Multilateral debt: the unbearable burden.

Key Points

* World Bank figures for 1999 show that $128 million is transferred daily from the 62 most impoverished countries to wealthy countries, and that for every dollar countries receive in grant aid, they repay $13 on old debts.

* The IMF and the World Bank are "preferred creditors" who gain power over impoverished countries as the amounts owed to them increase.

* Structural adjustment programs, which reorient economies to benefit corporate interests while reducing spending on social programs and locally oriented production, are imposed by IFIs on severely indebted countries.

Multilateral debt is that portion of a country's external debt burden owed to international financial institutions (IFIs) such as the International Monetary Fund (IMF) and the World Bank. For most of the world's impoverished countries, multilateral debt looms larger than other debts because of the status of IFIs as "preferred creditors" assigned them by the Group of 7 (G-7) industrialized countries. These same countries control the most votes at the IFIs and use the resulting leverage to insist on orthodox austerity and "free trade" policies. Because of the preferred creditor status of the IFIs, payments of multilateral debt takes priority over private and bilateral (government-to-government) debt.

Governments and private creditors often write off debts. But the IFIs contend that their bylaws prohibit them from granting debt relief or canceling debts. Borrowing governments have special incentive to stay current with their multilateral debts because IFIs determine the creditworthiness of borrowing countries. Until the IMF gives its stamp of approval that a country is adhering to the economic policies it recommends, impoverished countries generally cannot get credit or capital from other sources. Until a country has signed onto an IMF program, it cannot apply for bilateral debt relief from the "Paris Club" of creditor countries.

The significant growth of multilateral debt came to public attention with the Latin American debt crisis of the early 1980s. Mexico, Argentina, and Brazil all came to the brink of defaulting on loans that foreign banking corporations had freely offered to developing country governments during the 1970s. The IMF and the World Bank responded with massive loan packages conditioned on implementation of structural adjustment programs (SAPs), which are packages of neoliberal economic policy reforms ostensibly designed to restore economic health to indebted countries. This promotion of SAPs marked a changing course at both IFIs. The IMF shifted from short-term, balance-of-payment loans, mainly to industrialized countries, to medium-term loans for developing nations. The World Bank added policy-linked loans to its infrastructure development projects. Private debts were converted into multilateral debt as countries used the funds acquired from the IFIs to pay off the private banks that refused to issue new loans.

Multilateral debt is a problem for the entire Global South, but it's particularly acute for the most impoverished countries. For low-income countries (defined by the World Bank as those with per capita GNP below $785), multilateral debt increased by some 544% between 1980 and 1997, from $24.1 billion to $155.3 billion. Multilateral debt constitutes 32.75% of the long-term debt burden of the most impoverished countries. For middle-income countries, the corresponding percentage is 15%. World Bank figures for 1999 show that on average $128 million is transferred every day from the 62 most impoverished countries to wealthy countries, and that for every dollar these countries receive in grant aid, they repay $13 on old debts.

The debilitating impact of debt is felt in two main ways: 1) through the diversion of national resources to debt servicing, and 2) through the negative social and economic consequences of the SAPs that indebted countries are obligated to adopt. These SAPs are designed to transform economies from a focus on production for the local market to one that adopts a "globalized" model of production and export of products that earn the most hard currency. SAP-linked IFI loans are meant to finance the redesign of governmental, industrial, and commercial systems that will enable countries to service debts and become more integrated into the global economy. However, SAPs have almost invariably caused increased poverty, unemployment, and environmental destruction, while also leading to an increase in the overall size of a country's multilateral debt. The universal failure of the standard SAP recipe has meant that debt and structural adjustment simply end up fueling each other.

The global Jubilee 2000 debt-cancellation movement, which acquired great momentum in some 50 countries in the late 1990s, has continued under different names since 2000. The latest version of the IMF/World Bank debt management program, sometimes called the Cologne initiative (after the site of the 1999 summit of the G-7 countries), was a response, however inadequate, to the Jubilee movement. As part of the Cologne terms, the U.S. and other G-7 governments agreed to cancel 100% of the bilateral debts owed them by the most impoverished countries--as long as they are obeying structural adjustment programs. Despite the high hopes of many debt-cancellation campaigners, the G-7 Summit in Genoa in 2001 yielded no new decisions or initiatives on debt.

Soren Ambrose, 50 Years Is Enough Network