Debt

6 Sep 2011

Debt - Students for Global Action Conference © NEAD

Teaching about the debt owed by poor countries to rich countries links in with a range of other global issues. Debt is often a key reason behind poverty and underdevelopment, and is an important trade justice issue.

Background

Debt owed by poor countries to rich countries has become a serious impediment to poverty reduction and economic development.

Many of these debts were incurred during the 1970s when oil-rich nations deposited large amounts of money in Western banks. Banks in turn, loaned the money to poor countries in order to earn on the interest, while not paying much attention to where the money would be spent, or whether countries would be able to repay the amount.

While some of this money went into improving standards of living, much of it didn’t reach the poor. Instead, it went into the private bank accounts of dictators and corrupt leaders, or toward large-scale and often ineffectual development projects. Overall, about one-fifth of loan money was spent on arms.

When interest rates soared in the 1980s, poor countries found themselves in a position where they couldn’t afford to even make interest payments, let alone repay the initial loan. They began taking on new loans to pay back the old ones.

Today, the world’s poorest countries are spending over $100 million every day on debts they owe rich countries. This desperate struggle to meet their debt payments means that they cannot invest in important development areas, such as health and education. In 2005-2006, Kenya’s budget for debt payments was as much as for water, health, agriculture, roads, transport and finance combined (source: Jubilee Debt Campaign). And Kenya does not even qualify as a “Heavily Indebted Poor Country,” which would make it eligible for debt cancellation.

Debt cancellation

Politicians and campaigners around the world have been calling for debt cancellation for years, on the grounds that many of the debt burdens on poor countries are unfair, and even illegitimate. For example, the lender may have had wished to support a particular government out of self-interest, even if the regime was corrupt or oppressive. Or, the loan was taken for a project that ultimately failed because of bad advice or incompetence on the lender’s part. Also, the debt may have been contracted through illegal and non-transparent means.

Today industrialized nations as well as multilateral aid agencies have taken steps to cancel debt and to create debt relief schemes. In fact, the majority of debts owed by 22 countries to the International Monetary Fund (IMF) and World Bank have been cancelled. The two main debt cancellation schemes in place are the Heavily Indebted Poor Countries’ Initiative (HIPC), and the Multilateral Debt Relief Initiative (MDRI), and these have significantly helped the world’s poorest countries.

According to the IMF website:

“Before the HIPC Initiative, eligible countries were, on average, spending slightly more on debt service than on health and education combined. Now, they have increased markedly their expenditures on health, education and other social services and, on average, such spending is now more than five times the amount of debt-service payments.”

Still, campaigners and policy-makers argue that the schemes offer too little too slowly, often with unfair conditions attached, such as requiring that countries cut back public spending, or that they privatise basic industries. Such conditions not only undermine democracy by taking decisions away from a country’s government and citizens, but also delay debt relief while countries struggle to comply.

Why teach about debt?

Teaching about international debt is a good tool for citizenship education, enabling students to understand more about global interdependence and responsibility. Students learn about the role of politicians and major financial institutions, issues such as poverty and corruption, and the change that people can create by working together. Another interesting area is media coverage of debt issues—how does the media portray this, and how often? What opinions/perceptions do students form after reading about debt in the press?

When teaching about debt, it’s important to clarify the difference between personal and national debt. All countries have a certain amount of debt; the problem arises when these amounts become unsustainable.

Another important distinction is the one between loans and other types of aid such as grants where no repayment is required; loans benefit lenders through the earnings incurred on interest.

It is also worth pointing out the different sources of aid, such as bilateral, multilateral, or non-governmental.

Teaching resources

Browse through teaching resources relating to the topic of Debt >>

Useful websites

Jubilee Debt Campaign has an interactive view of debt across the planet.

CAFOD has a secondary level factsheet on international debt.

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