The Need For Rethinking Development Finance

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SEATTLE — In our current global economic system, debt is necessary for money to exist. Every dollar that has ever been created by our global fractional reserve banking system is still owned by the system. The sum of all international debt could only be canceled out if all dollars in circulation were paid back to the global banking system, and even then, the interest accrued on the money that has been loaned into existence could never possibly be paid off, as it has never truly existed. This is the reality of our economic system. Debt is necessary because of the zero-sum system. This isn’t necessarily a bad thing. Some debt is manageable, but when do we reach the threshold of unsustainable debt that cripples economic growth in developing countries?

John Perkins talks about the predatory development finance loans given out by the International Monetary Fund (IMF) and the World Bank, in his book titled “Confessions of an Economic Hitman.” The U.S. owes $20 trillion in loans, but the U.S. has a gross external debt of $18 trillion, which means that the U.S. owes a net $2 trillion. The U.S. internal debt has been re-loaned to the developing world through World Bank and IMF loans. If the U.S. were not able to collect on its $18 trillion external loans, it would have no way to pay back its $20 trillion internal loans.

The Organization for Economic Co-operation and Development changed the criteria for Official Development Assistance (ODA) in 2014 to now include external loans in addition to grants as ODA. These development finance loans, which now count as ODA, are given out to countries that have no foreign assets. As a result, countries have immense difficulty paying back these loans and become trapped in unsustainable debt. In the worst cases, countries like Angola spend 44 percent of their GDP on external debt payments. There is no regulatory framework that prevents these predatory loans from being given out.

The Jubilee Debt Campaign and the ONE Campaign raise awareness about the rising foreign debt in the developing world. The organizations’ work led to the creation of the Heavily Indebted Poor Country (HIPC) and Multilateral Debt Relief Initiative (MDRI) programs, which have helped 36 countries, mostly in sub-Saharan Africa, to cancel $97 billion of debt. Unfortunately, according to an IMF report, “over half of the countries that were included in HIPC and MDRI are now at risk of returning to unsustainable debt levels.”

The Jubilee Debt Campaign’s report released on March 13, 2017, shows that less developed country (LDC) “debt payments increased by 45 percent between 2014 and 2016, caused by a quadrupling of loans to LDCs between 2008 and 2016, from $56 billion to $262 billion.”

There are many ways that we can help make development finance more sustainable. The United Nations Conference on Trade and Development (UNCTAD) created guidelines for responsible borrowing and lending. These guidelines were touched on in the Addis Ababa Action Agenda (AAAA) in 2015, but unfortunately were not sufficiently endorsed. The AAAA encouraged the creation of a central debt registry with accurate representations of credit and debit balances, making the process of international loans more transparent, which minimizes risk.

The ONE Campaign suggests that states should lean towards grant-based ODA instead of loans, but if loans are given, interest rates should be kept low. Future success in achieving established Sustainable Development Goals will depend significantly on effective financing.

Josh Ward

Photo: Flickr

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About Author

Josh Ward

Josh lives in Omaha, NE. His academic interests include French, global studies and environmental studies. Josh believes that international development plays a very important role in environmental protection and social equity.

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