An ecumenical approach to financing for development
Paper prepared for the World Council of Churches by the Ecumenical Coalition for Economic Justice A project of Canadian Churches
The purpose of this paper is to assist the ecumenical community, in its desire for justice, peace and the integrity of creation, to engage in the debates leading to the United Nations Conference on Financing for Development (FFD) in 2002.
We address each of the six themes that constitute the official agenda for this conference in relation to our common vocation to live in right relationship with our neighbours, with the earth and with our Creator.
The ecumenical community approaches the issues addressed in the UN Financing for Development Intergovernmental Event with a particular understanding of that elusive term "development" - an understanding that has evolved and deepened over several decades. For the ecumenical community, justice is the heart of the matter. Any discussion of financing for development must take seriously the need to redress the mal-distribution of wealth and the ecological degradation perpetuated by the current inequitable and unsustainable economic system. We aspire to participate in a "Financing for Development" process that tangibly fosters greater social justice for the poor and the excluded, and restores right relationship between humans and between humanity and creation.
By asserting justice, ecological sustainability and the creation of viable communities as our goals, the ecumenical community's emphasis differs from the dominant approach, which focuses on fostering economic growth. We maintain that sustainable communities cannot be built through economic growth alone, least of all jobless growth that exacerbates inequalities and exclusion. The trickle-down theory of development advanced by the World Bank and the International Monetary Fund is a failure. The well-being of the majority has not resulted from economic growth which has benefited a minority.
The ecumenical community expressly rejects the neo-liberal economic policies promoted by the World Bank and the International Monetary Fund (IMF). Rooted in the belief that unfettered free markets will promote economic growth resulting in "development", the IMF and World Bank have required developing countries to adopt what are known collectively as the "Washington Consensus" policies. These include free trade, deregulation of capital markets, privatization of public enterprises and treating foreign investors the same as national investors. Experience over the past two decades shows that these policies have failed to meet even their own goals of attracting investment to developing countries and fostering growth. Far from reducing poverty or enhancing ecological sustainability, these policies have widened the gap between the wealthy and the poor, and have resulted in greater social exclusion and greater exploitation of the earth's resources.
For the ecumenical community, authentic human development can never be achieved when the ultimate goal is the amassing of wealth and material goods, creating an unquenchable thirst for more power, profits, and possessions. An alternative approach is required that allows us to express "development" and "economy" in relation to our common vocation to live in right relationship with our neighbours, with the earth and with our Creator. Such an approach includes these key affirmations:
- A recognition that real value cannot be expressed in monetary terms and that life-and that which is essential to sustain it-cannot be commodified.
- A belief in the inherent dignity of every person and a priority on creating the conditions for a dignified life.
- A commitment to an economy whose role is to serve the well being of people and the health of the earth.
- A focus on the ultimate aim of economic life to nurture sustainable, just and participatory communities.
- A vision of a global community whose interdependence is not reduced to trade and markets.
- An acknowledgement of a common destiny as co-inhabitants of the one earth for which we all share responsibility and from which we should all equally benefit.
- A responsibility to uphold the right of all people-particularly the diverse communities of the poor and excluded-to participate in the economic, social and political decisions which affect them.
From these affirmations flow alternative development models and alternative policies. What we ultimately wish to support is "the implementation of new development models that reject the destructive path of Northern industrial development and recognize the imperatives of social equity and ecological sustainability." (WCC 1995:169) When alternative models concentrate on providing access to food, work, education, health care and cultural opportunities to those who are now excluded, economic growth will result but the benefits will be widely shared. The ecumenical community rejects models of financing for development that simply increase monetary wealth without eradicating poverty, and have no regard for how that wealth is generated or distributed. Models that focus on poverty reduction, long-term employment and environmental restoration contribute to growth as a by product, not as an end in itself. In this respect, "a human development alternative", similar to that advocated by the United Nations Development Program, is much more in line with the goals of the ecumenical community.
Creating communities: giving priority to national autonomy and local participation
In proposing alternative models, it is important to clarify that no single development model is applicable to every country or every region. Imposing the same set of Washington Consensus, neo-liberal policies as conditions for receiving financial assistance has denied the truth that, "while the need for community is universal, communities are far from identical in their definitions of the common good or in their needs or wishes pertaining to development." (WCC 1994) National governments must retain the autonomy to determine the best path for development for their particular situation. A diversity of approaches is essential.
Given our belief in the inherent dignity of all persons including, above all, the poor and the excluded, we must insist on their right to participate in building viable communities wherever they may live. It follows, then, that financing for development must be a process that is managed from within the communities concerned. Financing for development should adhere to the principle of subsidiarity which holds that decision-making should always be as decentralized as possible. Where development can be financed at the local community level, without dependence on external funds, it should be. What can be financed nationally should be funded nationally. Over-reliance on external financing leads to dependence and to types of "mal-development". Mal-development is characterized by ecologically destructive overconsumption by the wealthy minority and the concentration of power in the hands of private transnational corporations and international financial institutions which exclude the majority of people.
Financial institutions must facilitate the reinvestment of savings in local communities rather than appropriate them into centralized funds for investment elsewhere. Similarly, national savings must be retained, as far as possible, within each developing country for domestic reinvestment, without interference by international financial institutions. Capital controls may be needed to ensure that wealthy individuals and companies do not siphon their assets out of the country into offshore tax havens.
The ecumenical community is critical of Washington Consensus policies that have weakened democratic states, and thereby weakened citizens' rights. International financial institutions must be transformed so that bodies like the IMF and the World Bank cannot impose neo-liberal policies of financial liberalization on sovereign states. For nation states to retain control over financing for national development, it will be necessary, in many cases, to strengthen democratic institutions so that governments can be held accountable.
Financing for viable communities involves matching the appropriate kind of financing to appropriate purposes. For example, it is inappropriate to use foreign loans to finance the building of rural schools where locally available building materials, requiring no imported inputs, can be used.
International loans (as distinct from Official Development Assistance in the form of grants) should primarily be used for investments that will generate foreign exchange to pay off the loans. Otherwise they will lead to a cycle of debt, dependence and mal-development with all its negative human and ecological consequences. Some human development measures, such as immunization programs for the eradication of tropical diseases, could be financed with Official Development Assistance grants from the international community without adding to the burden of debt.
In summary, financing for the development of viable communities must give the first and highest priority to utilizing domestic financial resources while stopping the haemorrhage of wealth abroad. This approach must be supplemented by appropriate international capital flows. However, without the reform of international financial institutions, no amount of new financing, by itself, will correct the problems of mal-development, ecological destruction and inequality resulting from Washington Consensus policies. In short, fundraising is not enough.
Respect for the inherent dignity of people requires that they not be treated as passive recipients in the development process. The ecumenical community believes in the capacity of people to work together to nurture vibrant, sustainable communities. Development must empower the poor, the marginalized and the excluded and enable their participation in shaping their own future. To that end, local communities must have the ability to mobilize domestic resources and participate in local investment.
Historically, societies have financed their own development primarily from their own resources. Thus it is appropriate that this is the first item on the official agenda for the UN Intergovernmental Event on Financing for Development. The Washington Consensus approach, on the other hand, assumes that developing countries must depend overwhelmingly on foreign financing because they lack domestic savings for investment.
In fact, developing countries' domestic savings rates are, on the whole, superior to those of the member countries of the Organization for Economic Cooperation and Development (OECD). According to the United Nations Development Program (2000:206-209) the ratio of gross domestic savings to Gross Domestic Product (GDP) for all developing countries was 25.6% in 1998 as opposed to 21.5% for OECD members that same year. The developing country rate of savings was one and a half times larger than that of the US which saved just 17.1% of its GDP in 1997.
