7. IMF, WB, Credit rating agencies

1. 7. IMF, WB, Credit rating agencies • These agencies are set up to facilitate better business • Credit rating agencies report updated credit history of countries to make both borrower and lender aware of accurate information • IMF and WB lend funds to developing countries to carry out huge projects • Lenders are citizens or businesses in developed countries • The loans are primarily short-term • Lenders immediately pull money if they speculate developing country’s economy weakening, fearing that loans may not be repaid later if the economy crashes • Pulling support exactly at times when they need it most

2. Credit rating agencies • Rated East Asia very high during growth periods in early 1990s • When Thailand’s financial market crashed on July 2, 1997, they downgraded ALL East Asia debt • Many foreign investments are tied to these “ratings” • A lower rating meant they could no longer invest in East Asia • ALL foreign lenders pulled their money from the region • The crisis became worse

3. IMF and WB • Do not help developing countries during crisis • Create and sign contracts that make developing countries promise to pay their loans in any condition • Consequences to developing country citizens is not their priority • Make the suffering countries increase their interest rates to stabilize the interest rate with lending country’s currency • Higher interest rates reduce capital borrowing • Businesses do not get cheaper credit to boost investment • Investment reduces when it needs to increase the most • Reduced investment means lower job opportunities • People lose their jobs, new workers entering market get no jobs • Countries go into recessions and depressions • Argentina asked IMF to change policies, IMF refused, Argentina refused to pay back their loan • Expansionary policy, economy grew, Argentina recovered

4. 8. Developing country debt management • There are 4 kinds of developing country debt • Normal, very poor countries that have mostly borrowed from other governments and multilateral institutions like IMF and World Bank • Nepal, Bangladesh, etc. • Debt accrued by countries that have suffered under corrupt and oppressive governments • Most African countries, Iraq, Libya, etc. • Emerging market where private lenders have lent too much to private borrowers, so much that it has national consequences • Middle-income countries that have borrowed too much (or have been lent aggressively by lenders) who can’t pay back without devastating adjustments to policies • Argentina

5. Debt relief for the poorest • Poor countries are so poor that they will take any money they can get • 1996 Highly Indebted Poor Countries • International community argued for debt relief for these • IMF in charge, criteria so strict that few qualified • 2000: agreement to expand the HIPC • June 2005 meeting of G8 • 100% debt relief for 18 poorest countries (14 were African) • Shallow debt relief leaves countries struggling, another debt crisis looming • Not only poor and corrupt countries but also good ones have debt problems • Brazil, Argentina, Russia, Turkey, Mexico

6. Odious Debt • Debt incurred by Iraq under Saddam Hussein • Debt incurred by Mengitsu regime in Ethiopia in 1974-1991 • Haile Mariam used that money to buy arms to suppress his people • Ethiopians are still repaying those loans • Corrupt military dictators in Nigeria in 1964-79 and 1983-99 • $250 billion dollars of petrol revenue was being generated each year • Still by 2005, the country had $27 billion in debt • Chile • Still paying debt from Pinochet regime • South Africa • Still paying debt from Apartheid • Argentina • “dirty war” between 1976-83, 10,000-30,000 disappeared • Had Argentina not refused to pay, would still be paying

7. Congo during the Cold War • Developed countries sent money to the military dictator • Money deposited into Swiss bank accounts, $5-10 billion amassed • Congo in $8 billion debt by the time Mobutu Sese Seko left • But western lenders are not punished for their support to the dictator • Citizens of Congo are still paying those loans • Debts incurred by non-democratic governments • The borrowed money may have helped the brutal regime stay in power • It is “immoral” to ask citizens of these countries to repay those debts

8. Solutions to Odious Debt • Such countries should not repay those loans • This also makes creditors to be careful not to give loans to dictators if they know they won’t be repaid • UN should keep lists of countries for which contractors and creditors will be put on notice that their contracts and credit will be reexamined after the regime is gone • Lender will be afraid to lend to dictators • Set strict guidelines • Loans for building schools will be approved • Loans for buying weapons will not be approved • International Credit Court

9. 5 Required Reforms • Do no harm • Nigeria was strong enough to manage its own economy but was asked to follow IMF criteria • IMF only cares about inflation, does not care about growth and stability • IMF does opposite of what Keynesian principles suggest: lower taxes, more spending, lower interest rates • Counter-cyclical lending • Provide support during needy times, not during good times • Risk reduction • Create insurance policies • Don’t provide loans to risky dictatorships

10. Conservative borrowing • Borrowers should not borrow more than needed • Lenders should not lend more than needed • Countries should save more during crisis • International bankruptcy law • Depending on need, debts should be restructured or forgiven • Personal bankruptcy laws help individuals escape from loans they cannot pay. Similar provisions are needed for countries • The Big Question • Who is more responsible for countries not being able to pay loans—countries that received the loans or lenders like IMF who designed bad loans? • Not monetary policy, fiscal policy is more important

11. Managing civil conflicts • Greed or grievance? • Maoist conflict started as a grievance, but Maoist era grievances are arising now • People’s land, houses, property snatched. They want it back now, and are not afraid to ask now. • Mediation (remember the scale) is the best solution • Court referred mediation, fully government funded • COMCAP run by MoFALD, funded by JICA • Other donor funded community-led • Community mediation centers are handling such cases at local levels—VDCs and municipalities • More training and support needed • Governance Facility

12. TRC needed in addition to CM centers