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close this bookPutting Life Before Debt (CI - CIDSE, 1998, 38 p.)
close this folderPART I: Debt and Jubilee
View the documentWhat is International Debt?
View the documentA Catholic Framework on Debt
View the documentWhy Now?
View the documentHow did the debt crisis come about?
View the documentImpact in the South

What is International Debt?

Many people have borrowed money to buy supplies, equipment, or a house. Countries do the same. They borrow money from private capital markets, international financial institutions, and governments to pay for infrastructure such as roads, public services, and health clinics; to run a government ministry; or to purchase weapons. Like individuals, countries pay back the principal and interest on the loans they take out. But there are important differences. If a person borrows money, he or she receives the money directly and pays it back according to the terms and conditions of the loan. But if a country borrows money, the citizens are not necessarily notified or informed of the purpose of the loan or its terms and conditions. In practice, many governments have used loans for projects that do not meet minimum standards of social, ecological, or even economic viability. At times, these loans have been used to enrich a small group of people or have been transferred out of the country to the private bank accounts of government officials.

A second difference is that a business or person who cannot meet his financial obligations over time goes bankrupt. A court is appointed to assess the debtor's situation and banks acknowledge that the debtor cannot fully pay his or her debts. But countries cannot file for bankruptcy - there is no such procedure, no arbitrator. At the international level, the creditors, not a court, decide whether and under what conditions to require the debtor country to pay its debt.

A Catholic Framework on Debt

Catholic social teaching offers a compelling way of understanding the complexities of the debt crisis and its impact on the human community. Our tradition draws from a large body of work that, in part, addresses the moral dimensions of economic activities. We believe that ethical analysis, rooted in human dignity, is as fundamental as any economic analysis to solving the debt crisis. Catholic social teaching offers a set of principles, outlined below, for action in a world longing for greater justice and peace. It calls us to examine the situation of international debt and discern the options and commitments necessary to bring about urgently needed economic changes.

Human Dignity

The foundation of Catholic social teaching, and the starting point for our work on international debt is the belief that each individual is sacred. All people are created in the image of God and are the clearest reflection of God that exists in this world. The Holy Scriptures state in Genesis that “God created humans in his image, in the divine image he created them” (Genesis 1:27). Each person has a basic dignity that stems from our very creation rather than from any action on our own part. The dignity of the human person is a criterion against which all economic, political, and social systems are to be judged and all aspects of the debt situation must be measured.

Rights and Duties

Human rights are moral claims to goods which are necessary to protect and promote human dignity. Rights and duties are complementary; every person possesses both. They specify the minimum conditions necessary to protect and promote human dignity in the political, social, and economic order. In Catholic social teaching, rights and duties also extend to relationships among states. States have responsibilities to each other and to the international common good.

The Common Good/Solidarity

Dignity, rights, and duties are protected or eroded by the social communities in which people live. Individual and communal duties are fulfilled in three essential communities that express the social nature of each person: the family, civil society, and the wider human community. All individuals have the duty, as members of society, to contribute to and to further the achievement of the common good. The common good is defined as the sum total of those conditions in society that make it possible for all people to achieve their full human development.

The common good has both national and international dimensions. There is currently no entity, however, which carries the responsibility and power to promote the international common good. In the absence of such an international authority, additional demands fall upon states, international institutions and private actors to accept their responsibility to promote the international common good. This responsibility demands that these bodies promote policies that increase the ability of marginalized people to participate in global economic and social systems. Such participation is implied in the principle which Catholic Social Teaching calls the universal destination of the goods of creation. This principle calls us all to see that the goods of creation are destined by God for the welfare of the whole human community. Pope John Paul II has called for the virtue of solidarity to guide our responsibilities toward others and toward the requirements of the universal common good. He speaks of solidarity as “... a firm and persevering determination to commit oneself to the common good; that is to say, to the good of all and of each individual because we are all really responsible for all.” (Sollicitudo Rei Socialis, 38)

The Church views the current debt situation as a factor contributing to the erosion of the international common good and calls for governments and institutions to actively seek solutions that assure human dignity, protect human rights, and accomplish the international common good.

