The Heavily In-debt Poor Countries Initiative is Not Working

by Anup Shah
This page last updated Thursday, August 30, 2001

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People who have worked on these issues for many years have frequently arrived at the conclusion that debt is not a financial or an economic problem at all but in every way a political one. It is the best instrument of power and control of North over South [and now East] ever invented; far superior to colonialism which requires an army, a public administration and attracts a bad press. Control through debt not only requires no infrastructure but actually makes people pay for their own oppression.

Susan George, The Global Citizens Movement: A New Actor For a New Politics¹, 30 August 2001

The Heavily In-debt Poor Countries (HIPC) initiative set up in 1996 by the rich nations through the IMF and World Bank calls for the reduction of external debt through write-offs by official donors. It was set up for the poorest of nations, for whom, according to the World Bank², the debt of the HIPC countries was, on average, more than four times their annual export earnings, and 120 percent of GNP. But the HIPC initiative has been met with a lot of criticism for not actually helping the countries it is supposed to be helping (the indebted nations) while helping those it wasn't necessarily meant to (the rich nations):

The most glaring problem with the Heavily Indebted Poor Country (HIPC) initiative for debt relief is that it will not provide lasting relief from debt for the highly indebted countries of the south. The HIPC process is aimed not at canceling debts, but at ensuring that they can be repaid. It has little to do with enhancing human development, reducing poverty, or even increasing economic growth in the debtor countries. Rather, it is designed to massage debt figures down to a level where they would be deemed sustainable again according to the criteria of the International Monetary Fund (IMF).

The Transfer of Wealth;³, Debt and the making of a Global South, Chapter 4, a publication of Focus on the Global South, October 2000.

The HIPC policy has long been criticized by many organizations for not actually amounting to much relief in real terms due to it being tied to certain conditionalities that are recommended by the IMF and World Bank, which prescribed the problems of the poorer countries in the first place. The IMF and World Bank themselves have come out with a report saying such things, as reported⁴ by the Drop the Debt campaign.

The European Network on Debt and Development, for example, point out in a report that the HIPC is unlikely to free up resources to tackle poverty⁵ for three main reasons:

Threshold levels to measure debt sustainability are arbitrary and still too high and that sustainability is defined in economic terms and not in terms of human and social development. As a result, they point out, several least developed countries with significant debt burdens have not been included in the HIPC initiative.
The debt reduction on offer is too small. They point out, for example, that Zambia and Niger will actually pay more after the initiative than they did before.
The piling up of different sets of conditionalities slows down the process. Conditionalities such as the much-criticized Poverty Reduction Strategy Papers (PRSPs) from the IMF and World Bank do not succeed in aligning macro-economic issues and poverty issues more closely than in the past and macro-economic frameworks haven't changed significantly as a result of PRSPs.

Furthermore, the World Bank has been criticized by Oxfam in a report⁶, for having used wildly optimistic growth projections for the 22 HIPC countries. The ramification of this as they continue is that because projections are linked to growth, revenues have been overestimated, and debt is likely to absorb much larger shares of government revenue than World Bank projections state meaning that in many cases nations will continue to spend more on debt than on basic education or health, even after receiving HIPC debt relief.

Jubilee Research (formerly the prominent debt campaign organization) has criticized the HIPC initiative, playing on the acronym, describing it as Half-hearted, Inadequate, Piecemeal Cancellation in a report that looks at the issue of corruption, debt, lending and borrowing⁷.

The case of Zambia as the following quote shows, highlights well the situation for most recipients of this relief:

Zambia's diligence in pursuing World Bank and IMF-led reforms has resulted in an increase in the poverty gap and the weakening of the country’s social services. Its debt burden has fundamentally undermined its efforts to tackle the HIV/AIDS crisis, and the numbers infected continue to rise above one million. Zambia has been forced to strain its resources to the limit in seeking to meet its huge debt service obligations. ... As Africa's debt service obligations grow each year, and as Africa's people are forced to repay these debts by mortgaging their health, their education and their future, it is time to acknowledge that the cancellation of Africa's debts represents the only just solution.

Salih Booker, The Myth of HIPC debt relief⁸, The Mail & Guardian (a pan-African daily), December 12, 2000

The IMF and World Bank have actually admitted that the HIPC initiative is backfiring⁹ in some cases and are confirming warnings that debt-relief advocates were making even before the scheme was launched.

Even Joseph Stiglitz, the World Bank's Chief Economist and Vice President, in January, 1998 called their structural adjustment HIPC initiative misguided¹⁰, calling for a more humble approach to macro-economics and a commitment to honor promises made in social sectors. People have become disgruntled at the initiative claiming that the program is more in the interests of the creditors¹¹ than the debtors.

