Transcript
Should Debt in the Developing World Be Cancelled?
Tim Jones
Senior Policy and Campaigns Officer, Jubilee Debt Campaign
Pamella McLaren
Advisor and Head, Debt Management Unit, Economic, Youth and Sustainable Development Directorate, Commonwealth Secretariat
Ann Pettifor
Director, Prime Economics
Chair: Larry Elliott
Economics Editor, The Guardian
31 May 2018
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2 Should Debt in the Developing World Be Cancelled?
Larry Elliott
Well, good evening everyone and welcome to this Chatham House event: Should Debt in the Developing World be Cancelled? My name’s Larry Elliott and I’m the Economics Editor of The Guardian and, to be frank, this is an event I never really thought I’d be hosting. I was on plenty of these panels, chairing them 20 years ago, when Jubilee 2000 was going and 15 years ago when – in the build up to the Gleneagles debt relief agreement. I honestly thought that my days chairing events about debt relief and debt cancellation were over, but clearly, they’re not. The IMF has been flagging up warnings of a new debt crisis and we’re here to discuss that tonight.
Let me just introduce the panel and then I’ll just say a few housekeeping things. On my left is Tim Jones, who’s the Senior Policy and Campaigns Officer of the Jubilee Debt Campaign. On his left is Pamella McLaren, who’s Advisor and Head of Debt Management Unit at the Commonwealth Secretariat and who has hands-on experience of debt management in Jamaica. On her left is Ann Pettifor, who I’ve known for many, many years, who’s Director of Prime Economics, but we did a lot of debt relief stuff back in the day and we were just talking about it upstairs. So, that’s the panel. They’re going to speak for seven/eight minutes each. We’re going to have a bit of a chat and then I’m going to open it up to you, on the floor.
Couple of things, this is a live event, it’s being – it’s on the record, it’s being livestreamed and you can comment via Twitter on #CHEvents. When it comes to it, if you could give your name, full name rather than just the Chatham House Member, that would be useful, and if you can keep your comments nice and short and sharp, that would be good, also. I can – I’ve chaired quite a lot of events and I can tell the difference between a question and a very long statement and I’ll be quite strict on them. You know, I’m from The Guardian, but I’m not that caring and sharing, you know. I can actually be quite nasty when I have to be, but I hope I won’t have to be, but you look like a lovely audience, who will keep your questions nice and short and sharp. So, that’s the format. We’re going to get underway and we’ll finish by 7:15 at the latest.
So, Tim, let’s start off by saying what is the problem out there?
Tim Jones
Great. Well, I’ll try and address what the problem is, starting with a story, and I’ll stand up, ‘cause I’m quite short, so make sure that you can see me. In 2013, two London banks lent $2 billion to three state- owned companies in Mozambique. The companies involved had no revenue and they had no contracts in place that would suggest they were going to generate any revenue any time soon. However, the banks still lent this money. Two officials, within the Mozambique Government, guaranteed the loans, saying that, “If the companies can’t pay, the Mozambique Government will pay instead.” These guarantees were not agreed by the Mozambique Parliament, so they violated the country’s constitution. Much of the lending was kept secret, then some of the money was spent on shipping equipment, which today, sits largely unused in Maputo Harbour. The rest of the money has either been stolen or spent on weapons, we don’t know which.
Three years later, in 2016, the loans finally became public knowledge for the first time. Now, the companies involved cannot pay this debt, but the question is, therefore, who should? One option is the Mozambique people, through tax increases or public spending cuts. But they and their representatives knew nothing about the loans. They’ve not benefitted from them and separately the economy, which is dependent on raw material commodities, has suffered because the price of commodities has fallen since 2014. A second option is that people elsewhere in the world pay. So, a standard response to debt crises is 3 Should Debt in the Developing World Be Cancelled?
for institutions, like the IMF and World Bank, to lend more money, which is used to pay off the original lenders and then the debt either stays with the people of the country concerned, or if somewhere down the line it is cancelled many years later, then it comes back to fall on the Governments that ultimately, pay for the IMF and World Bank. A third option is that the banks who lent the money should pay. They were willing to give the money secretly. They conducted a complete lack of due diligence, in terms of the loans, and they get much higher interest rates on lending to a Government like Mozambique than they would to, say, the UK Government. That is supposedly because it’s more risky. But if it is more risky, then when projects go wrong, they need to pay the cost. Or a final option would be that the individuals who really benefitted should pay, whether they’re in the Mozambique Government, in the banks or in the supplier who supplied these ships.
Now, I’d argue that it should be the individuals and the lenders that should be gone after, that they’re the ones that are most close to this, that bear most responsibility. The people in Mozambique or people elsewhere around the world didn’t know anything about them. They just don’t have any responsibility. However, the standard international response is the opposite. The first thing is to say, “How can the people pay? What cuts, what tax increases can be brought in to enable these debts to be paid?” And then, the bailout loans are given, which either keeps the debt on the country or it will, ultimately, if that debt is cancelled, pass the costs on some time down the line, and this isn’t just about impoverished countries. This is exactly what happened with Greece. When Greece could not pay its debts, the EU, the ECB, the IMF, lent more money to Greece, which paid off the banks that had lent the money originally. Now, Greece, everyone knows, has too much debt, but at some time down the line, the EU and ECB might cancel some of that debt. The people who were originally responsible, the lenders who lent to Greece, have got away.
In the 2000s, the global Jubilee Campaign, which I went on my first ever protest as a 16-year-old and Jubilee 2000, when Ann was leading it and Larry was there reporting on it, and that campaign has got $130 billion of debt cancelled for 36 countries. This debt cancellation was entirely necessary. For the previous two decades, countries had been entrapped in the equivalent of a debtors’ prison. In the 1980s and 1990s, there was a huge debt burden, the response of which was the IMF and World Bank lending more money, which paid off original lenders and the debt just increased. Austerity was introduced and that led to economies stagnating, poverty increased and the debt was higher in 2000 than it had been at the start of the 1980s. Under this weight of debt, cancelling debt was the only means of escape. But this one-off cancellation did not address the reasons why countries were in debt crisis in the first place.
In – we used to have for individuals that when you couldn’t pay a debt, you were locked up in debtors’ prison, but if you are in prison, it’s very hard to earn the money to pay a debt and so, over time, we’ve evolved and we’ve now got things like bankruptcy laws and we don’t send anyone, who’s an individual, to prison anymore. But for Governments, we have no bankruptcy process, and I think Ann might talk more about what a bankruptcy process could be like. That is of solutions, the number one thing that we could do is to have bankruptcy laws. A second thing is to stop these bailout loans as a response to a crisis. When debts can’t be paid, we need to require the original lenders to share in the costs.
But in order to prevent these cycle of crises, we also need much more responsible lending and borrowing. A first step towards this is transparency. It is outrageous that banks in London can lend money secretly to a Government. People have a right to know about debts taken out in their name. Lending to Governments is very different from other kinds of loans. Of course, in a case like Mozambique, the Government officials involved are responsible for this crisis, but so are the lenders. One does not exclude the other. It takes two to tango. Unfortunately, when we see debt crises erupting, all the attention seems to be put on what the debtor has done wrong and spreading that out to the whole people of a country, 4 Should Debt in the Developing World Be Cancelled?
rather than looking at what both sides have done wrong. Why were lenders willing to lend if this was such an irresponsible situation?