Preferential Option for the Poor

The preferential option for the poor calls each individual to give a weighted concern to the needs of the poor in all economic, political, and social decisions because it is the most impoverished people whose rights and dignity are most often violated. The preferential option for the poor is a principle that enters the universal social teaching with Pope John Paul II but reflects a moral demand as ancient as the Hebrew prophets. It is clearly conveyed in Jesus' words that whatever we do unto the least of our brothers and sisters we do unto Him, and it has more recently come to light in liberation theology. Those members of society with the greatest needs require the greatest attention and response. By assisting those who are most vulnerable, an option for the poor strengthens the entire community, for the deprivation and powerlessness of the poor wounds the whole human community. Such wounds are healed only by a greater solidarity with the poor and marginalized.

Archbishop Renato R. Martino, Vatican nuncio to the United Nations, explained this principle in a 1997 statement to the UN: “If the process of globalization which is taking place in our world is to be truly human, it requires the construction of a truly global community. In such a community, he said, there must be concern for all and especially for the weakest.

International Debt

Catholic social teaching sees the international debt of poor countries as both a complex policy issue and a profound moral challenge. In moving toward resolution of the problem, neither its complexity nor its moral character can be ignored. International debt is complex in size and scope. It affects the welfare of millions of people, scores of countries, international financial institutions, and private sources of funding. International debt also presents a moral challenge - the particular concern of the Church in addressing this problem - in how it affects the human dignity, human rights, and human welfare of some of the most vulnerable men, women and children in the global community. But the moral structure of international debt also includes the proper definition of the duties, responsibilities, and rights of a complex fabric of individuals and institutions. The moral dimensions of the international debt problem extend to how it was contracted, who was involved in key decisions, which institutions are now primarily responsible for its resolution, and what moral criteria should be used to articulate, structure and adjudicate this fabric of relationships.

In Catholic teaching, lending money is a legitimate moral enterprise if key conditions of justice are met on the part of the lender and borrower. This principle applies to both individuals and states, although the latter problem is much more complicated in its definition of responsibilities. It is this latter issue which today occupies the concern of many in the international community. The key principles to evaluate the moral problem in Catholic teaching are those of justice (commutative and social justice) and the option for the poor.

Commutative justice governs the kind of contractual obligations which are incurred in international lending and borrowing. But this contractual justice must be located within the broader context of social justice, since the problem of international debt is today a moral challenge not only for lenders and borrowers, but for the international community as a whole. To focus only on the terms of the loan and the nations or institutions involved rather than the conditions under which the loans were contracted, the purposes for which they were used, the impact on individuals today as the terms of repayment are set, is to isolate commutative justice from its social context.

The principles of social justice focus in this instance on the broad range of institutions which must be mobilized if the moral dimensions of the debt are to be addressed. Hence, responsibilities exist not only for the debtor countries and their creditors, but for international institutions (some of which hold debts), for the more significant states with major economic roles in the world, and for nongovernmental organizations, some of which are deeply involved in the lives of debtor nations.


Photo: ©1997 Martin Lueders

Interpreting the norms of social justice will require attending to the principle of the option for the poor. This principle calls attention to the condition of those in debtor nations who had no voice in the contracting of debts but whose lives are deeply affected by the choices made in resolving the debt problem. It is this principle, in combination with the requirements of social justice, which have led many in the Church to follow the leadership of Pope John Paul II in addressing the problem of the international debt which so seriously threatens the future of poor countries and their populations.

Cardinal Roger Etchegaray stated in his introduction to the 1987 Vatican document, At the Service of the Human Community: An Ethical Approach to the International Debt Question, “Debt servicing cannot be met at the price of the asphyxiation of a country's economy, and no government can morally demand of its people privations incompatible with human dignity.” He says further that, “in a world of increased interdependence among nations, an ethic of expanded solidarity will help to transform economic relations (commercial, financial and monetary) into relations of justice and mutual service, while at present they are often relations based on positions of strength and vested interests. Due to their greater economic power, the industrialized countries bear a heavier responsibility which they must acknowledge and accept... the time is over when (the industrialized countries) can act without regard for the effects of their own policies on other countries.”

Why Now?

