I spoke in parliament this morning on a private member’s motion moved by Rob Oakeshott on debt forgiveness for developing nations, and the role of ‘vulture funds’.
Debt and Vulture Funds
25 June 2012
Debt is not the most serious issue that developing countries face, but unsustainable debt burdens can, in certain cases, be a barrier to development. So the HIPC Initiative was launched in 1996 by the IMF and the World Bank, and its aim is to ensure that no poor country faces a debt burden that it cannot manage.
HIPC has a two-step process. The decision point requires that countries must fulfill the following four conditions: be eligible to borrow from the World Bank’s International Development Association, countries must face an unsustainable debt burden, have established a track record of reform and sound policies, and have a Poverty Reduction Strategy Paper. Of the 39 countries that are eligible or potentially eligible for HIPC Initiative assistance, 32 are receiving full debt relief from the IMF and other creditors after reaching their completion points. We know that, for these countries, debt relief has freed up resources for social spending. Before the HIPC Initiative, eligible countries were spending a little more on debt service than on health and education combined. Now their expenditure on health, education and social services has gone up and averages five times what they spend on debt payment. For the 36 countries that have debt relief, debt service paid, on average, has declined about two percentage points of GDP over the noughties. So the HIPC Initiative has been successful.
I think it is important that in considering any issue of debt relief we bear in mind the purpose for which debt is acquired. Debt is not of itself a bad thing. Just as we would not want to shut off credit markets to low-income Australians, so too we want to make sure that any reforms in the area of debt do not shut off access to credit for well-managed developing country borrowers. In fact, what is particularly striking is that more finance is not flowing to the world’s poorest countries. The return on capital ought to be highest for countries that are furthest behind the world average incomes, yet it has proven difficult to attract investors to these countries.
The concept that I find most attractive in this space is Michael Kremer and Seema Jayachandran’s notion of ‘odious debt’. They define odious debt as sovereign debt that is incurred without the consent of the people and not for their benefit. They give the example of debt incurred by apartheid-era South Africa. They argue that that debt should not be transferrable to successor governments. They argue that the development of an institution which could truthfully announce whether regimes were odious could create an equilibrium in which lenders have a strong incentive not to loan to odious countries but in which regimes in low-income countries that are spending borrowings for the advantage of their people could still obtain access to credit markets. To me, the notion of odious debt is particularly attractive, because it focuses on how the money is spent rather than on how much money is acquired. I would urge the House to do what it can to pursue the notion of odious debt.
The big shift since the creation of the HIPC initiative has been the rise of China as a donor. This is transforming overseas direct assistance. China currently operating largely outside the OECD DAC framework means that it is difficult for other countries to know what aid China is providing and to work in with that aid. So anything that we are doing in the space of odious debt, vulture funds or the HIPC initiative needs to take into account how the Chinese government will respond. To the extent we can, we need to bring China in to the community of nations that believes that overseas aid should be used to further the wellbeing of individuals rather than simply of regimes and leaders.