A new book explains how the West could easily save the Third World.

Sometimes in life one has to admit that things just aren’t working. This is one of those times. The way we deal with the debt of developing countries has come a long way since the Latin American debt crisis of the early 1980s. But it hasn’t come far enough. And it’s manifestly failing debtors and creditors alike.

We simply have to remind ourselves of why developing countries got into debt in the first place, and of just how destructive the consequences are, for all of us. And then the hard work starts. We need to come up with a new way forward.

To accomplish this we will have to accept this fundamental principle – that there are some debts that are so clearly illegitimate or unpayable, that countries should never be asked to honour them. It is justice, not mercy or charity.

However, and we need to be clear on this, although a process for determining illegitimacy and unpayability of debts will deliver in terms of truth and, potentially, in terms of reconciliation too, it will not necessarily deliver in meaningful material ways. A bankruptcy-type procedure to rule on matters of justice and equity is necessary, that is clear. But it is not sufficient.

Let’s get real here: many developing governments don’t have a good track record at using the resources at their disposal to address the needs of their poor, needy and sick. Pakistan spends approximately 5 per cent of its GDP on Defence but only 3 per cent on education and 0.8 per cent on health. President Obasanjo of oil-rich Nigeria spent $330 million in 2000 on building a new national stadium in Abuja, a figure that was more than that year’s combined health and education budgets.

If debts are cancelled on grounds of illegitimacy and unpayability, without ensuring in advance that the monies freed up will be used for development, the danger is not only that they may be squandered or won’t reach those who need them, but that the funds so released might serve to prop up undesirable regimes. Which means that if the bankruptcy process is to provide a real opportunity for citizens of the afflicted country to make a fresh start, we will have to come up with a way of ensuring that new monies go to those who most need them.

What this doesn’t mean, however is that we stall the bankruptcy process and withhold debt relief until a government is deemed to have sufficiently stepped up to the plate. Too many millions are dying, too many being lured to join extremist organisations, too many becoming angry and resentful, for us to be able to wait for a country to get a perfect scorecard on governance before providing it with debt relief.

We need to stop countries from having to repay illegitimate and unpayable debts as soon as possible, and then make sure that the monies thereby saved do go where they are most needed.

But how to do this? We must create legally established ‘islands’ of good governance – let us call them National Regeneration Trusts. These Trusts would effectively ring fence debt savings to meet development goals. Before you decry me as imperialist or neo-colonialist, let me qualify my proposal.

First, the trustees must be majority nationals, with the only non-nationals appointed from United Nations bodies such as Unicef or the World Health Organisation, trustees whose expertise and experience on the ground will be invaluable.

Second, the accounts of the Trust must be easily accessible to the public.

Third, putting monies into the Trust must be the only condition for a country to be eligible to participate in the process.

The only condition for the debt to be relieved must be that the monies saved actually do meet the needs of the sick, uneducated and poor and the environment, and are not siphoned off into foreign bank accounts, or to fund white elephant projects or civil wars.

Fourth, in order that a country doesn’t end up having to take money out of its budget to make payments into the Trust, the international donor community will have to pledge to continue financing these flows to the extent that it previously was.

Fifth and finally, at such a time that a country is recognised as democratic and reaches a predetermined level of human development, the Trust should be wound up, international donors no longer be asked to finance debt repayment flows, and any remaining debt stock still to be cancelled should simply be written off. The eventual aim of the National Regeneration Trusts should be their disappearance.

Why will these Trusts be more likely to deliver than governments in places of low human development and weak governance structures? Three reasons: they will be run predominately by civil society and civil society is significantly less likely to be beholden to domestic elites than ruling politicians; any concern over the motivation or independence of the civil society trustees, or over the government meeting its obligation to transfer funds into the Trust, would be addressed by the fact that debt would be effectively cancelled in instalments; and an international body of arbitration, separate from the Trust itself, would judge the spending of the money and seek to legally hold both the Trust and the country to account.