In the last three years, debt payments by impoverished Governments have increased by 60%, to the highest level since 2004. We urgently need a new way of responding to these crises, which both deals with them, but also, deals with preventing future ones. Our question is, does debt in the developing world need to be cancelled? And I think our answer is yes and no, sometimes it does, sometimes it doesn’t. One of the key things we need is for lenders to be made to share in the costs of crises when they do happen, as that is one of the only ways that we can make crises less likely to happen in the future. Thank you [applause].
Larry Elliott
Thank you very much, Tim. Pamella, perhaps you’d like to follow on from that?
Pamella McLaren
Oh, definitely. Thank you, Larry. Okay, so, I’m a strong proponent of cancellation of debt. I do believe that debts should be cancelled, and I’m looking, from my background in Jamaica, where Jamaica, in the Caribbean, is one of the world’s – it’s in the top ten of highly indebted countries. In the 90s, 1990s, there was a solution for HIPC countries, but middle income countries did not benefit from that initiative. And I do think that there should be some solution that lenders and borrowers, collectively, should come together to come up with some modality to assist countries, who are heavily burdened with debt. I am not advocating, necessarily, that it should be similar to the HIPC Initiative, because there are a lot of challenges with – in HIPC, in that, even up to today, there are some countries have not been able to fully cancel debt, particularly debt that was provided by non-Paris Club creditors.
So, while countries have actually benefitted from the HIPC Initiative and the MDRI, there were a lot of challenges. Some cases you had high transaction cost. Countries – there was no similar situation for each country. Each creditor it was an individual negotiation. So, there should be some framework that should be very clear to both lenders and creditors. To support that also, I think you need to have good legal and institutional structures in place. So, the case of Mozambique, where you had debt being contracted, debt being guaranteed, because it would have been some official within the Government machinery that would have guaranteed that debt, there should be some transparency that it is known that these debts are guaranteed and what are the terms and conditions. Whether, if there is a default, who is liable to pay, is it the Government that would step in for the public body? So, these are some situations that we need to be very clear about.
In terms of debt management, I also do believe that we need to build capacity within our developing countries, so that they are aware of good, effective and sound principles, in terms of debt management. They’re able to be in a position to inform policymakers, so, should I borrow this loan? What is – what are the risks involved in it? You should look at your repayment profile, for example, to ensure that when you are contracting debt, you will be in a position to have the ability to service that debt. So, while debt is – I think debt is not a bad thing in itself, but you need to have the ability to service that debt. It’s just as if you are looking at it from a personal perspective. You borrow debt to buy a car or a house, but it’s your ability to service that debt that is important and Governments should look at how am I contracting debt, how is this going to impact on social amenities? High debt, like in the case of Jamaica, strangles the ability of the political directorate to provide social amenities. So, because of high debt service, you may 5 Should Debt in the Developing World Be Cancelled?
not have enough to channel your revenues to health, education and other infrastructure development, for example.
Jamaica, we have had seven Paris Club restructuring, two commercial bank restructuring and two domestic debt restructurings, and in all cases, and this has been since 1983 up to 2013, different cycles of debt restructuring, it has not been enough. It has not really put us on a sustainable path and I think if debt was cancelled, it would have been more significant and meaningful. So, the restructuring is just a Band Aid approach, I think, where you may have, like, in the last two restructurings in the Jamaican experience, it was just a haircut and interest. So, in terms of your stock of debt, you still had that high stock of debt and while your servicing was reduced, it still was not enough to make a significant impact. So, in terms of your debt to GDP ratios, notwithstanding the restructuring, that was still high. Today, Jamaica’s debt to GDP ratio is 120%, hmmm, and very high debt servicing costs as well. So, in the recent experience of Jamaica, the restructuring was on the domestic debt, not the external, and if you look at Jamaica’s portfolio, there’s a high deg – percentage of commercial debt. So, they issued debt on the international capital market and there was no arrangement where they got any relief on that debt.
So, in terms of cancellation, I think, going forward, we should look at a very holistic approach, maybe not just commercial debt, not just domestic debt, not just official creditor’s debt, but look at an entire figure, you know, everything. Something similar where the highly indebted countries, like the HIPC, where they cancelled commercial, they cancelled Paris Club debt and official multilateral debt. So, I’m advocating that where countries, and I know the Caribbean is a good case in point, middle income countries that are highly indebted, that some solutions should come up for those countries. Thank you.
Larry Elliott
Thank you [applause]. Ann…
Ann Pettifor
Right.
Larry Elliott
…wrap it up.
Ann Pettifor
So, one of my favourite movies is The Big Short and I love the scene in it with the pole dancer. I don’t know if you remember this, and how many of you have seen it. So, the pole dancer is winding herself around the pole in a very sexual way and the Wall Street guy says to her, “Tell me, do you have a mortgage?” And she says, “Yeah, yeah.” He said, “At a variable rate of interest?” She said, “Yeah, of course,” i.e. of, you know, it was about 15%. He said, “Wow,” he says, and she says, “What do you mean wow?” She said, “I’ve got five mortgages.” So, what’s really striking about the pole dancer is that she plays a big part in bringing down the global financial system. She was a sub-prime borrower, and Goldman Sachs and all the other lenders that had lent money to her were disciplined by the market. Of course, they tried very hard to recoup their losses by, you know, taking possession of her house and so on and so – her houses, her five houses, or her five flats. But they were disciplined by the market and that is, you know, proper or this is what capitalism demands and this is what the free market theory is all about, is that if you take risks, then you ought to be prepared to face losses and if you take crazy risks, then the 6 Should Debt in the Developing World Be Cancelled?
market will discipline you with the severe losses. That does not happen in the international financial system. There is nothing safer than lending to the Mozambique Government, or to any governmental body. Ask Mr Paul Elliott – Mr Paul Singer of Elliott Associates, and because there’s always the taxpayer back – to ensure that ultimately, the creditor gets paid and there’s always the IMF and the World Bank that ensure that that happens. So, we see, sort of, free market theory in reverse when it comes to poor countries, low income countries and when it comes to lending.
And if I could just step back a bit, you know, and talk not just about individual countries, but about the system. So, the system, as advocated by the banks and the fund and by orthodox Economists, is that the world should be a world of capital mobility and that creditors should run the world. That they should be able to determine, for example, whether or not Lula should be elected as President in Brazil, or what, you know, they should be prepared to determine whether or not Italy should have another Government or another election. So, they’re in a position where they can use their power and the markets right now are using their power against Italy in order to force a result that suits the market. So, we have a, sort of, unaccountable form of Government by international capital flow, by international capital and we have the IMF and the World Bank saying that capital mobility is fundamental to the health of the system. And what it means is that creditors, and like those that lend to Mozambique, but like many other creditors, really prefer this kind of safe lending. They really don’t want to take risks. Having to assess the potential value of any loan, of any risk, is really too much like hard work and they’d have to employ too many people to, for example, check out whether or not the pole dancer can pay. That takes a lot of careful work, and similarly, in the international financial system, and with sovereign debt and sovereign lending.
