This is in response to the article entitled “Economic Injustice” by Paul Nagle, which appeared in the Generation on October, 24 2000. The article falsely accused the International Monetary Fund and World Bank of being responsible for the fact that many “poverty-stricken nations are still very poor” and heavily indebted. In addition, the article alleges the reason that they are responsible is outrageous increases in short-term loan interest rates.
Many events during the 1970’s and 1980’s contributed heavily to the indebtedness of today’s poorest countries. Oil prices and interest rates soared, and many industrial countries faced recessions thus weakening commodity prices. Many countries compensated for the resulting decline in trade with increased borrowing from foreign sources. Factors on an individual national level also contributed to the buildup of debt. Numerous countries had pre-existing trade deficits and virtually no savings. Poor government leadership, wars and corrupt government officials provided no way to deal with these external factors. Mr. Nagle’s article goes on to say that “corrupt government officials pocketed the money or used it to engage in military projects.” This seems to contradict his view that the IMF and World Bank are in fact responsible for the high level of debt in many countries.
The initial argument pertaining to the fact that the IMF and World Bank are responsible for causing the high levels of debt of many poor countries is ignorant. The countries are actually voluntary members of the IMF and therefore have a voice in the organization, albeit a small one. Voting power is based on the amount of funds contributed to the IMF, so it is only fair for those countries that contribute the most to have the largest vote. If you think about this in terms of stock ownership, those individuals that paid in the most capital are given the most voting rights. The IMF and the World Bank work on the same principle. The next issue deals with skyrocketing interest rates on personal loans and mortgages here in the United States. This has nothing to do with loans made to “indebted nations,” as the article would like you to believe.
Interest rates in the US rose in the 1970s due to a troubled banking industry, which witnessed numerous mergers and failures because of bad oil loans to Texas and Oklahoma. This period also saw the decline of the real estate market. Loans to underdeveloped countries didn’t have anything to do with interest rates in the United States.
The IMF is not responsible for “short term loans” at a “6%” rate of interest as stated in the article. Instead, over the past decades, the IMF has made many loans with maturities of 30 years or more for the very reasonable interest rate of 1%. In September of 1996, the IMF and the World Bank jointly created the Heavily Indebted Poor Countries (HIPC) Initiative. The purpose of this plan was to provide relief to the poorest countries by reducing their debt. Prior to this initiative, it is true that the IMF and World Bank took the role of preferred creditors and did not cancel any outstanding debt of their own. However after the passage of the HIPC initiative, they both have assumed some responsibility and canceled over $60 billion worth of debt. Revised in 1999, the initiative sought to incorporate positive economic goals into the basis for eligibility. In order to participate in the HIPC plan, each nation must write what is called a Poverty Reduction Strategy Paper (PRSP). This is a detailed plan and listing of goals that must be approved by the IMF if the nation is to receive relief. The reason for the approval is simple. This money is coming from taxpayers pockets in the creditor countries. The foreign governments want some kind of assurance that this money is being used for its intended purpose - reducing poverty. Even prior to the passage of the HIPC Initiative, an international committee headed by the French Treasury was comprised of many creditor nations, and in conjunction with the IMF, canceled almost $60 billion in debt in 1994.
Debt cancellation alone will not be an effective means to obtain poverty reduction; that is the thrust behind the HIPC Initiative. The debt relief could end up in the same corrupt or inept hands that the original loans were made to. What needs to be remembered is that most of these countries are continuously receiving aid from foreign nations. So where does it leave them if we cancel the debt? Right back where they are now, if some sort of restructuring is not made part of the process. The IMF and World Bank have made this initiative a number one priority. Instead of berating them with false accusations and fictitious reasoning, we as human beings should support the efforts of the IMF and World Bank in ensuring that relief not only means relief from indebtedness, but relief from poverty.
Russ Savik
Kevin Brooks
David Ensminger
Wasyl Darmograi
Patrick Baiocco
Sources:
International Monetary Fund - www.img.org
World Bank - www.worldbank.org
