Debt forgiveness may boost economy
One of the quickest ways to a revitalized economy may be through forgiving the debt owed by impoverished nations.
Basubeb Biswas, professor of international trade and economic development at Utah State University, said many nations, especially those in sub-Saharan Africa have amassed enormous debts to the International Monetary Fund (IMF), as well as private investors and governments.
Biswas said interest payments to creditors make it difficult for countries to pay off the debt balance.
Jubilee USA Network is an organization based in Washington, D.C., which had its inception from a Great Britain-based organization called Jubilee 2000 whose mission was to encourage the cancellation of debt owed by impoverished nations.
According to a press release from Jubilee USA Network, African nations combined pay four times more on debt repayments than on health care.
Shannon Peterson, professor of political science at USU, said after the OPEC crisis of the 1970s, lenders became more lenient with lending practices due to increased money.
Biswas said the debt formed as a result of aggressive lending strategies by various international organizations, both public and private.
“Aggressive lending is lending money to people who can’t repay it,” Biswas said.
He said the tactic is a mean-spirited way of making money.
Peterson said after loans were granted, interest rates increased, making it more difficult for debtors to repay.
Biswas said one example of debt crisis was exhibited in 1997 when Thailand, Taiwan and South Korea, all considered to be developing nations, borrowed money to build commerce, economy and infrastructure. The investments weren’t well-controlled, as some banks aren’t, Biswas said.
Since there were a lack of regulations and stipulations on the loans, the borrowing Asian nations in turn lent the money out. This lack of regulations has allowed other nations to spend loaned money on arms and shoring up oppressive regimes, according to www.jubileeusa.org.
One result of this was Thailand defaulting on its loan, Biswas said. Since Thailand couldn’t pay back its loan, apprehensions about the country’s ability to ever pay back the loan increased. Therefore, the Thai currency was devalued. This impacted the exchange rate by increasing the demand for American dollars on the part of American investors. The impact on the exchange rate meant that instead of having to pay back the equivalent of $10 for a loan, the Thai government had to pay back closer to $35 or $40 for the same $10 it had borrowed.
The situation has stabilized with the Asian developing nations, Biswas said, but problems still exist worldwide.
Peterson said in some African nations, approximately 40 percent of the gross national product is spent on interest payments.
“Debt is a form of instability in the world economy,” she said. “[Those countries] can’t be viable members of the world economy [with extensive debt].”
Peterson said the effects of debt extend beyond money matters. She said in order to combat financial problems, heavily indebted countries will sometimes engage in practices with environmental consequences. These countries exploit their natural resources by overharvesting, excessive mining or deforestation to make room for grazing cattle and destroy the basis for being able to turn a profit in the future.
“It’s a multi-faceted problem,” Peterson said.
Biswas said crises in the financial sector tend to affect other areas of the economy. Demand may decrease leading to a drop in production rates. Biswas said these effects aren’t limited to a defaulting country alone.
“We’re living in a world of globalization,” he said. “This affects the United States, too.”
When countries are troubled by debt, there is less demand for goods manufactured in the United States.
“The recession we see [in the United States] is due to a lack of demand,” Biswas said. “It’s in the interest of the nations if the loans are excused.”
Biswas said in the short term, lenders who excuse debt will be hurt, but in the long term, output and employment will increase.
Peterson said Great Britain’s finance minister is calling on the advanced nations of the world to forgive debts of those nations who are not able to make headway on loan payments.
Mara Vanderslice, outreach coordinator for the Jubilee USA Network, said some countries have already received relief.
She said Congress already appropriated sufficient funding to allow 100 percent cancellation of debt owed to the United States for 24 countries. Four of those countries, Bolivia, Mozambique, Tanzania and Uganda have already received debt relief. Fourteen countries are still awaiting approval for debt cancellation. Vanderslice said this cancellation will reduce debts of those countries by one-third. She also said getting Congress to approve debt cancellation was no easy process.
“It was an uphill battle all the way,” she said. “The issue of debt cancellation wasn’t even on the table four years ago. But that is how social change occurs. You start with an idea that seems ridiculous and two or three years later it becomes a moderate position.”
Vanderslice said the Jubilee USA Network has a special legislative opportunity this year.
“This year, the World Bank will come to Congress to ask for money and we have the chance to tell them they can’t have it unless they approve a 100 percent debt cancellation,” she said.
Vanderslice said the World Bank and IMF are the single-largest creditors and a 100 percent cancellation would also reduce impoverished countries’ debt by two-thirds.