Third world's debt dilemma
By: Sisir Basu

The Centre for Monitoring Indian Economics (CMIE) has sounded the alarm bell over India's external debt burden which has reached alarming proportions. Today it stand at $126.86 billion, taking a heavy toll of foreign exchange earnings, as the servicing burden per annum amounts to nearly Rs. 48,854 crore. The debt problem has plagued the economies of other countries as well. In fact, in the debt league table, India occupies the third place of dubious distinction out of 118 countries. The economies of 115, including what used to be once called the "Asian Tigers,'' have gone in tailspin causing untold sufferings to the people. Will it happen in our case as well?

As of now, the total debt burden of the developing countries stands at mind boggling figure of $ 2,280 billion. In the case of many developing countries whatever they earn goes in servicing their debt burden. Particularly disturbing is the fact that notwithstanding an increase in the disbursement of the fiscal grants and loans (including publicly guaranteed loans,) the net transfer of resource after allowing for repayment of amortisation, the outflow in 1997 stood at $ 980 billion.

What is however, more distressing is the decline in the transfer of resources in the current and constant prices in particular, when account is taken of the fact that, on the whole, the largest declines occurred in the lowest income countries in Africa, India, Pakistan, Bangladesh and Sri Lanka.

During the decade 1984-1994 a number of countries experienced such acute difficulty in meeting their debt-servicing obligations that they sought debt relief from creditors. In the past ten years, there have been 108 cases of debt renegotiation involving 37 countries, including India, to the tune of $ 202.8 billion. Moreover, such problems caused difficulties and were resolved at a heavy price dislocating economic activities of most of developing countries. In the present framework, only about 50 per cent of the actual money goes for real economic developments and the rest is paid back to the creditor countries in various forms.

What really lends urgency to the problem is that debt servicing payments may rise more rapidly in the next five years. The lengthened grace periods on loans granted in the '90s, have begun to expire and the terms attached to some categories of development assistance have unmistakably hardened during the past few years.

Rising prices of foodstuffs, fertilisers, manufactures and machinery have since 1990, dealt crippling blows to the economies of the developing countries. In the first place, as a consequence to the price increases, the financing of any given volume of imports has resulted in higher levels of debt and hence of service payments. In the second place, higher interest rates have reinforced the upward pressure on service payments resulting from higher prices.

The concept of aid, bilateral or multilateral was primarily used as an instrument of economic development. But the mounting burden of the debts has put the clock in reverse. The prices of raw materials found abundantly in the developing countries have not kept pace with finished products imported from the developed countries. This has resulted in appreciable decline in the import-export ratio. Not only that in the case of certain countries even reserves have exhausted. Thus, even the 'minimum economic and social activities and the minimum import levels required to achieve those objectives have been defeated.

Time and again, a number of studies, notably the Pearson Report and more recently OECD, UNCTAD and other related UN agencies have indicated the magnitude of the problem. But the psychological barriers that separate the thinking in the developed world and the developing world on this issue have acted as an impediment in resolving the crisis. As regards the creditors there is no evidence to suggest that "clearing the book'' would either impede their own economic progress or precipitate any major international financial or economic crisis.

There are three options open before the lending nations: (1) debt re-scheduling (2) re-financing and (3) cancellation. A close study reveals that debt re-scheduling does not give the desired results. It can be used to achieve a more desirable time profile of debt-servicing payments but will not reduce the sum total of payments due. In fact, when a moratorium interest charge is levied, re-scheduling increases the total volume of payments.

So far as the second alternative is concerned, it provides a possible remedy for an excess of long-term debt. Credits with long maturities and concessional interest rates sufficient to pay off old debt contracted on harder terms will serve to improve a recipients' debt structure.

On the other hand, borrowing on commercial terms simply to pay annual amortisation and interest charges on past debt is equivalent to the payment of moratorium interest in a re-scheduling operation. The extent to which an adequate remedy can be found in re-financing depends, therefore, on funds being made available for this purpose on a sufficient large scale and on substantially softer terms than the loans which they replace. If however, funds are made available for refinancing at the expenses of other forms of new lending on concessional terms to the same country, there is no overall gain for that country.

