Opinion of the Economic and Social Committee on "Debt relief in the combating of poverty in LDCs"

(1999/C 209/12)

On 28 January 1999, the Economic and Social Committee, acting in accordance with Rule 23(3) of its Rules of Procedure, decided to draw up an opinion on "Debt relief in the combating of poverty in LDCs".

The Section for External Relations, responsible for carrying out work on the subject, drew up its opinion on 12 May 1999. The rapporteur was Mrs Davison.

At its 364th plenary session on 26-27 May 1999 (meeting of 27 May 1999) the Committee adopted the following opinion by 118 votes in favour and 1 abstention.

1. Executive summary

1.1. In view of its longstanding concern about the extent of absolute poverty in the developing world, the Committee welcomes the new resolve of several Member States to improve public debt relief for the poorer countries.

1.2. Crucial to their success in attacking absolute poverty is social conditionality. The Committee takes the view that the public debt relief process should be speeded up and deepened for countries which apply "good governance" and give priority to eradicating poverty. The extra finance saved by debtor governments should be allocated to social projects via clear plans for poverty reduction. Priorities for these plans should be agreed with donors and with organised civil society. Careful monitoring should be based on improvements in poverty indicators such as child mortality, numbers in school, closing the gender gap. In the case of failure to use debt relief for social progress, the aid could be reallocated into decentralised projects.

1.3. As an incentive, and in view of the delays that have already occurred in debt relief, and the urgency of the poverty problem, the Committee would propose greatly reducing debt service payments on an immediate basis. This should apply to countries already identified as in need of help and which commit to spend the savings made, on poverty reduction measures.

1.4. Attacking the stock of debt could take longer, up to three years. Incentives should again be offered, at this stage, to countries with good governance committing to poverty reduction plans. The Committee proposes increased debt relief which would reduce debt stock between the ranges of 100 to 150 % of exports.

1.5. The EU has a vital role to play in using the current opportunity to alleviate both debt and poverty. The Committee calls on the Commission to be more active on the issues and on the Member States to coordinate and to find new resources. The EU should show leadership and help set the pace. Especially since not all Member States are represented there, it should coordinate EC proposals for the G8 so that they do not undermine each other, but instead enhance one another, so that powerful proposals are collectively made - and on the boards of the World Bank and IMF. Co-ordinated EU policies on debt and financial support to debt relief, coherent with the EU's role as a donor, both as the Commission and as Member States, could play a major and successful role in the achievement of the OECD's crucial 2015 human development targets.

2. Introduction

2.1. The Committee has repeatedly stressed its concern about the extent of absolute poverty in the developing world. For more than twenty years, under the aegis of the ACP-EU Joint Parliamentary Assembly, it has been organising, the dialogue between the Union's economic and social interest groups and those of the ACP (African, Caribbean and Pacific) countries. In the process of this debate, concern has been expressed about the limits which the burden of external debt payments imposes on government spending in many of the poorest indebted countries.

2.2. The Committee has already stressed the need for good governance and the development of civil society in the ACP countries and the South generally. It takes the view that the public debt-relief process should be speeded up and deepened for countries which apply "good governance" and give priority to eradicating poverty. To do so without this focus threatens to reallocate resources away from development and into general debt relief. This Opinion focuses on how, in practice, social conditionality could be achieved.

3. Priority to poverty reduction

3.1. In its report, Shaping the 21st Century, the Development Assistance Committee of the OECD set goals for 2015 for universal primary education, for a reduction of the number of people living in absolute poverty by one-half and for a two-thirds' reduction in child mortality. The Committee supports this goal as a minimum, but realises that without debt relief, a poverty focus and good governance, it will not be achieved.

