Georg von Fingerhut: A critical review of ”Athal,K. 2015. Ramrajya: Chapter 7: Good Governance

Krishna Athal in the book “Ramrajya” states extremely important point: “often countries have a way somehow of twisting the principles into shapes that suit their own personal agendas instead of those of the nation”[1]. We all aware of extreme amount of money paid every year by developing countries. Not so many people aware about why does it happened. Cold war and the corrupt regimes that emerged during this time was a prefect opportunity to put the country on the hook by throwing it into debt. Corrupt regimes easily spend the money and run away, whereas many countries with its sovereignty were left in the struggling situation. First of all, the government that spend the money already far away, but the lawns need to be paid back. Secondly, citizens are here and they demand for better conditions, where any fluctuation of their will can flow away any new regime. That puts another, already new government in the same situation, where lawn is already just a problem of survivor. Since cold war, such situation happened in more than 50 countries, where almost 300 million people live only on less than one dollar a day. According to the World Bank, up to 2015 there are still 39 countries happened to be in the same situation. Since the situation has not been solved, there were many talks about external debt cancelation. World Bank and IMF described those countries as Heavily Indebted Poor Countries (HIPC) and divided the countries above in three types:

  • Those that already completed status of HIPC such as: Angola, Afghanistan, Benin, Plurinational State of Bolivia, Burkina Faso, Burundi, Cameroon, Central African Republic, Republic of Congo, Democratic Republic of Congo, Ethiopia, The Gambia, Ghana, Guinea-Bissau, Guyana, Haiti, Honduras, Liberia, Madagascar, Malawi, Mali, Mauritania, Mozambique, Nicaragua, Níger, Rwanda, São Tomé Príncipe, Senegal, Sierra Leone, Tanzania, Togo, Uganda, Zambia.
  • Those that in the decision point: Chad, Comoros, Côte d’Ivoire, Guinea.
  • Those that in Pre-Decision Point: Eritrea, Somalia, Sudan.[2]

However referring to only the time of cold ward would be not correct. The author of the words mentioned above, Krishna Athal is a struggling representative of Youth United Voluntary Activity group in Mauritius. From the one hand, Mauritius is one of the most developed courtiers in Africa with relatively strong economy. From the second hand, we have an extremely difficult situation, when according to the data of Central Statistics Office of Mauritius, external debt of Mauritius doubled since 2010, from 200 MUR Million to almost 550 MUR Million.[3]

What should we do with this situation?

Pro.

Since 1980s Paris Club, World Bank, IMF and other official bilateral creditors mostly from developed countries tried to solve this situation. At the beginning in 1980s for the debt relief were proposed different concessional mechanisms. By 1995 Paris Club offered a mechanism of rescheduling of debt for low-income countries “Naples terms” when two-thirds of the eligible debt were rescheduled. However, the poverty-debt cycle still remained.

Another initiative was started already in 1996, named the original Initiative for Heavily Indebted Poor Countries (HIPCs), list of which was mentioned before. To be considered for such initiative, “countries must face an unsustainable debt burden which cannot be managed with traditional means”[4]. The initiative provides a debt relief on low-interest loans to cancel or reduce external debt repayments to sustainable levels, following extensive lobbying by NGOs and other bodies. That means, that countries can repay the debts in a timely fashion in the future but need to agree for some conditions instead.

Contra.

We can see that there is no such thing as a free lunch. In HIPCs initiative, by 1999 only four countries had received any debt relief. As an example of such program in East Africa, in May 2012 the IMF agreed to lend ten million dollars to help Republic of Djibouti “meet its debt and import payments”. In the response, the Djibouti government has “agreed to reform diesel fuel subsidies, freeze any hiring in the public sector, except for health and education and freeze public sector pay, except for the lowest salary band”. Above all mentioned Djibouti needed at the same time keep constant four percent of inflation.[5] Such maintenance of structural reforms or privatization for other countries in exchange of debt cancellation is common case. However conducting of such coordinal reforms and simultaneous debt payment is a very difficult task even for strong economies. In the end, Republic of Djibouti has not yet considered to be eligible for the HIPC initiative.

