Basic Ethical Principles
for a More Just International Financing Regime

Michael T. SEIGEL



The Jubilee campaign for debt cancellation asked for more than just the debt to be cancelled. There were two other specific demands: firstly, that the cancellation be carried out through a neutral, transparent and participatory procedure, and secondly that measures be taken to ensure that similar debt crises do not arise in the future.
Since the debt arose out of a whole situation of imbalance and inequality, then just canceling the debt is not enough. The other two demands should not be seen as things appended on the demand for debt cancellation. They lie at the very heart of the campaign and in the long run may even be more important that cancellation itself.
“Transparent” means that decision making processes should not be obfuscated. It means that all those whose lives are affected by decision-making should have access to knowledge about the decision making process—including knowing who are the responsible persons, what are the issues being considered, what decisions are actually made, and what are the reasons for those decisions. Like the other issues here, transparency is required not only of the debt cancellation process but in all areas of international finance and governance. It is a contradiction for international institutions to pretend to be promoting democracy and good governance without carrying out their own interactions with governments in an open and transparent way. Such things as World Bank country assistance strategies therefore should be public as should all policy requirements placed on governments by creditors and international institutions.
“Neutral” means that decision making should not be in the hands of one particular faction. Since, in a debt crisis, the creditors are usually the ones in the stronger position, neutrality will almost always involve making sure that the creditors do not control the process.
“Participatory” means that the neutrality of the process must be achieved not by carrying out the decision making in some distant and uninvolved way, but by involving all of those who will be affected by the decisions in the decision-making process. Clearly, the most important requirement here is to ensure the effective participation of those most vulnerable in this process.
Taking measures to see that similar debt crises do not arise in the future will require a comprehensive evaluation of the background and causes of the debt crisis. This evaluation itself must be transparent, neutral and participatory in the sense that has just been described. Such an evaluation would have to take full consideration of the fact that the creditor countries for the most part are former colonial powers and the indebted countries are former colonies. This is obviously not just coincidence and means that the debt crisis has to be viewed against the background of colonialism. It also cannot be just coincidence that the main creditor countries are industrialized countries while the indebted countries are exporters of commodities and raw materials. So an evaluation of the background of the debt crisis would also have to consider the disadvantaged situation of commodities and raw materials in the international market and redress this imbalance. Problems of misplaced accountability must also be addressed, especially when debt derives from such things as failed development projects carried out under the initiative and direction of the creditors and yet, when failure occurs, becomes completely the responsibility of the recipient country.
There are some basic ethical principles that point to the kind of system implicit in the Jubilee campaign demand for measures to be taken to ensure that similar debt crises do not emerge in the future. I will describe some of these principles.
a) The right to adequate food, clothing, shelter, access to medical care and education are primary rights that have priority over other rights, including the right of the creditors to repayment.
b) A government’s first responsibility is to the well-being of the people, particularly in terms of the primary rights mentioned in the previous paragraph. Therefore a government has a responsibility to provide for these basic rights before making repayments to creditors. A certain portion of the budget of each country should be considered sacrosanct and out of reach to creditors. This amount should be determined according to rights already defined in UN documents and should include a prudent reserve to deal with natural disasters, etc.
c) Governments also have the responsibility to maintain a certain degree of autonomy for the country so as to enable the people to live without sliding into servility. As well as requiring the avoidance of any form of tyranny within countries, this means that governments have a responsibility to avoid servile political or economic dependence on other countries or institutions. This responsibility to maintain a certain level of independence and self-governance also overrides the responsibilities that a government has to creditors. This means more than just that there should be limitations to the imposition of policy by creditors. It means that a certain portion of each countries budget should be reserved as funding to promote development so that a sufficient level of self-reliance is maintained. This development is necessary to ensure that the well-being of the people is achieved through active participation and not passive dole-outs. This portion of the budget too should be out of reach to creditors since it pertains to a responsibility of governments that overrides their responsibility to creditors.
The above are all grounded in the understanding i) that the raison d’etre of governments is the well-being of their people, and ii) that the right of ownership is not the most fundamental right and there are certain human rights that override it. Governments have a primary responsibility to protect those most fundamental rights. Only when they have allotted sufficient resources to meeting those requirements do the even have the right to respond to the demands of creditors. This basic principle is recognized, for example, in United States Chapter 11 Insolvency Law where states, cities, counties, etc., can apply for bankruptcy protection without exposing their citizens to loss of well-being or property. The suggestion here is that the principle be made to apply at all stages of the debt-servicing process, not merely at the stage of bankruptcy.
Clearly a loan to a government is not to the same as a loan to an ordinary economic actor such as a business corporation. The government, because its concerns include fundamental human rights, will always have responsibilities that override its responsibilities to creditors. Therefore an international lending regime is required that is compatible with these fundamental responsibilities of governments.
The logic of lending is that the recipient of the loan invest the money in some project and earn a sufficient profit from it to both repay the loan and the interest and retain a certain profit. When such profits are not earned, then debt crises occur. To the extent that a loan is not likely to generate a profit, it is likely to generate a debt crisis. Governments cannot operate like other economic agents not only because they have other overriding responsibilities, but also because they require financing for projects and programmes that are not likely to generate profits. Ordinary businesses do not have a primary responsibility to provide health services, education, disaster relief, infrastructure, etc. Governments have these as a primary responsibility and if financing for these is provided through loans at ordinary market rates, then debt crises are inevitable.
Finance to governments or government bodies, or loans for which a government is likely to become responsible, should therefore be classified according to the degree to which, by the nature of its use, the financing is likely to generate income..
l Finance for uses that are not income generating, especially in the case of poor countries, should be provided in the form of grants. In fact, UNCTAD has for many years now asked that ODA be given in the form of grants, not of loans, so this is anything but a new suggestion. However, one still hears of cases of donors offering loans for such things as fighting AIDS—a use to which profit is clearly not going to accrue. Such loans are predetermined to become debt crises. Such financing should be in the form of grants. In most cases, such grants could be considered reparations for colonialism or redress for inequalities and therefore as demands of justice, not as acts of charity.
l Uses of finance for such things as infrastructure development may be indirectly income generating. Depending on the level of economic resilience of the country, such finance could be grants, or could be loans free of interest, or at loans concessional interest rates with a stay on payments until the project has actually begun to produce profits.
l Loans for projects that are expected to be profit making could be made at market interest rates, but such loans should not be government guaranteed. If a loan cannot be made according to the logic of the market, it should not be serviced according to the logic of the market. If government guaranteed loans are indispensable then measures should be taken to reduce the governments vulnerability by taking such measures as putting limits on the accumulation of compound interest as well as recognizing the governments other primary responsibilities.
Finally, the current debt crisis has made it clear that there is a serious need to see that accountability for debts is apportioned according to real responsibility. This applies to more than just odious debts and debts that are the result of corruption. Parts of the current debt crisis are the result of the failure of development projects which, even if misguided, were well intended. Even in these cases it is not fair that the whole burden of repayment fall on the shoulders of the recipient country. In many cases, development projects have been carried out under the initiative and guidance of international donors and experts. Yet the donors, the creditors, the expert advisors are not held accountable at all. Power without accountability is an invitation to corruption.



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