3.2. The World Bank and IMF have identified and included forty one Heavily Indebted Poor Countries (HIPCs) (1), those with the highest debt burdens, with external debt amounting to more than twice their annual export earnings, and which are also poor. The majority of these countries, some 80 %, are located in Sub-Saharan Africa. It is no coincidence that these indebted countries have some of the worst social indicators in the world, and are far from achieving the goals set for 2015. Recent estimates on child mortality trends suggest that mortality rates will remain twice as high as the OECD target level in 2015. Looking at education, for instance, the situation is getting worse; debt is undermining the ability of these countries to achieve globally agreed education targets. The total number of children out of school in Africa is increasing not decreasing, and the gender gap in schools is widening. Sub-Saharan Africa now accounts for a third of the 125 million children out of school. According to current trends, Latin America and Asia, which also suffer from poverty are making progress in reducing the numbers of children out of school. Sub-Saharan Africa is not, however, and will account for three quarters of the 75 million children who will be out of school by 2015. In terms of gender, according to current trends, it will take 50 years for Sub-Saharan Africa to reach a level of gender equity.

3.3. On average for HIPCs, debt servicing absorbs 40 % of government budgets; for many HIPCs, debt servicing exceeds spending on health and education. Whilst governments would not always choose to spend the resources released by debt relief on social objectives, and while aid provides vital finance, it is equally clear that debt payments seriously limit the total resources available to meet such human development targets. Linking debt relief to poverty reduction can therefore make an important contribution to meeting the 2015 targets.

3.4. While the EC is a relatively small multilateral creditor (5 % total multilateral debt stock), it has a powerful political role. Four of the G8 governments are EC governments, UK, France, Germany, Italy; these are also some of the world's largest creditors. Member States hold about 25 % of outstanding bilateral claims on developing countries. The EC countries, as a block, hold the majority of shares on the boards of the World Bank and IMF; as a block these countries (plus the EC), are the largest donor in the world (56 % of overseas development aid in 1996). The majority of the poorest indebted countries are ACP countries.

3.5. The EU institutions are placing a greater emphasis now on poverty reduction. The Commission has given it a somewhat greater focus in its aid programme and in the negotiations on the renewal of the Lomé Convention. The French and British governments and the German presidency, have all made proposals for deepening public debt relief. The Nordic countries and the Netherlands have set aside significant resources for the problem. Individual governments have also exchanged debt into local currency to spend on social, environmental and development projects. The EU Parliament has also put poverty reduction on the top of its agenda. The ACP-EU Joint Parliamentary Assembly is currently elaborating a general report on the fight against poverty in the ACP countries and in the EU Member States. The Committee for its part has produced an Opinion calling for a strengthened focus on good governance(2) and human rights and links poverty reduction with trade in its opinion on Fair trade labelling(3).Several of Committee's Opinions including those ones on Investment and on the WTO draw attention to the need for core labour standards and for integration of the OECD guidelines for multinational behaviour in developing countries.

3.6. In addition to direct contacts established with organisations such as Quart Monde, the ESC welcomes the fact that civil society in the EU has become sufficiently concerned as to organise a world-wide campaign for debt relief focused on the June G8 meeting and the year 2000. "Jubilee 2000" brings together development agencies, charities, trade unions and churches all over Europe, linking with partners in the developing countries. For example, the mayor of Rome has declared Rome a Jubilee 2000 city.

4. Current debt-relief initiatives

4.1. This is an important year in terms of improving debt relief. The World Bank and International Monetary Fund are carrying out a comprehensive review of the HIPC framework.

4.2. Low income countries are eligible for traditional debt relief through the Paris Club of creditor nations. The secretariat of this group is housed in the French Treasury. The Paris Club can provide a reduction of up to 67 % in many of the debts owed to government creditors. A condition is that the debtor country first agrees and then demonstrates a track record of good performance under an economic programme with the IMF (International Monetary Fund).

4.3. It became clear that Paris Club relief was not sufficient to resolve the debt crisis in poor countries, and thus, as unsustainable debt still remained the Heavily Indebted Poor Country initiative (HIPC) (1996) was set up to extend Paris Club and other bilateral relief to up to 80 % and includes for the first time relief from World Bank, IMF and other multilateral debts.

