Responses to debt
In 1982, when Mexico became the first country to admit it could not repay its debts, the IMF and the World Bank stepped in to help. They lent money to help Mexico, and other struggling countries, repay their old loans. In return they imposed a system known as 'structural adjustment' on these countries. The aim was literally to alter the structure of how money in each country was spent. These Structural Adjustment Programmes (SAPs) consisted of strict measures designed to help a country repay its debts by earning more hard currency (e.g. dollars) through increasing their exports and reducing their imports.
Structural Adjustment Programmes
These are some of the measures governments implementing SAPs usually had to undertake:
- Spend less on health, education and social services
- Devalue the national currency and raise interest rates
- Cut back on food subsidies
- Cut jobs and wages for workers in government industries and services (e.g. teachers)
- Encourage privatisation of public industries, including sale to foreign buyers
- Take over small subsistence farms for large scale export crop farming (replacing growth of staple food crops with cash crops)
Structural Adjustment programmes actually led to a decline in living standards and deepened poverty. Governments were forced to spend their money on debt repayments, rather than public services for the population. Farmers had to grow cash crops for export, rather than food to feed their families. The exported cash crops being sold were cheap, but imported processed goods were costly. The prices of goods went up, and people struggled to barely survive.
HIPC
In 1996 the World Bank and the IMF launched a new international debt relief scheme known as the Heavily Indebted Poor Countries Initiative (HIPC). The HIPC initiative called for the reduction of external debt through write-offs by official donors. As of January 2004, 27 countries were receiving debt relief under HIPC. There are still many countries which are not receiving help, because they do not fulfil the HIPC criteria.
At the beginning of 2005, only $49 billion of debt has been cancelled. Low income countries still owe over $523 billion. The HIPC initiative has been heavily criticised. It is not aimed at cancelling debts, but at ensuring they can be repaid by reducing them to a 'sustainable' level (as judged by the IMF). Some critics claim the IMF uses overly optimistic projections of economic growth for these poor countries, which overestimate their potential income. This means countries are likely to continue spending more on debt relief than on basic education or health even after receiving HIPC debt relief. It is clear that more needs to be done to deal with the growing debt crisis.