Global Policy Forum

By David Malin Roodman

Imagine the distress of Africa, and the Democratic Republic of Congo is the sort of place that comes to mind. Following nearly a century of traumatic subjugation by Belgium, this European-designed nation eventually won independence, in 1960, and sank into violence within a week. After five years of conflict, a man named Mobutu took power by force with the help of the U.S. Central Intelligence Agency and began a rapacious, 31-year reign.

Though Mobutu skillfully cloaked his rule in the language of African nationalism—by giving his nation the supposedly more authentic name of "Zaire," for example—the dynamics of colonialism still held sway. He gave foreign companies access to Zaire's vast natural wealth, which included an estimated quarter of the world's copper and half its cobalt, and threw his cold war allegiance to the West. In exchange, the dictator won generous support from Western investors and governments, including billions of dollars in bank loans and half of all U.S. aid to black Africa in the late 1970s. From these funds, and from export earnings, he siphoned off a personal fortune of some $4 billion by the mid-1980s—a sum not unduly diminished by the purchase of a dozen estates in Continental Europe and chartered-Concorde shopping trips to Paris.

It would be wrong to suggest, however, that Mobutu gave nothing to his country. He imported 500 British double-decker buses, built the world's largest supermarket, and erected a steelworks that one banker said the country needed "like it needs central heating." The descent into hell began in 1975 when Mobutu, caught short by a plunge in the price of copper, threatened to default. For the next 15 years, he used his geopolitical leverage to force his creditors to defer his debt payments—or to cover them with new loans. He then essentially defaulted on the World Bank and the International Monetary Fund (IMF).

Meanwhile, Zaire entered a brutal economic slide. By the mid-1980s, the swollen bellies of the hungry became a common sight. A Belgian volunteer reported seeing "a little girl eating grass and another one who was eating the waste from the brewery….She told me she hadn't eaten for three days." Today, Mobutu is deposed and dead, but his legacies live on. His family holds his fortune, and his country holds his $12 billion debt. In a nation with an annual income of $110 per capita, each resident theoretically owes foreign creditors $236.

Zaire's disastrous involvement with foreign borrowing is one of the worst (and earliest) cases of its kind in the post-colonial era. It represents, if in caricature, the debt troubles that dozens of other poor countries have run into in recent decades. Currently, to use the World Bank's measuring sticks, some 47 nations are very poor—having a gross national product (GNP) of less than $855 per person—and heavily indebted, with their governments owing foreigners the equivalent of at least 18 months of export earnings. All but 10 of the 47 are in Africa.

For most people in these nations, life is hard. Civil wars, coups d'état, corruption, AIDS, famine, illiteracy are all relatively common. And almost no one thinks these countries can repay more than a small fraction of their foreign debts, which now total some $422 billion, or $380 per resident.

The debt crisis in low-income nations—it is commonly called a crisis, though it is actually a slowly developing, chronic syndrome—is one of two major strains of debt trouble that have struck the developing world since the 1970s. The first, which broke out suddenly in 1982, mainly involved "middle-income" countries, such as Turkey, Mexico, and most South American nations, as well as the commercial banks they borrowed from (though "low-income" countries were not completely immune). It largely spent itself in the early 1990s as banks and borrowing governments finally struck compromises on repayment.

The second strain spread gradually in low-income nations—and has worsened to this day. It is different because low-income countries, regarded as risky investments by commercial bankers, have mainly attracted official lenders: aid agencies, "multilateral" lenders such as the World Bank and the IMF, and export credit agencies (ECAs, which subsidize a country's exporters with cheap credit for their customers). While commercial lenders followed the classic manic-depressive cycles of private finance, first overrunning countries in their eagerness to lend, then retreating en masse, official lenders stayed on a more even keel.

For all their steadiness, though, official lenders also have run aground in the poorest nations, and in a way that is undermining the worldwide fight for sustainable development. Hundreds of billions of dollars of official loans have disappeared into corruption, capital flight, weapons buying, white elephants, and projects that worked better on paper than in practice. And now the need to service debts has cut into government budgets for roads, environmental protection, primary education, and basic healthcare. Indeed, many low-income debtors spent more servicing debts to the world's richest nations in the late 1990s than giving social services to their own impoverished citizens.