In the case of the third alternative, perhaps the best, this would immeasurably relieve the developing countries of their burden and preoccupation with the problems of indebtedness. Cancellation would thus represent a forthright expression of the goodwill and earnest intention of the developed countries to help the poorer nations to develop. And also to a great extent, a climate of mutual trust will be created to usher in a world of economic order. It would also mean that developed countries are prepared to let bygones to bygones. It would even show that the developed countries are prepared to relinguish their claim on the future resources of the developing countries.

In the present context of lack of development and increasing indebtedness, this would tatamount to a recognition that the problem of world poverty transcends the purely legal and contractual obligations of debt re-payment. By insisting on payment at all costs the creditor countries seem to place greater emphasis on the enforcement of their rights than on the concept of shared responsibility to which they as members of the United Nations have repeatedly subscribed.

On the other side of the spectrum, the hard-liner's antagonism to the write-off is rooted in what they prefer to call "defeat''. For them, it suggests financial irresponsibility and economic mismanagement. Failure to meet one's legal and contractual obligations is somehow seen as a negation of natural justice and international legitimacy.

In fact, these objections to write off are mainly emotional and psychological. As such they are rooted in the past and refuse to recognise that relationships and economic inter-dependence have changed. The indebtedness is as much a problem for the creditor as for the debtor countries. Perhaps, the psychological break-through will come when it is realised that as debts multiply and mount up they cease to be a problem for debtors and become instead a problem for creditors. After all, there are good precedents in history of debts obligations being condoned. To quote only a few, Britain and France never paid their World War I debts to the USA, nor did Germany and its defeated allies paid to reparations imposed upon them.

For the future, if donor nations accept that aid and development should go together and developing countries should achieve a viable minimum standard of living, a formal machinery is needed to conduct debt negotiations to replace the ad hoc arrangements that have been made so far , may be under the aegis of a UN agency. And also considerable benefit would flow from the inclusion in loan agreements a "bisque'' clause, whereby, under certain conditions, the debtor would be accorded some pre-agreed measure of relief such as the postponement or waiving of amortisation and interest payments. (INAV)

Curbing corruption
By: Mohinder Singh

The problem of curbing corruption has been discussed at such great length in our country that there are possibly no new ideas left to talk about. Again we have given ourselves elaborate anti-corruption laws and a whole set of machinery to enforce them. Yet corruption flourishes; indeed it could be increasing day, by day.

Endemic corruption underlies the breakdown of service delivery, the domination of the economy by black money, and the Government's inability to collect taxes effectively. "Corruption is the biggest single impediment both in development and in the way of social programmes," rued Inder Kumar Gujral when Prime Minister.

A serious anti-corruption campaign to succeed has to have an element of public revulsion against the practice. Unfortunately, like many other oriental nations, we don't have a strong indigenous tradition of censuring bribe-taking and bribe-giving. What little is there has been largely imbided under Western influences.

Well, there was a time when in every culture it was unthinkable to go empty-handed to someone more powerful. You went with something to give. You expected something in return. This was treated as an offering, not a bribe.

A major movement against bribe-taking with Renaissance and Reformation, especially against papacy selling Indulgences. In Dante's Divine Comedy, the sin coming for maximum condemnation is the sin of bribery. The concept was getting ingrained in the European mind.

Along with moral development against the concept of bribery, there occurred an important legal event. Bacon, the Lord High Chancellor, was arraigned before the House of Lords for bribery in chancery judgements. Bacon's defence: "Everybody does it." This was not accepted. Bacon's conviction is the only recorded instance of an English secular judge being convicted of bribe-taking.

Up to this point almost all the legal focus had been on bribe-taking by judges. It took a major intellectual effort to extend the idea beyond judges -- to administrators and to legislators. A high point was the trial of Warren Hastings for his bribe-taking as Governor General of Bengal. Though Hastings escaped conviction, the standards laid down by Edmund Burke, his prosecutor, became a part of civil service standards.

In recent times, USA has taken the lead in prosecuting legislators and businessmen - governors, senators, congressmen, state legislators, CEOs of companies -- for bribery. Hundreds of them have been tried and jailed. The country enacted an extraordinary law that punished its nationals for bribing foreign Governments or officials for securing business. Public sentiment against bribery has greatly hardened.

The history of bribery has one clear lesson to offer. It is absolutely imperative that judges remain honest. If they are not, the rest of society won't be. Honest judiciary -- right from the highest judge to the lowest -- and activist at that, seems an inescapable prerequisite for curbing corruption.

