PROPOSAL FOR AN INTERNATIONAL CONVENTION TO ESTABLISH LEGAL STANDARDS FOR THE INTERNATIONAL DEBT OBLIGATIONS OF NATIONAL GOVERNMENTS

January 10, 1994

The international community warmly applauds and espouses a strong commitment to the worldwide move toward democratic governance. Yet the decision processes of many of the institutions charged with assisting the development of low income countries actively undermine democratic governance and accountability. The multilateral banks (the World Bank, the IMF, and the regional development banks) are among the most egregious offenders.

Involved ever more deeply in dictating a broadening range of policies to borrowing countries, the World Bank and IMF, in particular, have moved far beyond the normal and legitimate concern of banking institutions with assuring the credit worthiness of their borrowers and the collection of their loans. As Jonathan Cahn argues in a well-documented Harvard Human Rights Journal article:

Tthe World Bank must be regarded as a governance institution, exercising power through its financial leverage to legislate entire legal regimens and even to alter the constitutional structure of borrowing nations. Bank-approved consultants often rewrite a country's trade policy, fiscal policies, civil service requirements, labor laws, health care arrangement, environmental regulations, energy policy, resettlement requirements procurement rules, and budgetary policy.(1)

The functions of the multilateral banks have evolved over time toward ever greater intervention in the governance processes of low income borrower countries. This intrusiveness has become especially evident since the World Bank and IMF assumed the role of international financial receivers of countries that accumulate international debt obligations beyond what they are able to service. In this role they set conditions for structural adjustment programs containing sweeping packages of economic policy reforms intended to direct an increased share of the economic resources and productive activities of the debtor country to debt repayment and at the same time reshape national economies and administrative processes to conform to their preferred economic and political ideology. In return for acceptance of policy conditions mandated by the banks, borrowing governments are promised more loans--which in most instances further increases their total indebtedness and tightens the hold of the multilateral banks on their governance processes.

In their governance role the multilateral banks function as non-elected legislative bodies without accountability to the citizenries who bear the consequences of their decisions. Indeed, the internal operating processes of the World Bank are so secretive that distribution of many of the most important documents relating to country plans, strategies, and priorities is restricted within the Bank itself. Access is often denied even to the Bank's own governing Executive Directors. Documents that are circulated within the Bank and distributed to member country governments and prospective private contractors at the Bank's discretion are seldom made available to the people presumed to be the loan beneficiaries.

What is rarely noted is the assault on democratic accountability posed by the basic loan operations of the multilateral banks. These loan agreements are routinely negotiated in secret between the banks and a handful of government officials who in many instances are themselves unelected and unaccountable to the people on whose behalf they are obligating the national treasury to foreign lenders. These loan agreements allow the government to increase current expenditures without the need to raise current taxes--thus limiting public scrutiny of the budgetary increases and freeing the public of its obligation to pay their taxes. However, the loans do need to be repaid and the repayment must ultimately come out of tax revenues. Thus, in effect, those officials who sign a foreign loan agreement are obligating the people of the country to future tax obligations completely outside of any process of public review and consent. This become especially egregious in those all too common instances in which the loan obligations were incurred for the personal benefit of a small elite that controls state power or even to finance the repression or displacement of the people to whom the repayment obligation is passed. It is akin to stealing a person's land for personal gain and then forcing the evicted to pay the bill for the guns and salaries of the police officials used to evict them.

Patricia Adams has documented the precedents in international law for the repudiation of certain "odious" debts incurred through ultra vires contracts (made by a person without proper authority) or used for purposes that were not beneficial to the people of the territory on whose behalf the obligation was incurred.(2) This area of law is not, however, well developed and current thinking tends to favor the lender's interests by accepting the power of de facto governments to bind their people to future financial obligations even in the absence of a social contract with them on the premise that this is necessary to foster international trade and investment.

The abuses of foreign borrowing by both democratic and nondemocratic regimes to circumvent public accountability and to convert funds raised through public means for private gain without citizen consent represent a major attack on democratic governance the world over. The aggregate commercial and official debt created through these practices are strangling the economies of poor countries and placing devastating burdens on the world's poor. The multilateral banks have often been accomplices in this travesty. The current situation serves well a variety of powerful personal and commercial interests, which no doubt accounts for the fact that it so little is said about it in public discourse. So long as this silence prevails the professed commitment of the international community to democracy, good governance, and the alleviation of poverty has a hollow ring.

It is time for those individuals and agencies who believe in the democratic accountability of government to the people and are committed to the premise that international assistance should serve rather than oppress the poor to call for an international convention clearly setting forth the minimal standards that must be met to establish that an international debt obligation of a government is legitimate and enforceable under international law. These minimal standards should include:

  • The borrowing government must have an established procedure for the negotiation and acceptance of foreign debt obligations that conforms to the standards of the international convention as approved by an elected legislative body with constitutional responsibility for financial appropriations.
  • The basic details of each loan agreement must be published in leading national newspapers at least 60 days before signing and all relevant documentation must be published and readily available for purchase at a reasonable cost by any interested party. These same documents must be available for review in readily accessible public locations by any interested person.
  • The responsible administrative agency must hold publicized, open public hearings at which responsible officials solicit public input and respond to questions.
  • The agreement must be accepted by at least a majority vote of the legislative body that holds constitutional responsibility for appropriations. The procedures used by this body must provide for appropriate public hearings at which citizen groups have a full opportunity to present their briefs and voice their opinions--especially those of any groups living in areas of specific project activities the loan may be intended to fund.
  • The loan agreement must be signed in a public ceremony by those representatives of the government assigned the requisite authority in the above mentioned loan procedures legislation.
  • The proceeds of the loan must be used for specific public purposes as set forth in the final loan agreement as accepted and approved through open public and democratic processes that conform to the above standards.

All international lenders, including the multilateral banks and bilateral aid agencies, would be responsible for assuring that these standards are met for any loans they make as a part of their normal fiduciary responsibility to assure that loans are properly secured and collectable. Any loan obligation successfully challenged in the relevant court of law as not in compliance with these standards would be considered fraudulent and unenforceable. There should be provision for international sanctions against any lending institution that attempts to pressure a government to pay an obligation declared odious by these standards in an appropriate court of law.

Historical experience suggests it is highly unlikely that either the international financial community or officials from the administrative branches of government will take the initiative toward formalizing such a convention unless forced to do so by overwhelming citizen pressure. Citizen groups, however, should find those legislators whose authority is being pre-empted by official and commercial lending processes to be natural allies in such an effort.

Prepared by David C. Korten, President, The People-Centered Development Forum

NOTES

1. Jonathan Cahn, "Challenging the New Imperial Authority: The World Bank and the Democratization of Development," Harvard Human Rights Journal, Vol. 6, 1993, pp. 159-194. The quote is from p. 160.

2. Patricia Adams, Odious Debts (London: Earthscan, 1991), see especially Chapter 19 "The Doctrine of Odious Debts," pp. 162-170.

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