So, you know, the point is this, that the market, and the free market operates on this basis, but even free marketeers recognised here in Britain, back in 1800s, the 1850s, that actually, the system, the free market system, would not work well unless it was possible for corporates to default on their debts. You know, before 1855, and it was as late as that, if you didn’t pay your debts, you ended up in Marshalsea Prison, and Charles Dickens played a very big part in exposing how unjust that was. But what Economists and creditors worked out, when they found that their debtors were in Marshalsea Prison, was that, you know, they weren’t repaying their debts. They weren’t economically active. The debt wasn’t getting repaid. The creditor wasn’t being – getting the service, the debt service that they needed and so, they had this extraordinarily enlightened approach, which was well, in that case, let’s get him out of Marshalsea Prison and back into the marketplace, where he’ll be economically active and hey presto, he might a) pay back his old debts, and b) he might take out new debts, right?
So, for me, you know, the 1855 Bankruptcy Act is a great civilizational advance and the Jubilee 2000 Campaign made the whole issue of an insolvency framework for the resolution, the orderly restructuring of debts of sovereign debtors, an absolutely fundamental part of the campaign. And to our absolute astonishment, in 2001 [bell], oh dear, I’ve used up my eight minutes, in 2001…
Larry Elliott
No, you’re alright.
Ann Pettifor
…the IMF, Anne Krueger, the number two at the IMF, decided that yes, this was after the chaos of the Argentine default, that yes, we should have a restructuring mechanism. And the IMF set up something called the Sovereign Debt Restructuring Mechanism and convened a huge conference to discuss whether – how this should work. So, we were thrilled, because at last the IMF was taken onboard our idea that 7 Should Debt in the Developing World Be Cancelled?
you needed a process to assess, you know, it takes two to tango. It takes creditors and debtors, and to assess how much the burden of losses should fall on the debtor and how much should fall on the creditor. There should be some fair process, as there is in domestic bankruptcy law, for determining that and now the IMF was backing it. Unfortunately, the IMF said, “Yeah, we like this idea of an independent framework for the resolution of debt crises, but we’ll decide how much the debt is and how much it’s worth and, you know, and how much – what the value of the debt is and we’ll” – so, that’s a really pretty fundamental part of the process. And we said, “No, you can’t do that, ‘cause you’re a creditor.
But anyway, the whole thing was blown up by the Finance Minister of Mexico, Mr Agustin Carstens, who today heads up the Bank for International Settlements, who, at this conference of 3,000 Economists, Bank Finance Ministers, officials and so on, put his hand up and said, “No, as a debtor country, we are opposed to any restructuring framework, because we don’t want to upset our creditors.” And that killed off the IMF’s idea and it killed off our idea for a process, a proper independent process for resolving debt crises. ‘Cause I don’t think we could – just to get to the point of today’s discussion, I don’t believe we can just argue for debt cancellation. There are some countries that can pay and they try not to pay, you know, the debtor isn’t always the good guy and creditors often, you know, are punished for the fact that they have taken the risk of lending. So, we need a fair process and we propose a process where the debtor make two representatives onto a committee, the creditors suggested two representatives and then, the four of them suggested a third person would – who’d become the, sort of, Chair of this committee and they would decide. They would work out – that those five people would work out how to resolve the crisis, in favour of both parties and taking both parties’ interests into account. Unfortunately, that was defeated by the man who now runs the Bank for International Settlements and we’re back to where we were before, but it’s rarely, absolutely necessary.
Larry Elliott
Thank you [applause]. So, let’s just explore a few of those things. Tim, I mean, how big a problem is this? I mean, you talk about – talked about Mozambique, I mean, you know, are we anywhere close to being in the situation we were in at the end of the 1990s, when there was a whole group of low income countries really, you know, as you say, stuck in debtors’ prison? How big a problem is this now?
Tim Jones
Yeah, we have several countries that are in as much, or worse, trouble as they were when the debt relief initiatives began. Some are like Jamaica, that never qualified for debt relief; some are like Mozambique and Ghana, that got quite a bit of debt cancelled and are now back in a crisis again.
Larry Elliott
So, why…
Tim Jones
It’s not…
Larry Elliott
…are those countries back in a crisis, you know? 8 Should Debt in the Developing World Be Cancelled?
Tim Jones
A lot of money was lent and one of the reasons that they wanted to give debt relief, ultimately, was so they could start lending new money again. A condition of a debt relief scheme was you had to borrow more money from the IMF and World Bank. So, you’ve got an underlying amount of lending that has to be given as loans, that is aid money. But then, since particularly our financial crisis here in the Western World, interest rates here have been low, and so there’s been a big push to lend and so, there’s been a lot more private lending wanting to go and Governments willing to borrow. And then, in 2014, commodity prices fell and so, for commodity exporters they – their economies drastically changed. The Mozambique currency, Ghanaian currency, fell by almost 50% against the dollar, so if your debts had been taken out in dollars, that’s doubled the value of them. And so, that’s – there’s lots of other things around it, but just to be – a brief, kind of, way through the story.
There’s lots of countries that are not in that situation yet, but it’s worrying that most of them, their trajectories they’re heading that way.
Larry Elliott
Yeah and, I mean, one of the interesting points about US – rising US interest rates is this is going to – this is potentially, the trigger for a lot of problems in emerging markets, isn’t it?
Tim Jones
Yeah.
Larry Elliott
That there are a lot of countries who have borrowed in dollars, in the commercial markets, and they are now going to have to face repaying them at much higher interest rates.
Tim Jones
Yeah, so it’s US Central Bank interest rates rising and the value of the US dollar rising, big risks that you have if you’re borrowing in foreign currencies.
Larry Elliott
Hmmm, yeah. Pamella, one of the arguments you used to hear a lot, back in the late 1990s and the early 2000s, from Governments which were very resistant to the idea of debt relief, was that cancelling the debt would create a massive moral hazard problem, that if you wrote off the debt, countries would just have no incentive to look after their finances well. That they would just get back into more debt on the assumption that those debts would eventually be paid off again and that we’d back in the same problem. What’s your response to that argument? I mean, ‘cause it – you’re calling for debts to be cancelled. I’m sure those arguments would be rehearsed again by the Finance Ministers of certain hard-line countries, who would say the – you’re just – we warned you, 15 years ago, that this would be a moral hazard problem and so, it’s proved.