There are, of course, some countries such as Mugabe’s Zimbabwe or Myanmar where the level of confidence in government is so low that the conditions for the Trust are likely to be absent. And others, where finding suitable trustees from civil society will present a formidable challenge. However, in the majority of cases this is not the case.

But even if this great step is taken and the past resolved, we will still need to plan for the future. To avoid the debt threat reappearing in another few years, and developing countries ending up back in despair, new principles for borrowers and lenders will have to be adopted, on top of the bankruptcy procedure and the National Regeneration Trusts. Let me suggest just five.

First, instead of borrowing so much, those developing world governments that can, need to make improved efforts to mobilise domestic resources.

Second, all classes of lenders need to be mandated to make transparency of borrowing a condition of the issuing of loans.

Third, developing countries that borrow in the international capital markets must be allowed to control capital in and out flows.

Fourth, there must be a complete overhaul of the West’s export credit agencies so as to ensure that rich countries stop lending so carelessly, stop providing loans to developing world governments to buy arms, and stop financing environmentally unsound and over-priced projects. And the rich world also needs to consider its own borrowing. The United States’ increasing debt burden, for example, has all the ingredients of a future debt crisis in the making.

Fifth, the immunity of the IMF and World Bank needs to be waived. Where professional negligence or lack of due diligence in lending can be proven, a claimant, whether a village, an individual or a nation, must be able to hold the institutions liable in the same way that a bank can be held liable by law.

We need to do more than just lend better and more wisely, do more than just cancel illegitimate and unpayable debts. To breach the gap between need and resources in those countries which, even with all their debts cancelled, would still not have enough money for health or education or to meet the needs of their poor, the rich world will need, given the urgency of the situation, to reach deep into its pockets and give much more – in the form of grants.

Not in the way it has in the past: grants were, of course, as susceptible to political hijack as loans. But either through the Trust mechanism, in those cases in which it is deemed necessary to ring fence aid flows. Or, otherwise, in a way that is closely aligned to the spirit of the Trust. The rich world will also need to curb its desire to protect its own industries. For, for the developing world to regenerate, it is debt relief, aid and trade that are the Holy Trinity.

The challenge will be how to ensure that those in the rich world who find their own lives tough – the elderly, the poor, the unemployed, the sick, those struggling to keep their mortgage payments going and send their kids to school – do not bear the financial brunt. So rather than diverting resources for aid or paying for debt relief from government budgets that could instead be spent on social expenditure or domestic welfare needs, or raising funds in the form of new across-the-board income taxes, the money will need to be found elsewhere.

Cuts in military expenditure (for the price of four Stealth bombers, 155 million children can be sent to school for a year), windfall taxes on the debt vultures’ extraordinary profits, active measures to help expedite the repatriation of corrupt dictators’ stolen funds (billions of pillaged dollars are just sitting in offshore accounts), made more possible today than ever before given the post-9/11 trend towards repealing bank secrecy laws and rolling back banker-customer confidentiality, the making secure of migrant workers’ income taxes so as create a ‘development bond’, and global pollution taxes on energy companies (with monies collected earmarked for environmental purposes) are measures that would raise billions of dollars and would not fall on everyone’s shoulders alike.

There are also innovative financing schemes that Gordon Brown, George Soros and Joseph Stiglitz have all recently come up with. Gordon Brown’s International Financing Facility, for example, which makes secure rich countries’ future aid pledges, could raise an extra $50 billion a year at no additional cost to taxpayers.

And, in order that the cessation of subsidies on Western products, so critical for the developing world’s success, does not destroy communities and heartlands in the West, measures must be taken to create new jobs and provide new opportunities for those there who in the short term could, as a result, lose out. Free trade must also be fair. Hardly beyond the wit of human ingenuity.

· Extracted from IOU: The Debt Threat and Why We Must Defuse It by Noreena Hertz, published by Fourth Estate.

Noreena Hertz, The Observer (U.K.), September 12, 2004