Why is World Debt a Problem?

• Almost a quarter of the world’s population (1.2 billion people) live in conditions of extreme poverty. The single biggest cause of poverty is World Debt. Because of poverty caused by World Debt over 19000 children die every day (over seven million each year).

• Over 40 of the world’s poorest countries - sometimes referred to as Highly Indebted Poor Countries, or HIPCs for short, (for example: Ethiopia, Ghana, Kenya, Zambia, Nicaragua and Vietnam) owe huge amounts of money to the governments and banking institutions of the richest countries (such as Britain, the United States, France, Germany and Japan).

• At the end of 1998, countries in Africa owed a total of £157 billion, or to put it another way; every man, woman and child in Africa owes £276 to the rich countries. In Ghana the average annual income per head in 1998 was £244, in Kenya it was £217, in Ethiopia it was just £68. (In the rich countries average annual incomes were between £13,500 and £19,000.)

• Because of the amounts of money the poor countries have to pay to the rich countries each year, the poor countries do not have enough money left to spend on vital services that would help to reduce poverty – things like hospitals and schools.

• When people fall ill they are often unable to work. In poor countries there are no sickness benefits or unemployment benefits, so people who are unable to work lose income and become poorer. If there are not enough hospitals and doctors then people may not recover from their illnesses, and become trapped in poverty. In 1991 in Angola there was one doctor for every 25,000 people, in Mozambique one for every 33,000, in Malawi one for every 50,000. (In western countries such as Britain, France and the USA there is at least one doctor for every 500 people.)

• Some people are poor because they lack the knowledge and skills that would enable them to find work. Education would solve this problem, but if there are not enough schools and teachers, then people can become trapped in poverty again. In Ghana 35 per cent of the population are illiterate, in Burundi the figure is 65 per cent, in Burkino Faso it is 81 per cent. (In western countries the figures are between 0 and 2 per cent.)

Why are the poor countries in debt in the first place?

It’s quite a long and complicated story, and begins some time ago:

• In the 1970s oil producing countries like Saudi Arabia became very rich because the demand for oil was very high. They earned more money than they could spend, and therefore saved large amounts in banks in the USA, Britain and other rich countries.

• When people save money in a bank, the bank pays them a return, known as a rate of interest. In order to be able to pay interest on savings, the banks have to lend out the money to other people, and charge them a slightly higher rate of interest. (The bank makes a profit for itself in the difference between the two rates of interest.)

• When lots of money flows into banks, as it did in the 1970s, interest rates tend to fall, which means it is cheaper to borrow money. The banks tried very hard to encourage poor countries to take out loans, telling them that interest rates were very low, and they'd easily be able to afford to repay the money.

• For the poor countries it seemed like a good idea at the time. They could borrow money and use it to pay for schools and hospitals, and to invest in building up industries to produce things to sell to the richer countries. With the money they earned from these sales they would earn enough to repay the loans, and have money left over to put back into their countries - perhaps to build even more schools. It seemed like a good way to work themselves out of poverty.

• Some of the money that was borrowed was not used properly. Some countries had corrupt leaders who stole some of the money to make themselves rich. Some of these leaders spent money on weapons and armies to keep themselves in power.

• Towards the end of the 1970s, things went horribly wrong. The rich countries began to experience serious economic difficulties, they suffered from a recession – which meant that people in those countries became unemployed and had lower incomes - and the amount of money that people spent went down. At the same time, interest rates went up dramatically.

• The poor countries were now faced with a crisis through no fault of their own. Because of the recession in the rich countries they could not sell their products, and their earnings went down. Because of the increase in interest rates they were asked to pay higher amounts of money to the banks – which they could not afford because of their fall in earnings. Some countries told the banks that they could not afford to repay their loans, this led to an international crisis.

• To try to bring an end to the crisis, the governments of the rich countries and an organisation called the International Monetary Fund (IMF) stepped in. They offered to lend money to the poor countries that would enable them to pay off some of the loans to the banks. The poor countries would instead owe money to the rich countries governments and the IMF.