9 Should Debt in the Developing World Be Cancelled?
Pamella McLaren
Oh, and I don’t think the average country Finance Minister of Government would necessarily be irresponsible. While I advocate cancellation of debt, I do think that structures should be put in place to assist countries in ensuring that they don’t go back to being in debt distress. So, for example, usually there would be some – a reform agenda. So, for example, you may have reform for revenues, for taxes, that’s very important. So, this is something that the Governments should try to put in place. I am also a big, you know, believer that debt management, prudent debt management, is important. So, if you build capacity in countries for Debt Managers to be in a position to analyse risk, for example, to be able to advise the policymakers, that they are the ones who are contracting debt, to – about timing, about the structure, should I be borrowing commercial debt or should I be giving guarantees? You should have a guarantee policy in place. So, for example, in the case of Mozambique, apparently, there was no guarantee policy in place, because if there are – was a policy in place, the lender would be aware, there should be some transparency issues, where it is known, whoever is issuing the debt, they’re accountable. They have to go to Parliament, for example, to tell everybody that okay, we are going to borrow money to buy ships. So, you need to have – be able to have transparent framework in place, build capacity, so you can, you know, advise your policymakers.
Larry Elliott
And do you think those frameworks, the proper debt management structures, proper [bell] – sorry, sorry, Ann.
Ann Pettifor
Sorry, sorry.
Larry Elliott
I should’ve told everybody to turn their mobile phones off. I mean…
Ann Pettifor
Sorry, sorry, it was my timer.
Larry Elliott
Do you think that those debt management structures, the proper procedures for collecting taxes, should be put in place before debt release has been granted, or as part of a – because that’s what some – 30:28] the IMF, I’m sure, would say, that, you know, you need to have – to ensure that the debt relief is going to be well used on all of the things that you’ve suggested: education, health and so on?
Pamella McLaren
Well, from my experience, it’s a process. So, I think these should be done concurrently, as well. So, for example, if you are going to look at a legal framework, in terms of guarantee, where in your debt law you are going to have provisions there to guide policymakers in the issuance of guarantee, usually, this takes some time to do. So, rather than have these things in place prior to cancellation, the cancellation, I think, is immediate, so it can be done concurrently. 10 Should Debt in the Developing World Be Cancelled?
Larry Elliott
Okay, thank you. Ann, I mean, how do you think this process is going to get going politically? I mean, it was quite difficult, back in the late 1990s…
Ann Pettifor
Yeah.
Larry Elliott
…even at a time when the world economy, you know, was in the middle of a boom and G7 countries didn’t really have very much else to worry about. I mean, there’s plenty of policy space. It was still quite difficult, wasn’t it? I mean, it was quite difficult to get political will for this to happen. I mean, how do you think it’s going to be – is it going to be possible to recreate that campaign for debt relief, and if so, how?
Ann Pettifor
I have to tell you, it was one of the most difficult and exhausting things I’ve ever done and until the debted countries, in some way get together and also form a, if you like, a cartel, in the same way as the creditors do, the Paris Club is a cartel of creditors, and the debtors are very reluctant to do that and for probably sound reasons. So, we don’t get organised, the debtors organised. But for the public to be mobilised again for change, at a time when there’s a huge amount of insecurity here, financial and other kinds, and when actually, there’s also other threatening debt – I think corporate debt is actually, likely, to be the trigger for the next crisis, ‘cause corporate debt is way out of sync. So, you know, I just think the world’s financial prob – and also, since the crisis, I mean, at the time we were organising for Jubilee 2000, there was, you know, a fair amount of prosperity and stability in the core and we were working with countries at the margin. Well, then the crisis moved to the core and the crisis is still in the core ten years after 2007/9, you know, we have Italy blowing up and we’ve had Greece and who knows what’ll happen, and we have Central Bankers that cannot raise interest rates, you know. They’ve been threatening. The new Governor, as I said, threatened to raise interest rates four times this year and he’s already had to rollback on that, because their economies are all so weak. So, I think that political conditions are really very difficult for mobilising for the countries on the margin, or – I mean, not that middle income countries are as marginal as some of our countries were, but I can’t see it happening. And anyway, I have to tell you, it’s the hardest thing in the world to do.
Larry Elliott
And, I mean, do you see – and you talk about the debtor countries mobilising, which is obviously important.
Ann Pettifor
Yes.
11 Should Debt in the Developing World Be Cancelled?
Larry Elliott
But one of the reasons that it did get going was that there were some people in the creditor countries who were behind. I mean, you know…
Ann Pettifor
Indeed.
Larry Elliott
…Gordon Brown was behind it…
Ann Pettifor
Indeed.
Larry Elliott
…Tony Blair, you know, you did have somebody at the centre of the creditor countries who was prepared to pick up the phone and badger other Governments to do stuff.
Ann Pettifor
Absolutely.
Larry Elliott
Do you see anybody, maybe Tim and Pamella have got a view on this, do you see anybody, in the creditor countries, with that degree of political engagement?
Ann Pettifor
No, not so, and also, we had The World Bank. I mean, the World Bank came around, the President of The World Bank became a supporter and they helped push the IMF into doing it, and the Paris Club into doing things. So, we don’t have that big institution, alright, and I don’t know of anyone who is in – politically open to this. Tim, I don’t know, perhaps you are more in touch than I am.
Tim Jones
What do you think, Pamella?
Pamella McLaren
If I may, I think, in recent times, there is an appreciation from the multilateral institutions that there is need now to support middle income countries in our, maybe not necessarily cancellation, but at least to provide some debt relief. And while it has been challenging for Caribbean countries, and I can share with you, if you look at the Caribbean countries and you look at their debt structure, it is so different that there is no one solution. You’d have to have a menu of options for the – those countries and it has been very 12 Should Debt in the Developing World Be Cancelled?
difficult to have that dialogue and to come to some agreement. But in recent times, I know that now there is some traction and there’s a group that is actually meeting and looking together to look at the threat of…
Ann Pettifor
Is the Commonwealth Institute involved in that, or…
Pamella McLaren
We are.
Ann Pettifor
…have been?
Pamella McLaren
We are involved in that.
Ann Pettifor
That is encouraging.
Pamella McLaren
Yeah. So, some of the solution may be debt swaps, for example, not necessarily cancellation…
Ann Pettifor
Yeah.
Pamella McLaren
…but at least, you know, debt swaps. GDP linked bonds, that type of…
Larry Elliott
Okay and some of those things are actually being tried, are they?
Pamella McLaren
We are be – they are being discussed.
Larry Elliott
Ah, okay and not tried yet, no.
13 Should Debt in the Developing World Be Cancelled?
Pamella McLaren
Discussed, and from my experience, these things take very long. So, I’m not expecting anything any time soon, but at least there is now some dialogue, which is good.
Larry Elliott
Okay, time for you to play your part. I think we’ve got some mics, so perhaps you’d like to put your hand up. If you can – I’ll try and take questions one at a time. I find that a bit easier, if I can. So – but we’ll take a few at a time, if we start running out of time. But if you can tell me who you are and put your hand up if you’d like to ask a question, I’ll start taking them, and if you’ve got a particular member of the panel that you want to quiz, then please do so. Yeah, there’s a lady there and then there’s a gentleman there and as I say, we’ll take them in that order, the gentleman there, there’s a lady there.
Cath Hibider
Hi, I’m Cat Hibider from City Group. My question is, if we go with the scenario of debt cancellation and if we go with the scenario of shifting the burden also to the creditor, how can we make sure that we do not have a shrink in liquidity for the new debt for developing markets that’s much needed for these countries?