4.4. To be eligible for HIPC status countries must be eligible for concessional assistance from the IMF and World Bank, must face an unsustainable debt burden which cannot be solved through other debt-relief mechanisms and must establish a track record of reform through IMF and World Bank supported programmes.

4.5. The HIPC process is a rather lengthy one. In the first three-years, a track record of good performance under IMF/World Bank supported programmes is required, except for countries that already have a sustained record of strong performance. During this period, bilateral creditors are expected to reschedule eligible debt servicing obligations becoming due, with up to 80 % reduction in present value. After three years the country reaches a Decision Point, where eligible bilateral debt stock is reduced by 67 %. Following three more years (or less with good performance) the country reaches the completion point and bilateral creditors reduce the stock of eligible debt by up to 80 %. Multilateral creditors (including the IMF, the World Bank and the EC) reduce their claims in order to cover the balance of unsustainable debt. The Commission has decided to increase its structural adjustment facility allocation by 15 % to countries reaching their decision point. This is generally allocated to social spending.

4.6. The total cost have recently been updated and estimated at around $ 12,5 billion, funded from a range of sources. Recent increases in costs are particularly due to falls in commodity prices on which many HIPC countries rely.

4.7. There are a number of concerns with the HIPC framework. The HIPC process is too long and too inflexible. Countries have to undergo successfully around six years of IMF reform programs before being eligible for HIPC debt relief. From when the initiative was conceived in 1996, only two out of forty-one countries have actually received debt relief so far, and only three are due to receive relief in 1999. At the same time the amount of debt relief provided has not been enough to bring about debt sustainability when, for example, raw material prices fall. The burden of debt servicing during the HIPC process, and at the end, still remains high, diverting resources from human development needs. The recent World Bank/IMF review of HIPC, completed in April 1999, highlights many of the problems with HIPC, and also notes that "in absolute terms the Initiative may not be significantly reducing debt service from current level paid".

4.8. Overall HIPC has been criticised because it is not doing enough to impact on poverty in the countries concerned. For example, debt is only really sustainable if there is adequate export income and currency reserves; sufficient internal savings and state income to mobilise funds within the country; there is surplus of export income after essential imports; domestic budgets are sufficient for the fundamental tasks of the state and sufficient to address deep levels of poverty and inequality and to achieve of the 2015 targets.

4.9. Many of these criticisms have in part been recognised by the UN and by bilateral creditors, notably five of the G7 members have all proposed improvements in HIPC in the run-up to the G8 summit in Köln in June 1999, the UK, Germany, France, the USA and Canada. Other non G7 European members making recent proposals include Ireland and Norway. Proposals to improve HIPC by the G7 are varied and include: widening eligibility to bring in additional countries such as Jamaica, Cambodia, Ghana and Bangladesh; providing debt relief more quickly by shortening the time period from six to three years; making some improvements in the criteria to increase the amount of debt relief provided; increasing bilateral debt reduction in the Paris Club to above 80 %; cancelling aid loans or service; selling IMF gold to fund the initiative; increasing bilateral contributions to the HIPC Trust Fund; increasing aid; and discussion of improved linkages to poverty reduction. The UK government has proposed a social code of conduct and also that the EC provide increased resources to HIPC from its aid budget. The German Presidency proposes binding and complete cancellation of debts from development assistance tied to good governance and poverty reduction. All these proposals may help to improve the amount of debt relief provided. They now need to be co-ordinated, the mechanisms to link debt relief to poverty reduction need to be clarified and appropriate finance provided to a reformed HIPC debt relief framework. The Committee calls on the EU Member States to present the EU as a responsible economic power deeply committed to an effective framework of North-South relations as well as to the eradication of poverty in the world and to put in additional debt relief finance including from the European Development Fund.

