30 FUNDING DEVELOPMENTRelieving the debt burdenNumerous countries have been rendered incapable of development through overwhelminglevels of national debt. What can be done to honour these countries’ right to develop?By Dr Cephas Lumina, Research Professorof Public Law, University of Fort Hare, SouthAfrica and former UN Independent Experton the effects of foreign debtIn 2012, the total external debt ofdeveloping countries was estimated at$4,900 billion. During that year, theypaid $620 billion servicing their debts.To service their debts, governments areoften forced to divert scarce financialresources from essential investments inhuman, social and physical infrastructurethat provide the foundation for sustainableand equitable development. Debt servicingalso significantly reduces the capacity ofcountries to establish the conditions forthe realisation of human rights, particularlyeconomic, social and cultural rights. Inshort, excessive debt burdens can createconsiderable obstacles to development.While claiming that Heavily IndebtedPoor Countries (HIPCs) have beenable to increase their poverty-reducingexpenditure as a result of multilateral debtrelief, the World Bank and InternationalMonetary Fund (IMF) have also notedthat these countries have made uneven,even limited, progress in achieving the UNMillennium Development Goals (MDGs). 1Furthermore, the policy conditionslinked to the provision of new loans anddebt relief by international financialinstitutions (IFIs) often have a negativeimpact. For example, the realisation ofmany basic rights may be hampered byrequirements to reduce governmentspending or limit investment in socialservices such as education and health.This undermines national ownership ofdevelopment strategies.According to the IFIs, these policymeasures aim to promote economic growthand prosperity, as well as to restore the debtrepayment capacity of recipient countries byreducing debt to levels deemed ‘sustainable’by the creditors. Nonetheless, the availableevidence demonstrates that the measuresin fact have a negative impact on therealisation of human rights in the longerterm and have contributed to increasingpoverty in many debtor countries.In Greece, for example, public spendingcuts implemented under the bailoutprogramme of the IMF, European CentralBank and European Union, and labourmarket reforms have resulted in increasedunemployment, homelessness, povertyand social exclusion, and severely reducedaccess to public services.It is widely accepted that countryownership of national developmentstrategies is the foundation of developmenteffectiveness. Nevertheless, policyconditions linked to new loans and debtrelief have left many poor countriesensnared in externally prescribed orapproved policy frameworks that underminetheir development and make it difficult forthem to comply with their human rightsobligations. Indeed, very high debt burdensleave countries subject to the control of IFIsand other creditors, eroding their abilityto freely determine and pursue policiesfavourable to their development.Illegitimate debtA substantial share of the debt owed bydeveloping countries – estimated at morethan $500 billion – is attributable toreckless or self-interested lending practicesby financial institutions in the developedcountries during the 1970s and 1980sfor unproductive investments; lendingby affluent countries to authoritarian orcorrupt regimes in return for supportduring the Cold War; and questionablepolicy prescriptions by IFIs. Many contendthat this debt is odious or illegitimate andtherefore unenforceable.Under international law, national debtincurred by a regime for purposes thatdo not serve the interests of the nation isunenforceable. Such debts are consideredto be the responsibility of the regime thatincurred them, not the state. As originallyarticulated by Alexander Sack in 1927,a debt was presumed to be odious if itmet three essential conditions: (a) it wascontracted by a despotic regime; (b) it wasnot used for the needs of the population ofthe borrower state; and (c) the creditor wasaware of the nefarious use of the funds.The odious debt doctrine has historicalprecedents. For example, after the Spanish-American War of 1898, Spain contendedthat Cuba should repay the loans made toit by Spain. However, the United Statesrepudiated the debt, arguing that it wasimposed on Cuba by force of arms andserved Spain’s interest rather than Cuba’s,and that the debt therefore ought not tobe repaid.In 1998, the British House of CommonsInternational Development Committeeused the doctrine to recommendcancellation of Rwanda’s debt. In 2003,following its invasion of Iraq, the UnitedStates called for the cancellation ofthat country’s debt on the basis that itwas incurred by the repressive regimeof Saddam Hussein, but this argumentwas later abandoned to avoid settinga precedent. In 2005, the NigerianParliament requested the country’sgovernment to repudiate a debt that hadlargely been inherited from the militarydictatorship, particularly under SaniAbacha (1993–1998).GLOBAL DEVELOPMENT GOALS 2014
FUNDING DEVELOPMENT31© ReutersIn recent times, debt cancellationcampaigners have increasingly invokedthe concept of illegitimate debt to justifycancellation of debts incurred as a resultof profligate lending. While there iscurrently no universally accepted definitionof illegitimate debt, the concept is usedto refer to a broad variety of questionabledebts, including debt incurred byundemocratic means, debt incurred underpredatory repayment terms, and debtresulting from irresponsible projects thatdid not further development objectives orcaused harm to the environment. Thus, theconcept is much broader than the conceptof odious debt.Members of a Bambuti, or pygmy, community outsidetheir hut near the eastern Congolese (DRC) city ofGoma. Out of the 39 countries identified by the HIPCInitiative, 33 are from sub-Saharan AfricaA notable recent example of the useof the illegitimate debt concept is thatof Ecuador. In 2008, the commissionestablished by the government of RafaelCorrea Delgado to audit the country’sdebt reported that there were numerousinstances of irregularities and illegalitiesin the contraction of foreign public,commercial, bilateral and multilateralloans during the period 1976–2006, thatmany of these loans violated the principlesof international and domestic law andhad harmful impacts on the country’spopulation and environment. It concludedthat these loans were illegitimate.Based on these findings, in December2008, the government announced that itwould officially default on its global bonds2012 and in February 2009 it declared atechnical moratorium on global bonds2030. This reduced the country’s totalforeign debt by $2 billion plus $7 billionon saved interest until 2030. These savingshave enabled the government to scale-upits social spending.Nevertheless, other countries with debtsthat many consider odious or illegitimatehave opted to pay them, ostensibly becauserepudiation would be costly. For example,the Philippines, which in 2010 had anexternal public debt of $45 billion, ofwhich $21 billion was incurred duringthe corrupt regime of Ferdinand Marcos(1965–1986), continues to service that debtwhile government spending on educationand healthcare remains well below thebenchmarks set by UNESCO and theWorld Health Organization.Similarly, in 1993, South Africa inheriteda debt of $18.7 billion from the apartheidregime but the democratic governmentof Nelson Mandela opted to service thisdebt because default would be costly: thecountry’s credit rating would be adverselyaffected, foreign investors would bedeterred and the country would have topay more for future borrowings. Thegovernment settled the debt in August2001. Meanwhile, the vast majority ofSouth Africans remain deprived of basicpublic services to varying degrees.Multilateral debt relief:what has been achieved?Since the late 1990s, the World Bank andIMF have coordinated international effortsto address the external debt problems oflow-income countries through two mainmechanisms: the HIPC Initiative, launchedin 1997, and the Multilateral Debt ReliefInitiative (MDRI), created in 2005. Theaim of these initiatives is to reduce thedebt burdens of the beneficiary countriesto levels deemed ‘sustainable’ by the twoGLOBAL DEVELOPMENT GOALS 2014
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