When the devastating earthquake hit, Haiti was already facing two other major crises. One was the massive destructions from the four major hurricanes that hit Haiti in 2008. At the time, the UN Under-Secretary-General for Humanitarian Affairs, John Holmes, described the four hurricanes of 2008 as the "worst disaster in the last 100 years" to strike Haiti; but by early 2009 the United Nations reported that only 40% of the $107 million it requested from member governments had been pledged. Even less had actually been delivered.
The other crisis was the long-term drain on the government's treasury from paying off debts to the international system. Much of this debt came from loans to the Duvalier regimes, and mostly appropriated by them and their cronies rather than for economic and social development of the country. This has meant that in the post-Duvalier period, much government revenue has gone to the international financial system rather than into education, infrastructure, health, the building of housing.
Haiti is one of 49 countries that have been subjected over the last 20 or 30 years, depending on the country, to an extreme debt-repayment schedule by the international financial system, particularly the World Bank and the IMF. Generally, the IMF asks these countries to pay 20% to 25% of their export earnings toward debt service.
In sharp contrast, after WWII the Allies only insisted on 3% to 5% of Germany's export earnings for debt service, as well as canceling 80% of Germany's war debt. And they asked 8% from Central European countries when communism fell after 1989.
Thus today's debt-service burdens of 20 to 25% on poor countries are extreme.
Indeed, they are so extreme that Jubilee's forceful debt cancellation campaign actually succeeded, in part because creditors (i.e. rich country governments) recognized that the conditions of these loans meant that most of the poor country borrowers would never be able to pay up the principal; further, most had already paid several times the original debt in interests. (I develop all of this at length in Globalizations. Special Issue on the Financial Crisis. Vol. 7, February 2010
The Debt
The debt of poor countries in the South had grown from US$507 billion in 1980 to US$1.4 trillion in 1992. Debt service payments alone had increased to $1.6 trillion, more than the actual debt. From 1982 to 1998, indebted countries paid four times their original debts, and at the same time, their debt stocks went up. (For easy to access and understand data on poor-countries debts go to www.Jubilee.org)
In 2006, before debt cancellations set in, the poorest 49 countries had debts to the international system totaling US $375 billion, and paid over $34 billion in debt service (payments of interest and principal). This comes to $94 million a day. If we include the so-called developing countries, for a total of 144 countries, this debt stood at over US $2.9 trillion in 2006, and $573 billion paid just to service debts in 2006.
These countries had to use a significant share of their total revenues to service these debts. Debt-to GNP ratios were especially high in Africa, at 123% in the late 1990s, compared with 42% in Latin America and 28% in Asia. For instance, Africa's Interest payments reached $5 billion in 1998, which means that for every $1 in aid, African countries paid $1.40 in interest in 1998. By 2003, debt service as a share of exports revenues were well over20% in several countries, notably in Zambia (29.6%) and Mauritania (27.7%).
Haiti, with 76 per cent of its population below the poverty line, paid $60 to $80 million a year in debt service over the last decade. In addition, it was subjected to an aid embargo from 2001 to 2004 in an effort to topple the government, perhaps seen as left-leaning. Haiti was still paying off its debt of US$ 1.7 bn when the devastating 2008 hurricanes hit, with budgeted debt service payments of over $1 million every week. This underlines how serious is the failure to fulfill the pledges for the 2008 post-hurricane reconstruction, which has also further aggravated the current situation.
Generally, IMF debt management policies from the 1980s onwards can be shown to have worsened the situation for the unemployed and poor (UNDP, 2005, 2008). The so-called adjustment programs of the 1980s and 1990s destroyed many traditional economies, leaving many countries only with major debts. They also at times furthered sharp concentrations of wealth and advantage, mostly via corruption by governments and elites. Much research on poor countries documents the link between hyper-indebted governments and cuts in social programs. These cuts tend to affect women and children in particular though cuts in education and health care, both investments necessary to ensuring a better future (for overviews of the data, see various annual issues of the UNDP and of the World Bank).
For instance, at the height of these programs in the early to mid-1990s, Zambia's government paid $1.3 billion in debt but only $37 million for primary education; Ghana's social expenses, at $75 million, represented 20% of its debt service; and Uganda paid $9 per capita on its debt and only $1 for health care. In 1994 alone, these three countries remitted $2.7 billion to bankers in the North.
Out of this mix of conditions emerge alternative survival economies; some of these have long existed in poor countries but now have expanded and often operate at larger scales -- regional and even a global scales. Emigration is one of these survival economies, both through employment overseas and via remittances sent back home. Criminality both minor and major offers yet other survival strategies. (But this I will have to write about in another post.)
Debt Cancellation Becomes the Only Way Out
This is the larger landscape within which Haiti did what it took to qualify for debt cancellation by the end of 2008. But the World Bank decided to postpone debt cancellation -- this amidst the devastations of the 2008 hurricanes. To do this to a poor country, with inherited debts going back to the dictatorships of the Duvaliers, and unfulfilled pledges for post-hurricane reconstruction, which in spite of all had managed to meet the criteria for debt cancellation, is almost inconceivable. In fact, so much so, that Zoellick, then recently appointed president of the World Bank asserted in a public press conference that a good part of Haiti's debt had been canceled. The World Bank had to retract this promptly; let me clarify that the Bank holds just 27% of that debt. It was not till July 2009 that 1.2 billion of its debt was cancelled. Even so, Haiti has to pay hundreds of thousands of dollars every week on the remaining debt, mostly to the Inter-American Development Bank and IMF. Today, January 21, the world bank announced it only holds 4% of Haiti's external debt. (This paragraph has been updated to clarify the World Bank's role in Haiti's debt).