Within the South, there are considerable variations in savings rates. The highest savers are the East Asian countries which collectively saved 39.3% of the value of the goods and services they produced in 1998. Latin American and the Caribbean countries saved 19% of their output. Sub-Saharan Africa saved 14.8% of its GDP. Writing from his African context, Yash Tandon (2000) addresses the myth that African countries do not have savings and therefore must rely on foreign capital: "Africa's savings are not only underestimated but also not even recognized as 'savings' under a certain accounting convention. The result is that Africa's savings ... are externalized as debt payments, profits, dividends, transfer price payments, contract price payments for commission agents, consultancy fees, [royalties] etc. ... There is no 'savings gap' in Africa, except that all the savings are externalized and described in the sanitized language of economists as 'factor payments abroad' ". The challenge for financing development is to retain this extracted wealth for reinvestment at home. To achieve this goal, a number of measures described elsewhere in this paper are necessary: cancellation of debts; use of capital controls to stop capital flight to tax havens; reorientation of Official Development Assistance from loans to grants; genuine transfer of technology rather than protectionism for corporate intellectual property rights; judicious use of foreign financing for essential imports but not for luxury goods, armaments or inappropriate megaprojects; regulation of foreign investment including restrictions on the free inflow and outflow of speculative investments.
Mobilization of popular savings
Throughout the South, and in the North as well, there are numerous examples of popular savings institutions geared to offering credit services to those who are excluded by conventional banks. Women, low-income earners and the poor have developed their own microfinance institutions, often referred to as Rotating Savings and Credit Associations (ROSCAs). Perhaps the best known of these is the Grameen Bank in Bangladesh which serves over two million people. Other peer group savings associations are known by different names in different regions: "pasanaku in the Andean countries, tanda in Mexico, syndicate in Belize, gamaiyah in Egypt, xitique in Mozambique, esusu in Nigeria, chit fund in India, he hui in China [and] the tontine [in West Africa]." (Gélinas 1998:109)
A distinguishing characteristic of ROSCAs throughout the South is the predominance of women in their organization and management. ROSCAs operate in both rural areas and in cities where they offer credits for investment in small productive enterprises. Most traditional ROSCAs do not charge interest on loans, although modern commercial versions that do charge some interest are evolving. More than 10 million people have participated in various microcredit arrangements.
What all these associations have in common is a dependence on each participant's sense of belonging to a community. ROSCAs typically have late payment and loan default rates much lower than commercial banks (around 2%) because of peer pressure. Communal ties function to prevent defaults since group members collectively guarantee loan repayments and access to future loans depends on repayment of earlier borrowing, Members keep their obligations because failure to do so would mean isolation from the community.
The success of microcredit institutions is grounded in maintaining these community ties and their independence from outside financial institutions. Local savings and credit cooperatives have failed "whenever external elements -interference by missionaries or international cooperants, church and state meddling, ill-considered injection of foreign capital-slipped in, disrupting the dynamics of cooperation. ...
"Cold money, that is funds from foreign sources, undermines the attitude of leaders as well as members of savings and credit cooperatives, insofar as these funds are considered surplus from countries that have too much; this is why borrowers do not feel an obligation for repayment and good management of these funds. Warm money, on the other hand, acquired through sweat and relentless work on the part of the saver, demands tight management, transparency and absolute control, from the beginning to the end of the savings-credit-investment cycle." (Gélinas 1998:117-118)
National policies for financing development
While microcredit lending can make a significant contribution to local community development, it cannot finance large infrastructure projects. Nor should poor peoples' savings be appropriated by national authorities as they are most productively reinvested in community enterprises. One of the problems with conventional banking systems is that they appropriate savings from less developed regions and take them to financial centres whose banks tend not to reinvest them back in the local communities where they are needed. Instead banks prefer to lend to large corporations or wealthy individuals with established credit ratings.
In its African Alternative Framework to Structural Adjustment Programmes for Socio-Economic Recovery and Transformation (AAF), the UN Economic Commission for Africa proposes viable fiscal policies for fostering community-based development. The AAF offers a clear alternative to the neo-liberal Washington Consensus policies imposed through Structural Adjustment Programs (SAPs) dictated by the IMF and the World Bank. Several key recommendations in the document concerning financing for development are highlighted below:
- Governments should establish guidelines for credit allocation that favour food producers and manufacturers of basic necessities. This contrasts with the insistence of SAPs that credit should be allocated through private capital markets that direct financing to large companies and wealthy individuals regardless of how it is used.
- More rural financial institutions are needed to mobilize rural savings for reinvestment into the local economy. Private financial services tend to be centralized in large institutions located in urban centres. Credit allocation policies must also remove the bias against lending to women.
- Special funds should be designated for loans, sometimes at subsidized interest rates, to small and medium enterprises, including cooperatives, family businesses, and private and public firms. Problems of corruption and nepotism can be overcome by making the mechanisms for allocation transparent and open to citizen review as has been pioneered in Uganda.
- The efficiency and integrity of tax collection must be improved. Nation states must have the means to tax corporations and wealthy individuals in order to mobilize domestic savings for investment in infrastructure and other development needs such as education and health care. Taxation regimes must rely more on progressive measures that make the wealthy pay a higher share of their income in taxes and reduce reliance on regressive measures like Value Added Taxes that put a disproportionate burden on low income earners.
- A corollary of progressive tax reform is capital control measures to prevent the corporations and the wealthy from avoiding taxes by depositing their money in offshore banks or tax havens.
- Allow for the use of limited, realistic and decreasing deficit financing for productive investments that have little import content. In rejecting the notion that governments should never run fiscal deficits, the AFF adopts a more rational approach, calling for prudent spending priorities to ensure that financial resources are used for productive purposes. This means less spending on the military and ostentatious projects, such as palaces.
Consistent with the AAF, other analysts maintain that local development needs such as building rural schools or paying teachers' salaries or small business lending programs should be financed with local currencies. Indeed, borrowing foreign currencies for these programs can be hazardous. Even if the foreign loans have zero or very low interest rates, their repayment can be become burdensome, especially if the local currency is devalued, as so often occurs under Structural Adjustment Programs. (Bond 2000:15)
These alternatives suggest an approach to mobilizing domestic savings that is compatible with the ecumenical community's demand for national autonomy and community participation.
Justice demands measures that will allow local communities and developing countries to retain their own savings for investment in development. The outflow of wealth from the South to the North must be reversed.
The ecumenical community is committed to an economy whose role is to serve people and the health of the earth. Investment should be a tool at the disposal of local communities and nations in their vocation to build sustainable societies.
This principle precludes acceptance of investments which are unstable, exploitative, or disruptive. Putting the economy at the service of people means allowing nations to exercise their right to select and tailor investment to the needs of their communities in pursuit of productive and sustainable development.
The Financing for Development Intergovernmental Event puts the mobilization of private foreign investment in second place on its agenda. The explicit expectation is that developing countries should capture a larger share of the massive amounts of private capital that now flow around the globe. In 1990, official grants and loans accounted for over half of financial flows into developing countries. By 1999, however, private financial flows were more than five times greater than official inflows from bilateral and multilateral agencies.
But these private flows reach only one out of every five developing countries. The UNDP (1999:31) points out that currently "only 25 developing countries have access to private markets for bonds, commercial bank loans and portfolio investments. The rest are shut out by their lack of credit rating."
The IMF approach is to have developing countries try to improve their credit ratings by liberalizing their economic policies. Structural Adjustment Programs (SAPs) often include measures such as lowering corporate taxes. Transnational Corporations (TNCs) continue to lobby for investment agreements within the World Trade Organization (WTO), the Free Trade Area of the Americas and elsewhere, that will incorporate "national treatment" clauses requiring governments to treat foreign investors as favorably as domestic firms.
However, indiscriminate liberalization and national treatment for foreign investors has not led to the building of sustainable communities. Attracting massive inflows of private capital investment must not be confused with genuine financing for development. The 1994-95 Mexican and the 1997-98 Asian financial crises demonstrate that attracting speculative investments into bonds, stock markets or real estate ventures can be very destabilizing. The five countries most affected by the Asian crisis -Indonesia, Malaysia, South Korea, Thailand and the Philippines-experienced an overabundant inflow of volatile, speculative investment during 1995 and 1996 and then a sudden net outflow of some $105 billion within one year.
The massive bailouts organized by the US Treasury and the IMF ($48 billion for Mexico and $120 billion for three Asian countries) primarily benefited foreign investors in these countries while saddling their peoples with greater foreign debts of dubious legitimacy.
The mass unemployment and impoverishment that resulted from the Asian crisis is testimony to the folly of thinking that just any kind of foreign capital inflow is desirable. According to World Bank estimates, the East Asian financial crisis threw 10 million people into "extreme poverty" (earning less than a dollar a day) and another 23.8 million into poverty (earning less than two dollars a day). The number of poor households in Indonesia and Korea virtually doubled reaching, respectively, 20.3% and 19.2% of all households.