Larry Elliott
Okay, who’d like to take that one on? Ann, you want to take that one on? I think this is one for you, isn’t it?
Ann Pettifor
Yeah, I mean, I…
Larry Elliott
I mean, there’s – that’s the point, isn’t it? You know, there is a point there that, you know, a lot of these countries have got big, big capital needs, they need…
Ann Pettifor
Yeah.
Larry Elliott
…finance to finance their development, so…
Ann Pettifor
Well, for me, all the advanced economies, as they’re called, have advanced by building up their own monetary systems, which have enabled them to finance their own development. They’ve only, very recently, in historical terms, become dependent on foreign creditors for help and what’s happening now is that with low income countries and middle-income countries the assumption is that you don’t really need to have a functioning monetary system, which will enable you to raise the finance domestically, which is how we – I mean, the British Government finances all of its activity – activities by issuing bonds and the 14 Should Debt in the Developing World Be Cancelled?
Bank of England plays a big role in managing that. Doesn’t happen in many poor countries. So – and poor countries are too dependent, if you like, on hard currency loans from foreign creditors and I think that dependency is flawed and is always going to make them vulnerable. I would like to see much greater policy autonomy for low income countries and the ability to finance investment and activities through their own well developed monetary system, with the institutions that are necessary to that monetary.
Now, The World Bank and the IMF don’t encourage that, you know. It needs a sound central bank, independent. It needs a taxation system that works. It needs tax collectors that are trained and paid well. It needs a judicial system, which upholds contracts, and so on. So, these are in – and it needs a decent accountancy system, for assessing assets and liabilities and poor countries are not encouraged to build these institutions, which would make them financial autonomous. They’re encouraged, instead, to borrow on the international capital markets and, for me, that is just a strategy that means we’re going to have recurring crises, because, you know, it brings in the volatility of exchange rates. It depends on what happens in other countries, you know, the – it’s basically, we all wait to see what the Federal Reserve is going to do around interest rates and what’s going to happen to the value of the dollar, and we’re all utterly dependent on that – with that.
Larry Elliott
It’ll take time to build up that sort of struct…
Ann Pettifor
Of course it is, but we’ve never seen the bank and the fund actually work very hard to help. I’m, you know, I’m a South African and I’m South African born and I’ve watched the South African Government develop a tax collection system and it has – it is the department in South Africa, which is the most sophisticated and the best developed. And that’s absolutely fundamental to having a sound currency and to having a sound monetary system, and the South Africans have managed to do it. And they’ve gone from a stage when, you know, virtually no black people paid taxes, because they were never beneficiaries of public welfare, to a situation where now, many millions more pay taxes and actually, the system works extremely well. It’s one of the reasons Mr Zuma got into trouble, because the Head of the tax collec – the tax – the tax collection office, if you like, wanted to be independent and wanted it to be incorruptible and so on and so forth, and has succeeded in that. But, you know, South Africa’s unusual. You don’t see other countries – it’s not a condition, of IMF conditionality or World Bank that you shall develop a sound monetary system.
Larry Elliott
Hmmm, okay. Pamella, you wanted to do…?
Pamella McLaren
Ah, yes. I think we also should recognise that for some very small countries, it’s difficult for them. There’s no domestic market, for example. So, it’s very difficult for them to access funds from that market.
Ann Pettifor
Yeah. 15 Should Debt in the Developing World Be Cancelled?
Pamella McLaren
So, this is one of the reasons to why they are so dependent on external finances.
Ann Pettifor
Then they could have regional coalitions of, you know, West Africa, Sou – East Africa, Southern Africa, and so on.
Pamella McLaren
Yeah, but even with regional, also, like in the Caribbean, there is a regional market, but it is still very thin.
Ann Pettifor
Sure.
Pamella McLaren
Hmmm, we’re look…
Ann Pettifor
But the question is, do they need – always need a hard currency? I mean, why can’t they have their own currency and use that for domestic investment? You know, it’s about whether or – you know, most advanced economies began by developing monetary systems. Back in 1694, we set up the Bank of England here, you know.
Larry Elliott
Time moved a bit more slowly back then, though, didn’t it?
Ann Pettifor
Yeah, but…
Larry Elliott
I mean, countries a bit more time to build and nurture those sort of institutions. I mean, I know the question was, sort of, you know…
Ann Pettifor
Yeah.
Larry Elliott
…if the – if a country has debt relief and the creditor countries decide actually, you know, we’re not going to be interested in lending to that country again, then, you do have a potential problem, don’t you? 16 Should Debt in the Developing World Be Cancelled?
Ann Pettifor
Yeah, ‘cause you can’t buy oil and all of the really important resources they need and, yes, so they are dependent. But I still argue that it’s not a model that we used for our development. We didn’t say oh, we’ve got to – let’s go and borrow on the international capital markets. We developed our own monetary systems. So, I think ultimately, that’s what I would like to see more of.
Member
Oh, okay, and just a thought, so…
Larry Elliott
Just a quick one then, because we’re – you’re…
Member
Yes, but it’s very important too, actually.
Larry Elliott
Hang on, you need a mic.
Member
Oh, sorry. Yeah, I agree with you, developing the domestic market is very essential, but what about countries with wide kind of deficits, they would still need external currency? Like, you can’t remove the dependency on the external markets. You can make them less dependent, but they still need it.
Larry Elliott
Okay, I think we’re – sorry, Tim. Quickly then, ‘cause I want to move onto other questions. Do…?
Tim Jones
It’s alright, I mean…
Larry Elliott
I think there’s – I think that – I don’t think there’s any disagreement with that.
Ann Pettifor
Yes.
Duke Oputa
Yeah, and my name is Duke Oputa, Chatham House Member. I’ll pick up on Ms Pettifor’s tax issue. My question was going to border on it, so maybe a little thing. My country, Nigeria… 17 Should Debt in the Developing World Be Cancelled?
Larry Elliott
If you could keep it nice and short, that’d be great.
Duke Oputa
Yeah, Nigeria, my country, and we have the lowest tax GDP ratio in the whole world, about 6%, which is absolutely ridiculous. But my question really is, the main problem for us is the fact that our Government spent 40%, or thereabouts, of its revenue, on debt servicing. Is there a case for limiting the proportion of the expenditure of the Government as a means of perhaps bringing some discipline on what they can borrow, and let’s say, 10% and no more than that? If you can’t, you know, if you have to spend more than 10%, then the debt itself is too much for you.
Larry Elliott
Tim, and perhaps you’d like to take that one? Thank you very much.
Tim Jones
Yeah, and I think that’s one of the ways that you could look at it when deciding what is a – how is a debt sustainable.? I think it’s important to break a debt down and so, within debt servicing, you’ve got principle and interests and how much does that matter between them? And then, this issue of whether it’s domestic debt or external debt. Because the danger with not servicing domestic debt is, potentially, you’re putting your own financial system under risk. Well, we certainly think that there should be much stronger rules on saying these level of external debt payments has been reached, therefore, we need to have a sustain – restructuring process to get it back to a sustainable level.
