Debt and Poverty

KC JOURNAL NO 4 June 2003

Dalitso Kubalasa* argues that there is an inextricable link between debt and poverty, and that Africa’s debt burden is closely linked to the imposition of structural adjustment programmes

“The problem with debt is that once you indulge in it, you will be lucky yet unlikely to come out… The more we pay, the more we owe, and the less we have…” – A Uruguayan writer, Eduardo Galeano

Debt vs ‘living within your means’

This paper will focus on debt in Sub-Saharan Africa because it is believed to be the region where the issues of poverty and debt present us with greatest immediate challenges. Some of the debt issues in this region are:

Malawi, Zambia, Mozambique and Lesotho, just to mention a few, are all highly dependent on donor funding for a major part of their budget revenue.

  • International financial institutions such as the IMF and the World Bank wield great influence over the economic policies pursued by low- income governments, partly through the conditions they attach to loans, partly through the amount they contribute to the national budget, and partly through their formal and informal involvement in policy formulation. Bilateral and multilateral donors often have similar influence for the same reasons.

In 1995, the per capita income of South Asians (in terms of purchasing power) surpassed that of the Sub-Saharan Africans – making Sub- Saharan Africa the poorest region in the world. That statistic may seem relatively meaningless until we consider that in 1980, per capita income in Sub-Saharan Africa (measured in the same terms) was twice that of South Asia.

 

  • Average per capita income in Africa in 1997 was only 75% of what it had been in 1980, representing an average negative growth rate of 1.6% a year over that period, while income distribution also worsened during that period. In 1980 the income of the wealthiest 10% of the continent’s population was 37 times higher than that of the poorest 10%. In 1995 it was 62 times higher.

 

  • The poor thus bore a disproportionate share of the burden of negative growth. The average rate of annual per capita income growth for the poorest 20% of Sub-Saharan Africa’s population was 12.0% between 1980 and 1995. For the richest 10% it was only -1.2%.

The dual realities of falling incomes and worsening income distribution in the region have meant that poverty in Africa has been increasing faster than in any other region of the world. The (approximate) proportion of the continent’s population living on less than a dollar increased from (a rough estimate of) 18% in 1980 to 24 % in 1995. Africa was the only continent that recorded an increase in the numbers living at such a desperate level of deprivation. The numbers living on less than $1,000 a year increased from 55% to 70%.

  • As poverty has increased, so has debt. Of the 41 countries that are currently classified as heavily indebted poor countries 33 are African.

Although debt might arguably have its own role as a catalyst element in development, this paper seeks to bring to light the strong link Debt has to Poverty. It brings to the fore the intrinsic understanding of the link between Budgets and Debt (Household and National levels) as well as the original link between Debt and Structural Adjustment Programmes (SAPs) in Africa, and the impact such policies have had on African economies. The paper also looks at the dichotomy between the role of the state in providing social services as well as the role of the state in further impoverishing the people.

Debt is also a major obstacle to education and unless we act now, poor people will pay a terrible price. The world’s poorest countries (mostly African countries) owe billions to the World Bank, International Monetary Fund and to some other wealthy governments. Every year, they have to hand over huge sums in debt repayments leaving little or none at all to invest in basic services such as primary education and others. Uneducated children continue becoming illiterate adults, earning low wages and unable to educate their own children. If we sit back, this vicious circle of poverty will continue, shaming us all. Poor children didn’t borrow the money, but they’re the ones paying the price.

How does Debt come into being?

In trying to understand how debt comes into being, the paper looks at two perspectives: the Household debt and the National Debt in the light of their respective Budgeting principles. This school of thought is heightening the understanding of how debt comes into being and how its overarching brunt brings about poverty, both at the household level and at the national level.

A household has its own level of income which ‘has to’ form the basis of its spending (budget) in the same way as the State has its own level of Revenue, which also ‘has to’ direct and control the appetite for spending. If the household has no controls over its spending appetites, it fails to live within its ‘realistic’ means or within its levels of income and it immediately finds itself in a trap and at the mercy of debt. This thus automatically triggers the vicious cycle of poverty hinging on the pressures of the debt servicing and the aggression of the creditors, in the face of the mounting pressures to survive in meeting the ever-increasing needs and necessities of life. This gradually erodes the peace of the household which consequentially leads on to more debts and yet more creditors to evade and/or run away from, thereby sinking it into the severely deep, inextricable confines of poverty.

It is along the similar lines that the State finds itself in the noose of Debt (foreign and domestic). This is especially so when it has similar shortfalls in putting in place strong and tangible fiscal policies governing its expenditure as well as effective and sustainable revenue generation mechanisms to be able to realistically live within its means. This also automatically sets the vicious cycle ticking, bringing along its own dire consequences on the economy and eventually on the people through the rising debt levels and the diminishing possibility of servicing it in the light of the deep-rooted, continued borrowing that ensues such debt dependency.

Debt and Conditionalities

There is sufficient blame to go around, and all of those constituencies must be willing to carry their share of the blame, but we must focus on the one group that is blameless – the marginalised, uneducated, landless (or nearly landless), and powerless African poor. All initiatives must concentrate on addressing the plight of that group and must aim ultimately at providing that group with the tools for addressing their own problems. Improving human security in this context means providing these people with access to the means to avoid hunger, war and harm.

Human security for the disadvantaged can only be assured over the long term, only if the structures that maintain the status quo are addressed. These are: poor education, poor health, lack of access to land and markets (domestic and international), limited employment opportunities, and the absence of a voice in their future. Making a direct connection between debt relief and poverty reduction is one first step, but this is a workable approach only if debt relief is sufficient to release some of the domestic resources required for addressing poverty issues, and if the policies are domestically determined (owned by the domestic population).