Despite the disastrous Asian financial crisis, the IMF continues to advise the elimination of capital controls, although at a slower pace and in a sequenced fashion.
Foreign direct investment (FDI)
Since the Asian crisis, inflows of dubious speculative investment into the developing countries have lessened and Foreign Direct Investment (FDI) has again become the dominant form of capital flows.
In 1999, developing countries received a record $208 billion worth of FDI. (UNCTAD 2000:7) This amount is approximately four times greater than the amounts developing countries received either in Official Development Assistance (ODA) or from new loans.
The worldwide competition to attract more FDI has important implications for developing countries. During the 1990s, country after country made changes to its regulations and tax laws in an effort to attract more FDI. Between 1991 and 1999, various countries (some on more than one occasion) made 974 different policy decisions that either liberalized investment rules or lowered taxes in order to attract more FDI. These same countries made only 61 changes aimed at increasing government control over corporate activities. (UNCTAD 2000:4)
A prime example are changes to corporate taxation rates, which have a direct effect on the ability of states to finance their own development. Developing countries systematically lowered their corporate tax rates on foreign investors during the 1990s. Typically in the 30-35% range 10 years ago, few developing countries now have corporate tax rates above 20%. This destructive competition results in a loss of tax revenues available for development. Gertrud Ochsner (2000) estimates that "if developing countries were applying OECD corporate tax rates their revenues would be at least US$50 billion higher.
Despite all these efforts to attract more FDI, the share of total worldwide FDI going to developing countries has declined from 38% in 1997 to 24% in 1999. Moreover this investment is concentrated in only a few countries. Just 10 developing countries receive four-fifths of all FDI flows to the developing world. The poorest countries have failed to attract much FDI even though they have rigidly applied liberalization measures under IMF and World Bank SAPs. African countries received only $9 billion of new FDI in 1999 while larger flows went to Asia ($106 billion) and Latin America and the Caribbean ($90 billion).
The regional mal-distribution of FDI is only part of the problem. About one fifth of the FDI entering Asia in 1999 and over one-third of that entering Latin America and the Caribbean was identified as investment in mergers and acquisitions of existing companies (both private firms and privatized state enterprises) instead of "greenfield" investments in new production. The latter are generally superior to mergers and acquisitions since they involve new resources to generate new productive capacity and employment, while mergers and acquisitions merely transfer control from domestic to foreign firms.
Furthermore, mergers and acquisitions often involve layoffs and lead to new outflows of foreign exchange in the form of dividends paid to transnational corporations (TNCs). They often reduce competition in the domestic market and stifle growth of local industries. Transnational corporations do not usually adapt technology to the domestic needs of host countries. Although labour intensive technologies may be more appropriate in some developing countries, the transnationals may prefer to use capital intensive methods in order to reap the advantages of both high productivity and low wages.
Clearly, not all FDI is to be welcomed. Foreign investment that is predominantly short term, speculative and volatile may lead to instability. FDI which concentrates on the exploitation and processing of natural resources may reinforce the principal structural weakness of economies which are dependent on a few primary products or on a few markets for export income. Economic cycles in these countries then remain subject to variations in the international prices of these raw materials.
FDI can also have negative effects when it absorbs local savings, disrupts local industries and leads to excessive capital outflows or when the jobs it creates are in export enclaves disconnected from the national economy.
However, Foreign Direct Investment can play a positive role when it is invested in productive rather than speculative activities, when it transfers appropriate technology and when it facilitates access to markets and creates employment consistent with democratically determined national development plans. Developing countries need to have tools that enable them to be selective about which foreign investments should be welcomed and which should be prohibited. The ecumenical community rejects the Washington Consensus demand for "national treatment".
Governments should have the right to impose performance requirements on foreign investors while favouring local, family and community businesses and publicly owned enterprises. Governments should be able to require investors to meet national, regional or local content goals. They should be able to require them to purchase inputs locally; to hire personnel locally; to transfer appropriate technology and to provide incentives for the reinvestment of profits.
In particular Southern governments must be able to demand that TNCs adhere to norms of corporate social and environmental responsibility. Social and ecological guidelines and benchmarks for business performance that include independent monitoring and reporting must be developed and applied to TNCs. This involves a shift from voluntary to binding codes for transnational corporations and for financial and investment institutions. Governments should have the power to encourage productive investments that increase links between the local and the national economy and screen out investments that make no net contribution to development, especially speculative or very short-term portfolio investments that lead to volatility and instability, rapid capital outflows, and economic crises.
Unfortunately international trade and investment agreements like the North American Free Trade Agreement, the dormant but not forgotten Multilateral Agreement on Investment and the Trade-Related Investment Measures of the World Trade Organization undermine these rights and restrict the power of national governments to promote sustainable economic development.
Justice demands that developing countries be able to use capital controls to regulate inflows and outflows of foreign investment of every kind. International trade and investment agreements must be changed so that developing countries can exercise more control over foreign investment.
There is a need to distinguish between the economic growth that fosters just, sustainable and participatory communities and that which aggravates inequality, social disintegration and damage to the environment. The current structural inequities in the global trading system lead to a growth that often undermines rather than enables the development of viable communities in the North and South. A fundamental restructuring of trade institutions is required before trade can meaningfully aid development.
It is no surprise that trade is the third item on the official Financing for Development agenda. The IMF, the World Bank and the World Trade Organization (WTO) constantly project large potential gains from increased trade for developing countries, reflecting their growth-at-all-costs approach to development. For example, the World Bank estimates that developing countries could increase their export earnings by more than $100 billion a year if the industrial countries opened up their markets.
However, just as unfettered private capital flows may have harmful effects on communities, increased trade does not always lead to sustainable communities. Looking at overall export earnings is not enough. We have to look at the effects of trade liberalization on distribution of income within societies: "In almost all developing countries that have undertaken rapid trade liberalization, wage inequality has increased, most often in the context of declining employment of unskilled workers and large absolute falls in their real wages." (UNCTAD 1997) Increased exports may also result in environmental destruction leading to the disintegration of local communities. Over fishing, unsustainable forestry practices and the depletion of soils from agrochemical-dependent monoculture of plantation crops are obvious examples.
Food security at risk
Trade liberalization that results in decreased employment, lower wages for the poor, and ecological devastation is mal-development. The agricultural sector of developing countries, which provides food and employment to the majority of the world's poor, is particularly vulnerable to the negative consequences of trade liberalization. A study by the UN Food and Agriculture Organization (FAO) on the outcome of the Uruguay Round Agreement on Agriculture indicates that liberalizing agricultural trade can undermine food security for developing countries and does not necessarily improve their export earnings.
The FAO studied the impact of the Uruguay Round agreements on 16 developing countries. It found that, "All 16 countries experienced a rapid rise in food imports while exports were flat. In Sri Lanka, for example, the rise in food imports was accompanied by a decline in domestic production, resulting in a clear drop in rural employment ... [with] 300,000 unemployed as a result of the importation of potatoes and onions." (Carroo 1999:1) Likewise, in Ghana, farmers who grow corn, rice and soybeans or tend goats and sheep cannot obtain economic prices for these products even in the village markets. They cannot compete with cheaper imported items, often "dumped" (sold below the cost of production) on these markets by Northern countries.
While some agro-exporters from Southern countries, such as palm oil and coconut oil producers, have won some increased market access as a result of the Uruguay Round, the beneficiaries are largely plantation owners and processors.
The FAO study noted a general trend towards the concentration of land holding, with small farmers tending to lose title to their plots as large landowners consolidate control. The FAO (1999) concludes that this process has "marginalized small producers and added to unemployment and poverty." Trade liberalization that results in such disintegration of local communities is not a tool for authentic development. Quite the opposite-it is a cause of mal-development.
Despite the failure of its Seattle Ministerial meeting to launch a new comprehensive round of talks, the World Trade Organization (WTO) is actively pursuing further liberalization of trade in agricultural products as mandated by agreements made at the end of the Uruguay Round in 1994. Instead of further trade liberalization, which will exacerbate the problem, the ecumenical community is calling for a serious reform of the international trading system.
