These are the notes for the Debate on Debt (Saturday, March 2nd, 2013) led by John Nightingale:
Jubilee Debt Campaign is against unjust and unpayable debt and any system which makes it so. Lending should be for investment in something useful. Finance should be working for people.
In a family there is hardly ever any question of “debt”, and this can be extended in small-scale communities. In some traditional languages there are no words for “lending”, “borrowing”, and “debt”- it is understood that help must be given to those in need. And this creates a bond between people, where the only “repayment” required is to give help if the earlier helpers are themselves later in need. But as societies grow more impersonal, lending, borrowing and the obligation to repay debt becomes a norm.
A FLASHBACK TO THE HUMAN CHAIN OF 1998
The debts in the “third world” built up from political independence from 1970s on. Governments in newly emerging nations were ambitious for development and often eager for loans.
In 1971 the US dollar went off the gold standard and effectively became the world’s reserve currency. Restrictions on global capital movements were reduced; currencies floated free.
A rise in oil prices led to petrodollars being readily available for loans. Meanwhile interest rates rose and commodity prices fell. When third world governments could not repay, the debts were often taken over from western banks and then held by governments or international bodies.
The cold war led to dodgy loans to dodgy governments, eg that of Mobutu in the Democratic Republic of the Congo (DRC); often the people were unaware of the loans or how they were spent.
Many countries were being crippled by debts they could NEVER hope to repay. Consequently the Jubilee movement was formed and the Human Chain of protest around Birmingham took place in 2008. As a result the world leaders promised to take action to cancel the debts of the poorest nations. (JDC calculates that at most the debts cancelled were about a quarter of what was needed.)
DEBT CANCELLATION AND ITS CONSEQUENCES
Some $125 billion dollars worth of debt has been cancelled over the last 12 years among heavily indebted poor countries. (NB One year’s total national income in the UK is about $2,500 billion, 20 times as much; $125 billion is about the annual national income of New Zealand. The DRC which is listed as having similar population to the UK has an annual national income of less than $12 billion!)
Hence debt payments for the poor countries, which have completed the process of debt relief, have gone down from over 20% of government revenue in 1998 to less than 5% in 2010.
There has also been higher spending on health and education; for example in Tanzania primary school enrolment almost doubled once school fees were abolished after debt relief. Great benefit!
THE FINANCIAL CRISIS OF 2008
This was an accident waiting to happen; in 2006 Ann Pettifor published a book entitled “The Coming First World Debt Crisis”, predicting what happened in 2008. It was largely a result of excessive PRIVATE borrowing and lending, associated with speculation, dodgy deals and bubbles in the market (especially housing). Banks have the power to “create money” by making loans far greater than the deposits they hold from savers, and the incentive to do it because it promises more profit. Complicated ways of dividing up the accounts appeared to reduce risk, but in fact obscured the level of risk being taken. When banks faltered, the governments of most countries bailed them out as “too big to fail”. It was largely the bailouts which produced the existing excessive government debt.
Poor countries have also suffered from the first world debt crisis and consequent contraction in the world economy; JDC research shows that foreign debt repayments will increase by at least one third as a result. In March 2010 the International Monetary Fund (IMF) and the World Bank have assessments of the abilities of 68 lower and middle income countries to pay their debts, by which 5 are in default, 15 at high risk, 23 at moderate risk, 25 at low risk; none at no risk!
This is particularly worrying as the people of such countries are likely to be part of the “bottom billion” living on less than $1.25 a day and to be subject to the ill effects of climate change which has been exacerbated by the pollution caused by the rich industrialised nations.
WHAT SHOULD BE DONE ABOUT THE DEBT CRISIS NOW?
We need to learn from the experience of those countries that went through the earlier third world debt crisis: summary cuts and privatisations can make things worse. It is unjust and unhelpful to penalise the poor rather than the people and institutions which made the mistakes. The lenders need to share some of the pain in the changes that need to be made.
1. Finance needs to be shifted away from speculation (eg on property prices and exchange rates) and into productive investment bringing long-term benefits, eg in the green economy.
2. Revenue needs to be obtained not just by loans but also by taxation which is progressive ie falls more on those who can afford to pay. Tax evasion needs to be rooted out by the operation of stricter national and international regulation eg against tax havens.
3. Lenders and borrowers should both share in the risks as well as the benefits of lending. There needs to be a fair system of adjudication when things go wrong. (This happened within the UK when debtors’ prisons were succeeded by the bankruptcy process.) One method is to use a debt audit, as practised by Ecuador and Norway; another is to have an international debt court whose members represent both debtor and creditor nations.
4. Those financing British exports, including the UK Government through the Export Finance Department, should see that their projects are viable, beneficial to the recipients and free of corruption.
