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[afro-nets] Debt Relief As If People Mattered
- From: "Claudio Schuftan" <email@example.com>
- Date: Fri, 1 Sep 2006 12:44:59 +0700
Debt Relief As If People Mattered
(for a full version of this paper see http://www.jubileeresearch.org/news/debt_relief_final.pdf )
We believe it is a fundamental human right to have basic needs met - for food, clean water, shelter, education and health. Yet 45% of the world's population live on less than $2 a day, at which level life expectancy is markedly reduced because their ability to meet these needs is restricted, partly because of the high costs of debt service.
This paper is by Jubilee Research at NEF (the new economics foundation). It promotes a concept of debt sustainability which puts the rights and basic well-being of people first and those of the creditors second.
Traditionally, debt sustainability has been judged along narrow financial lines. A country's ability to pay is assessed primarily by looking at its income from export earnings, with little or no account taken of the demands on government funds. According to the most recent data available, Lebanon spends 59% of its budget on debt service, well over twice its spending on health and education combined. The Philippines spends 47%, nearly twice its combined spending on health and education. Twenty countries spend more than 20% of their budget servicing foreign debt. In many of the world's poorest nations, debt service payments have taken precedence over providing people with a basic standard of living. In other words the Bretton Woods Institutions' concept of debt sustainability should rather be called debt repayability. The approach proposed here provides a much needed alternative.
The UK and other Northern governments like to paint a picture of their generosity in giving debt relief to the poorer countries of the world. In fact, the net flow of resources from North to South (that is the flow taking both net capital flows and interest paid on loans into account) would be negative if it were not for grant aid (which includes debt cancellation). Even taking this into account, the total net flow from North to South over the 34 years since 1970 amount to a paltry $92 per person living in the South. This is less than $3 a year, little more than one-fifth of the average British child's weekly pocket money. The picture is not one of any generosity on the part of the North.
Human Rights and Debt Cancellation
National governments have an obligation to provide for the meeting of their citizens' basic needs. If a government can only meet its debt service payments by taxing poorer citizens so that they cannot pay for enough food or shelter and at the expense of providing basic health and education services, this violates human rights. If they are prevented from doing so by their creditors' demands for payments, then the creditors bear the responsibility for this violation. The amounts currently committed to relieve the debts of low and middle-income countries fall far short of the levels needed to avoid this.
In adopting the UN Millennium Development Goals (MDGs), all the world's countries have made a commitment to reduce global poverty by 2015. The Millennium Goals also reinforce earlier commitments to universal rights, including in health and education. But the MDG targets will be impossible to meet as long as developing countries have to use such a large proportion of their resources to meet crippling debt service payments.
Our approach to debt sustainability therefore takes as its starting point the amount of revenue that a government can be expected to raise without increasing poverty or compromising future development. This means not taxing those people who already have less income than they need to fulfill their basic rights, and protecting government spending needed to meet basic human development needs.
An Ethical Poverty Line
Recent research shows that life expectancy falls off at an astonishing rate below a mean income of $3 a day (taking into account relative prices). At this level, life expectancy in a country is about 70 years, while at $1 a day it is in the region of 40. We therefore adopt an "ethical poverty line" of $3 per person per day - a level more compatible with the human rights to health than the $1 and $2 a day poverty lines used by the World Bank and others.
Calculating Sustainable Debt
We therefore calculate the taxable proportion of national income by deducting $3 a day for each person living on more than this amount and actual income for those living on less. (We also carry out the same exercise using the World Bank's $2 a day poverty line.) We then estimate maximum feasible gross revenue as 25% of this taxable national income, assuming that marginal tax rates above this level would be too distorting to the economy.
>From this maximum feasible revenue we deduct basic minimum expenditure on health, primary education and social expenditure to give net feasible revenue. Of this net feasible revenue, we then assume that between 20% and 40% could be set aside for paying interest on external debt. From these annual payments, we estimate the net present value of debt which could be carried without violating human rights, and compare this with the current level of debt for each country.
Based on these assumptions, and using data for 136 countries, we calculate how much debt cancellation each country would need to reduce its debt to a sustainable level.
. Of the 136 countries surveyed, between 51 and 54 need complete cancellation of their debts and between 32 and 53 need partial cancellation on human rights grounds.
. Based on the ethical poverty line of $3 a day, the net present value of debt that should be cancelled is between $424 and $589 billion. This is far more than is envisaged under the current Heavily Indebted Poor Country (HIPC) programme (under which the maximum debt which might be written off is $59 billion for 38 countries) and the G8 Gleneagles deal which could at most amount to $24 billion even if all 38 countries qualified.
. Our recommended debt cancellation amounts to between 31 and 43 per cent of all outstanding developing country debt. This sounds a lot until it is compared with the shortfall of aid below the target of 0.7% of rich countries' GDP, which was $120 billion in 2005, alone. If the North had met the target each year between 2001 and 2005 it could have wiped out all this debt.
. We also carried out the same calculations using the more common $2 a day poverty line. Even at this lower level, our results show that between $359 and $517 billion of debt cancellation is needed for a wide range of countries if their debt is to be brought down to sustainable levels.
In order to stop the drain on Southern government budgets from debt servicing (which is one of the factors which prevent their meeting the basic needs of their populations), substantial debt cancellation is urgently needed beyond that provided under the Heavily Indebted Poor Countries (HIPC) initiative and the 2005 G8 deal.
A further implication is that none of the countries requiring debt cancellation on the grounds set out in this paper can afford to take out more debt, though that is what has happened in the past. Yet they all need more resources, beyond the relief which could be provided by debt cancellation, if they are to meet the MDGs and reduce poverty. There therefore needs to be a substantial increase in grant aid (at least up to the 0.7% of GDP target) in addition to the debt cancellation we propose.
Please distribute this paper as widely as possible and do send your comments on it to the author, Steve Mandel (firstname.lastname@example.org). Please indicate whether you are commenting in a personal capacity or on behalf of an organisation, and in the latter case please give the name of the organization. To assist you in responding to the final question, we have posted an interactive spreadsheet on our web-site, at http://www.neweconomics.org which users can download to see the effects of changing the parameters. Please also email us if you would like to receive electronic copies of future research papers in this series and other reports produced by NEF's New Global Economy programme.