5. The view of the Committee

5.1. General concerns

5.1.1. The Committee has proposed strengthening the attack on world poverty on all fronts; trade, aid, employment, conflict prevention, good governance, gender issues and debt. It has stressed the need for good governance and poverty focus for such an attack to succeed. The Commission has also committed itself to principles of sound governance in its aid programme. A critical component of good governance is citizens' participation, including women, in the affairs of state via parliaments and via their representative organisations. This also reduces the potential for conflict, but the Committee has called too for the EU and US to co-operate more actively on conflict prevention and the German Presidency has proposed that a comprehensive strategy for conflict prevention be considered in depth at the G8. The aim is to set up an early warning system (and/or to support the existing systems in the poorer countries) to be followed by international co-ordination talks using the umbrella of the UN. Finally, the Committee has called for consistency between EU aid and trade policies and has encouraged the cooperative movement and voluntary "fair-trade" labelling.

5.1.2. There are two major problems caused by external debt. The most pressing is the social impact especially on the poor. However, there is also the problem that the overhang of debt acts as a deterrent to external investment and to the debtor country's own investment in growth. Debt relief is important to help promote investment and reduce capital flights. If the poor countries are to grow out of poverty and play their part in world trade to the mutual benefit of all our economies, they must attract investment and expand their economies. Debt relief is not an end in itself but a route to achieving these goals.

5.1.3. Given the delays that have already occurred in the debt relief process and the urgency of the poverty problem, the Committee would recommend an immediate focus on social issue.

5.2. Social conditionality and the involvement of civil society

5.2.1. The Committee supports the idea of a system of incentives in debt relief for countries willing to make commitments on poverty reduction, human and minority rights and good governance. Incentives should be provided for countries committed to poverty reduction, by greatly reducing debt servicing from the beginning of the HIPC process. Debt stock reduction could take place at the end of a shortened process, with a maximum time-frame of three years, rather than the current six. This would be on the condition that all benefits from this reduction in debt servicing would be allocated on a social basis to poverty reduction measures. In case of failure to use debt relief for social progress, aid to central governments should be proportionally reduced and used directly to support decentralised projects.

5.2.2. The intention would be twofold. Firstly to relieve countries from excessive debt servicing during the HIPC process; debt payments would be substantially reduced so that government resources, currently used to pay debt, would be released specifically for increased government expenditure in poverty reduction areas. The government would be required to work with donors and organised civil society to develop clear plans for poverty reduction. The finance saved would be allocated to these plans and would contribute to increased social expenditure, such as primary education and vocational training, primary health care, the problem of HIV/AIDS, and also to other poverty reducing measures, such as rural roads, women's programmes, job creation and support to poor farmer agricultural production.

5.2.3. Secondly, at the end of a shortened HIPC process, say three years (maximum), countries would receive increased debt relief which would reduce debt stock to between the ranges of 100-150 % of exports. This would also be provided on the condition that savings in debt servicing for the following five years be used for poverty reduction investment. The debt relief provided would need to be final and irreversible if investors are to be reassured that long term debt sustainability is being achieved. However, if at any time during, and in, the five years after the HIPC process, governments reneged on their commitments to allocate resources from debt relief to poverty reduction, then donors should reallocate future aid and lending proportionally to decentralised projects. Such a commitment should be institutionalised. It should be remembered that these countries will be reliant on aid resources for some time into the future, and there will continue to be strong relationships between governments and donors. The Committee would urge the Commission and Member States to set up a system of cooperation to use those relationships to ensure good governance and an anti poverty focus. This should include more monitoring in the field and involvement of the economic and social partners.

5.2.4. Countries would agree to allocate saving from debt servicing into a Poverty Fund. This Fund would be monitored by a committee made up of government, donor and organised civil society representatives. Involving the economic and social partners in self-help measures will build confidence. Resources would be allocated from this fund into national poverty reduction priorities, that have been agreed with donors and civil society. Careful accounting procedures should be used to keep administrative costs down.