Putting equity on the trade agenda
Unfortunately, many of the measures that are needed to redress the actual inequities of the world trading system are not even on the agenda of the WTO. For example, developing countries annually lose millions, perhaps billions, of dollars because of transfer pricing. This refers to the practice of transnational corporations (TNCs) of under-invoicing or over-invoicing transactions between their subsidiaries in order to avoid taxes or reap monopoly profits. For instance, it is estimated that the pharmaceutical TNCs make internal sales to their Latin American subsidiaries at prices between 33% and 314% above world market levels.
The need of developing countries to conserve scarce foreign exchange for essential purposes by prohibiting imports of non-essential luxury items is not acknowledged by the WTO. The free market ideology of the WTO, the IMF and World Bank leads them to advise developing countries (sometimes under duress as when they are negotiating SAPs) to dismantle measures designed to cut luxury imports or allocate foreign exchange to essential purchases. Furthermore the WTO fails to address the long-standing complaint of developing countries about the decline in the prices they receive for their exports relative to the prices they pay for imports. This ratio of import and export prices is known as the "terms of trade". Between 1980 and 1991, terms of trade losses for all developing countries amounted to US$290 billion.
The World Bank (2000:3) reports that non-oil commodity prices fell by 11.2% in 1999. This is only the latest episode in a trend that has persisted throughout the 20th century. Real non-oil commodity prices have fallen by nearly two-thirds since 1900 with half of this decline occurring over the last two decades. (World Bank 2000:24) The World Bank predicts the terms of trade of developing countries dependent on commodity exports are likely to continue to deteriorate as supplies of agricultural and mineral products grow relative to demand due to increasing crop yields and improved mining and refining techniques.
Decades of efforts to stabilize commodity prices through international commodity agreements appear to have been abandoned. The one commodity whose price has gone up is oil, due to the success of the Organization of Petroleum Exporting Countries in curtailing supplies (see graph).
Experience within countries such as Canada shows that supply management for agricultural commodities-through the allocating of production quotas among farmers so that total supply matches demand and excess supply does not depress prices-is a viable solution to falling prices.
Instead of growing ever more coffee, cocoa or sugar in competition with their neighbours and thus depressing prices, developing countries must revive efforts to cooperate with one another to curtail over-production and ensure more adequate prices. The Association of Coffee Producing Countries is currently organizing efforts among 33 exporting countries, representing 85% of world supplies, to curb exports and boost prices which fell to a seven-year low in mid-2000. (FTL 19/05/00)
Other measures are needed to ensure that the benefits of trade are more evenly shared within countries. One of these involves the use of state-sponsored marketing boards. A study carried out by UNCTAD (197:144) shows that countries that carried out far-reaching free market reforms - Côte d'Ivoire, Egypt, Malawi and Tanzania - experienced large and growing profit margins for private traders at the expense of farmers. In countries that continued to regulate markets through state-sponsored marketing boards, the results depended on the willingness of the state to redistribute income back to farmers. While there were price movements favourable to small farmers in Cameroon, marketing boards in Ghana and Kenya passed on less of the income from export crops to farmers.
It is important to note that agreements under the WTO include not only trade in goods, but extend to investment, intellectual property rights and trade in services. These agreements are based on the same neo-liberal ideology that the IMF and World Bank adopt to promote economic growth. Equity and the redistribution of wealth are not a concern. The WTO agenda is built on a theory of comparative advantage which, for most developing countries, often lies in the provision of cheap labour, particularly (and increasingly) that of women working in export processing zones. Southern countries that compete on the basis of cheap labour too often face falling prices and non-tariff barriers for their exports.
Both the investment and services agreements address the very foundation of national economies, as they seek to privatize markets for goods and services and attempt to minimize the capacity of governments to intervene. Public health programs, public education and public pensions are all at risk, particularly from the current WTO negotiations to expand the General Agreement on Trade in Services (GATS). (Sinclair 2000)
In the case of the Trade-Related Intellectual Property Rights (TRIPs) agreement, there is increased protection for TNC patent rights and decreased access to appropriate technology for development. During the 1960s and '70s, the official goal of UN bodies was to make technology available for development. Then came what UNCTAD's director of technology transfers calls "the great reversal ... [whereby] cooperative efforts to set up a more balanced intellectual property rights system were cast aside as the North suddenly decided that the South had simply better pay lost royalties and pull in line with the patent system of the North." (Cited in ECEJ 1993:41)
Pharmaceutical corporations are among the principal beneficiaries of the TRIPs agreement within the WTO. The TRIPs code extends patent protection to 20 years, protecting corporate monopolies instead of encouraging technological diffusion. The cost of paying monopoly prices for patent medicines and the consequent inability of developing countries to afford life-saving medicines cannot be measured in monetary terms alone. Any international agreement on intellectual property rights, such as the WTO TRIPs code, must permit developing countries to produce or import generic copies of patent medicines.
In the case of antiretroviral drugs for treating victims of HIV/AIDS, the cost of generic substitutes is about 40 times less than patent medicines. Whereas the cost of a standard treatment for people suffering from HIV/AIDS in North America is US$10,000 a year, the equivalent drugs could be produced for just US$230 a year. (Lexchin 2000) The inequities encountered in the trade arena are among the most significant obstacles to a vision of development that will build sustainable communities.
Justice demands a fundamental reordering of international institutions including the WTO before trade can contribute meaningfully to economic development and justice.
The ecumenical community imagines a global community whose interdependence is not reduced to trade and markets. We believe that the deep human desire of the majority of people is to participate in the care of their neighbours and our collective home, the earth.
Our political leaders have a responsibility to respond to this desire by galvanizing resources for sustainable social development within a renewed framework of cooperation. It is a task that requires imagination and a change of heart, as our leaders invite collaboration in a common commitment to global solidarity.
Raising new resources for sustainable development requires a new commitment on the part of governments and international financial institutions. A new spirit of cooperation is required in the face of increased economic integration. In addition, new forms of global governance are also needed so that compliance does not depend on voluntary cooperation alone.
Increase Official Development Assistance (ODA)
For many low-income countries, Official Development Assistance (ODA) is still the principal source of financing for development. Yet ODA continues to decline as a portion of the goods and services produced by Northern countries.
The continuous fall in levels of ODA over the past decade is an indictment of the industrialized countries in their unwillingness to return to the South, through aid, even a small portion of the sums they appropriate through other means. ODA from OECD countries fell to US$51.9 billion in 1998, equivalent to only 0.24% of donors' Gross National Product. This decline makes the donors' 1969 promise to increase aid to 0.7% of GNP more elusive than ever.
The historical record shows that ODA can make a positive contribution to human and social development as long as developing countries, and people living in poverty themselves lead the process. Experience also shows that aid is more effective when particular efforts are made to involve women in the design and administration of projects. ODA has contributed to increasing access to clean water, to falling infant and child mortality through inoculations and oral rehydration therapy, to immunization programs against smallpox, polio, diphtheria and measles and to improvements in physical infrastructure. (Siniscalchi and Tomlinson 1997:6) However, not every type of development assistance is equally useful and some may be harmful. ODA can have a negative impact when it is tied to purchases from donor countries. Tied aid is estimated to cost as much as 25% more than untied assistance.
ODA causes immense harm when used for inappropriate projects such as large dams that displace people from their homes and damage ecosystems by flooding farms and forests.
Justice demands that donor countries recommit themselves to meeting the target of dedicating at least 0.7% of GNP to ODA. Moreover, the quality of aid must be considered just as important as its quantity. In order not to contribute to the debt trap, ODA should be in the form of grants, not loans-even low-interest ones.
Implement a currency transaction tax (CTT)
In Part II, we referred to the damage that unfettered capital flows can cause when they are swiftly transferred from country to country. These volatile flows of "hot money" have increased over the past two decades to the point where daily turnover on world currency markets is now more than the equivalent of US$1.8 trillion each business day.
One measure that could curb this volatile trade in hot money is popularly known as the "Tobin tax" after its first proponent, Nobel-prize winning economist James Tobin, who first introduced the idea in 1972. Tobin's basic concept has remained, although various modifications to the idea have since given rise to a new name, the Currency Transaction Tax (CTT).
The basic idea of a Currency Transaction Tax (CTT) is that a small tax (initially of 0.1% or less) would be charged on all international financial transactions in order to deter excessive, destabilizing currency speculation and give national central banks more control over monetary policy. Estimates of potential revenue vary according to the assumptions made about the size of the tax, its efficacy in actually slowing down the volume of currency trading and how many transactions would avoid the tax (either legally, since certain intergovernmental transactions might be exempt, or illegally through tax evasion). A recent midrange estimate by David Felix puts the potential revenue from a 0.1% tax at US$200 billion a year, assuming that the tax was successful in reducing foreign exchange turnover by up to 50%.
