Rethinking Bretton Woods | Sat, Jun 30, 2007
The G8 and the international financial institutions (IFIs) have recently emphasized their concerns about what they call “free-riding”, i.e. the situation in which “non-concessional lenders indirectly obtain financial gain from IDA’s debt forgiveness, grants and concessional financing activities without paying for it.
In this paper, written by Aldo Caliari from Center of Concern and Jean Merckaert from CCFD on behalf of the CIDSE/Caritas Internationalis Working Group on Resources for Development, the functioning of the existing mechanisms for ensuring debt sustainability in the long run, including mechanisms to address debt reaccumulation, are analyzed from a human development perspective.
A Human Development Approach To Preventing New Cycles of Debt (June 2007)
The G8 and the IFIs have recently emphasised their concerns about "free riding", i.e. the situation in which non-concessional lenders indirectly obtain financial gain without paying for it.Â This concern covers two phenomena: creditors not assuming their share of debt relief, and developing countries getting into new cycles of debt with non-concessional lenders. CIDSE, as a Christian organization, is also concerned about these issues because they undermine the benefits of debt reduction.Â This paper argues, however, that it is precisely the G8/ IFIs approach to developing countries' debt that prevents them from finding a lasting and holistic solution to the debt problem.
The paper explores and criticizes creditor countries' attempts to find "a lasting solution" to the debt problem and their policy responses embodied in specific G7/G8 initiatives, the Debt Sustainability Framework and the Paris Club's Evian approach. It identifies a number of problems common to these initiatives, for example, they:
- Are based on a notion of sustainability that continues to ignore the MDGs
- Neglect donors' promises on aid and debt relief
- Presume all debt contracts are valid, not providing for creditor co-responsibility
- Punish the debtor for actions where responsibility is, at least, shared with the creditor
- Give a green light to non-participating private creditors and "vulture funds"
- Are, ultimately, ineffective in deterring irresponsible borrowing and have the potential to compound it
The paper develops the Catholic Social Teaching bases that orient CIDSE in developing its position. In particular, the ethical imperative not to engage in irresponsible lending as present in the teachings of the Church. It maintains that the current issues and the consequences of recurring debt overhang are only one more manifestation of a situation of systemic power imbalance that fuels the vicious circle of over-indebtedness, poverty and economic underdevelopment for millions of people in the South.
As international development and advocacy agencies that focus on the consequences of debt crises for the poorest and most vulnerable people, CIDSE continues to believe in the imperative need of establishing a binding framework to deal with sovereign debt. It supports the proposals to establish a Fair and Transparent Arbitration Procedur which, akin to a bankruptcy system at the domestic level, could be seen as a first step towards the adoption of an international tribunal on sovereign debt.
Finally, the paper explains how such a framework would address many of the shortcomings previously identified in the policy response by the G8, the Paris Club and the IFIs to prevent new cycles of debt.
Read the full report here