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The Progressive Economics Forum

Norway to cancel illegitimate debt

Kudos to Norway, already a leader in foreign aid as a share of GDP, for cancelling the bilateral debts of five poor nations. The amount of money is not huge, so one might ask why it has taken this long – the 2000 Jubilee campaign might have been a better time.

From the story below, Norway actually seems pretty innocent when compared to some of the lending to poor countries in the 1960s and 1970s that went into military budgets or the private bank accounts of dictators, but that the Paris club has insisted the people of those countries repay (in South Africa the biggest line item in the budget, as of a few years ago anyway, was servicing debt incurred by the apartheid government). This “odious debt” is much worse than Norway’s push to sell some ships.

Still, it is nice to see the gesture. It is a different tack from the “blame the victim” mentality that has prevailed until now, and says that lenders bears responsibility too, not just borrowers. The slogan from Jubilee South a few years ago was “don’t owe, won’t pay”.

It would be even better if other rich countries followed on this lead. Debts skyrocketed in the early 1980s when interest rates shot up, yet poor countries were simultaneously sqeezed by declining terms of trade as oil prices went way up vis-a-vis their commodity exports. It has now been 24 years since the original 1982 “debt crisis” and the situation is still grim for most countries.

While the odd headline in the papers has suggested relief of these debts, outright debt cancellation has never been the objective. Rather, rich countries have given “relief” to bring down debt to “sustainable” levels – meaning debt on the books that is realistically serviceable, and writing off the portion that was not being paid anyway. This process has kept many countries from outright default.

And any such gestures were always in exchange for structural adjustment programs that emphasized privatization of state enterprises, deregulation, liberalization of trade and foreign investment, and tight monetary policies. These programs have mostly been done through the IMF and World Bank, and have been dismal failures.

Norway Breaks Silence on “Illegitimate Debt”
Emad Mekay

WASHINGTON, Oct 3 (IPS) – Anti-debt campaigners are hailing as groundbreaking Monday’s decision by Norway to cancel 80 million dollars in debt owed by five poor nations after it determined that the loans were not granted in a good faith effort to promote development.

Several leading non-governmental organisations immediately touted the decision as a model for other wealthy creditors to follow in order to ease the global debt crisis that has squeezed many developing nations.

“It is not fair that the populations of debtor nations continue to pay the price of corrupt, negligent and politically motivated lending in the past,” said Gail Hurley of the international anti-debt group Eurodad.

“Today the silence has been broken and we urge other creditor countries, in particular in Europe, to follow Norway’s bold lead,” she said.

A press release from the Norwegian foreign ministry said the countries that will benefit are Ecuador, Egypt, Jamaica, Peru and Sierra Leone. Burma and Sudan are two other countries that could benefit from the plan in the future.

In its announcement — the first of its kind by a rich lender nation — the Norwegian government publicly admitted it had made “a policy failure” and that it had played a role in adding to the “illegitimate debt” that those poor nations accumulated over the years and which have eaten into their social spending budgets.

The decision is also significant because Norway broke ranks with the cartel of creditors who have mostly denied they were lending irresponsibly or for political reasons.

Rich nations, especially in the powerful group of bilateral creditors known as the Paris Club, and through multilateral lenders like the World Bank and the International Monetary Fund, have long denied promoting illegitimate debt to corrupt governments or failed policies in developing countries.

In its statement, the Norwegian government said the “illegitimate debt” in question came about as the result of a campaign in effect from 1976 to 1980 to bolster the country’s troubled shipbuilding industry by selling 156 vessels and shipping equipment to poor countries.

The projects in poor nations fell quickly into unsustainability and the Norwegian government became their creditor.

“As a creditor country, Norway has a shared responsibility for the debts that followed,” the Norwegian government said in its statement.

“In canceling these claims, Norway takes the responsibility for allowing these five countries to terminate their remaining repayments on these debts,” said Minister of International Development Erik Solheim.

An official probe in the late 1980s found that the effort lacked adequate analyses of the real needs of poor nations as well as risk assessments. The main conclusion was that this kind of lending campaign should not be repeated.

“Norway’s government has, in effect, admitted that its lending in these particular cases was irresponsible and motivated by domestic concerns, rather than an objective analysis of the development needs of the countries involved,” said Hurley of Eurodad.

The proposal comes as part of the government’s new 2007 budget put before parliament. It suggests that the debts be cancelled unilaterally and unconditionally, without extra budgetary allocation.

The government of Norway, an affluent oil-rich country, said it will not report the cancelled debts as official development assistance to the Organisation for Economic Cooperation and Development, a group of 30 rich nations. This means that the debt forgiveness will be supplementary to Norway’s ordinary official aid.

Such a move breaks the tradition of counting partial debt alleviation as part of new aid to poor nations — a practice critics say has led to artificially inflated aid budgets that give the impression there is more money available for developing countries than there really is.

“Norway’s statement this week, and its willingness to accept responsibility for illegitimate lending, set an important precedent that other international creditors must heed,” said Ann-Louise Colgan, acting co-executive director of the Washington-based Africa Action.

Development groups have lobbied for years for the cancellation of debts owed by poor nations. They routinely condemn illegitimate debt and other forms of debts where poor populations have not befitted from loans incurred under dictatorships or through corrupt dealings or ill-conceived economic policies.

The anti-debt campaigners now say Norway’s decision should encourage international financial institutions, particularly the World Bank and International Monetary Fund (IMF), to which poor nations owe billions of dollars, to follow suit.

Colgan said that these institutions “can no longer turn a blind eye to their own historically unfair and corrupt lending practices. They must follow Norway’s lead, and cancel the illegitimate debts being repaid now by impoverished countries in Africa and throughout the global South.”

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Comments

Comment from julenka
Time: October 15, 2006, 7:19 am

Mm. Whilst I support debt relief in general, I’m not sure whether such pickin’-and-choosin’ is the right way to go about it. I mean, this sets a precedent, whereby poor countries can take out loans then refuse to pay them later, on the basis of ‘well, it was that guy that borrowed the money, and he bought a plane, and now we have nothing’. It sounds good in theory, but in practice it could mean that the richer countries would be reluctant to lend money in the first place.

Still, I’m glad that something is being done. This is better than nothing!

Comment from RogerC
Time: October 15, 2006, 4:54 pm

An amazing story this! Norway, a rich lending nation, has accepted that loans it made were wrong, and not in the best interests of the poor nation it leant to.

Now we know that there are dozens of stories about the dubious lending practices of rich nations. Jubilee 2000 was uncovering stories regularly about these sort of corrupt lending stories. For example, there was a story circulating (but a vague recollection on my part here) in around 1986, just after the World Bank’s own representative recommended that money should not be lent to Mobutu and said that the government was desperately corrupt and the money would never be re-paid. Just after this an immense loan of $4Bn was advanced to Mobutu.

Well done Norway! It would be good to see other Goverments look hard at thier previous actions and accept that perhaps dubious loans, tied in to sales from thier nations arms companies, were wrong. Lets see some more cancellation of these odious debts!

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