The region’s debt stock increased from US$3 billion in 1962 to $228 billion in 1996 and to $317 billion in 1998. Currently sub-Saharan Africa is estimated to be spending over $12 billion annually in external debt servicing. Africa’s debt problem is a reflection of lopsided and flawed patterns of world trade and development. Since colonial days, most African countries concentrated on production of a narrow range of products for export to Europe while they imported high value added manufactured goods and high technology products from the same countries. Malawi is no exception here.

Since the early 1980’s, the International Monetary Fund (IMF) and the International Bank of Reconstruction and Development (IBRD) or the World Bank, have implemented macroeconomic policies known as Structural Adjustment Programs (SAPs) in most African countries. Designed to assist developing countries to emerge from the debt crisis, SAPs were established as conditionality for the re-scheduling of existing loans as well as granting further loans to developing countries. International financial institutions as well as some bilateral donors have based their policy recommendations on the belief that overarching state institutions create barriers to economic development and poverty reduction. They therefore advocate a reduction or elimination of the role of the state in food marketing or public services such as rural extension. Poverty and social impact assessments are not undertaken prior to the implementation of such policies.

Despite their role and influence in national policies, donors have been unwilling to take responsibility for the impact of their policies. Donor responses to the current problems and food emergency need to start with an acknowledgement of their responsibility, together with past and present southern African governments, for the increase in poverty and vulnerability in Southern Africa. They must be willing to explore, together with southern African governments and citizens, pro-poor macro-economic, debt relief and budgetary policies, even where these differ from orthodox beliefs.

Both the IMF and the World Bank claim that SAPs will ensure that countries grow out of their debt but with decades of adjustments, there has been no case proving this point. The “logic” behind SAPs has been and remains: the IMF and the World Bank grant developing countries loans, to pay interest on outstanding loans which they cannot pay because they are assumed to be bankrupt.

The Debt burden also continues creating inequalities manifested in the growing gap between the developing and the developed world. Further, the continued remote control and exploitation of the poor and developing countries with the increasing dependency is virtually crippling the small economies.

Debt and poverty

The link between Debt and Poverty is inextricable.

It can be explained in the impact of the macroeconomic policies, such as the popular Structural Adjustment Programmes (SAPs), on African economies. Studies suggest that deterioration in already poor living standards often culminates in high levels of violence, corruption and moral decay as people continue struggling to survive with anything that comes their way.

It is clear that Debt has been far from beneficial to the social welfare and economic growth and development of developing countries and their people. Rather than alleviating poverty and assisting the economic growth and stabilisation of the economies in the recipient countries, SAPs and other policies have instead contributed to further sinking them into a deep abyss of further debt, into deep economic crises and consequently into a deeper abyss of poverty.

The poor majorities living in the developing countries that have followed and implemented World Bank and IMF programmes have found themselves with few options for survival. Development goals have been compromised because standard debt servicing cost-analysis leaves out the social costs of loan and debt relief conditionalities. This includes debt servicing in the light of health-related problems, declining quality of education, high levels of unemployment, high levels of crime and violence, among others.

Africa’s Survival: Which Way?

The million-dollar question being asked is;

“Will Africa be free of poverty if all the debt it has accrued is cancelled?” The answer is most definitely a NO. This bringing to light yet another chain of questions, WHY, HOW, WHERE?? All of which have to have an answer if African economies are to bountifully rise and shine in the face of this entire poverty-stricken, gloomy and bleak picture. This Winter School on NEPAD could be one good forum for these answers to see the light of the day, as well as for an effective way forward to be mandated by all of us as Social Movements and well meaning Civil Society. It remains our challenge as Civil Society to continue advocating for strong civil society participation in building sustainable economies by seeing to it that policy formulation is as consultative as possible and that implementation is as duly effective as conceptualization. All citizens must benefit if we are to successfully foster the reduction of the chronic levels of poverty.

Africa’s debt repayments to the governments and institutions of the ‘North’ continue to be seen by many as an important reason for Africa’s impoverishment. For many years governments and civil society organisations have called for Africa’s Debt cancellation. This call has basically been based on the fact that all countries in Africa have paid this debt many times over. NEPAD however, does not talk of debt cancellation, but of ‘debt relief’; endorsing the Highly Indebted Poor Countries (HIPC) initiative and existing debt arrangements, saying that African countries can only resort to NEPAD after using the existing World Bank, IMF and Paris club arrangements.

‘Is NEPAD going to wield Africa out its economic woes by representing a step forward for Africa? Is it going to be yet another plan that fails to take off but instead adds to Africa’s misery, more debt and poverty?’

Given the long-standing call for debt cancellation, and the criticism of the programmes imposed on African countries, we need to develop a foolproof multi-sectoral approach and position on NEPAD and its approach to the debt problem, steering it, if anything to contribute to Africa’s recovery. Let’s fight for the recognition and involvement of Civil society in the formulation, implementation and monitoring of important policies. This can only be done if we are to be organised in coordinating a more conscious way, to develop a ‘common understanding’ of the tasks that face us at regional level and to never undermine the strength of one voice as a united and collaborative Civil Society.

IN SOLIDARITY WE WILL CONQUER DEBT & POVERTY

* Dalitso Kubalasa works for the Malawi Economic Justice Network and is active in the civil society movement in Malawi.


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