Until recently, debates on the CTT focused in its feasibility, and concern that the tax could be avoided through use of offshore financial havens or switching to other financial instruments. However, changes in the infrastructure for settling foreign exchange trades combined with technological developments, make it increasingly clear that the obstacles to a CTT are primarily political, not technical.
As Rodney Schmidt (1999) has observed, "The infrastructure for settling foreign exchange trades is becoming increasingly formal, centralized and regulated... [This transformation is] due to new technology [that is] subject to increasing returns to scale and to cooperation between trading and central banks to reduce and eliminate settlement risks." Schmidt concludes, "The technology and institutions now in place ... make it possible to identify and tax gross foreign exchange payments, whichever financial instrument is used to define the trade, wherever the parties to the trade are located and wherever the ensuing payments are made."
With less doubt as to the feasibility of a CTT, the debate is now shifting to the question of who should administer such a tax and what its revenues should be used for. In this regard, a vice-president of the World Bank has proposed that the revenues should be administered by the IMF and the World Bank and be used only to fight international currency crises. He even goes so far as to say that the revenues should not be used to fund "good international causes". (Serageldin 2000)
Members of the ecumenical community and other civil society groups strongly challenge the idea of turning over the revenues from a CTT to the World Bank and the IMF. We believe that a transparent, democratic and accountable mechanism should be established to administer the revenues from a tax on what is essentially international gambling. Further, we believe that the revenues must be directed to social development and should be used first and foremost to meet the needs of the victims of the global casino economy.
This view gained credence during the July 2000 Special General Assembly of the UN called to review progress on implementing the conclusions of the World Summit on Social Development. That assembly mandated the UN to carry out a new study on "proposals for developing new and innovative sources of funding ... for social development and poverty eradication programs." Some UN member states understand this mandate as including an investigation of the use of CTT revenues for social development.
Justice demands an early implementation of a CTT and the dedication of its proceeds to social development and poverty eradication.
Make reparations to developing countries
Many civil society organizations believe that the time has come to demand reparations for Southern peoples who have suffered from manifold injustices including slavery, exploitation, land dispossesion, racism and ecological damage at the hands of colonial and imperial powers. While it is not possible to put a precise dollar figure on the reparations owed for these injustices, the amounts owed clearly exceed the total value of developing country debts. (See ECEJ 2000B)
In some cases the amount of reparations due to Southern peoples for particular injustices can be estimated. For example, a Jubilee 2000 South Africa (2000) discussion document suggests that the South African people are owed compensation equivalent to: a) apartheid's foreign debts (both those outstanding and those already paid); b) the profits earned by foreign banks, financial institutions and foreign corporations during the apartheid period; c) the total economic cost of apartheid-caused debt, damage and lost opportunities to the other 10 countries of Southern Africa.
Another example of an area where compensation can be estimated is the debt owed to Indigenous peoples for their identification, selection and cultivation of medicinal plants. The value to the North's pharmaceutical industry of medicinal plants and microbials from the South has been estimated at US$30 billion a year. (ECEJ 2000B:9) Similarly, Northern agribusiness makes large profits by appropriating plants and animals that have been selectively bred by generations of peasant farmers in the South. Yet the WTO's Trade-Related Intellectual Property code does not even recognize the value of indigenous knowledge, let alone provide for its compensation. A case for reparations can also be made for losses due to falling terms of trade that can be calculated for specific periods and specific groups of countries. As noted above, between 1980 and 1991, terms of trade losses for all developing countries amounted to US$290 billion.
Furthermore, Southern countries should be compensated for their historical role in serving as "carbon sinks" absorbing excessive emission of carbon dioxide and other greenhouse gases emitted by industrial nations. We estimate that the "carbon debt" owed to developing countries for serving as carbon absorbers for Northern countries is now between US$30 and US$59 billion a year. (ECEJ 2000B:10-14)
Justice demands reparations for Southern peoples who have suffered from manifold injustices including slavery, exploitation, land disposition, racism and ecological damage at the hands of colonial and imperial powers.
Close down tax havens and offshore financial centres
The use of offshore tax havens by transnational corporations deprives the governments of developing countries of revenues needed for investment in basic services and infrastructure for development. It is impossible to make a precise calculation of the amount lost each year but a conservative estimate puts it at around US$50 billion, approximately equivalent to ODA. This estimate is based on the effects of tax competition and nonpayment of taxes on capital flight and does not take into account outright tax evasion or losses incurred because of transfer pricing by TNCs. (Ochsner 2000)
Several policy options are available for dealing with these losses including a multilateral approach to common standards to define the tax base and minimize tax avoidance. More information must be available on funds deposited offshore so that they can be taxed and the illicit proceeds from illegal arms and drug trades seized. An international convention is needed to facilitate the recovery and repatriation of funds embezzled from national governments or state firms.
Any effort to close down tax havens must take into account the development needs of states that resorted to hosting offshore financial firms, often for lack of other alternatives. Alternative development opportunities must be found for affected countries that will lose revenues when financial institutions in their jurisdictions close down.
Justice demands a new spirit of international cooperation that would ensure that:
- there is genuine commitment to a higher quality and quantity of ODA;
- revenues from a Currency Transaction Tax are devoted to social development and poverty eradication;
- reparations are made to Southern peoples who have endured exploitation, racism and ecological devastation for generations
- capital flight to offshore tax havens is prevented and that wealth is returned for investment in authentic development.
The ecumenical community affirms our common destiny as co-inhabitants of one earth for which we all share responsibility and from which we should all equitably benefit. The international debt crisis has dramatically distorted this equitable vision. The full and immediate cancellation of this debt is a moral imperative.
Debt relief initiatives to date have failed to address either the magnitude of the moral crisis or the depth of the will for global solidarity expressed by the Jubilee movement. Debt relief continues to be an exercise of power and control through the conditionalities imposed by the International Financial Institutions. The ecumenical community reiterates its plea for a genuine Jubilee, a new beginning in equity and justice for the developing world.
Reducing the debt burden of developing countries ranks fifth on the agenda of the FFD Intergovernmental Event despite the fact that it is potentially one of the best ways to free up foreign exchange for investment in sustainable human communities. However, debt cancellation, by itself, is not enough. The imposition of Washington consensus policies by the IMF and the World Bank as conditions for debt relief must also be addressed. In 1999 less developed countries paid US$298 billion dollars in total debt service on their long-term debts. That year those debts totaled US$2,071 billion, over four and a half times greater than in 1980 before the onset of the debt crisis. (World Bank 2000A)
These debts more than quadrupled over 19 years despite the fact that developing countries paid out approximately US$1.9 trillion more in debt service than they had received in new loans over the same period. (Calculated from World Bank 1994, 1998 and 2000A) They have accrued in large part because new loans were contracted to keep up payments on old credits without being invested in productive activities. For the poorest countries, two-thirds of the increase in debts between 1988 and 1999 was due to covering arrears through new lending. (UNCTAD data cited in TWR No.107:26)
In the private sector, uncollectable debts are routinely written down by creditors anxious to keep "bad debts" from impairing their balance sheets. One of the scandals of the 1990s is that funds have been diverted from Official Development Assistance for use in keeping up payments on debts that should have been written off long-ago.
The Highly Indebted Poor Countries (HIPC) Initiative must be understood as a creditors' plan designed to help the World Bank and the IMF deal with the uncollectable debts of some 41 countries. The statement on debt adopted at the Eighth General Assembly of the World Council of Churches in Harare puts this clearly: "Debt management proposals [like HIPC] ... are designed by creditors ... [for the purpose of] debt collection, not debt relief. Furthermore, Western creditors, represented by the IMF, impose conditions whose purpose is to generate revenues for debt service. Structural Adjustment Programmes impose unacceptable conditions on debtor nations and drain them of precious resources."
Under pressure from the international Jubilee debt cancellation movement-in which the churches play a leading role on every continent-the HIPC Initiative was "enhanced" following the 1999 Köln Summit of the Group of Seven industrial nations. The enhanced initiative was supposed to provide US$50 million in nominal debt relief for 33 countries expected to qualify.
