Latin American Debt Relief:
There is Less Than Meets the Eye
• At the beginning of July, the G8 nations set forth a precedent-setting “100 percent” debt relief plan for qualifying
African and Latin American countries.
• However, the majority of Latin American debt is owed to parties not included in the plan. As a result, no more than a
third of the face value of the foreign debt was actually waived for any of the four regional countries covered in the
agreement, while other needy nations were completely excluded.
• Debt relief is an absolute essential for curing the region’s social ills, but in order to qualify, candidate countries
are forced to comply with damaging neoliberal conditionalities.
• For debt relief to be successful, a new, more generous, more inclusive process must be implemented that allows a Latin
American nation to prioritize its socioeconomic needs and dictate the tempo of its own development.
With rock concerts, public rallies and white bracelets alike petitioning world leaders to “make poverty history,” the
issue of debt relief has recently arrested unprecedented international attention. This high-energy advocacy coincided
with the annual meeting of the club of rich nations, the G8 Summit, held July 5-8 in Scotland. There, the debt of the
developing world was addressed, with a landmark “100 percent” debt cancellation proposal put on the table for qualifying
countries. Nearly all of the fanfare focused on Africa, whose development has been all but paralyzed by its crippling
external debt of $333 billion (2004), an alarming 36 percent of the continent’s total GDP. While 14 of the 18
beneficiary countries included in the G8 plan (devised by financial ministers from member countries Britain, Japan,
Canada, France, Italy, Russia, Germany and the U.S.) are located in Africa, also of significance are the four remaining
ones from Latin America, a region which has been similarly beset with unmanageable external debt burdens.
At $720 billion, Latin America’s foreign debt is equivalent to 38 percent of the continent’s GDP. The debt has
represented a significant drain on development in Latin America since the region’s crisis of the early 1980s, triggered
when Mexico defaulted in 1982 on its extreme obligations. Payments on debt service alone can consume over half of any
given Latin American government’s annual expenditures, frequently at the cost of investment in infrastructure and social
programs. This misappropriation results in troubled economies, unsatisfied citizenries and unstable polities, all which
perennially roil the region.
Too Good to be True
Given the debilitating impact of Latin America’s debt burden—not to mention the relative lack of progress on the
issue—it is no wonder that the G8’s announcement of “100 percent” debt cancellation caused hopes to soar throughout
Latin America, as well as among debt relief activists. Britain’s financial chief Gordon Brown dubbed the deal “the
biggest debt settlement the world has ever seen,” and the global media heralded the plan, which would supposedly waive
all foreign debt for qualifying countries. This agreement, unlike its predecessor the Highly Indebted Poor Country
(HIPC) initiative, was designed to wipe out not only debt service payments, but also debt principal held by Bolivia,
Guyana, Honduras and Nicaragua, presumably leaving the participating countries with ample funds for much needed
development endeavors.
The devil, however, lurks incontestably in the details. Only 24 percent of the countries’ debt is owed to the
institutions inscribed in the debt cancellation plan—primarily, the International Monetary Fund (IMF) and the World
Bank. The overwhelming majority of debt in the four included hemispheric countries is owed to bilateral and private
institutions and to the Inter-American Development Bank (IDB), which were not even included in the original scheme. In
reality, the alleged “100 percent” cancellation plan only signifies roughly 23 percent cancellation for Guyana, 32
percent for Bolivia, 25 percent for Honduras, and a mere 18 percent for Nicaragua, according to 2003 World Bank debt
figures. While partial cancellation, of course, is preferable to none, the figures involved are less than sufficient to
meet the countries’ needs.
Conspicuous Inadequacy
Further highlighting the insufficiency of the debt relief scheme, a number of countries with huge debt burdens were not
included in the original HIPC plans nor in the latest G8 formula, due to the dogmatic criteria used by the World Bank to
determine need. Haiti, for example, whose debt represents 40 percent of its GDP, spends twice as much on debt payments
as it does on healthcare. The poorest country in the hemisphere, Haiti’s debt has more than tripled in the past decade,
and its social conditions have correspondingly deteriorated, with its per capita income figure now standing at $355.
