Saturday, April 13, 2013

Debt and Aid

Globalisation: Aid and Debt dynamics and impact on development

Jasper Tumuhimbise

Paper I presented on 6th to 9th Feb 2013

1.0 Introduction:
Debt and Aid are two big issues that seriously affect poor countries’ chances of fighting poverty. One is the amount of aid they get. The other is the amount of debt they repay periodically. Across the world, impoverished countries are being forced to repay debts far bigger than original loans, instead of spending precious cash on essentials like schools and hospitals. Countries like Uganda and Bangladesh, for example, has to make crippling debt repayments, when they desperately need to use money to pay for better health care and education – especially for the poor people who are below the poverty line and survive on under a dollar a day.

The concept of Debt:
The debt of developing countries is in this sense an external debt incurred by governments of developing countries. In general it is in quantities beyond the governments' political ability to repay. "Unpayable debt" is external debt with interest that exceeds what the country's politicians think they can collect from taxpayers, based on the nation's gross domestic product, thus preventing the debt from ever being repaid.
There are two types of debts; Domestic or Foreign. A country occasionally needs to borrow from institutional and individual investors for budgetary purposes. Top officials, such as central bankers, may also engage in debt transactions on securities exchanges to implement monetary policies this constitutes Domestic debt.
On the other hand, External debt (or foreign debt) is that part of the total debt in a country that is owed to creditors outside the country. The debtors can be the government, corporations or private households. The debt includes money owed to private commercial banks, other governments, or international financial institutions such as the International Monetary Fund (IMF) and World Bank.

The concept of AID
Foreign Aid is the transfer of money, goods or technical services from a donor to a recipient. In the past it was for a short run political advantage rather than long term humanitarian principals or economic development. Currently beyond political interests is the need to effect development at various levels to meet certain standards like the Millenium Development Goals.
Aid comes in various forms but there are four major forms that are recognized:
1. Military aid: In the past the cold war was facilitating military aid without due consideration of democracy or economic development. Currently however there are other strategic interests and recipients of such aid are in effect supposed to use this aid in the interest of the Donor. For example USA’s military Aid to South Korea targets North Korea, while that one to Uganda targets the Great Lakes region including The Sudan.
2. Technical assistance: this is the least costly of Aid and it is designed to disseminate knowledge and skills rather than goods and services or funds. Perssonnel from Developed economies are sent to Recipient countries to advise on various programs like Agriculture, education, Engineering, Medical, etc. the impact of such assistance can be very great especially in rural areas while the costs are generally modest except if they are associated with major development projects.
3. Grants and commodity import program: Various donors up to 1950s would donate grants or outright gifts to Recipients for which no economic returns and repayments were expected. This has been however replaced with long term loans and recovery grants.
4. Development loans: Bilateral and multilateral loans are made to the recipients but with very poor credit ratings. It should however be noted that aid in form of loans is strictly speaking not aid since it attracts transfer of funds which recipients pay back both the principal and interest. These loans have created a heavy burden as will be seen later.

1.1 Principles of Aid
The Paris Declaration and Accra Agenda for Action are founded on five core principles, born out of decades of experience of what works for development, and what doesn't. Convention on the Organisation for Economic Co-operation and Development (OECD) promotes these principles that have gained support across the development community, changing aid practice for the better.
It is now the norm for aid recipients to forge their own national development strategies with their parliaments and electorates in a principle of ownership and donors support these strategies. This encompasses the fact that Developing countries and recipients of Aid set their own strategies for poverty reduction, improve their institutions and tackle corruption.

Alignment of work to streamline their efforts in-country is the second principal. This principle encourages Donor countries to align behind these objectives and use local systems to channel their aid instead of creating parallel ones.
Harmonization; for development policies to be directed to achieving clear goals and for progress towards these goals to be monitored, Donors and Recipients have harmonized plans that can easily be monitored.
Results in regard for donors and recipients alike to be jointly responsible for achieving these goals; Developing countries and donors shift focus to development results and results get measured. Impact of Aid is evaluated on the ground.
Mutual accountability. Donors and partners are accountable for development results. Accountability goes beyond paper work to reports and ensuring that original obligations are met.

Beyond its principles on effective aid, the Paris Declaration (2005) lays out a practical, action-oriented roadmap to improve the quality of aid and its impact on development. It puts in place a series of specific implementation measures and establishes a monitoring system to assess progress and ensure that donors and recipients hold each other accountable for their commitments.

Designed to strengthen and deepen implementation of the Paris Declaration, the Accra Agenda for Action (AAA, 2008) takes stock of progress and sets the agenda for accelerated advancement towards the Paris targets. It proposes the following three main areas for improvement:

Ownership: Countries have more say over their development processes through wider participation in development policy formulation, stronger leadership on aid co-ordination and more use of country systems for aid delivery.
Inclusive partnerships: All partners - including donors in the OECD Development Assistance Committee and developing countries, as well as other donors, foundations and civil society shall participate fully in the Aid and development process.
Delivering results: Aid is focused on real and measurable impact on development.
Capacity development - to build the ability of countries to manage their own future - also lies at the heart of the AAA .