One of the issues that when restructurings do happen is that obviously, the private sector wants to keep it as limited as possible, but that’s, kind of, accepted. So, the restructuring reduces it to just the level, which is serviceable at that point in time. But if anything goes wrong, if there’s any new shocks, you end up in another crisis. This is where you ended up with Jamaica having several debt restructurings over several years and so, you – once you’ve reached that point where it’s seen as it’s become unserviceable, you actually need to get the payments down well below that to allow space for future shocks, rather than it just being a keep it serviceable for the next couple of years and then, the crisis erupts again.
Larry Elliott
So, do you have a figure in mind, I mean, what’s – for external debt? I mean, I know you’re drawing the distinction between domestic debt, which is clearly a valid one, but do you have a rule of thumb for what you…?
Tim Jones
Yeah, and the IMF, and like, around 15 to 18% of Government revenue being spent on external debt payments and obviously, as campaigners, we’d like to push it lower, but I think that’s a decent starting point. That is principal and interest and, so, the interest component of that is lower.
18 Should Debt in the Developing World Be Cancelled?
Larry Elliott
Okay, good. There was a woman in the front row there. Perhaps you could hand the mic to her.
Cinzia de Santis
Cinzia de Santis from a charity, Healing Venezuela. In the last few decades, Venezuelan Government has contracted a massive, and often illegal debt, in the sense that it’s, you know, without the approval of the National Assembly. There is any visibility in the international bodies that, you know, deal with sovereign debt about what’s happening in Venezuela?
Larry Elliott
Who knows? Who…?
Ann Pettifor
If I understand – to explain. Well, I mean, well, I think what’s happening in Venezuela is tragic and awful and it’s catastrophic, actually. But can I say that – and also, to the gentleman who spoke before, that, you know, both of these economies are really dependent on one commodity, oil, and it’s – and, you know, how do you protect for the collapse in the oil price?
Now, I worked with Ngozi Okonjo-Iweala to help Nigeria clear $30 billion of debt, at the Paris Club in 2005, and she proposed setting up a, sort of, sovereign wealth fund, which was going to be there for when the oil price did fall. I don’t know what’s happened to that, I doubt it exists any longer. But the fact is that, you know, Nigeria’s problem is debt, but her real problem is the fact that she’s dependent, so dependent, on one commodity for almost all of her revenues and that’s the problem and as long as that is the case, there are going to be recurring debt crises. And the ratios, you know, trying to keep the ratios right, when your key earner, which is your – the oil of – collapses, means your ratios just go overnight. So, I mean, I would say that we should’ve followed the advice of Ngozi and kept, you know, a wealth fund for rainy days and Governments should do that. But in the case of Venezuela, I mean, I think it’s all pretty hopeless, really. I don’t think there’s anything much that we can advise there, except that it has to be start from scratch and the question is, and what’s so extraordinary, is the Government have survived this collapse of the economy.
Larry Elliott
Pamella, you’re…?
Pamella McLaren
Yes, I want to say something. Yeah, there’s also an issue of accountability. So, you have countries they borrow debt, they borrow and are the debt really channelled to the right places that they should be used for? So, you do have a lot of that as well, too, you know. So, they’ll borrow and the funds aren’t going to where? So, that’s also an issue. I mean, I don’t want to – that’s not maybe politically correct for me to talk about that, but that is a big issue as well.
19 Should Debt in the Developing World Be Cancelled?
Ann Pettifor
But Pamella, I’ve been to endless IMF World Bank Annual Meetings in Washington and it’s an extraordinary sight. You see the big Rolls Royces or the big fancy cars rolling up, with Bankers. There’s more Bankers at the IMF meeting than there is anywhere else in the world, and you see Finance Ministers from Africa having afternoon tea in posh hotels with these Bankers and you see them signing contracts.
Pamella McLaren
Hmmm hmm.
Ann Pettifor
And nobody knows what’s happening and nobody – the Bankers are very happy, because it’s all clean and being done in Washington and the Politicians are very happy, ‘cause they can go home and nobody knows what they have done. Now, why doesn’t the IMF and The World Bank manage that process and then we might get some transparency in the thing?
Pamella McLaren
Hmmm.
Larry Elliott
Good luck with that.
Pamella McLaren
Yeah. Well, I mean, the countries are sovereign countries too.
Ann Pettifor
Yeah.
Pamella McLaren
So, the IMF can man so much and no more.
Ann Pettifor
That’s true, exactly, yeah.
Pamella McLaren
So, we need to take responsibility, as technocrats in our countries.
Ann Pettifor
Yeah, yeah. No, you’re right. 20 Should Debt in the Developing World Be Cancelled?
Pamella McLaren
Hmmm, oh yes.
Larry Elliott
Right, okay. There’s a gentleman there, I’ll take you and then the gentleman at the back afterwards and then we’ll…
Member
[Inaudible – 50:28], I’m a Member and a Freelance Marketing Consultant. My question is, is there a possibility to create nudges to avoid countries getting debt that they cannot pay?
Ann Pettifor
Say that again, I…?
Member
Is it possible to create nudges in behavioural economics to avoid countries to get debt?
Larry Elliott
Nudges, is it possible to nudge economies in the way to prevent them from getting back into that? Tim, are you a nudge econ…?
Tim Jones
I’d say, I mean, I’m not a – that much of a nudge, if it doesn’t lead to much happening. But I don’t know whether you will see these as nudges or not. I think this transparency point is vital at the moment, that it’s the first step to being able to hold Governments to account is knowing that a debt exists. We have a proposal of a small nudge into the system. The way international debt works at the moment is that all contracts for international debt are either under English Law or New York Law and we could bring in a small legislative change that says, if you’re lending, under English Law or New York Law, then for that contract to be enforceable, if it’s a loan to a Sovereign Government, it has to have been publically disclosed when it was given, and we set up a register where all these loans have to be disclosed. So, it’s the tiny change that then, completely incentivises lenders have to be transparent when they lend, and if a Government is not willing to sign up to say that it is transparent, then a lender says, “Well, we can’t lend to you. So, that is one nudge to just, kind of, blow open and have this transparency.
And the other nudge is that when this crisis erupts, the IMF’s default position is we’ll lend money into the crisis and so, that immediately starts paying off the people who lent recklessly, and this is the real moral hazard that exists in the system. It’s nothing to do with Governments, it’s about the moral hazard for lenders that when you lend to Governments, you know you’re likely to be paid by the IMF and World Bank if the Government can’t, so you don’t need to take as much risk analysis. So, if instead, the IMF make clear we’re only going to lend once it’s clear that the private sector has agreed to reduce the debt to a sustainable level, that then changes the system and forces the private sector to negotiate, because if they want to be paid, they need that IMF money. And so, that again, is the nudge at the start of the system, 21 Should Debt in the Developing World Be Cancelled?
rather than these bailouts happening and then 20 years down the line, all the debt is owed to the IMF and World Bank and is then having to have a massive debt cancellation campaign. We don’t need that kind of campaign again. We don’t need Governments like the UK and Germany to be relieving debts. What we need is, the private sector to take the hit at the start when the crisis begins.
Larry Elliott
Okay. Right, there’s a gentleman at the back there. Let’s take you, yeah, that’s it.
