Defusing the debt threat: Bill Peters, one of the founders of the Jubilee 2000 campaign for debt remission, reviews a new book on the international debt crisis.

I.O.U. THE DEBT THREAT AND WHY WE MUST DEFUSE IT NOREENA HERTZ Fourth Estate, 2004 ISBN 0007-178990

Despite Osama bin Laden, WMD, the Iraq War, etc, the rich-poor gap remains the major source of insecurity in our globalizing world. It underlies terrorism, environmental degradation, the issues of freedom and democracy spread over Bush's second inaugural speech.

In her new book, IOU, Noreena Hertz updates the post World War II discussion of the remedy, with admirable clarity. Her sub-title, the debt threat and why we must defuse it, links the discussion to the acute dangers our children and grandchildren may face, leaving no doubt about its priority for planners, politicians, economists and all of us. Her well-chosen statistics on the contemporary effects of poverty across the continents fully support that conclusion.

Hertz is no less clear about the origin of the rich-poor gap--the comparative advantages cumulatively developed in the regions best endowed with natural assets; the systems and structures, economic and financial, which their populations devise to maintain and reinforce their advantages; the distribution of power which enables them to stay in that position despite the obvious inequality on which it rests. Ajit Singh, mentioned as one of Hertz's advisers, says that the resultant liberalizing and globalizing regime 'is sub-optimal both for the rich and poor countries and is responsible for keeping the world economy functioning below its potential'. This needs remedying, for the sake of both rich and poor.

Hertz bases the remedy she proposes, first, as all good economists must, on Adam Smith, who 'gave a favourable nod to international bankruptcies in 1776'. But she also cites more recent authorities: two Nobel laureates, Josepth Stiglitz and Laurence Klein, Jeffery Sachs of Colombia University, and the Austrian academic Kunibert Rafter, who has a long record of international bankruptcy research. They recognize the principle that countries should not have to service debts which disable them from meeting the fundamental needs of their people.

To define 'which sovereign debts are repayable or illegitimate, and how debtors and creditors should be treated as a result', Hertz proposes a method of mediation through what she calls National Regeneration Trusts. Most of the Trustees would be nationals of the countries concerned, with a leaven of UN-avouched non-nationals, operating transparent accounts and open processes. This means no more Paris Club (the group of creditor nations which have negotiated with debtor countries since 1956) or Washington Consensus (the long-standing acceptance of consensus among the US government, the World Bank and the International Monetary Fund as overriding for major economic decisions).

Similar proposals have come from civil society, the International Monetary Fund (IMF) and both debtor and creditor-leaning governments. Hertz lists the obstacles. 1) Banks, generally conscious of their past and current bottom lines, don't want it. 2) The US clings to the Washington Consensus and its long-held blocking votes on the boards of the IMF and World Bank, and doesn't want more multilateralism. 3) Middle-ranking debtor countries are fearful for their credit ratings and need foreign investment. 4) Civil society has so far failed to build on the grassroots support acquired by the Jubilee 2000 campaign, which signed up 24 million supporters of debt remission by 2000. Hertz argues that none of these obstacles is insuperable.

Relevant to the second obstacle is Amartya Sen's comment, 'The (globalization) debate is ... about inequality of power ... for which there is less tolerance now (than in 1945).' Is he right?--the crucial question. Public opinion could be the clincher and requires much effort, as this reviewer repeatedly urges in print. *

IOU is rich in economic reflections and insights, not least on the differences between John Maynard Keynes and Harry Dexter White, founders of the IMF and World Bank, over where to charge the cost of preserving global financial equilibrium. Keynes' wish to have it shared by rich and poor was blocked by the US Treasury economist, a tragic outcome which has often been reinforced since. His ideas for a supra-national bank for redistribution, however, remain tenuously alive, in such schemes as Gordon Brown's International Finance Facility.

The IMF and World Bank are starkly labelled 'discredited'. Research studies, Hertz reports, repeatedly identify 'the single most consistent effect of the IMF' as 'the ability to redistribute income away from workers'.

An excellent book.

* For example 'Let's make a very brood coalition for changing the world'--Humon Ecology, Issue No. 20, May 2003 pp 7-9.