3.0 Overview of Uganda’s debt and aid
There are two types of debts. One is External/foreign while the other is Domestic. On the External/ Foreign debt front, Uganda's external debt by the end of March 2011 was 4.76 billion dollars. In April 2011, a total of 669 million dollars was approved by Parliament. On the domestic front, Uganda’s annual debt stock of the country has grown at an average of 16.6% annually, which the report describes as alarming. Much of the borrowing is driven by the country’s budget deficit. Unsustainable debt levels hurt the country’s credit rating – a key indicator that investors use to make investment decisions.
High debt levels also mean that a country might not have the money to deliver on crucial social services such as health care, education, infrastructure as the government is consumed by paying off the debt. To control debt, governments usually increase taxes, lay off some workers, among other painful measures – all of which make up for a depressing economy.
Between June 2003 and June 2011, for instance, Uganda’s domestic debt rose from just Shs 1.6 trillion to a whopping Shs 4.6 trillion despite the fact that Uganda benefited from huge debt write-offs from key creditors in 2005. The study, Uganda’s current domestic debt status and its implications to the economy, shows that government securities alone amounted to Shs 4 Trillion – about 88.6% of the debt while domestic arrears amounted to Shs 515.4bn .

Much of the debt from the government securities is interest paid out to financial institutions. The interest on concession loans that government will pay is estimated to increase from Shs 327.2bn in 2009/10 fiscal year to Shs 713.9bn in the 2012/13 – almost the entire budget of the health sector.

On AID, Uganda is a beneficially of donor assistance from several countries. This refers to official development assistance (ODA) from Organization for Economic Cooperation and Development (OECD) nations to developing countries and multilateral organizations. ODA is defined as financial assistance that is concessional in character, has the main objective to promote economic development and welfare Uganda and this AID contains grant elements. USA, UK, Scandinavian Countries, EU, Irish Aid are some of the top donors.

On the onset, it should be noted that aid has attracted a lot of corruption. Resultantly, Overseas Development Institute have highlighted the need to tackle corruption with, but not limited to, the following methods :
• Resist the pressure to spend aid rapidly.
• Continue to invest in audit capacity, beyond simple paper trails;
• Establish and verify the effectiveness of complaints mechanisms, paying close attention to local power structures, security and cultural factors hindering complaints;
• Clearly explain the processes during the targeting and registration stages, highlighting points such as the fact that people should not make payments to be included, photocopy and read aloud any lists prepared by leaders or committees.
Uganda has suffered greatly on corruption of aid and many donors have withdrawn some form of aid from some programs and threatened further action.

4.0 The demand for aid and abolition of debt.
Foundations and Civil Society Organisations and the affected Least Developed countries demand aid rather than debt. There have been efforts to cancel debts and consider them instead as aid for various reasons. However, it should be noted that the causes of debt are a result of many factors. Some of the current levels of debt were amassed following the 1973 oil crisis. Increases in oil prices forced many poorer nations' governments to borrow heavily to purchase politically essential supplies. At the same time, OPEC funds deposited in western banks provided a ready source of funds for loans.
In many countries, a proportion of borrowed funds went towards infrastructure and economic development financed by central governments, a proportion was lost to corruption and about one-fifth was spent on purchase of arms and hence the opposition to the issue of debt.
4.1 From Debt to Aid campaigns
There is much debate about whether the richer countries should be asked for money which has to be repaid. The Jubilee Debt Campaign gives six reasons why the third world debts should be cancelled and instead aid to increase. These include:
Firstly, several governments want to spend more money on poverty reduction but they lose that money in paying off their debts. This implies that for poverty to be alleviated, debts should be forgiven. Uganda benefitted out of HIPC debt cancellation and money was channeled to Poverty Action Fund.

Secondly, the lenders knew that they gave to dictators or oppressive regimes and thus, they are responsible for their actions, not the people living in the countries of those regimes. For example, South Africa has been paying off $22 billion which was lent to stimulate the apartheid regime.

Also, many lenders knew that a great proportion of the money would sometime be stolen through corruption. This, it is argued would lead to increased poverty levels and hence the need to abolish debt.
Next, the developing projects that some loans would support were often unwisely chosen and failed because of the lender's incompetence. Technical ability for LDCs to absorb some of the loans remained lacking.

Also, many of the debts were signed with unfair terms, several of the loan takers have to pay the debts in foreign currency such as dollars, which make them vulnerable to world market changes. These unfair terms can make a loan extremely expensive, many of the loan takers have already paid the sum they loaned several times, but the debt grows faster than they can repay it.

