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Rethinking strategies for resolving the Third World Debt crisis
African Forum and Network on Debt and Development (AFRODAD)
July 25, 2003

By Charles Mutasa, Research & Policy Analyst

The worldwide struggle for the cancellation of developing countries' debt by civil society organizations has put the debt issue in a prominent position on the international agenda. The resolution of the debt crisis is still one of the major objectives of the international social movement, especially African social movements. More than 25 million signatures were attached to what the world considers to be the greatest petition of the 21st Century mobilised by the Jubilee Movement around the World, yet the debt is still with us. The million-dollar question is what should the developing world and its starving masses do to resolve the crisis?

There are many facets to the debt crisis but the fundamental weakness is that the Creditors, who constitute the donors, continue to dominate the decision making process regarding how to resolve the Debt crisis. For many years now, the Debt Relief Initiatives such as the Initiative for Heavily Indebted Poor Country (HIPC) have been designed by donors to safeguard their interests. This reflects a lack of global governance to protect the interests of the weak debtor nations and their people. Our global village is one in which the small and poor have their say while the big and rich have their way. A democratic or rights-based framework for resolution of the current debt crisis is therefore necessary.

It is important to note from the outset that the debt problem is inextricably tied to other factors (political, economic and social) prevailing in both creditor and debtor countries. These factors, more than the absence of a dispute settlement system, are mainly responsible for the current level of Southern debt. The other contributory factor to the persistence and magnitude of the current Debt crisis is the intransigence of some Northern creditors (states, international financial institutions and commercial banks) in the face of calls for debt cancellation or reduction. The need for a Fair and Transparent Arbitration mechanism is therefore based on the absolute need to resolve the power imbalance between the Creditors and Debtors.

A Power Imbalance Mechanism
The unique problems of debt call for establishment of a special court. Many arbitration institutions in the world do not restrict their modes of settling disputes to one mode. They employ methods and processes, which are appropriate for each particular dispute. It would not be appropriate to enhance current mechanisms such as the Paris Club by introducing arbitration panels to hear possible disputes between Debtors and Creditors because such a club which is in fact a cartel can still intimidate Debtors under the guise of debt negotiation. The imbalance in bargaining power between the Creditors and Debtors calls for the establishment of a neutral and impartial arbitral institution.

It is desirable that an International Treaty set up the proposed Court under the auspices of the United Nations. Notwithstanding the UN weaknesses, establishing the proposed Court under the auspices of the United Nations would be the most logical step for obvious reasons. The UN has historical memory of these processes. It has the resources and legal mandate to enforce compliance on such crucial matters. More importantly, the UN is well placed in terms of global governance and safeguarding the interests of the marginalized people of this world.

The Court could be composed of not more than five arbitrators from both the Debtor and Creditor sides with an independent arbitrator to ensure impartiality. This kind of composition has been used in other arbitral tribunals. However, such a court could also maintain a panel of arbitrators from which parties can choose. It would have a secretariat to provide the necessary organisational support. Existing facilities such as courtrooms, library, and consultation rooms belonging to the Permanent Court of Arbitration in The Hague could be accessed.

It is a common feature of court and arbitral proceedings for parties to apply for stay of proceedings pending disposal of arbitral proceedings. Under this power, repayment of particular disputed loans could be frozen, stayed or suspended until the Court makes a decision. This power may be vested in the court by treaty and the Rules of the court. The idea is to maintain the status quo until an action is disposed of.

The rationale for a special court on debt
Reasons for an arbitration court are varied and many if someone considers not burying his head in the sand like an ostrich that sees the storm coming. First, while the debtors have made undisputed and legitimate claims and demands for debt cancellation, the creditors on the other hand claim that debt cancellation is not the action needed to resolve the problem. So the question of whether or not there should be debt cancellation presents itself as a clear subject of arbitration.

Secondly, the African Ministers of Finance meeting in Addis Ababa in November 2000 as part of the Regional Meetings on Financing for Development called for an independent body, that would not be unduly influenced by the interest of the creditors, to examine the situation of HIPC and other Debt stressed countries in respect to debt reduction, conditionalities and other issues related to the Debt problem. The Ministers called for the provision of a debt-servicing moratorium, including accrued interest, in order to allow African countries to find durable solutions to their debt problems.

Thirdly, The Third United Nations Conference on the Least Developed Countries (UN LDC-III) that was held in Brussels in May 2001 fully acknowledged that the external Debt overhang of the majority of LDCs constitutes an obstacle to their development efforts and growth. Debt service takes up a large part of the scarce budgetary resources that could be directed to productive and social areas. The same conference acknowledged that the debt overhang harms the internal and external investment climate and thus called for a viable mechanism to resolve the impasse and usher these countries to the road map of development.

Fourthly, there is need to reassign the responsibility for the Debt crisis and burden partitioning where that might be necessary. There is a need for Arbitration on specific types of Loans or debt in particular the odious and illegitimate debts. Quite frankly, there are debts that Developing countries ought not to repay because their people never benefited from the loans. These include debts incurred by illegitimate debtors and creditors acting illegitimately, loans misused through corruption; debts incurred from illegitimate loans of projects that did not benefit the people as was intended; debt incurred through wrong policy advice such as adjustment policies or a result of external factors over which debtors have no control. The list could extend to include debt in which the money was actually stolen and banked in the North and debts that cannot be serviced without causing harm to people and communities. In a nutshell, it is a violation of human rights to repay debt at the expense of meeting human development needs.

Conclusion
There is a need for finding an appropriate instrument and institution to deal with the special case of the debt problem. Existing instruments such as the Permanent Court of Arbitration based in The Hague, the United Nations Commission on Trade could either have its mandate extended to include Debt issues or a new Commission specifically for debt could be established. There is every reason to think of a viable alternative after the Jubilee movement call for total unconditional cancellation of debt failed to bring relief to the overburdened and struggling economies. As one sage noted the Jubilee movement mobilisation and collection of 25 million signatures to have the debt cancelled in what could be considered the world's greatest petition did not succeed possibly because creditors also go to church.

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