Despite its absurdly high debt to export ratio of almost 300 percent, Haiti eluded the World Bank qualification
criteria, preventing the country’s much-needed debt relief. Though not as dramatic as the Haitian example, severely
indebted countries like Argentina, Brazil, Ecuador, Jamaica and Peru are also significantly hindered by debt payments
without any reform in sight; in one year Jamaica paid $17.05 for every $1 received in aid grants, and debt payments
constitute a staggering 70 percent of Argentina’s GDP. Countries like Brazil and Mexico struggle with debt despite their
large economies and relative prosperity, as debt payments limit their ability to spend their limited resources on social
needs, even as a growing percentage of each country’s population may be living in poverty.
The issue is not that these countries have failed to make sincere attempts to reduce their debt. According to the World
Bank, in meeting its interest payments, Latin America has paid more than the equivalence of its total debt, shelling out
$730 billion between 1982 and 1996 without so much as making a dent in its debt inventory. Countries are forced to
acquire new debt in order to pay off the interest from former loans, a quicksand-like scenario which leaves no easy
exit. In light of these staggering facts, it is important to hold the G8 nations fully responsible in the process of
debt cancellation; a token 20-30 percent debt cancellation for four Latin countries, regardless of the accompanying
rhetoric, is not sufficient. To fully cancel these debts is not an act of charity, but one of fairness and
responsibility, as Latin America’s debt burden and the resultant bleak social conditions in the affected nations, are as
much the fault of the avaricious lending practices of financial institutions, as the wanton and often venal spending
records of past Latin American military governments. The G8 is not fully owning up to this responsibility, spending for
every one dollar in aid about six dollars in agricultural subsidies for their own economies. This ratio ends up being
extremely disadvantageous to the economies of the developing world.
The Ifs, Ands and Buts of Debt Relief
Debt relief in no way is a blank check from the developed world. Rather, qualifying countries pay a high premium for the
coveted relief, as cancellation accords historically have been garlanded with neoliberal conditionalities that have
proven to be overwhelmingly burdensome to debtor nations. These terms, often embodied in the notorious Structural
Adjustment Programs (SAPs) that accompany most aid packages, force countries to privatize valuable state industries
(often for pennies on the dollar), as well as liberalize trade and cut public spending. In a recent interview with COHA,
Morrigan Phillips, a fellow at Jubilee USA, an advocacy network in the forefront of the debt relief movement, commented
that “fighting those conditions is becoming the most important thing” in the debt relief movement, for they have proved
harmful to the continent. Bolivia and Guyana, for example, both cite an erosion of workers’ income as a result of the
SAPs. Further, most countries face decreases in income equality, employment, literacy and living conditions for the
average citizen as a result of implementing such required reforms.
According to a 2001 estimate by the UN Economic Commission for Latin America, 45 percent of Latin Americans now live
below the poverty line, as opposed to 41 percent in 1980, before the IMF initiatives began. Despite such dire results,
conditionalities nevertheless remain a prerequisite for debt relief. Bolivia, Honduras, Nicaragua and Guyana were
required to meet a “completion point” of neoliberal conformity before they could be considered for debt relief by the G8
countries and their financial institutions; any nation hoping for relief must go through the same process.
Candidates seeking debt relief are caught in a classic Catch-22 dilemma: in order to relieve poverty they must
institutionalize the circumstances that created it in the first place. This compromise does not end when external debts
are finally relieved. Rather, countries must continue to conform to IMF/World Bank expectations in order to win the good
credit ratings that are the password for attracting foreign investments. Success in debt relief endeavors must begin by
eliminating these hamstringing conditionalities; as analyst Mark Engler of Foreign Policy in Focus told COHA, “Countries
should not have to be invaded in order to have their debts forgiven.”