The cancellation of external debt without anything back is a difficult question even for United Nations. In July 2012 a United Nations report was introduced an indexed loan repayments program, where the interest rate connected to a country’s economic export growth. According to it, borrower country would repay more of their debts in the good times, and less during the hard times, what potentially don’t solve the problem but only postponed it.

At the same time debt relief raises concerns about excessive borrowing in the future, what is another problem for developing countries. It creates a huge doubt for IMF and World Bank to lend money for the future development.[6]

Pro.

Other policy that could be conducted by the country to reduce the debt is increase of inflation. Reduction in the nominal value of currency will reduce the value of debts and could increase the chance of debt relief.

On the other hand, another opportunity for debt cancellation could be found in help of other countries. Brazilian government in May 2013, announced to cancel or restructure almost 900 million dollars debt for African countries. Such policy will help expand Brazil’s economic connections with Africa in infrastructure, agriculture and social programs and at the same time rapid up the growth of trade and investment between regions.  In the program included 12 countries, in beneath which Tanzania, that owes Brazil 237 million dollars, along with oil-producing Republic of Congo and copper-rich Zambia.[7] 

At the same time, after long negotiation with IMF, World Bank, African Development Bank and several Western lenders since 1999 followed by a catastrophic recession that ran for a decade until 2008, neighborhood country Zimbabwe finally reach its goal. According to CNBC Africa, Zimbabwe’s Finance Minister Patrick Chinamasa proclaim that “Zimbabwe will have its external debt arrears cleared by April 2016”. If the country will achieve its goal in 2016 it will be an important prove that it is possible to clear external debt with its partial cancellation and other initiatives provided by external institutions.

Contra.

Another question is what would debt cancellation bring to the country. Does all these initiatives after cancelling external debt or governmental policy of inflation will really help the country and improve poverty and other issues? Simply speaking, will it all reach the poor people? On the other hand, what is the reason for relieved countries, don’t contract further debts, under the understanding that the future debts will also be forgiven? Possible corrupt regime of the country could use the investments and external initiatives in their private means. And here we come to the case of Mauritius. As the most important example we can see previously one of the most developed country in the world that under NGO’s policies and corrupted government led the country into the debt. Such policy not only makes the country more depended on global North, but brings unstable situation in the country that is at the moment not so globally reflected. The bubble of IT technology when country was full of money is disappeared and what would be the other future for the country, as not be depended on global NGO’s and their initiatives to struggle in the future poverty. From this perspectives external debt cancellation is not a possible solution.

Driving a conclusion, we see, that external debt and the burden of paying back the debt is an important problem in poor countries where funds have to be syphoned off basic social services to pay for external debt servicing. Depending on the country, policies provided by external institutions are helpful for one country and destructive for another. Some countries are more or less struggled to solve the problem of external debt, but in spite of all the affords of international community, the majority of HIPC countries are still in debt. At the same time not only HIPC countries are struggling from the debt, but previously developed countries as Mauritius are also in the very difficult situation, where simple external debt cancelation will not solve the problem that they face.

[1] Krishna Athal, “Ramrajya” p214

[2] Official Web Site of World Bank, External Debt – accessed December 5, 2015

[3] Central Statistics Office of Mauritius Web Site – accessed December 5, 2015

[4] Factsheet: Debt Relief Under the Heavily Indebted Poor Countries (HIPC) Initiative – The IMF – accessed December 5, 2015

[5] Jubilee Debt Campaign Website – accessed December 5, 2015

[6] The World Bank “Global Development Finance” 2006, Washington DC, p.95

[7] News Paper Report, May 2013

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YUVA

Registered in February 2015, YUVA started as a group of enthusiastic individuals, and today it has mobilised thousands of young people with a simple aim of creating a better future for children and youth of Mauritius. At the heart of YUVA’s duty lies the conviction that the collective destinies of the human race are bound together.

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