganda)
Barbara Kohnen, Policy Advisor, US Catholic Conference
Mulima Kufekisa, Coordinator, SAP Monitoring Project, Catholic Commission for Justice and Peace (Zambia)
Msgr. Richard Liddy, Director, Center for Catholic Studies, Seton Hall University
Gideon Lintini, Chief Economist, Ministry of Finance and Economic Development (Zambia)
Rev. Gasper LoBiondo, SJ, Senior Fellow, Woodstock Theological Center
Charles Lwanga-Ntale, Director, Development Research and Training (Kampala, Uganda)
Alan MacArthur, Policy Development and Review Dept., IMF
Duncan MacLaren, Director of International Relations, Caritas Internationalis (Rome)
Msgr. Diarmuid Martin, Secretary, Pontifical Council for Justice and Peace, Vatican
Dolores T. Martin, Dean, W. Paul Stillman School of Business, Seton Hall University
Most Rev. Theodore E. McCarrick, Archbishop of Newark and Chairman, International Policy Committee, US Catholic Conference
Sandra Midence, Undersecretary of Credit and Public Investment, Ministry of Finance (Honduras)
Pedro Morazan, Director of Suedwind (Germany)
Gabriela Nunez, Minister of Finance (Honduras)
Seamus O'Cleireacain, Dept. of Economics, Columbia University
Franco Passacantando, Executive Director for the World Bank, Italy
Stephen Pickford, Executive Director, UK Delegation to IMF/World Bank
Phyllis Pomerantz, Country Director for Mozambique and Zambia, World Bank
Dana Robinson, Board of Directors, Raskob Foundation
Mark Rocha, Provost, Seton Hall University
Most Rev. Oscar Rodriguez, Archbishop of Tegucigalpa and President, Consejo Episcopal Latinoamericano (CELAM)
Douglas Ryan, Country Representative for Honduras, Catholic Relief Services
Most Rev. Michael A. Saltarelli, Archbishop of Wilmington and Board of Directors, Catholic Relief Services
William Scheurch, Deputy Assistant Secretary for International Development, Debt and Environmental Policy, US Dept. of the Treasury
Godfrey Simasiku, MP, Deputy Minister of Finance and Economic Development, Zambia
Msgr. Robert Sheeran, President, Seton Hall University
Lawrence Summers, Deputy Secretary, US Dept. of Treasury
Vito Tanzi, Director, Fiscal Affairs Dept., IMF
William Toth, Seton Hall University
Axel van Trotsenburg, Manager, HIPC Implementation Unit, World Bank
Kevin Watkins, Senior Policy Advisor, Oxfam UK
Ewart Williams, Senior Advisor, Western Hemisphere Dept., IMF
James Wolfensohn, President, World Bank

List of Observers

David Beckmann, Bread for the World
Tom Chabolla, Archdiocese of Los Angeles
Jerry Filteau, Catholic News Service
Joe Gunn, Canadian Conference of Catholic Bishops
Reinhard Hermle, MISEREOR, Germany
Barbara Holloway, Office of Debt Policy, US Treasury
Ruben Lamdany, Operations Evaluations Dept., World Bank
Rev. Gerhard Mockenhaupt, German Catholic Bishops' Conference
Gustav Niebuhr, New York Times
Don Rogers, Catholic Relief Services
Kathy Selvaggio, Catholic Relief Services
Anuradha Seth, United Nations Development Program
Veena Siddharth, Oxfam International
Yeomin Yoon, Professor of Finance, Seton Hall University