Meanwhile, private investors and local entrepreneurs—the proverbial haters of uncertainty—have been discouraged by doubts about what debtor governments, cornered by their creditors, will do next. Will they raise tariffs on exports? Or print money, thereby feeding inflation?

Because debt trouble set in gradually in low-income countries, no one can point to a particular child dying in Mozambique from tetanus or to a particular plot of forest cleared by a poor farmer in Honduras and say with confidence, "Debt caused that." But the experience of middle-income countries, where debt crisis developed with a suddenness that spotlighted the link between cause and effect, offers a vivid picture of its impact. In Mexico, wages halved between 1982 and 1988. In the Philippines, a million or more desperate peasants moved into the hills, where they cleared erodible slopes of protective trees and farmed to survive. And in southeastern Brazil, immunization cutbacks opened the way for a measles epidemic that killed thousands of babies in 1984.

The debt crisis in the poorest nations thus confronts the world with a dilemma. Critics on one side of the issue point to the theft and waste and ask why taxpayers in rich countries should let incompetent or unaccountable governments off the hook. Debt is a promise to pay, and a promise is a moral obligation. But critics on the other side, represented most effectively by the international Jubilee 2000 coalition of churches and nongovernmental organizations (NGOs), decry the "chains of debt" that enslave the world's poorest nations to the richest ones and, they submit, choke off government spending for immunizing poor children or teaching them how to read.

In 1999, the leaders of the seven leading industrial nations (the G–7) announced their latest response to the debt crisis, the enhanced Debt Initiative for Heavily Indebted Poor Countries (HIPCs). It is easily the most far-reaching debt reduction offer yet, and a sign of the power of Jubilee 2000. The HIPC initiative aims to cut the $205 billion debt of 41 qualifying nations by some 45 percent within perhaps five years. (Six comparably poor and indebted countries are not listed for various reasons.) Additionally, Italy, the United States, and the United Kingdom, among others, have promised to write off all their loans to "the HIPC 41," which could bring the total reduction to 55 percent.

With the debt reduction initiatives, official creditors have taken an important step toward resolving the current debt troubles, and with another big push from the likes of Jubilee 2000, they might go far enough to succeed. However, the initiatives only attack the symptoms of debt crisis. Largely designed by and for creditors, they do little to highlight, much less address, the underlying causes. As a result, they will almost certainly invite fresh crises in the poorest nations.

Rich governments have made important financial contributions to the development of poor nations: they have stamped out smallpox, funded family planning programs that have dramatically slowed population growth, and built rural roads and schools. But as long as lending and borrowing occur in ways that invite trouble, loans from foreign governments will probably do as much harm as good.

Several major problems lie at the heart of the debt crisis. All reflect hard economic and political realities. Rich countries restrict imports of crops and clothing and other exports of poor countries, effectively demanding loan repayment while refusing the goods offered as payment. Official agencies often lend to poor countries for reasons that have little to do with aiding their development and assuring their ability to repay loans, and everything to do with winning geopolitical allegiances—or sales for Lockheed Martin and Caterpillar.

Loans proffered with more genuine intentions of aiding the borrower run into another problem: they are supposed to be repaid regardless of results, even though failure is to be expected in the difficult business of development. Finally, both the agencies that lend and the ones that borrow are often insulated from the consequences of their actions. This insularity gives free play to bureaucratic tendencies toward arrogance, over-optimism, the pursuit of growth in lending and borrowing for its own sake, and even corruption.

Stating each problem so starkly evokes solutions that are simple in theory. Creditor countries need to buy more goods from debtors. ECAs and other agencies need to put enhancing the borrower's ability to service debt before geopolitics and domestic politics. An international bankruptcy process is needed to make loan write-offs routine and require lenders to bear some costs of failure. And so on.

In practice, however, reform is a challenge as complex as it is vital. Powerful business lobbies, for example, protect ECAs and import barriers; it will take an equally organized political campaign to overcome them. And if official lenders become too accountable—too afraid of failure—then they could fall prey to the very herd mentality that once provoked a debt crisis in middle-income nations. The project of reform must proceed with realism to stand a chance of serving, rather than undermining, sustainable development in the poorest nations. If they thrive, the rest of the world can only benefit.

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