As of the end of 2000, 22 countries had reached the "decision point", promising them US$34 billion in nominal debt relief provided they continued to apply Structural Adjustment Programs monitored by the IMF and World Bank. The Bank and the Fund say these 22 countries will see their debts reduced by 47%. Additional write-offs of bilateral debts through the Paris Club could lead to average debt reductions of about two-thirds. Nevertheless a two-thirds debt reduction for these 22 countries is equivalent to less than 8% of the total debts of the 52 low-income countries whose debts should be cancelled entirely according to the Eighth General Assembly of the World Council of Churches.
Despite the Köln Debt Initiative's call for a "framework for poverty reduction", the enhanced HIPC plan still involves only a small amount of debt relief over and above the write-off of debts that are uncollectible in any case. Writing off "bad debt", or what bankers might call "impaired loans" or "non-performing" assets, does not give the debtor new money to invest.
Consider the example of Nicaragua. The World Bank and IMF say that Nicaragua will receive a relatively large 72% debt reduction, eliminating US$4.5 billion of its US$6.3 billion debt. However, Nicaragua has been able to pay only about half of its annual debt service (paying about $245 million a year instead of the $500 million owed). The debt reduction granted to Nicaragua will reduce total payments owed to $170 million, a reduction of $330 million. This sounds generous until one realizes that the reduction in Nicaragua's actual payments is only $75 million (the difference between the $245 million it was able to pay and the $170 million now demanded). This is equivalent to only 11% of government spending and 30% of social spending. In Uganda nominal HIPC debt relief of 48% or US$2 billion will amount to actual relief equal to only 2.2% of government spending and 7.5% of social spending. (NSI 2000:8-9)
As the documents prepared for the WCC General Assembly at Harare assert, "Debt relief must be ... a contribution to eradicating poverty and building sustainable community, not ... a means to achieve debt sustainability." Yet reducing debt payments only enough to match developing countries ability to pay remains the primary goal of the HIPC initiative. A study by Joseph Hanlon (1998) of the human development needs of 93 developing countries found that even with a 100% write-off of their debts, 28 of these countries would not have sufficient savings on debt service to be able to meet the poverty reduction targets nominally accepted by donor nations.
In light of the unacceptable nature of the enhanced HIPC Initiative, the global Jubilee movement reiterates, as a priority demand, the immediate outright cancellation of 100% of the debts of low-income countries. It is also imperative that structural adjustment conditions attached to new loans and even modest debt relief be eliminated. Given the incredible hardship placed on poor countries through continued debt service, it is scandalous and illegitimate to continue to insist on payment at all.
Furthermore, in line with the WCC Assembly's call for "substantial debt reduction for severely indebted middle-income countries", the Jubilee movement extends its demands, beyond a priority on poor countries, to seek cancellation of the illegitimate debts of all Southern countries.
In November 2000, an international forum on Illegitimate Debt convened by the Canadian Ecumenical Jubilee Initiative identified four broad categories of illegitimate debts:
1. Debts that are illegitimate to repay, that is, they cannot be serviced without causing harm to people and communities. It is a violation of fundamental human rights when states fail to meet the basic needs of their people because needed resources are sacrificed to debt payments. As the Eighth Assembly of the WCC declared: "The basic human needs and rights of individuals and communities and the protection of the environment should take precedence over debt payment."
2. Debts incurred by illegitimate debtors and creditors acting illegitimately which includes both "odious debt" (that is, any debt incurred not for the needs or interests of the state but to strengthen a despotic regime that represses its own population) and loans which were stolen through corruption.
3. Debts incurred for illegitimate uses, such as debts for projects which were never built or did not benefit the people as they were intended; debts for projects that were destructive to the community or its environment; and debts contracted for fraudulent purposes.
4. Debts incurred with illegitimate terms, including debts incurred at usurious interest rates; debts that became unpayable as a result of external factors (such as Northern countries unilateral increases in interest rates or dramatic falls in commodity prices) over which debtors had no control; and private loans converted to public debt under duress in order to bail out lenders.
Justice demands the outright cancellation of all illegitimate debts and the elimination of Structural Adjustment Programs. The root causes of injustice and inequality underlying the debt crisis must be addressed. An independent tribunal (see Theme VI) empowered to assess and cancel developing countries' illegitimate debts should be established as an urgent priority.
The ecumenical community affirms the right of all people-particularly the diverse communities of the poor and excluded-to participate in the economic, social and political decisions which affect them. Our current economic system places excessive power in the hands of international economic agencies and global financiers. The concerns of developing countries and their peoples must be addressed within a more democratic system which assures their participation in global economic policy making. Global economic governance must be transformed so that its institutions serve all people, not simply the wealthy and the powerful.
The final item on the official UN Financing for Development agenda refers to the need to strengthen the coherence of the international monetary, financial and trading systems in support of development. Many in the ecumenical movement and elsewhere in civil society have come to the conclusion that this goal cannot be achieved without the fundamental transformation of the International Monetary Fund, the World Bank, the World Trade Organization and, indeed, parts of the United Nations itself.
In the wake of the Asian financial crisis, there seemed to be a window of opportunity for substantial reform of what is called the "global financial architecture." Critical voices were heard from within some of the international financial institutions themselves. For example, Joseph Stiglitz, then chief economist at the World Bank, began to publicly criticize not only the IMF's mishandling of the Asian crisis but also some of the fundamental premises of World Bank and IMF Structural Adjustment Programs.
But this window now seems to have been slammed shut. Stiglitz was forced to resign from the World Bank for his outspoken criticism of the Washington Consensus neo-liberal policies. In an article written just as he was preparing to leave the World Bank, Stiglitz went to the heart of the matter: "There are ... real risks associated with delegating excessive power to international economic agencies ... The institution can actually become an interest group itself, concerned with maintaining its position and enhancing its power." (Stiglitz 1999: A583) He concluded, "Ultimately, if we believe in democratic processes, the countries must make the decisions for themselves, and the responsibility of economic advisors is only to apprise them of prevailing views." (Stiglitz 1999: F594)
Poverty and inequality will not be eradicated unless the dominant neo-liberal economic paradigm imposed by the World Bank and the IMF is changed. Enhanced financing for development will fail to meet the poverty reduction goals even of the international institutions themselves unless the Washington Consensus policies are abandoned. Mal-development cannot be solved by fundraising alone.
Southern countries must take part in designing new financial architecture
Just as developing countries have been unable to determine their own internal priorities due to externally-imposed SAPs, they have also been kept largely on the margins of debates concerning "the new financial architecture".
Only a small number of the larger developing countries-China, India, Indonesia, Korea, Argentina, Brazil, Mexico, South Africa and Saudi Arabia-have been formally invited to participate in new groups created to discuss reforming the financial system. The Group of Seven industrial countries invited them, along with Russia and Turkey, to join the "Group of Twenty" to discuss monetary reform because these 11 countries are deemed to be "systemically significant". In other words, their debts are so large that a default by any one of them might threaten the stability of the whole system.
Smaller developing countries are kept on the margins of talks on global financial reform. So far the outcome of these talks has yielded no grand design for a new architecture but only some minor renovations. Measures to establish more transparency in financial dealings by releasing more information are akin to the installation of a few light bulbs and windows in the old structure rather than a whole new architecture.
The IMF and the World Bank, meanwhile, are striving to maintain and even enhance their powers. The Bank and the Fund are continuing a pattern that has been labeled "mission creep" through which they gradually intrude into areas that ought to be the exclusive jurisdiction of national governments. For example, some of the privatization programs sponsored by the Bank and the Fund are setting dangerous precedents, particularly when coupled with the General Agreement on Trade in Services now under renegotiation within the WTO. The IMF's Structural Adjustment Program for Mozambique includes a plan to privatize rural water and sanitation services.
In September 1999 the World Bank sponsored a seminar on privatizing education in less developed countries. An official from the International Finance Corporation, the World Bank branch that promotes private foreign investment, argued that public education has failed and schools need to be privatized. The Bank invited a representative of a private investment firm who presented the corporate view that education and training should be seen as a "US$2 trillion global market" waiting to be tapped by entrepreneurs. He said privatization "will result in sustainable, high price/earnings ratios and significant opportunity for investors." (Crane 1999) One shudders at the thought of what this would mean for the very poor who are already excluded from educational opportunities due to their inability to afford school fees.