Finally, many of the loans were contracted illegally, not following proper processes. This related to the fact that some debts is that the money loaned by banks is generally created out of thin air, sometimes subject to a small capital adequacy requirement imposed by such institutions as the Bank of International Settlements.
Maurice FĂ©lix Charles Allais a 1988 winner of the Nobel Memorial Prize in Economics commented on this by stating “The ‘miracles’ performed by credit are fundamentally comparable to the ‘miracles’ an association of counterfeiters could perform for its benefit by lending its forged banknotes in return for interest. In both cases, the stimulus to the economy would be the same, and the only difference is who benefits.” He opposed loans.

5.0 Impact of increased aid and debt abolition
Some people, such as the anti-globalists argue against forgiving debt on the basis that it would motivate countries to default on their debts, or to deliberately borrow more than they can afford, and that it would not prevent a recurrence of the problem. Economists refer to this as a moral hazard. However they argue that increased aid especially to the social sector is a welcome move. Others encourage long term assistance rather than short term relief that only distorts the economy.
For example when Zambia’s debt was cancelled in 2005 and turned into assistance, its government was able to introduce free health care for people in the countryside – scrapping fees that once stopped millions getting care they needed. And education got a boost too – extra funds made available by debt relief also paid for 4,500 badly-needed new teachers. Making sure developing countries get the aid money they need is just as important as cancelling their un-payable debts.

5.1 On education
Millions of children in Tanzania, Uganda, Kenya and Malawi are now going to school, thanks to a combination of debt relief and aid. And increased infrastructure development like in roads in Ethiopia with foreign aid are now making it easier for children to get to school, people to reach hospital, and farmers to transport and sell their crops.
5.2 On sustainable development
Africa may be getting enough aid, but the question of whether aid works has a short answer as ‘no’. This is because rich countries pledged 0.7 per cent of their annual national incomes in foreign aid. And so far, just four nations – Sweden, Norway, Denmark and the Netherlands – have reached the target. NGOS are working hard, encouraging governments and international organisations like the UN to meet their promises on aid, and spend it more effectively.
5.3 On social sectors
Health and Education campaign demands that world leaders cancel poor countries’ debts, and increase foreign aid. People are calling for more and better money to get every child into school, and to ensure everyone has the doctors, clinics and medicines they need when they are sick.

In 2005, G8 leaders promised to cancel some of the debts of 42 countries, and give an extra £50 billion in aid by 2010 – half of it to Africa. But for the second year in a row, rich countries have not delivered on their commitment to increase their aid to fight extreme poverty.
There are also campaigns in India, to demand that the government delivers the 9% of the country’s income for health and education they have committed. Children and campaigners there are reminding their leaders that ‘9 is Mine’. The government is being pressed to act soon.

5.4 Recent debt relief
A number of impoverished countries have recently received partial or full cancellation of loans from foreign governments and international financial institutions, such as the IMF and World Bank.
Under the Jubilee 2000 banner, a diverse coalition of groups joined together to demand debt cancellation at the G7 meeting in Cologne, Germany. As a result, finance ministers of the world's wealthiest nations agreed to debt relief on loans owed by qualifying countries.

A 2004 World Bank/IMF study found that in countries receiving debt relief, poverty reduction initiatives doubled between 1999 and 2004. Tanzania used savings to eliminate school fees, hire more teachers, and build more schools. Burkina Faso drastically reduced the cost of life-saving drugs and increased access to clean water. Uganda doubled school enrollments under Poverty Action Fund program.

In 2005, the Make Poverty History campaign, mounted in the run-up to the G8 Summit in Scotland, brought the issue of debt once again to the attention of the media and world leaders. Some have claimed that it was the Live 8 concerts which were instrumental in raising the profile of the debt issue at the G8, but these were announced after the Summit pre-negotiations had essentially agreed the terms of the debt announcement made at the Summit, and so can only have been of marginal utility.
Make Poverty History, in contrast, had been running for five months prior to the Live 8 announcement and, in form of the Jubilee 2000 campaign (of which Make Poverty History was essentially a re-branding) for ten years. Debt cancellation for the 18 countries qualifying under this new initiative has also brought impressive results on paper. For example, it has been reported that Zambia used savings to drastically increase its investment in health, education, and rural infrastructure. The fungibility of savings from debt service makes such claims difficult to establish. Under the terms of the G8 debt proposal, the funding sources available to HIPC countries are also curtailed; some researchers have argued that the net financial benefit of the G8 proposals is negligible, even though on paper the debt burden seems temporarily alleviated.