Zahan Mohammed
Hi, it’s Zahan Mohammed. So, my question is, even if debt’s cancelled for these countries, I mean, what guarantees that these Governments would not go on yet another debt-fuelled spending sprees? I mean, and you talked about transparencies in these negotiating process, I mean, in the case of the Belt and Road Initiative, we have seen that they are projects which are funded by unsustainable debt projects and the public have opted for it. They’re very popular in the public.
Larry Elliott
Okay. Right, who would like to take…?
Ann Pettifor
And I always like to cite the example of Russia in 1998, was it, 97/98? And Russia defaults on her debt, boom, just like that, “Sorry, we’re not going to pay.” And the next day the creditors piled in. Why? Because the balance sheet was now clean, basically, there weren’t any outstanding debts. And with all the African countries as well, the minute the HIPC process was completed, the bank and the fund piled back in again. The country was now more sustainable. It didn’t have a heavy – you know, its balance sheet was more orderly, so why not lend more? So – ah, but Russia was really interesting. Now, of course, Russia had oil and gas and so on, but still, you know, it was a poor and, at the time, unstable country and what was extraordinary was the way the private sector just rushed back in the day after, effectively the day after default.
Larry Elliott
And yeah.
Ann Pettifor
So, the question is, you know, I think the debtor and the Ministers should be responsible. There should be a transparent process and so on, but so should the creditors. And it should be – but credit – the only thing that’ll discipline creditors, and I don’t believe in nudging, I believe you’ve got to discipline them, is the fact that they’re going to get – make very big losses and they’re going to have to take on the burden. But when you lend to Governments, there is no burden, you know, there – there are no losses. You know, if you lend to a corporate, if you lend to a company, a private company, you’re taking a risk, but if you lend to a Government, it’s virtually riskless, really, except in the case of maybe Venezuela, you know. But it’s very seldom that Governments get into that sort of mess and when Russia defaulted, the international capital markets were fine about it. 22 Should Debt in the Developing World Be Cancelled?
Larry Elliott
Let me – one of the interesting part of that question is mention of the Belt and Road Initiative and that’s one of the big changes in the last – since HIPC and Jubilee 2000, is China’s arrival on the scene as a very big player in international development and international investment, particularly in Africa.
Ann Pettifor
Yeah.
Pamella McLaren
Hmmm, very interesting.
Larry Elliott
I mean, what sort of – what’s the implications of that for the whole debt story, do you think? Anybody like to take that on? Tim, you would.
Tim Jones
Yeah, I mean, well – and China’s a huge issue. I tire of when it’s used as if China are the only people lending. When, in most of the cases, if you look at the debt breakdown, China tends to make up between ten to 20% of the debt burden, a similar amount to The World Bank listed for African countries. But yeah, it’s one of the creditors. I worry that most of their lending is being used just to extract commodities and it’s maintaining commodity dependence and that the ultimate key to tackling these resolving rounds of crises is getting out of this dependence on commodities and into other industries.
Ultimately, sitting here in London, there’s not a lot I can do to hold China to account. But campaigners that we work with in debtor countries are trying to hold their Governments to account on that lending, so I’d say it is a huge issue. It needs to be taken account, but China’s lending does not, kind of, excuse irresponsible lending by Western institutions and Western banks and so, I think for those with power in those institutions, they need to look at their own lending.
Pamella McLaren
Just, I’d like to just comment on the China lending. In some regions it is about commodity. I think, in others, it’s not commodity, it’s about support for China, it’s about vote at the UN.
Ann Pettifor
Yes.
Pamella McLaren
That’s what it’s all about, really.
Ann Pettifor
Yeah, yeah. 23 Should Debt in the Developing World Be Cancelled?
Pamella McLaren
Because they are very exposed in Africa and the Caribbean and it’s not just about commodity. It’s…
Ann Pettifor
It’s geopolitics.
Pamella McLaren
It is geopolitics, that is it, and it’s a long-term plan that they have. So, if you look, they’ll go in, they’ll lend, they’ll give you a long moratorium on – and debt servicing as well.
Ann Pettifor
Hmmm.
Pamella McLaren
So, it is really a geopolitical issue, really, for China.
Larry Elliott
Good. There’s a gentleman at the back, but in the very back row, and then you’re in – and next.
Gregory Smith
Gregory Smith, Chatham House member. I remember Tim wrote a very good report about Zimbabwe in 2011. I just wondered, do you think Zimbabwe’s debts should be cancelled?
Larry Elliott
Okay, Tim, that’s one for you.
Tim Jones
Not at the moment and Chin – I hope this reflects what our allies in Zam – in Zimbabwe are thinking. Zimbabwe defaulted on its debt in 2000, it’s not been paying since. What it wants to get out of a debt process is to be able to borrow more money again, because that is the financial benefit. The deal on the table, potentially, for Zimbabwe, is agree to start paying some of its old debt, get some cancelled and then it can borrow more money. And our concern is that there aren’t the processes in place yet to ensure that new borrowing is accountable, so we definitely don’t think that Zimbabwe should pay these defaulted debts.
If you look at the history it’s outrageous irresponsible lending, most of the debt is illegitimate. But also, we don’t think that there should be new loans being given to Zimbabwe yet, until they can be ensured that they’re used in a useful, productive way. And so, the campaigners in Zimbabwe, the main thing they’ve wanted is an audit into the debt to expose this issue, where does this debt come from and how can we make sure we don’t get into the situation again? It’s one of these – another of these nudges and that often, campaigners in the Global South have, is audit the debt, find out the situation, find out who was 24 Should Debt in the Developing World Be Cancelled?
responsible and work out how to prevent this happening again. And our – we often find creditors do not want to audit debts because it exposes their own role in helping to create the crisis. But it’s something that could get a lot more traction, if there was more official support for these kind of investigations into where the debt comes from.
Larry Elliott
Gentleman – and the gentleman in front of that – the one who asked the previous question, yeah.
Uzza Raut
Uzza Raut, Chatham House Member. I have a question on, sort of, guaranteed debt, so more to do with, sort of, SOEs and subnational Governments. So, you have – obviously, we talked about transparency and guarantee policies, but those have to do a lot with explicit guaranteed debts. But with a lot of these sovereigns, you start talking about implicitly guaranteed debt, so key sub-regions that have started borrowing. For example, debt in China, like sub-sovereign debt in China, when you’re talking about, say, SOEs in South Africa, debt to Eskom and Transnet. So, when we do these discussions of, sort of, EM debt, how much of this implicit and explicit sub-sovereign and SOE debt do we take into account, do we actually look at that when we’re talking about cancellation and restructuring?
Larry Elliott
Tim, that’s a very interesting question, and I’ve no idea about the answer to that, but you may well have.