Although the World Bank has officially adopted poverty reduction as its goal, its own record on structural adjustment is not reassuring. An internal World Bank study leaked to the Financial Times found "a disconnect between Bank policy and practice." (FTL 24/09/99:10) The internal study reviewed 54 structural adjustment and sectoral loans made between July 1997 and December 1998. The Bank's review concluded that: "The majority of loans do not address poverty directly, the likely economic impact of proposed operations on the poor or ways to mitigate negative effects of reform."
In view of the poor record of the Bretton Woods Institutions, more decentralized alternatives open to democratic processes must be found for delivering financing to developing countries. Many members of the ecumenical community and other civil society organizations believe that a reformed UN should be given more responsibility for managing the global financial system.
Who should adjust?
Not only are developing countries excluded from redesigning the financial architecture, they are also compelled to accept Structural Adjustment Programs before they receive financing from these institutions. These programs have been discredited again and again as causing, rather than alleviating, poverty. SAPs are vehicles for carrying forward Washington Consensus policies in the interests of creditors rather than debtors. One of the fundamental problems with SAPs is that they put the onus for adjusting to externally induced financial crises solely onto debtor countries. Financial bailouts nominally involve new lending to debtor governments but the real beneficiaries are often speculators whose unwise over lending caused the crises in the first place. When these bailout loans are used to pay off foreign lenders or to take over private debts, it is the people of the developing countries who are burdened with new debts and the belt-tightening austerity measures that are typically part of SAPs.
A more just international financial system would put more of the burden of adjustment on the lenders and speculators. Thus one reform measure deserving support is the addition of an Emergency Standstill Clause (ESC) to loans and bond contracts. Such a clause would enable debtors with balance of payments problems to suspend payments and negotiate with their creditors instead of having to run to the IMF for bailout loans that come with costly strings attached.
Some visionary plans for the reform of the international financial architecture would make the IMF and the World Bank subordinate to a reformed United Nations system. As far back as 1992, the UN Development Program's Human Development Report described a visionary blueprint for a new financial architecture that would include:
- A global central bank to create a common currency, maintain price and exchange rate stability, provide for a global adjustment of surpluses and deficits and for equal access to international credit, and give developing nations the liquidity they need.
- A system of global income tax to be collected automatically from rich nations and distributed to developing countries "on the basis of a shared policy dialogue rather than a system of formal conditionality."
- An international trade organization to, among other things, manage commodity price stabilization schemes. The 1992 UNDP report saw it merging functions of GATT and UNCTAD. Today it would mean replacing the WTO, which the UN Sub-commission on Human Rights found to be "a nightmare" for developing countries. (FTL 14/08/00) The jurists on the Sub-commission found that the WTO's rules "reflect an agenda that only serves to promote dominant corporatist interests that already monopolize ... international trade." The report found that the WTO fails to take into account the needs of poor people and of women and that "developing countries are forever condemned to a marginal negotiating position within the WTO framework." (For more information on developing countries and the WTO see ECEJ 2000A)
- A new Development Security Council within the UN which would establish a global policy framework for all development policy issues including food security, ecological security, humanitarian assistance, development aid, debt cancellation and social development.
Another version of this reform would see the creation of a UN Economic and Social Security Council, comparable in status to the Security Council. (Camilleri, Malhotra and Tehranian 2000:50, 54) The UNDP report acknowledges that such visionary changes will take time to achieve. A new financial architecture will have to be built one piece at a time beginning with the reform of existing institutions which cannot be abolished overnight. For progress to be made, the international financial institutions must be subjected to more democratic decision making as occurs in UN bodies rather than the unequal distribution of votes that now prevails within the IMF and the World Bank where the wealthiest countries have most of the votes.
In any discussion of reforms, it is important to keep in mind the distinction between reforms that are mere palliatives and may even end up reinforcing unjust structures and genuine transformative measures that weaken the powerful and enable genuine participation by the poor and the excluded.
Some civil society organizations advocate a much smaller role for the IMF, in effect returning it to its initial purpose of making loans to countries in balance of payments difficulties. This would involve removing from the IMF the ability to attach SAP conditions which put all the pressure for adjustment on debtors alone. Ulrich Duchrow (1995:231) advocates a return to John Maynard Keynes' vision articulated prior to the Bretton Woods conference that established the IMF and the World Bank. Keynes advocated measures that would induce countries with payments surpluses to adjust so that the burden would not fall solely on those with payment deficits.
When international liquidity is needed it should be created by public institutions rather than the private financial system. In the short term, this would involve new issues of Special Drawing Rights (SDRs) by the IMF. Eventually a new currency for funding international commerce could be created by a world central bank that would replace the IMF. In either case, newly created international currency should be allocated according to the needs of developing countries.
The full range of institutional change required for a new international financial system is beyond the scope of this paper. (This will be the subject of further ECEJ research in 2001). However, the global Jubilee movement has opened up discussion of the need for some kind of debt arbitration mechanism that would go beyond HIPC and deal with the illegitimate debts of all developing countries.
International Arbitration Tribunal
The WCC's Eighth General Assembly's statement The debt issue: A Jubilee call to end the stranglehold of debt on impoverished peoples observes: "It is unjust that creditors dominate the debt relief process. We need new, independent and transparent structures for governing relations between debtors and creditors. In particular, we need a new just process of arbitration for international debt cancellation."
Most domestic legal systems would never allow creditors to act as judge, jury and bailiff in proceedings involving debts in which they hold an interest. Yet this is what occurs within the Paris Club of government creditors and the London Club of private creditors when they discuss debt restructuring for developing countries. Following the work of Kunibert Raffer (1992), proposals are being developed for an international debt arbitration tribunal modeled on Chapter Nine of the US bankruptcy code which sets some important precedents. Chapter Nine applies to municipal governments in the US and therefore acts as a model of how an insolvency proceeding can be applied to a sovereign state. It combines a general framework with flexibility to deal with particular situations. Its procedures can be initiated only by the debtor government. Once a petition is filed there is an automatic stay on enforcement of claims against the debtor. It exempts from creditors' reach resources needed by the state to meet the needs of its population. A government is not expected to stop providing essential services for the health, safety and well-being of its people. The people affected have a say in the proceedings. For example, municipal employees may be represented through their trade unions.
An international arbitration tribunal could draw on some of these elements. Civil society, for example, should have a place at an international tribunal whose proceedings should be open and transparent for all to see. However, some cautions are in order since not just any kind of tribunal would necessarily benefit the poor and the excluded. If a poorly designed tribunal had jurisdiction over only a limited range of matters, it could end up assisting private financiers more than the impoverished peoples of debtor countries. For example, it could end up sanctioning only the cancellation of debts that could never be collected in any case while leaving in place obligations to pay the many kinds of illegitimate debts described earlier under Theme V.
Some officials within the IMF suggest that the IMF itself could modify its Articles of Agreement to take on the functions of an arbitration tribunal. But this would not be a neutral body. The IMF is a creditor itself and represents the interests of its largest shareholders. It could never serve as a neutral arbitrator. The scope of any international arbitration tribunal is crucially important. Only an arbitration tribunal that empowers debtors to cancel a wide range of illegitimate debts would be consistent with the goals of the Jubilee movement. As AFRODAD (2000:4) asserts: "An international arbitration process ... [must] also take into account the cases of dubious and illegitimate debts. ... as well as [cases involving] the retrieval of money stolen by leaders and put in foreign banks."
Justice demands the genuine transformation of the international financial system, including the creation of new institutions, to ensure that all countries and their peoples are democratically represented and their concerns are meaningfully addressed.
In this paper we have argued that merely providing more financing for development initiatives is not enough. Development cannot be reduced to a question of financing alone. An exclusive focus on money flows alone is analogous to the behaviour of a medical doctor who treats only the patient's blood circulation while ignoring the digestive system, the bone structure, the pulmonary system and other vital organs. Justice demands a more holistic diagnosis.
The ecumenical community challenges the very heart of the matter: the neo-liberal paradigm enforced by the World Bank, the International Monetary Fund and the World Trade Organization. Increasing funding for activities that reinforce this model of mal-development will not eliminate poverty, inequality or ecological devastation. On the contrary, it will only exacerbate these injustices.