We are approaching the great celebrations around the new Millennium. The Jubilee is both a time of repentance when injustices are put right as well as the symbolic beginning of a new era. Jubilee symbolizes a fresh start for the poor, an opportunity to reestablish justice and equity throughout the world. In the Hebrew Scriptures, the Jubilee was to have occurred every fifty years. It was a time to free slaves, return land to its rightful owners, and forgive debts. Linking this biblical concept to the coming millennium, Pope John Paul II states: “Christians will have to raise their voice on behalf of all the poor of the world, proposing the Jubilee as an appropriate time to give thought.. .to reducing substantially, if not canceling outright, the international debt which seriously threatens the future of many nations” (Tertio Millennio Adveniente, 51). We see the Jubilee in the Year 2000 as the time for a new beginning for impoverished nations, an opportunity for justice and the solution to the problem of international debt.

It is not only the approach of the Third Millennium that makes this a time ripe for change. Within the last decade, old animosities between East and West have broken down and new, stronger, and wider allegiances between rich nations have developed. The time is right to rectify relations between North and South. Shared economic growth, fairer trading links, increasingly stable political relationships, sustaining the environment - these goals benefit North and South. Development is an expression of the common good.

The international debt remains a serious obstacle to human development. Many impoverished countries are forced to use their scarce resources, including bilateral aid2, to pay their creditors rather than to invest in the health and education of their people. However, through continuous pressure and long-term commitment, civil society organizations and some concerned governments have attempted to reduce the debt of the world's poorest countries. These have made a helpful, yet marginal difference in the lives of people.

In 1996, another possibility for debt relief emerged. The major creditors3 of the world agreed to reduce some debt of the most impoverished countries through the Heavily Indebted Poor Country (HIPC) Initiative. In doing so, they both acknowledged that debt is a severe obstacle to development and responded to advocacy efforts from civil society organizations. Despite its historic importance, first experiences of the HIPC Initiative reveal that it is far from sufficient.

The upcoming Jubilee, combined with devastating poverty of the least developed countries, the widening gap between rich and poor worldwide, the relative failure of past efforts at debt reduction, and a new opportunity for debt relief, present a challenge we cannot ignore. In the spirit of solidarity among nations and people of the North and South, we have an obligation to promote an authentic and substantial solution to the debt problem.

How did the debt crisis come about?

The international debt crisis became apparent in 1982 when Mexico announced it could not pay its foreign debt, sending shock waves throughout the international financial community as creditors feared that other countries would do the same. The immediate cause of the crisis occurred in 1973 when the members of the Organization of Petroleum Exporting Countries (OPEC) quadrupled the price of oil and invested their excess money in commercial banks. The banks, seeking investments for their new funds, made loans to developing countries, often without appropriately evaluating the loan requests or monitoring how the loans were used. In fact, due to irresponsible practices of creditor as well as debtor governments, much of the money borrowed was spent on programs that did not benefit the poor - armaments, large scale development projects, and private projects benefiting government officials and a small elite. The 1973 oil price increase also had the effect of triggering inflation in the United States and other industrialized countries.

In 1979, OPEC raised the price of oil a second time. Meanwhile, the US adopted extremely tight monetary policies to reduce inflation, producing a domestic recession. The combined impact of the rising price of fuel and rising interest rates led to a worldwide recession. Developing countries were hurt the most. Their exports declined as the domestic cost of production rose and the major importers reduced their purchase of goods from overseas. Latin American governments which had taken out loans from commercial banks at floating interest rates (rates that vary according to the current market interest rate) saw the interest on their debt skyrocket. African governments, reacting to the worldwide collapse in commodity prices, borrowed heavily from other governments and multilateral banks at both market interest rates and concessional (very low) rates. When Mexico finally announced that it could not pay its foreign debt, the international financial system appeared on the brink of collapse. The world's major creditors acted to save the commercial banks and the world economy.

Impact in the South

The existence of debt has both social and financial costs. Heavily indebted poor countries have higher rates of infant mortality, disease, illiteracy, and malnutrition than other countries in the developing world, according to the UN Development Program (UNDP). Six out of seven heavily indebted poor countries in Africa pay more in debt service (i.e., interest) than the total amount of money needed to achieve major progress against malnutrition, preventable disease, illiteracy, and child mortality before the year 2000. If governments invested in human development rather than debt repayments, an estimated three million children would live beyond their fifth birthday and a million cases of malnutrition would be avoided4. The UNDP estimates that sub-Saharan African governments transfer to Northern creditors four times what they spend on the health of their people. (Human Development Report, 1997)

On the financial side, heavy indebtedness is a signal to the world financial community that the country is an investment risk, that it is unwilling or unable to pay its debt. As a result, impoverished countries are either cut off from the international financial markets or pay more for credit. The UNDP estimates that in the 1980s, the interest rates for poor countries were four times higher than for the rich countries due to inferior credit ratings and the expectation of national currency depreciations. Another cost of debt is the absence of infrastructure such as roads, schools, or health facilities that could both fight poverty and create the conditions for more economic growth. A different type of cost is associated with the time civil servants spend negotiating debt repayments. Oxfam International estimates there have been over 8,000 debt negotiations for Africa since 1980.

