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Background: Indebtedness

Caught in the debt trap

Some of the very poor countries in the world have large debts. Governments have to pay so much interest that there is nothing left for urgent investments such as schools and hospitals. Without the necessary infrastructure, however, the economy cannot get going and hence the treasuries of these countries remain empty. Thus, debts prevent these countries from developing. For this reason Kindernothilfe supports action groups which campaign for debt cancellation and a fair way of settling debts.

Blümreise: DhakaPoor countries as Bangladesh cannot afford to invest in the social system. Picture: Jens Großmann 
Causes
The large national debts of many countries have several causes. During the cold war both sides "bought" the loyalty of poor nations by granting them loans without paying any attention as to how the money was spent. Thus, large sums of money went to dictators and military regimes and was spent on arms and foolish prestige projects or even landed in the pockets of those in power. These loans were frequently of no benefit whatsoever to the people of poor countries.

At the same time the prices for some products, particularly agricultural goods, have dropped dramatically in recent years. Developing countries whose exchequers depend heavily on income from these products suffer from these drops with drastic reductions in income,but at the same time they have to spend increasingly more on the imports of oil and gas. In addition, industrial countries impose high duties to protect themselves from goods produced in developing countries. Subsidies for products from industrial states also make it difficult for developing countries to export their goods and earn money. The result - these countries have to take out loans. And then interest payments and debt servicing gobble up the largest part of the budget with hardly any money left for investment in the social and education system.

Treffen der G7 Finanzminister in EssenDemonstrators demanding debt reliefs during a G8 summit in Essen, Germany, in 2007. Picture: Ralf Krämer 
Debt cancellation
In 1999 in Cologne, the G7 countries agreed on an important measure to reduce the debts of countries worst affected - Heavily Indebted Poor Countries (HIPC) were to be granted debt forgiveness. However, only 15 of the 38 countries have so far benefited from this measure.

In a further round of discussions on debt relief in June 2005, the heads of governments of the G8 countries agreed on granting debt relief to 37 countries amounting to a total of 45 billion Euros. The amount of debt relief, however is deducted from the normal amount of development aid. This means that poor countries receive less development aid. Besides, many very poor countries were not included at all in this debt relief agreement.

Only one third of all countries that bear the burden of heavy debts were included in the G8 agreement.

The roles of the IMF and The World Bank
The International Monetary Fund (IMF) and the World Bank play a decisive role in analysing how much debt relief a country should be granted. The problem is however that the IMF and the World Bank are also creditors of the indebted countries and are obviously not interested in granting complete debt forgiveness. The IMF and the World Bank frequently call for structural adjustment programmes to be adopted by their debtors. Many of the points in these programmes are considered by development experts to be of little use.

What action is Kindernothilfe taking?
Kindernothilfe supports the campaign "erlassjahr.de" which calls for a just process of debt cancellation. With 1000 affiliated organisations, "erlassjahr.de" is the largest political development organisation in Germany. It grew from the alliance "Development needs debt cancellation" which was founded at Kindernothilfe's headquarters. As a member of the steering committee of "erlassjahr.de", Kindernothilfe is involved in its policy making.
Combating poverty is the focal point of every Kindernothilfe project. Applying the system of micro-loans and income creating measures, people are empowered to be self-sufficient and independent of aid from outside. They are also independent of support from the state which is anyway non-existent in heavily indebted countries.

Annual Report Annual Report 2009 (pdf, 2,5 MB)


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