This paper has outlined alternative approaches to development more closely aligned with our belief that development must foster just, participatory and sustainable communities. Much can be learned from the United Nations Development Program's human development approach and the African Alternative Framework of the UN Economic Commission for Africa. Further work on new models for development is needed and requires participation from civil society organizations around the globe.
With regard to the six themes of the UN Financing For Development Intergovernmental Event, the following is a summary of basic issues that must be addressed in creating new models for development.
- a commitment to retaining community and national savings for reinvestment where they are generated;
- measures to minimize and reverse the outflow of wealth from developing countries;
- selective use of foreign financing for essential imports and projects that will strengthen the national economy;
- international trade and investment agreements that enable national governments to require corporate social responsibility, to promote local sustainable economic development and to screen out foreign investments that jeopardize such development;
- a rewriting of international trade agreements to redress the inherent inequities of the world trading system;
- a commitment to high quality Official Development Assistance and use of revenues from a Currency Transaction Tax for genuine economic and social development;
- a commitment to develop effective global governance that will support responsible international financial activity, particularly in the areas of capital flows and tax havens;
- immediate cancellation of 100% of the debts of low-income countries and an end to Structural Adjustment Programs;
- acceptance by the international community of the moral and economic arguments for the outright cancellation of illegitimate debt and support for the creation of an independent arbitration tribunal to rule on such debt;
- a respected place for developing countries in debates about the needed reform of international financial institutions;
- a genuine transformation of the IMF, the World Bank, the WTO and parts of the UN, leading to responsible global governance at the service of all peoples.
For the ecumenical community, the issues related to financing for development must not focus simply on quantities of financial resources. The debate should focus on justice and, above all, seek to restore right relationships among human communities and between humans and all of Creation.
Measures designed to regulate the inflow and outflow of financial capital. Examples include restrictions on offshore deposits, requirements concerning how long capital must remain in a country before it can be repatriated and licensing requirements.
Currency TransactionTax (CTT)
A small tax on all international financial transactions to deter speculation. The CTT is also known as the "Tobin Tax" after Nobel-prize winning economist James Tobin who first proposed the idea in 1972.
Foreign Direct Investment (FDI
Investments in which non-residents exercise majority ownership and control.
General Agreement on Trade in Services (GATS)
An intergovernmental agreement signed under the World Trade Organization establishing rules for trade in services.
Human Development Alternative
The orientation of the United Nations Development Program's Human Development Reports which start from the premise that "the purpose of development is to create an enabling environment for people to enjoy long, healthy and creative lives ... [a] truth too often forgotten in the pursuit of material and financial wealth."
An ideology that encompasses a belief in unfettered free markets which are assumed to promote economic growth.
Official Development Assistance (ODA)
Official government-provided aid for the promotion of economic development or human welfare.
Rotating Savings and Credit Associations (ROSCAs)
Local community-based savings and loan associations where members pool their savings and make loans to each other.
Structural Adjustment Programs (SAPs)
The set of neo-liberal policies demanded by the International Monetary Fund and the World Bank as conditions for receiving new loans or debt relief.
The principle that decision-making should always be as decentralized as possible so that decisions are made at the local, community level whereever possible and only those that must be made at the state, provincial, national or international levels are made at those levels.
Trade-Related Intellectual Property Rights (TRIPS) An intergovernmental agreement signed under the World Trade Organization establishing international rules with respect to patents, copyrights and trade marks.
A set of policy provisions based on neo-liberalism that include free trade, deregulation of capital markets, privatization of public enterprises and treating foreign investors the same as national investors.
International Arbitration Court on Foreign Debt Harare: AFRODAD
> Camilleri, Joseph; Malhotra, Kamal; and Tehranian, Majid (2000)
Reimagining the Future: Towards democratic governance Bundoora, Australia: Department of Politics La Trobe University
Canadian Ecumenical Jubilee Initiative (2000)
Report on Forum on Illegitimate Debt: Definitions and Strategies for Repudiation and Cancellation Toronto: Canadian Ecumenical Jubilee Initiative
Carroo, Winston G. (1999)
"WTO Challenged at Seattle Ministerial Meeting" Netline New York: Agricultural Missions Program of National Council of Churches, US
Crane, David (1999)
"Let's not teach McSchools to the developing world" Toronto Star 03/10/99: A12
Daly, Herman (1996)
Beyond Growth: The Economics of Sustainable Development Boston: Beacon Press
Duchrow, Ulrich (1995)
Alternatives to Global Capitalism Utrecht and Heidelberg: International Books and Kairos Europa
Recolonization or Liberation: The Bonds of Structural Adjustment and the Struggles for Emancipation Toronto: Ecumenical Coalition for Economic Justice
"Free Trade and Patenting Life: Is Nothing Sacred?" Economic Justice Report IV/2 Toronto: Ecumenical Coalition for Economic Justice
"1 Part Poverty Reduction, 2 Parts SAPs: A Recipe for Disaster" Economic Justice Report X/4 Toronto: Ecumenical Coalition for Economic Justice
"Development and Democracy: The WTO Fails to Deliver" Economic Justice Report XI/1 Toronto: Ecumenical Coalition for Economic Justice
"Ecological Debt: South Tells North 'Time to Pay Up'" Economic Justice Report XI/3 Toronto: Ecumenical Coalition for Economic Justice
Agriculture, Trade and Food Security: Issues and Options in the Forthcoming WTO Negotiations From the Perspective of Developing Countries Rome: Food and Agricultural Organization
Gélinas, Jacques (1998)
Freedom from Debt: The Reappropriation of Development Through Financial Self-Reliance London, Ottawa and Dhaka: Zed Books, Inter Pares and University Press.
Greider, William (1997)
One World, Ready or Not New York: Simon and Shuster
Hveem, Petter (2000)
Global Financial Challenges: Towards a responsible financial architecture for the developing countries Oslo: Norwegian Forum for Environment and Development
Jubilee 2000 South Afri2000)
Reparations: A draft position paper Cape Town: Alternative Information and Development Centre
Lexchin, Joel (2000)
"Patents on AIDS drugs are patently unnecessary" The Globe and Mail Toronto (4/09/00:A13)
North South Institute (2000)
Review: The North South Institute Newsletter Ottawa: The North South Institute (October)
Ochsner, Gertrud (2000)
Chances and limits of the closure of tax havens Paper presented to the International Conference Towards a Just International Financial System in Bad Homburg, Germany, Nov. 23-25
Raffer, Kunibert (1992)
"What's Good for the United States Must be Good for the World: Advocating an International Chapter 9 Insolvency" in From Cancún to Vienna: International Development in a New World Vienna: Bruno Kreisky Forum for International Development
Schmidt, Rodney (1999)
A Feasible Foreign Exchange Transactions Tax Ottawa: The North-South Institute
Serageldin, Ismail (2000)
"New economic realities" Al-Ahram Cairo (undated copy circulated on the Internet)
Sinclair, Scott (2000)
GATS: How the World Trade Organization's new "services" negotiations threaten democracy Ottawa: Canadian Centre for Policy Alternatives
Stiglitz, Joseph E. (1999)
"The World Bank at the Millennium" The Economic Journal Oxford: Blackwell
Siniscalchi, S. and Tomlinson, B., eds. (1997)
The Reality of Aid London: Earthscan
Tandon, Yash (2000)
SEATINI Bulletin III/1
Trade and Development Report Geneva: United Nations Conference on Trade and Development
World Investment Report Geneva: United Nations Conference on Trade and Development
Human Development Report New York: Oxford University Press
Human Development Report New York: Oxford University Press
Human Development Report New York: Oxford University Press
Accelerated Climate Change: Sign of Peril, Test of Faith New York: World Council of Churches
Development Assessed: Ecumenical Reflections and Actions on Development Geneva: World Council of Churches Unit III Justice, Peace and Creation
The debt issue: A jubilee call to end the stranglehold of debt on impoverished peoples Statement adopted at Eighth General Assembly in Harare. Geneva: World Council of Churches
World Bank (1988)
World Debt Tables Washington: World Bank
World Bank (1994)
World Debt Tables Washington: World Bank
World Bank (2000A)
Global Development Finance Washington: World Bank
World Bank (2000B)
Global Economic Prospects Washington: World Bank
FTL Financial Times
TWR Third World Resurgence
Penang: Third World Network