Corruption in many debt-ridden, weak and mostly ineffective governments could undermine the positive effects of debt cancellation. But the evidence shows that the 2006 debt cancellations made a difference (IAEG 2009). For instance, in 1997 Zambia used 18.3% of its income on exports of goods and services on debt service; by 2007 it was 1.3%. For Ghana these figures are 27.1% and 3.1% respectively. For Uganda they are 19.7% and 1.2%.
A Coda: We Already Bailed Out the Big Banks Then!
There are two aspects of this debt regime that have not received sufficient attention.
One is the push by large banks with an excess of money in the 1960s and 70s, to get global south governments to borrow. Rising oil prices and the decision of oil exporters to deposit profits in the international banking system are one source of these bank riches. At the time, highly regulated national economies in the global north offered far fewer profit options than were to come with the new post-1980s global era. Lending to poor country governments was one profit option, especially with diverse protections and earnings enhancements, such as the Export-Import Bank set up by the US government. Whether it made sense for those poor countries is dubious.
Further, the cold war promoted the search for allies, no matter how corrupt. Thus Haiti, at the time under Duvalier, was given loans it was unlikely to pay back. And the US did not do much to prevent much of the money being appropriated by the Duvalier family and their cronies rather than for economic development.
The second insufficiently noted fact is that under IMF restructuring, rich country taxpayers paid off the debt to the lenders, mostly commercial banks. In the 1980s and into the 1990s it became evident that these poor countries were not going to be repaying their debt anytime soon. The banks succeeded in getting the IMF, the World Bank, and other parties in the multilateral system, to adopt the debts with tax-payers money. The commercial lenders got their principal back, besides the vast interest payments collected over one or two decades. The banks did not lose, and indeed negotiated a whole set of new loans via the IMF's expanded guarantees. Poor countries were still stuck with the debt. And we the taxpayers of the rich countries were now the proud owners of debts that were unlikely to be repaid (and, in many cases, should not be repaid, given how often they were extended to corrupt dictators).
Yes, our taxes were already used in the 1980s to bail out the big banks after their irresponsible lending in the 1960s and 1970s.
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http://eye.columbiaspectator.com/article/2010/02/18/understanding-haiti
Ms. Sassen's article is quoted in there.
"Confessions of an Economic Hitman".
Doesn't explain in great detail, but does so in a way the average man can understand...and he gives tons of real life examples...of how we overthrow governments that decide not to either participate(take out loans), or decide not to pay up.
Economic development has been better when micro-loans are used - $100 to buy a sewing machine for a seamstress. $200 to build a better well in a farming community.
Part of the problem with these loans was the political elites in Europe and the US where more familiar with large scale projects -- like the national road system Eisenhower had built -- than with small loans that would help the majority of the countries' populations.
Finally, Haiti's debt service problem mirrors the indemnity Haitians had to pay France in the 19th c - imagine - an indemnity for throwing off a colonial power! That bankrupted the country for more than a century, and now in the late 20th and early 21st, Haiti is in the same boat again.
Perhaps contemporary economists will see the long term damage crippling loans do to 3rd world countries and stick to the micro-loans that are so effective.
Why does the West spend money on big ticket items - weapons and wars - but never can find funds to help poor people?
About microcredit:you are so right about Western govts , or the big itnermediary organizations (IMF, World Bank) preferring large scale projects over microloans. The nobel prize winning economist who is credited with having developed one of the first large micro-credit systems finds that it takes a lot fo tiem to develop an effective system. He argues that a lot of those who are trying to do set up micro lending banks are wrecking the concept: they think it is just a question of setting up a microlending bank, and that is it. It isn't. This may partly explain why it is so difficult for these old-format institutions (huge, vertically integrated, not quite connected to the communities, etc). The world Bank does have a lot of really good people among field workers who are trying to do this seriously (besides having done the dams and other large projects).
What a shame, the 20th Century could have been a wondrous start to a intelligent world, nature shall be the leveler and we will all be victims of our own greed, sorry kids if you want to do better you shall have to disregard your elders leaders they lie follow at your peril.
Get rid of them early.
http://www.imf.org/external/pubs/ft/survey/so/2010/NEW012010A.htm
The bottom line: No interest thru 2011. No principal for 5.5 years.
But just to avoid consuion for the reader who might not read my long post: these favorable terms are partly a result of the activists who have fought for decades to get a fairer regime. In the post i mentioned that the GErmans after WWII were asked only 3% for debt service on their eport earnings (sure it was a different situation, but still.. the project was to incorporate Germany into the larger world economy of the time. And they asked only 8% from Central Europe after 1989. Why then 20 to 25 % for decades from the poor country governments.
s.
"The International Monetary Fund has backed off an effort to impose new loans on Haiti. Last week, the IMF said it would provide Haiti with $100 million under an extension of a previous loan. The initial funds imposed conditions including wage freezes for public sector workers, inflation controls and price hikes for electricity. But after public outcry, the IMF released a statement claiming its $100 million loan would now come in the form of an interest-free grant."
s.