7 IMF WB CREDIT RATING AGENCIES These agencies

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

Credit rating agencies Rated East Asia very high during growth periods in early 1990 s 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

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

8. DEVELOPING COUNTRY DEBT MANAGEMENT 1. 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, 2. Debt accrued by countries that have suffered under corrupt and oppressive governments Most 3. 4. Bangladesh, etc. 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

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 G 8 100% 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

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

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

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

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

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

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 Mo. FALD, 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

TRC needed in addition to CM centers