JUBILEE FOR JUSTICE
In this year of the Queen’s Diamond Jubilee, JDC has launched a petition for a “Jubilee for Justice”; it means “cancelling the unjust debts of the most indebted nations, promoting just and progressive taxation rather than excessive borrowing, stopping harmful lending which forces countries into debt”. So far it has been signed by thousands of people; also almost 500 Faith Leaders have signed a letter pointing to the background of justice in all faiths. Finally, John Sentamu, Archbishop of York, recently wrote in an article for the Guardian: “Such a jubilee then, goes well beyond cancelling some debt. Unjust debt is at the heart of our global economy; at the heart of deep inequality between rich and poor, as well as between rich and poor countries. If a jubilee is a call for justice, it must consist of far-reaching changes in the global economy to build a society based on justice, mutual support and community; an economic and political as well as spiritual renewal in our society.”
The information above is obtainable in “The State of Debt: Putting an end to 30 years of crisis” available on
www.jubileedebtcampaign.org.uk or in printed form, free, from: Jubilee Debt Campaign, 28 Charles Square, London N1 6HT (020 7324 4722). The figures for national income are those given for 2008 GDP in “The Economist Pocket World in Figures”, 2011 edition. John Sentamu’s words: http://www.guardian.co.uk/commentisfree/2012/oct/09/unjust-debt-heart-inequality-jubilee
For information about JDC activities in Birmingham please contact
SOME FURTHER NOTES
What about purchasing power parity? The DRC has an average national income per head of less than one two hundredth of that of the UK at international exchange rates; once purchasing power parity is considered (the prices of goods traded only within the country, and not across international borders) the proportion becomes one in a hundredth – see the national tables on pages 250-4 of Pocket World in Figures 2011.
Why did the US take the dollar off the gold standard? Because the US had been overspending on the Vietnam War and had depleted its gold reserves and feared being unable to repay in gold what they owed to foreign governments, eg France, who were asking for this. With the gold standard gone it was easier for governments to allow their currencies to float free, to find whatever value they would fetch in the market. It was thought that it was better for them to find their own level than to face bouts of speculation which might force them to devalue suddenly and acrimoniously (as happened to the UK during the Wilson administration). On the other hand countries wanting to coordinate their trade and investment policies thought that currency stability would help their long-term planning. That was one of the reasons for the attraction of the euro. However a common currency to work well requires the member countries to have a common financial discipline, without some members being constantly in surplus and others in deficit; though the EU had rules there was little effective enforcement.
But didn’t other countries know what Greece was doing when it went into the euro? The answer is that senior politicians and financial experts certainly did, but kept quiet because they wanted Greece in for political reasons, and thought the good times would last for ever!
Why was there such a bonfire of regulations from the 1970s on, when from hindsight that seems to have been disastrous? Business people tend to dislike regulations such as currency and exchange controls, tariffs, taxes and income policies which they think hamper their pursuit of profit. Unions which had backed much regulation disliked incomes policies and were able to subvert them. Many business people thought that low productivity, high wages and labour unrest could not be cured by regulation but only by competition. There was some truth in this, but an absence of regulation leads in the long not only to social inequality but also to financial instability, with booms and then disastrous busts. The slump of the 1930s, which the regulations were intended to cure and prevent repetition, was forgotten.
What was the cause of the First World Debt Crisis? In general it was NOT excessive government spending. In the UK the proportion of government spending declined in relation to national income from 1997 to 2008 and even in 1997 was far less than it had been during the Second World War. Much more important factors were too much lending by banks and too much borrowing, especially for the purchase of assets such as houses, by individuals. When the asset bubbles burst (eg in the housing market) then people lost confidence. There started to be a run of the banks which governments felt were too big to fail. So in general (eg Ireland, Spain, UK, US) they bailed them out; hence adding hugely to the public debt. NB the total debt in the UK (financial, business, individuals, government) is over 4 times the annual national income and second only to Japan, but still government debt is quite a small proportion of it. In the long term debt needs to be brought down, but if this happens too quickly then no one is spending any money so no one can make money by selling anything.
What caused the crisis in the Eurozone? Some countries, like Ireland and Spain, ran into trouble in the housing market, like the UK. With Greece it was a bit different. Greece had been used to getting into a deficit when it had its own currency, and just printed drachmas to get out of it. When it went into the euro it had to stop that, but instead it just borrowed from the richer countries. They, like Germany, were willing to lend because the rate of interest was good, and they never thought that Greece would go bust because it was now part of the euro and the other countries would bail it out. Today that’s an open question. But didn’t other countries know what Greece was doing when it went into the euro? The answer is that senior politicians and financial experts certainly did, but kept quiet because they wanted Greece in for political reasons, and thought the good times would last for ever!