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Borrowing is a critical source of financing for human and physical investment. Yet for developing countries borrowing presents unique financial challenges the investment it supports often has diffuse and long-term benefits. Going into the COVID-19 crisis, a growing number of developing countries were facing difficulties in managing their debt, which have been aggravated in the wake of the pandemic.
In this body of work, CGD experts address the following questions: How should borrowing be used to overcome the immediate crisis and relaunch a sustainable and resilient recovery? Can debt relief provide a short-term palliative? For how long? When should longer-term debt restructuring be considered? How can the global community deal help developing countries deal with private sector debt? What is the role of “new” official creditors that were not part of previous debt relief initiatives?
The world is in the throes of a health, economic, and social crisis due to the COVID-19 pandemic. Slower global growth has significantly worsened the economic prospects for all countries, including the poorest ones. Low-income countries (LICs) are also finding it more difficult to service their external debt as well as to access private capital—concessional and non-concessional
Cared for by her grandmother in a village in Nigeria, Ngozi Okonjo-Iweala is emphatic that her experiences as a child are what led her into a career in public service and development. “I lived some of the issues that people are concerned about in development,” she explains in the video below, part of a new CGD podcast.
This year marks the 10th anniversary of 2000 Jubilee debt relief movement, in which religious organizations, development NGOs, and policymakers pressed successfully for deeper, faster debt relief for the world's poorest countries. What did the movement achieve? What pitfalls and policy opportunities lie ahead?
CGD fellow David Roodman discusses the beginning of the Jubilee movement.
On Wednesday, September 29, 2010, CGD experts were joined by key actors in the movement to assess the legacy of the Jubilee. The event featured presentations by CGD Senior Fellow David Roodman and Todd Moss. The chair of CGD'd board, Ed Scott, and Minister Counselor Lars Petter Henie of Norway provided opening remarks. The morning and afternoon panels were moderated by CGD's Lawrence MacDonald, vice president of communications and policy outreach, and Nancy Birdsall, CGD's president.
The morning panel focused primarily on the evolution of the Jubilee movement and its growing impact in the last decade. CGD fellow David Roodman explains in his essay The Arc of Jubilee that the Jubilee 2000 movement, which called for the cancellation of the foreign debts of the poorest nations, reached its zenith in the late 1990s and 2000—and then, by design, shut down. In the space of a few years, it became one of the most successful international, non-governmental movements in history.
Jamie Drummond on why the Jubilee movement gained support from both secular and religious institutions.
Roodman concludes that nongovernmental groups have shown that they can exercise power by educating members of the public and engaging them in the policymaking process. The success of Jubilee 2000 led directly to creation of new, high-profile NGOs in the 2000’s such as DATA and the ONE Campaign (now merged). It advanced an advocacy style that exploits the power of stars such as Bono; uses media old and new with savvy; strikes a strongly centrist stance (in the U.S. context, bipartisan); and subtly melds secular and religious appeals. In particular, Jubilee progeny unlocked more than $50 billion in U.S. government funding for global health in the 2000s, mainly for HIV/AIDS treatment in Africa. This aid flow dwarfs the new funds generated for debt relief. See David's full speech here, view the handout, or read his full paper here.
Masood Ahmed explains the importance of the process of engaging heavily indebted poor countries in the Jubilee movement.
In transition between the morning and afternoon panels Masood Ahmed, director of the Middle East and Central Asia Department at the IMF, offered a first-hand perspective of how international financial institutions are approaching the issue of odious debt and what obstacles remain for the process of debt cancellation. Ahmed explained that in the World Bank there was always the sense that debt relief was a "crazy idea". In fact there was never any concern about where the money for debt relief would come from, but rather people within the World Bank were concerned that these efforts had short-term benefits and long-term consequences.
Speaking to these concerns, Todd Moss followed by arguing that the International Monetary Fund is partially at fault due to its proven systematic overestimates of growth for heavily indebted poor countries. Additionally, even as past debt was relieved, the sustainability of low-income countries' debt was eroded by new, even greater official lending—primarily by IFIs. Between 1989 and 2003, new nominal lending to HIPCs was twice as large as the amount of nominal debt relief provided. In the early 2000s, several donor governments, think tanks, and civil society organizations began to realize that the HIPC Initiative did not provide a lasting solution to the problem of unsustainable debt in poor countries.
Todd Moss outlines some of the crucial elements of the evolution of the Jubilee movement.
However, despite sound academic support for debt relief, the reality of instituting any kind of debt cancellation policy for the heavily indebted poor countries still remains grounded in a quagmire of bureaucracy both on the scale of governments and international finance institutions. Some members of the afternoon panel raised doubts about whether there was any statistically significant evidence that debt relief was an effective tool for aid of the heavily indebted poor countries.
Clay Lowery discusses the difficulties of instituting policy changes in the face of governmental bureaucratic gridlock.
The panel ultimately offered conflicting assessments of how to proceed with the future of the Jubilee movement. Panelist Seema Jayachandran posited that the status quo had to be changed in order to give poor countries better opportunities to avoid the burden of illegitimate lending. The idea of debt relief in itself can be a powerful tool in spurring economic growth for the HIPCs, but it is by no means a sweeping solution regarding the issue of odious debt.
Another approach, set forth in a recent CGD working group report, is to prevent odious debt from forming in the first place. The report, Preventing Odious Obligations: A New Tool for Protecting Citizens from Illegitimate Regimes, proposes an agreement that could declare that successor governments to a (named) illegitimate regime would not be bound by contracts that the illegitimate regime signs after the declaration. Some rogue investors might operate in defiance of the system, but this new approach would still help free successor governments from concerns about repudiating illegitimate contracts.
Despite the success of the Heavily Indebted Poor Countries (HIPC) in reducing the debt burdens of low-income countries, at least eleven Sub-Saharan African countries are currently in, or face a high risk of, debt distress. A few of those currently at risk include countries that have been excluded from traditional debt relief frameworks. For countries outside the HIPC process, this paper lays out the (formidable) steps for retroactive HIPC inclusion, concluding with lessons for countries seeking exceptional debt relief treatment.
Nigeria is currently classified by the World Bank as a ‘blend’ country, making it the poorest country in the world that does not have ‘IDA-only’ status. This paper uses the World Bank’s own IDA eligibility criteria to assess whether Nigeria has a case for reclassification.
CGD recently hosted a conversation with Acting President Goodluck Jonathan of Nigeria on several key issues facing his country. He addressed access to electricity and electoral reform as two of Nigeria’s most pressing development challenges.