Opinion of the Economic and Social Committee on 'Debt relief in the combating of poverty in LDCs'
Date: 1999-05-27
Institutions: European Economic and Social Committee
Subjects: EU aid, debt reduction, developing countries, poverty

C 209/48

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Official Journal of the European Communities

22.7.1999

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.

As an incentive, and in view of the delays that have
1.3.
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.

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3. Priority to poverty reduction

3.1.
In its report, Shaping the 21st Century, the Develop-
ment 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 sup-
ports this goal as a minimum, but realises that without debt
relief, a poverty focus and good governance, it will not be
achieved.

The World Bank and IMF have identified and included
3.2.
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.

On average for HIPCs, debt servicing absorbs 40 % of
3.3.
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 outstand-
ing 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
into local currency to spend on social,
exchanged debt
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 label-
ling (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 organis-
ations 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.

(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, Liber-
ia, Madagascar, Mali, Mauritania, Mozambique, Myannar, Nicarag-
ua, 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.

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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).

It became clear that Paris Club relief was not sufficient
4.3.
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 multilat-
eral 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 estab-
lish a track record of reform through IMF and World Bank
supported programmes.

4.5.
In the
The HIPC process is a rather lengthy one.
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 expect-
ed 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.

The total cost have recently been updated and esti-
4.6.
mated 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,
the USA and Canada. Other non G7
Germany, France,
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 eradi-
cation of poverty in the world and to put in additional debt
relief finance including from the European Development Fund.

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5. The view of the Committee

5.1. General concerns

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.

5.1.1.
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.

The intention would be twofold. Firstly to relieve
5.2.2.
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.

Secondly, at the end of a shortened HIPC process,
5.2.3.
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 remem-
bered 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. 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

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.

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5.2.5.
National plans are often made up of sectoral invest-
ment 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 trans-
parency, including clear accounting procedures by govern-
ments 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.

The Committee agrees with the proposition that debt
5.2.7.
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

Brussels, 27 May 1999.

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
the
poverty-reduction goals as governments agreed at
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.

At the same time as providing debt relief,

5.2.8.
it is
important that the debt crisis is not repeated. The Commission
should support countries in the development and implemen-
tation of improved debt-management strategies. While credi-
It is vital that
tors have responsibilities,
countries undertake prudent borrowing,
ideally on con-
cessional 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.

lenders do also.

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.

The President

of the Economic and Social Committee

Beatrice RANGONI MACHIAVELLI