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To Pay or To Develop - Debt Sustainability Handbook

19 May 2006

When is an emerging or developing country’s debt “sustainable”? Considering the debt crisis that has characterised much of the last three decades, this may sound an odd question to ask. The humanitarian catastrophes that the world witnesses every single day, and the overwhelming lack of resources that these countries can devote to basic human needs such as health, education, shelter and security – not to mention minimal state infrastructure – simply seem to point to the fact that no debt at all is sustainable when considering the developing world.

Indeed, during the 80’s and early 90’s it already had become so obvious that much Southern indebtedness was unsustainable, and in many cases just plain unpayable, that Northern creditors – and their supranational arms such as the World Bank and the International Monetary Fund – implicitly acknowledged this with limited debt cancellations being granted through the Paris Club process. This was then followed, trying a slightly more systemic approach, by the two (1996 – 1999) Heavily Indebted Poor Country (HIPC) Initiatives and, finally, through the recent Multilateral Debt Relief Initiative (2005) which – falsely – claims “100 percent” relief for the poorest of the poor.

Unfortunately, reality does bite. Even this latter round of relief – which encompasses a mere 27 out of more than 50 indebted poor countries and covers only three multilateral institutions (the IMF and World Bank, as well as the African Development Bank) out of 19 – does not do enough to free debtors from the slavery of debt and to stand financially on their own feet. Once again the notion of sustainability that is applied merely considers the financial capacity to repay their creditors, and withholds any inclusion of, for instance, the availability of resources needed to cater to at least the basic needs of their peoples and achieve the Millennium Development Goals. It is an approach that does not put forward the type of generalised, open and dynamic solution to a problem that will resurface again within a few years. Moreover, it is a logic which by limiting its angle to the financial side of things does not guard against renewed unsustainability and the resulting, recurring debt crises.

Hence one fundamentally sound path forward is, in our opinion, the elaboration and subsequent implementation of a type of debt sustainability - within a fair and transparent process - which, at any point in time, would situate available resources against those needed to satisfy a developing country’s basic necessities as established by those Millennium Development Goals that have been subscribed by both debtor and creditor governments. Only then the amount of resources in excess that can be devoted to the repayment of existing debt should be considered. This method, to be applied to every country struggling to reach these objectives, is the only way to guarantee that basic yet unyielding principles of equity and justice are adhered to. The understanding of the importance of the antagonistic kinds of “sustainability” is key to the conception of an alternative - to the creditors’ – approach; and to do so it is crucial to realise that it is not a neutrally technical question to be left to specialists but rather an intensely political one that basically reads: on what grounds can the rich be repaid when the poor are starving?

One final, but all important reflection: considering the question of sustainability does not imply at all that the issue of legitimacy of debts is somehow set aside. On the contrary, these threads actually complement and reinforce each other; indeed, it is our conviction that the evaluation of whether a debt is sustainable begins only after all illegitimate debts have been taken off the books, because these simply should not enjoy any status and should therefore be declared void. After having excluded all illegitimate debts, it could nonetheless be the case that a country’s debt is still unsustainable when considering it from the human needs perspective; hence the constructive and positive integration of these two notions.

The notions of debt sustainability and illegitimate debt appeal to two very distinct concepts of justice: illegitimate debt tries to take account for the historical dimension of debt. It aims at an analysis of how debt was accumulated and whether this process of incurring debt took place in accordance with certain ethical standards. As the object in question is a process over time, we shall call the according concept of justice “historical justice”. The concept of sustainability appeals to the moral question of what is needed to secure human development in the future. To do so it appeals to the concept of “justice as fairness”: what would be an appropriate level of debt considering the various restrictions placed on debt service by ethical questions regarding human development.

As debt sustainability and illegitimate debt are based on two different moral concepts, there are no reasons why one notion of justice should be comparable (or even more important) than the other. Both are essential, and both have to be pursued with great vigour and confidence.

This handbook was originally produced and released in the German language by erlassjahr.de, a member of the Eurodad network, with Eurodad’s active involvement.

Click here for the German Edition "Handbuch Schuldentragfähigkeit - Schulden müssen tragbar sein", or call +49 (0)211 / 4693-196.

Read the handbook in English here:

To pay or to develop - debt sustainability handbook : 412 Kb