5.2.5. National plans are often made up of sectoral investment plans, such as those supported by the EU in, for instance, education or health, which would be appropriate for receiving finance from such a Poverty Fund. Similar mechanisms were developed in Uganda, where the government publicly agreed to allocate HIPC debt relief to a Poverty Action Fund, which disburses finance to the national Poverty Eradication Action Plan. This approach is being successfully implemented at this time; for instance, part of the finance has been used to support the government's efforts to attain universal primary education, where recently primary school enrolment increased from around 2 million to over 5 million, when the government eliminated official school fees.

5.2.6. The Committee would stress the need for transparency, including clear accounting procedures by governments and for social performance indicators, covering for example, access to health care, jobs, numbers of children in school, numbers completing schools, gender gap. These need to be very specific to prevent abuse. For example, a simple requirement to increase spending on health can merely be achieved by raising doctors' salaries. To measure instead indicators like child mortality reveal true improvements in everyday life. At the same time, targets need to be small in number to enable close monitoring. Most governments have developed indicators for monitoring these areas, for example, key statistics are produced in the UNDP Human Development Report on an annual basis or in the World Bank Annual Report.

5.2.7. The Committee agrees with the proposition that debt relief should not be at the expense of development projects, especially those operated at grassroots by the NGOs. The German Presidency called for all donors to make a contribution to the World Bank's HIPC Trust in 1999 to prevent its programme of support for the poor countries being diverted. Furthermore debt relief will not be enough to ensure that such countries escape from poverty. While national governments must ensure improved policy reforms and efficient use of resources, increased financing will still be necessary to achieve poverty-reduction goals as governments agreed at the Copenhagen World Summit. The EU should promote the achievement of increased levels of aid from its Member States, and attainment of the 0.7 % GNP target for aid allocation.

5.2.8. At the same time as providing debt relief, it is important that the debt crisis is not repeated. The Commission should support countries in the development and implementation of improved debt-management strategies. While creditors have responsibilities, lenders do also. It is vital that countries undertake prudent borrowing, ideally on concessional terms, and for poverty reduction focused initiatives. Parliaments and organised civil society can play an important role in scrutinising new lending. At the same time, monitoring of poverty reduction efforts should be undertaken to ensure that budget allocations, debt relief, aid and new lending are achieving the intended impact.

6. Conclusions

6.1. The EU has a vital role to play in using the current opportunity to alleviate both debt and poverty. The Committee calls on the Commission to be more active on the issues and on the Member States to coordinate and to find new resources. The EU should show leadership and help set the pace. Especially since not all Member States are represented there, it should coordinate EC proposals for the G8 so that they do not undermine each other, but instead enhance one another, so that powerful proposals are collectively made - and on the boards of the World Bank and IMF. Co-ordinated EU policies on debt, coherent with the EU's role as a donor, both as the Commission and as Member States, could play a major and successful role in the achievement of the OECD's crucial 2015 human development targets.

Brussels, 27 May 1999.

The President

of the Economic and Social Committee

Beatrice RANGONI MACHIAVELLI

(1) The HIPCs are Angola, Benin, Bolivia, Burkina Faso, Burundi, Cameroon, Central African Republic, Chad, Congo, Côte d'Ivoire, Democratic Republic of Congo, Ethiopia, Ghana, Equatorial Guinea, Guinea-Bissau, Guyana, Honduras, Kenya, Lao Pdr, Liberia, Madagascar, Mali, Mauritania, Mozambique, Myannar, Nicaragua, Niger, Nigeria, Rwanda, Sao Tome and Principe, Senegal, Sierra Leone, Somalia, Sudan, Tanzania, Togo, Uganda, Vietnam, Yemen and Zambia.

(2) Opinion on development aid, good governance and the role of socio-economic interest groups, OJ C 287, 22.9.1997.

(3) Opinion on the European "Fairtrade marking" movement, OJ C 204, 15.7.1996.