The Power of Precedence
The news about debt relief—including that from the most recent G8 proposal—is not all doom and gloom. Martin Luther King
Jr. once said, “[A true revolution of values] will look across the seas and see individual capitalists in the West
investing huge sums of money in Asia, Africa, and South America only to take profits out with no concern for the social
betterment of the countries, and say: ‘This is not just’.” Perhaps such a revolution of values is now beginning to take
place, even if debt relief efforts have thus far been unable to solve the needs of the developing world. According to
Engler, G8 leaders have, in essence, established that full debt cancellation is “morally just and politically feasible,”
acknowledging that relief is both necessary for growth and possible to bring about. Those involved in the anti-debt
movement are in a position to apply further pressure and continue to make demands on G8 leaders, who will find it
increasingly difficult to argue against the precedents that they themselves have established. Continuing on this
trajectory, it is not overly idealistic to foresee the cancellation of IDB debts or even private debts, which would
further pave the road to true full debt cancellation.
Though partial debt relief has not provided final solutions, it has provided some tangible benefits. According to the
World Bank, between 1999 and 2004, countries receiving debt relief have been able to almost double their spending on
poverty reduction programs and institute social reforms such as in the areas of education, health care and water
purification; the United Nations Development Program estimates that the lives of several million children could be saved
annually if the debt of the world’s 20 poorest countries were cancelled and the money instead invested in health care.
Debt cancellation clearly has been found to be a powerful tool for promoting growth and social investment, and as such,
it deserves higher prioritization in any dialogue involving G8 leaders as well as those from the developing world.
A Little Initiative, Anyone?
In spite of debt relief’s powerful potential good in the development process, the G8 has shirked from the full
leadership its members should be taking on the issue. Engler described the HIPC debt relief initiatives leading up to
the July agreement as “kicking and screaming compromises,” conceded to by the G8 only after years of relentless pressure
by those involved in the Jubilee debt relief movement and others. As a result, some countries have chosen to take their
own course of action instead of waiting for G8 debt relief to kick in.
In December 2001, Argentina defaulted on a portion of its bonds worth $81 billion, a move that eventually, if
reluctantly, was accepted by 70-75 percent of the country’s bondholders and subsequently forced the IMF into a bruising
renegotiation process. In June 2005, Ecuador announced that it would divert resources traditionally used to pay off its
debt into capitol infrastructure and social investment, a decision which initially caused creditors to raise an uproar,
but eventually they resigned themselves to accept the proposal. The IMF is only as strong as countries allow it to be,
and when debtor nations like Argentina and Ecuador come forth with their own initiatives, pressure mounts, and the IMF
is forced to enter into the negotiation process if it wants to maintain some degree of control over its outcome. This
type of self-determination is relatively rare in a region that usually succumbs to IMF neoliberal mandates, but it may
be necessary if debtor nations are to ever rid themselves of crushing debt burdens and the social ramifications that
normally accompany them.
Still, prospects of greater self-determination do not obliterate the considerable significance that further G8-initiated
relief could represent. Argentina, in spite of its monumental default, still owes $13.8 billion to the IMF and over $15
billion to other multilateral institutions; its debt payments continue to claim upwards of 75 percent of the country’s
annual GDP. Although Nicaragua was included in the recent “100 percent” deal, remaining debt payments represent two and
a half times what is spent on health and education combined, and 11 times its primary health care spending. The evidence
is clear that further relief is needed to solve the residual debt-related woes of Latin America.
Breaking Outside the Mold
If debt cancellation initiatives are to be successful, they must be fundamentally altered, allowing countries to dictate
their own development. Instead of imposing a “one size fits all” mandate on affected nations, relief-granting
institutions must acknowledge the wide-ranging diversity of individual Latin American nations in their reform plannings.
Implementing economic policy should be expected to proceed very differently in Haiti than in places like Brazil and
Mexico, which have much larger economies but nonetheless struggle with immense poverty. As Engler told COHA, “It’s
really a question of allowing countries to experiment and create their own path to development, for no other model has
been allowed to develop.” Approaching debt relief and development from this perspective would probably do a lot more for
Latin America’s poor than misleading labels.
This analysis was prepared by COHA Research Associate Alicia Asper.
August 2, 2005