Heavily indebted countries face enormous pressure to generate foreign exchange in order to pay their debt service and purchase essential imports. The international financial institutions often offer financial assistance to countries in this situation and use their leverage to compel the countries to accept structural adjustment and stabilization policies. These structural adjustment policies (SAPs) and the austerity measures associated with them can have a strongly negative impact on the poor, both initially and for extended periods.

SAPs are designed to: I) Stabilize faltering economies by reducing inflation and correcting the balance of payments; and, 2) Increase growth by making economies more productive and efficient and by opening them to market forces. Major elements in structural adjustment programs typically include:

· Raising taxes to increase government revenue and balance the budget
· Eliminating price and interest rate controls
· Reducing the size and scope of government and privatizing state-owned enterprises
· Reducing tariffs and other restrictions on foreign trade
· Reducing regulations on businesses and on capital flows to encourage local and foreign investment.

Although SAPs may help a country become more competitive in the global arena, they can severely harm the poor. This happens when:

· Social expenditures (especially for health, education, and welfare) are cut back in order to meet targets for reducing fiscal deficits

· Public sector employees are dismissed in government down-sizings without retraining or other economic opportunities

· Local companies close in the face of competition from abroad

· New investment is slow and does not create jobs at the rate expected

SAPs can also create an environment which values global competition above all else, resulting in lower wages and worsening labor conditions for workers. Deregulation of labor markets can result in situations where workers cannot exercise their rights and local entrepreneurs and multinational corporations maximize their profits by operating sweatshops. Women and children, the majority of sweatshop workers, are hurt the most by starvation wages, long hours, and unsafe or unsanitary conditions.

BOX 1:

STRUCTURAL ADJUSTMENT IN ZAMBIA5

In Zambia:

Annual per capita income is US $350,80% of the population lives in absolute poverty, a recent drought has devastated the country, and HIV is a growing epidemic.

Positive aspects of SAPS:

· Reduced inflation from over 200% in 1992 to 35% in 1996
· Opened foreign exchange market
· Opened trade so more consumer goods, mostly from South Africa, are available

Negative aspects of SAPs:

· Unemployment. 80% unemployment due to the privatization of state-owned enterprises, reductions in the civil service, closing of many industries.

· Higher prices. Government removed subsidies on basic goods such as mealie-meal (maize), fuel, transport, and fertilizer. Cost of an average basket of food for a family of six in Lusaka was approximately US $150 in February 1997, while monthly salary for a teacher was only $45.

· Fees for health & education. Ten years ago, Zambia had one of the highest primary school attendance rates in Africa. Today, fewer than half the children attend school. Because families cannot afford the fees for all their children, girls stay at home, marry earlier, have more children, and are less likely to send their children to school than if they would have received/acquired one or two years of schooling.

· Declining infrastructure. No money for maintenance and repair of housing, water, sanitation systems, roads.


· Environmental Neglect. Long-term ecological issues such as deforestation are simply ignored.

SAPs are based on economic theories considered universally applicable and thus are often applied uniformly. Yet, the specifics of the timing and sequencing of SAPs may not adequately take into account a country's political and institutional culture or its ability to absorb the adjustments. Governments are then forced to decide which public sectors to cut and which to save. Unfortunately the poor and the vulnerable are the ones least able to protect themselves in this process.

Debt and structural adjustment policies can harm the environment. When countries need to generate more foreign exchange to service their debt, they increase exports. But because many developing countries depend on exports such as logging, mining, or a single agricultural crop, there is a serious risk that they will exploit these resources in a way that will cause major damage to the environment. Unless effective programs of environmental protection are put in place, export orientation can have a devastating impact on the land and its people.