The 2005 HIPC agreement did not wipe all debt from HIPC countries, as is stated in the article. The total debt has been reduced by two-thirds, so that their debt service obligations fall to less than 2 million in one year. While celebrating the successes of these individual countries, debt campaigners continue to advocate for the extension of the benefits of debt cancellation to all countries that require cancellation to meet basic human needs and as a matter of justice.
To assist in the reinvestment of released capital, most International Financial Institutions provide guidelines indicating probable shocks, programs to reduce a country’s vulnerability through export diversification, food buffer stocks, enhanced climate prediction methods, more flexible and reliable aid disbursement mechanisms by donors, and much higher and more rapid contingency financing. Sometimes outside experts are brought to control the country's financial institutions.

5.5 The 2004 Indian Ocean earthquake
When the 2004 Indian Ocean earthquake and tsunami hit, the G7 announced a moratorium on debts of twelve affected nations and the Paris Club suspended loan payments of three more. By the time the Paris Club met in January 2005, its 19 member-countries had pledged a total of $3.4 billion in aid to the countries affected by the tsunami.
The debt relief for tsunami-affected nations was not universal. Sri Lanka was left with a debt of more than $8 billion and an annual debt service bill of $493 million. Indonesia retained a foreign debt of more than $132 billion and debt service payments to the World Bank amounted to $1.9 billion in 2006.

5.6 G8 Summit 2005: aid to Africa and debt cancellation
The traditional meeting of G8 finance ministers before the summit took place in London on 10 and 11 June 2005, hosted by then-Chancellor Gordon Brown. On 11 June, agreement was reached to write off the entire US$40 billion debt owed by 18 Heavily Indebted Poor Countries to the World Bank, the International Monetary Fund and the African Development Fund. The annual saving in debt payments amounts to just over US$1 billion. War on Want estimates that US$45.7 billion would be required for 62 countries to meet the Millennium Development Goals.

The ministers stated that twenty more countries, with an additional US$15 billion in debt, would be eligible for debt relief if they met targets on fighting corruption and continue to fulfill structural adjustment conditionalities that eliminate impediments to investment and calls for countries to privatize industries, liberalize their economies, eliminate subsidies, and reduce budgetary expenditures. The agreement came into force in July 2006 and has been called the "Multilateral Debt Reduction Initiative", MDRI. It can be thought of as an extension of the Heavily Indebted Poor Countries (HIPC) initiative. This decision was heavily influenced and applauded by international development organizations like Jubilee 2000 and the ONE Campaign.

Opponents of debt cancellation suggested that structural adjustment policies should be continued. Structural adjustments had been criticized for years for devastating poor countries. For example, in Zambia, structural adjustment reforms of the 1980s and early 1990s included massive cuts to health and education budgets, the introduction of user fees for many basic health services and for primary education, and the cutting of crucial programs such as child immunization initiatives.

5.7 Criticism of G8 debt exceptions
Countries that qualify for the Highly Indebted and Poor Countries (HIPC) process have had only debts to the World Bank, IMF and African Development Bank canceled. Criticism was raised over the exceptions to this agreement as Asian countries will still have to repay debt to the Asian Development Bank and Latin American countries will still have to repay debt to the Inter-American Development Bank. Between 2006 and 2010 this amounts to US$1.4 billion for the qualifying Latin American countries of Bolivia, Guyana, Honduras and Nicaragua.

6.0 Conclusion
In dispensing debt and aid, there is a relationship of National Units to the international Systems that are somehow manipulative. Some states can never be understood sufficiently in terms of actions, such as sending a note or declaring war on certain countries through Military Aid. Governments often contemplate their relationships to the environment or to regional subsystems in terms that are broader than those that have very specific considerations underlying specific decisions.
The two components of foreign policy that reflected these broader concerns have been called orientations and national roles and something in considerable details how a nation and its Government will generally relate themselves over a period of time to the outer world. They reflect basic national attitudes and needs, as well as external conditions. There are major orientations that have been observed repeatedly throughout history: isolation, national alignment, and coalition formation. There are, of course, varieties of each, but basically they are all strategies that involve the making or avoidance of commitment to others states. They are adopted- often only gradually – in light of considerations; but geographic location, perceptions of threats, national needs, and systemic characteristics may be the most important.
National roles outline the functions and task to which states see them-selves committed within different international contexts. They thus provide guidelines for action when specific situations arise in the environment. A government that defines itself as a bastion of the revolutions, for example, will very probably provide diplomatic, military, and propaganda support (actions) to rebels groups operating in a certain country. Further, National roles also reflect the general and specific objective governments pursue within regions or in the world as a whole. The other important and last component of foreign policy, the goals governments seek to achieve abroad which in a way still relates to the above two components.

• "Jubilee Campaign".
• The Chicago plan & New Deal banking reform By Ronnie J. Phillips, 1995, M.E. Sharpe Inc.
• Shah, Anup (July 2007). "Structural Adjustment—a Major Cause of Poverty.". Global Issues. Retrieved 2007-08-13.
• cited 4th Feb
• Dec 2, 2012

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