And at the end of 1999, Joesph Stiglitz stepped down as the former Chief Economist of the World Bank renewing his previous criticisms¹² of the World Bank and IMF saying that it was not open and transparent enough, especially to additional viewpoints and the positions of the developing countries. In his own words, The policy of imposing conditions on countries seeking economic aid had failed.

The most senior finance minister in Britain, Gordon Brown also admitted that debt needs to be cut back and it is a major cause of poverty, injustice and even a barrier to peace in some areas of the world¹³. This is fairly significant as Britain has been a key player in the world financial institutions, from its colonial history to modern economic strength and world influence.

The IMF has attempted to provide deeper, broader and faster debt relief with their enhanced HIPC debt initiative. Unfortunately though the same old problems of forcing poor countries' economic policies to be dictated by the IMF remains unchanged¹⁴.

[T]he new attention of the Bretton Woods institutions to governance and institutional reform is not cosmetic but real — and, potentially, all the more hazardous for being so. The worry is that the new paradigm could amount to the worst of both worlds: on the one hand, the new orientation justifying intervention by the IMF and World Bank into aspects of national policy development and institution building well beyond the economic sphere; on the other, such increased leverage being used for much the same exploitative purposes as before.
Some see this trend manifested already in the limited moves towards debt forgiveness and reduction which have been spearheaded by the IMF. The Washington-based research and campaign group Development Gap, for example, sees these as creating new and deeper opportunities for IMF control, rather than as a genuine transfer of authority to client countries.
The IMF would be given the additional role of imposing, and determining the adequacy of, poverty-reduction programs. Perhaps the greatest and most outrageous irony in the proposed debt-reduction plan is the far greater penetration that it would allow the Fund into the societies of its client countries. Its new role as judge and financier of anti-poverty programs is a frightening prospect given that the institution remains wedded to an orthodox adjustment paradigm and has demonstrated that it knows considerably less about poverty than the Third World poor know about classical economics. The plan would allow the IMF to determine the adequacy of government consultations with civil society.
For decades, the Fund has imposed its will on the countries of the South, reshaping their economies with virtually no input from the millions of people affected by their policies. Farmers, workers, consumers, small entrepreneurs, indigenous people and many others have taken to the streets to express their anger and frustration, but to little avail. Not only has the Fund failed to respond, but it has ensured that governments are unresponsive as well by threatening a cut off of all international financing if its adjustment policies are not implemented. Now the institution that has undermined democratic processes around the world as it forces the adoption of poverty-inducing measures is set to be the arbiter of the adequacy of citizen involvement in the design of poverty-reduction programs. [Remarks to the UNCTAD Trade and Development Board meeting, 25 October 1999]

Brendan Martin, New Leaf or Fig Leaf? The challenge of the New Washington Consensus¹⁵, Bretton Woods Project, March 2000.

More Information

As well as the above links, the following provide more in-depth information, about the HIPC initiative and its criticisms:

The Transfer of Wealth;¹⁶ Debt and the making of a Global South, a publication of Focus on the Global South, October 2000, Chapters 2 and 4. (You will need to download¹⁷ the Adobe Acrobat reader to read the online PDF version, if you have not already got it.)
What I learned at the world economic crisis. The Insider¹⁸ by Joseph Stiglitz, former Chief Economist of the World Bank, harshly criticizes the IMF.
This report¹⁹ from Oxfam, about debt, the IMF, the Heavily Indebted Poor Countries Initiative etc. shows that even though there has been some effort to do something, not enough is being done.
Reality Check: the need for deeper debt cancellation and the fight against HIV/AIDS²⁰ A report by Drop the Debt, contains an independent audit of World Bank and IMF accounts which show they can afford to cover the costs without damaging their ability to function.
The Challenge of Maintaining Long-Term External Debt Sustainability²¹ by the World Bank and IMF, April 20, 2001. (You need the Adobe Acrobat reader²² installed to read PDF documents.) This report admits that the HIPC debt package will provide an end to the debt crisis for the countries involved. Amongst other things, it points out that the amount of debt that is reduced is not that much.
Foot-Dragging on Foreign Debt²³ from the South Centre provides additional critique of the HIPC initiative and the Poverty Strategy Papers (PRSP) from the IMF and World Bank, to replace the flawed Structural Adjustment Programs.
Debt reduction for poverty eradication in the least developed countries²⁴ provides analysis and recommendations on debt of least developed countries and the impacts of HIPC.
Kicking the Habit; Finding a lasting solution to addictive lending and borrowing and its corrupting side-effects²⁵ by Joseph Hanlon and Ann Pettifor, Jubilee Research, March 2000, looks at the impact of misused lending and spending, as well as the issue of corruption.