• The rich countries and the IMF would charge lower rates of interest than the banks, and give the poor countries longer to pay off the loans. However, in return the poor countries had to agree to certain conditions – known as Structural Adjustment Programmes (SAPs).

• SAPs conditions meant that the poor countries had to cut back on spending on services such as health and education, so that they could spend more money repaying debts. (We’ve already seen that these services are important for poverty reduction.) The United Nations Secretary General, Kofi Annan, recently pointed out that in many African countries up to 40 per cent of government spending went on debt repayments. Sub-Saharan Africa spends over twice as much repaying debts as it does on basic health care, and almost as much as it spends on education.

• They also had to agree to produce goods mainly for export to earn more money to repay the loans. This meant that people in the poor countries had to go without goods themselves. In 1997, 26 per cent of Tanzania's export earnings went towards debt repayments. In order to be able to sell more exports, the poor countries had to make their prices cheaper, to do this they had to devalue their currencies. However, this also made imported goods more expensive, meaning that poor people could not afford them.

• SAPs have failed to solve the debt problems of the poor countries, and many people believe they have made the problem of poverty much worse.

How bad can it get?

Many of the poor countries cannot afford to pay all of the interest on their loans each year, let alone anything towards repayment of the loans themselves. This means that year by year their debts have grown, because the interest that is not paid is added to the loan outstanding. Since 1990 the amount of money that the poor countries have to pay each year has risen from £7.4 billion to £10.3 billion. All the time that debt keeps growing, poverty will also grow.

Why should I be concerned?

First of all because we are all members of the human race, and we have a moral responsibility to make sure that all of our fellow human beings can live dignified and healthy lives, free of poverty. However, if you're unimpressed by that argument, there are others. Debt is not just a problem for the poor countries, it affects all of us, think about these examples:

• For many poor countries their main source of income is natural products – agricultural goods and minerals. Because poor countries are so desperate to pay off their loans, they are forced to exploit their natural resources in unsustainable ways. For example we all know that deforestation is a major issue, contributing to the problem of global warming, and that we need to slow down the rate at which we cut down trees. However, for many poor countries, wood is their major source of income and they need this income to repay their debts. If the debts were cancelled then forests could be managed in more sustainable ways to benefit us all.

• Because they are so desperate, some people in poor countries have turned to growing drugs to earn an income. These drugs then find their way into western countries and contribute to problems of crime. If the debt burden was lifted and poverty was reduced, farmers might be able to make a decent living from traditional crops, and in turn that might lead to less crime on the streets of western cities.

• If debt were cancelled, poor countries would start to become richer. As their incomes grew they would want to buy more goods produced in the rich countries. This would create jobs in the rich countries for people producing those goods and help to reduce unemployment - we would all become better off.

What can be done to solve the problem of World Debt?

• For many years now campaigners have been arguing that the debts owed by the world’s poorest countries to the rich governments and the IMF should be cancelled, because this would be the most effective way of reducing world poverty. The rich governments were slow to take notice, but over the past few years have begun to make progress towards debt cancellation.

• Every year representatives of the governments of the richest seven countries in the world (known as the G7) get together to discuss global economic issues. At the G7 meeting in Cologne in 1999, they promised to cancel £68 billion worth of debt from the poorest 41 countries. Despite this promise few poor countries have yet to see any real progress on debt cancellation.

• Later in 1999 President Clinton of the United States said that he would cancel all of the debts owed to the US by the 30 poorest countries.

• Gordon Brown, Britain's Chancellor of the Exchequer, said in December 2000 that all debt payments from the 41 poorest countries to Britain would, from 1^st December, be cancelled or held in trust to be returned to the poor countries to pay for poverty reduction policies once suitable policies had been agreed.

• The IMF has promised to cancel about one-third of the debts owed to it, but seems reluctant to increase the amount of debt it will cancel.

• Debt is still a major problem. Campaigners are concerned that debt relief or cancellation is not taking place quickly enough, or that the rich countries and the IMF are insisting on too many conditions which poor countries will find difficult to meet. As long as the debt problem continues, people will die from poverty caused by debt.