Tim Jones
And they’re – in terms of whether they’re covered in figures, they – if there’s not an explicit guarantee, they won’t tend to be covered in the official figures on publically guaranteed debts. Should – I mean, I have a – and I don’t know much at all about sub-sovereign state level, but when we’re talking about state- owned enterprises, a simplistic view is, if you’ve lent money without an explicit state guarantee, to a state- owned company, then if that state-owned company, within its business, is able to pay, that’s fine. If not, it’s a normal bankruptcy procedure. There’s no reason why that should shift to the state if they’ve not given an explicit guarantee. If it is an explicit guarantee, that’s effectively the same as lending to the Government and so, all the important transparency processes need to happen around that and I’d – I know it’s probably overly simplistic, but want to, kind of, keep that divide.
Larry Elliott
Okay.
Pamella McLaren
I agree. I agree with that.
Larry Elliott
Gentleman, there. We’ve got a couple more and then we’ll probably wrap it up, I think.
25 Should Debt in the Developing World Be Cancelled?
Radicu Chera
Hi, Radicu Chera. I study economics at UCL. I have two questions, actually. One is, for some creditors or lenders the cancellation of debt might be quite an extreme approach to things, but realistically, what do you think is the best solution, Government linked, I mean, sorry, GDP linked notes or some sort of – you know, a propeller of whether, you know, the Government is doing better? Fine, you know, that’s a reasonable amount of debt to be paid with some specifications. Another, for countries heavily dependent on exporting commodities, you know, in terms of their economic wellbeing, how can these countries, when they’re dealing with so many issues, such as, you know, infrastructure, taxation, as was mentioned previously, how can they realistically improve their inner status and their dependency on foreign lending, when, just for countries in the Gulf which have, you know, uncomparable resources, for them, it’s 20/25 year initiatives, whereas, they’re not dealing with as many problems as countries in Africa or South America might be dealing with?
Larry Elliott
Pamella, maybe you’d like to take that one on? I mean, the…
Pamella McLaren
Oh, that one is – let me think about that one.
Larry Elliott
I mean, there was a ques – a particular question about, you know, “Should it be done through GDP linked notes.” I just wondered whether you have got any, from your debt management days, whether you’ve got any insight into the best way for countries to structure this?
Pamella McLaren
Well, I think countries need to look at other options, really. Not necessarily GDP linked bonds, but maybe look at doing buybacks, for example, buy back some of your high cost debts, you know. In good times, when you have buffers, you know, be opportunistic and strategic in looking at your portfolio and to reorganising that in a acceptable way, not necessarily a cancellation. But looking at other solutions.
Larry Elliott
And the second part of the question was, “How can countries realistically get over their dependency on foreign debt?”
Pamella McLaren
Realistically, is to grow, that’s it. You…
Ann Pettifor
That’s the only way.
26 Should Debt in the Developing World Be Cancelled?
Pamella McLaren
Yeah, that’s the only way, you have to grow, and for a lot of developing countries too, in terms of growth, how do you also get investment?
Ann Pettifor
Yeah.
Pamella McLaren
You know, so you have to get investment, you have to grow. There’s a big brain drain, as well, that affects countries significantly.
Ann Pettifor
They have to export their people to…
Pamella McLaren
Yes.
Ann Pettifor
…pay their debts, but…
Pamella McLaren
You know, so how do you use remittances, you know? Use remittances maybe not just for everyday, day- to-day transactions, but maybe investment. You know, you have a big diaspora to tap into the diaspora, for example. Diaspora will provide funding maybe at significantly lower rates than market rates. So, these are some of the things that we are developing in countries we need to explore.
Ann Pettifor
I always think about Japan, you know, Japan has 250% - debt to GDP is 250%. It’s a prosperous country. They have full employment. They’re carrying along nicely. Everybody thinks of them as a basket case, but David Pilling, his new book on GDP, says, actually, “You go there and there’s a huge amount of social and political stability. There’s a sense of community. There’s full employment. There’s prosperity.” And most of that debt is domestic debt. They’ve borrowed from their savers, their, you know, their pensioners, and so on and so forth. There’s a high number of – a very high value and it hasn’t affected them at all. They’re booming, effectively.
Larry Elliott
Yeah. So, would you say to a sub-Saharan African country, you know, be like Japan?
Ann Pettifor
Yes. 27 Should Debt in the Developing World Be Cancelled?
Larry Elliott
Right, now, final question. There was a gentleman here. I’m sorry, this is going to have to be the last one, but…
Nick Wyver
Thanks. Nick Wyver, Civil Servant. It’s been a little bit gloomy so far, in terms of the prospects for the future. So, to end on a, kind of, possibly optimistic note, should – is there reason to be cheerful in the growing interest in sustainable or responsible or impact investing and the, kind of, growing interest in people having a sense of where their pension funds are being invested or what their banks are investing in and the kinds of PSG or STG lenses that are being put on top of investments?
Larry Elliott
Okay, are there reasons to be cheerful? That’s a good way to wrap up the evening, isn’t it? So, we’ve had quite a lot of…
Ann Pettifor
Yeah, I want to…
Larry Elliott
Go on, Ann.
Ann Pettifor
…be cheerful, because the IMF, in this paper about how awful the debt is, says that, “Growth in low income developing countries is estimated at 4%, .7 – nearly 5% in 2017, with most of them recording higher growth than in 2016,” you know. So, these countries are doing well, and we’re talking about middle income countries, or I think – or, I don’t know, I hope – well, there are low income countries in here. So, they are. I mean, we would die for that rate of growth here, wouldn’t we?
Larry Elliott
Hmmm hmm.
Ann Pettifor
We have such very low rates of growth in advanced economies. So, I think they are doing something well and they are – they understand that they have to expand economic activity and employment and that this is a good – it’s good for business, good for the Government too. But I – but Tim is going to say and it’s not fair. But I did think that, reading this IMF report, that that was extraordinary.
Larry Elliott
Okay. Pamella? 28 Should Debt in the Developing World Be Cancelled?
Pamella McLaren
And I also think we need to recognise that it’s a process, it takes time. So, sometimes, we need to be a little patient and if countries do the right thing, eventually, they’ll see benefits. So, some are doing good things, too. It’s not all doom and gloom.
Larry Elliott
Okay, Tim, finish on a cheerful note.
Tim Jones
Yeah, how to do it. I think, I mean, my cheerful note is that when you two earlier were talking about oh, how difficult it was to get debt cancelled and the many years and hundreds of thousands and millions of people around the world who had to take action in order for it to happen, that’s not what we need now, in terms of debt. That we’re not in the same situation. We’ve got a crisis emerging now that people are starting to recognise. We can make these nudge changes, maybe a bit more than a nudge, that could deal with the situation now, rather than us needing to have all that effort and ultimately, get this international processes and taxpayers in the West having to cancel debts. If we just make sovereign debt a bit more like how commercial debt is treated and change some of the processes and how we respond to a crisis, that is what can both help deal with those crises and make them far less likely in the future. So, I don’t think it is as big a challenge as you were saying earlier, but it is something that we need to act on now to prevent it becoming that kind of challenge.
Larry Elliott
Okay, so it’s a problem, we should’ve learnt lessons from the past and we can deal with it?
Tim Jones
Yeah.
Larry Elliott
Okay, on that note, thank you all very much for coming [applause]. Thank you very much to my panel, to Tim, to Pamella and to Ann, thank you all very much. Hope you all come again to Chatham House sometime in the future.