Allied to judiciary is the role of public prosecutors. No wonder Supreme Court is giving such close attention to the institutions of CVC, CBI, and ED. Without independent, honest, and efficient prosecuting agencies, the effectiveness of courts in curbing corruption gets greatly diminished.

While providing an honest judiciary should still a manageable proposition because of the relatively limited numbers involved, the same can't be said of the executive wing of Government: millions of officers and clerks, inspectors and other field staff. The task looks well-nigh hopeless, with the corrupt employing some of the most ingenious practices imaginable. Any breakthrough here has to await the growth of strong public sentiment against official corruption. The present scenario where someone like Sukhram, accused of massive money laundering, promptly wins an assembly seat on popular vote, can't be deemed promising.

One approach commonly advocated these days is to reduce opportunities for bribery. This means doing away with the host of regulations, licences, permits, officials clearances, inspections, subsidies, reimbursements, price controls, quotas, and so on. Ironically, our advances in liberalization during the 1990s have dramatized the prevalence of corruption. Evidently a lot of controls are still in place, while increased economic activity is raising the stakes all round. Deregulation may have done away with some industrial licensing but then you can hold up an industrial proposal on environmental clearance or any other "no objection" item. Corruption must be addressed if reform is to be sustained and liberalization consolidated.

Another approach is to privatize much of the public sector. For example, the sort of power theft and corruption now prevalent in the Delhi Vidyut Board was simply unthinkable if the utility was being run by a private company or companies. Where the system allows two parties to enrich themselves at the expense of a third party (the DVB and eventually the taxpayer), they will conspire to realize the potential gains.

Corruption is only one of the reasons to privatize -- efficiency is another. Private sector operations in competitive conditions are inherently more efficient than those in monopoly management by Government or semi-Government agencies.

Now we come to the most talked about corruption -- among ministers, legislators and politicians. And it isn't so much the sums these worthies may be siphoning away as setting the climate or bribery. Corruption at the top can vitiate the whole working atmosphere of a Government department or agency.

One explanation of political corruption: politicians collect funds for elections; at least recoup the money they had spent on their own election. It is in this context that some advocate state funds to candidates for meeting election expenses. But what's the certainty that the candidates given this dollop of financial aid will be proof against corrupt practices when attaining positions or power. It may well the throwing good money after the bad.

And why would politicians voluntarily give up levers of power that net them money and patronage? It's no surprise, the pace privatization here has been so excruciatingly slow. Understandably the switchover is opposed by labour unions, but there is also much footdragging by the concerned ministers and bureaucrats. To them public sector means purchase, construction contracts, and patronage, coupled with quite a few everyday facilities and perks.

One solution being advocated is to constitute various statutory boards or committees for approving big tenders or orders or appointments, with those decisions only to be challenged in courts. Yet the position as it obtains today is just the reverse. Minister are increasingly insisting that all such matters must be put up to them for a "final decision". They are wanting more and more of departmental orders, clearances, and transfers to be referred to them; a clear trend towards greater intervention at ministerial level. Their power over postings is a key to understanding corruption. Highly placed politicians rarely discuss the motives for a transfer; they prefer to keep it shrouded in secrecy.

All in all it's a depressing scenario for curbing corruption. As long as you run a Government highly intrusive in economic activities, the scope of corruption among politicians and bureaucrats will remain high. Of course there are degrees of corruption. For example, communist Governments in West Bengal and Kerala have been relatively cleaner.

If one is really serious about curbing corruption, the only effective and permanent remedy is the shifting of as many decisions as possible from the political to the economic arena. Borrowing an analogy from Steve Forbes, the American business magnate, we should drain the swamp and the mosquitoes will disappear. Going after hordes of mosquitoes with a flywatter doesn't work.

Governments in developing countries are likely to continue with their highly interventionist role in the economic sphere. That makes the chances of curbing corruption rather slim. Whether they can be persuaded to concentrate on education, health, social welfare and a certain basic infrastructure, while progressively shifting decisions in economic matters to actual actors in the economic arena, is a million dollars question.

Meanwhile we could accord high priority to providing a whole network of honest judiciary, backed by independent prosecuting agencies. And constitute a host of statutory boards or committees for sanctioning major contracts or purchases, with appeals only to courts.