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The South Has Already Repaid its External Debt to the North: But the North Denies its Debt to the South

Paulo Nakatani teaches at the Federal University of Espíritu Santo, Vitória, Brazil. Rémy Herrera is a researcher at the CNRS—Centre of Economics of the Sorbonne, France. This article is a slightly revised version of part of a written statement presented by the Centre Europe Tiers-Monde (CETIM) during the March 2007 4th session of the Human Rights Council of the United Nations Organization in Geneva.

Developing Countries’ External Debt

The South has already repaid its external debt to the North. Since the onset of the global debt crisis, precipitated in 1979 by a sharp increase in the Federal Reserve’s interest rates by Paul Volcker, the devel-oping/emerging market economies as a whole have paid in current dollars a cumulative $7.673 trillion in external debt service.1 However, during the same period their debt has increased from $618 billion in 1980 to $3.150 trillion in 2006, according to figures published by the International Monetary Fund (IMF). The external debt of this group of countries, comprising 145 member states, will continue to grow throughout 2007, according to the IMF, to more than $3.350 trillion. The debt of the Asian developing countries alone could rise to $955 billion. Although they have already repaid, in interest and capital, far more than the original amount due in 1980, these countries are now carrying a burden of debt much larger than they faced at the beginning of the period.

These data from the IMF are expressed in current dollars, which  complicate the comparisons between different time periods. Nevertheless, it is clear that the external debt of developing/emerging market economies, measured by the ratio debt service/GDP (along with debt service/exports), has been  increasing since the beginning of the 1980s. Total external debt service of these countries grew from 2.8 percent of GDP in 1980 to 4.0 percent in 1989 and 6.9 percent in 1999, before decreasing slowly to 5.2 percent in 2006, just above the 5.1 percent average for the period.

This gigantic drain of resources operating for more than a quarter of a century has changed neither the status of these dependant economies, nor the nature of their relations with the developed countries of the North. It contributes, on the contrary, to the ever increasing concentration of wealth, at the national level in favor of the dominant classes of the countries of the South, and at an international level in favor of the countries of the North. It explains in large part, over the last few years, the dramatic increase in intra– and international inequalities, as well as the increase in relative and absolute poverty. International debt repayment constitutes one of the forms of transfer of surplus produced by the countries of the South to the North—and of surplus produced by the workers of the South to the capitalists of their own countries and to those of the North. This has tended to increase the rate of labor force exploitation in the South. In this way, the developing countries and “emerging market” economies transferred to their creditors an annual average of 3.68 percent of their GNP during the decade following the debt crisis (1980–89). In the past ten years (1997–2006), marked by a series of financial crises and a growing polarization of the capitalist world system, this transfer rose to 6.2 percent of GNP.2

In recent years, in the context of ever increasing market integration and deregulation of capital movements, there has been a general transformation of debts to bonds on financial markets and a conversion of external debts into internal debts. This gradual evolution, which is still ongoing, hides some perverse effects, in particular that interest rates are often higher on internal debt. Reducing external debt service repayments make it more difficult to calculate precisely the size of the drain associated with the external debt. This only further complicates and worsens a situation in which the transfer of surplus from South to North continues to operate through a myriad of channels, such as the repatriation of profits on direct foreign investment, profits on the revaluation of bonds recorded as portfolio investments in balance of payments, and other forms of unequal exchange.

The external debt can be interpreted both as a means of financing and a constraint on the financing of capital formation. Nevertheless, the weight and dynamics of the debt show that the loans do not contribute to financing development. Besides, the debt is itself increasing in order to cover repayment of interests and capital. So it functions as a self-perpetuating mechanism of poverty aggravation, work overexploitation, and a block on development in the economies of the periphery of the capitalist world system.

The debt—a financial, socioeconomic, and political problem

The current disproportion of developing country debt and the past history of the monetary and financial international system provide no indication of a possible solution to the debt crisis if only the efforts and resources of these countries are mobilized. Economic, commercial, monetary, and financial relations between the countries of the center (the North) and those of the periphery (the South) of the capitalist world system must be profoundly reorganized, following new principles. These should impose strict limits on the capital accumulation dynamics based on profit maximization and plundering, and should promote solidarity and cooperation between partners. This is one of the essential conditions for the construction of a fairer international economic order.

The external debt of developing countries is not only a financial problem. In most cases, it developed according to the conditions and interests of the dominant capitalists of the countries of the North, in close collaboration with the elites of peripheral countries. These alliances often produced complex situations, such as “odious” debts (illegitimate and/or illegal), the transformation of external debts into public debts—which can often be viewed as forms of “odious” debts—and “ecological debts.” Odious debts were contracted by local elites and used against the public interest, to finance sumptuous expenses, corruption, or repression of the working classes—often resulting in massacres and torture. The conversion of private debts into public debts was a way for the state to manage the debt crisis in favor of the local bourgeoisie. When the United States decided to increase its interest rates—in the hope of resolving its own crisis—many governments of the peripheral capitalist countries at the beginning of the 1980s nationalized a large part of the private external debts of the local bourgeoisie, imposing responsibility for the cost of the operation on the population. Furthermore, the debt also served to finance polluting activities of transnational companies, which have resulted in severe environmental degradation and highly negative externalities at national and international levels.

These debts contribute to the increasing misery of large parts of the populations of the countries of the South, especially in Africa. Between 1980 and 2006, $675 billion has been extorted to finance the debt service flows from the African continent, even though it is the poorest in the world.3 This is more than the amount of external debt owed by all the developing countries at the beginning of the crisis. As a yearly average during this period, this corresponds to $25 billion. By way of comparison, hardly more than half of this sum would be enough, according to the estimates of the UN Food and Agriculture Organization (FAO), to eradicate hunger, thanks to the provision of food rations corresponding to nutritional levels considered to be satisfactory to each poor inhabitant of the South. Remember that according to the World Bank, there are over four billion poor people in the world, more than 850 million people still suffer today from malnutrition, and five million children die of starvation each year in the world. The wealth accumulated in the countries of the North is in part produced by exploitation of workers and destruction of nature in the countries of the South.

Proposed solutions to the debt problem

Many nongovernmental organizations, such as the Committee for the Cancellation of Third World Debt (Comité pour l’Annulation de la Dette du Tiers Monde—CADTM), or Jubilee South, consider, with reason, that the developing countries have paid off their external debt to Northern creditors, in totality, and that it is the rich countries that effectively owe debts to the poorest countries.4 According to these social movements, debt cancellation is the only available means to open the way to development. However, the countries at the center of the capitalist world system, and their multilateral monetary and financial institutions—above all the IMF, the World Bank, and the Paris Club—have no interest in resolving the problem of external debt, because it represents a reliable means of keeping the countries of the South in perpetual dependence. As a consequence, it is the people of these countries, supported by social movements (in the South as well as in the North) who must take on this task.

Thus, the campaign for developing country debt cancellation must be supported—in particular the initiatives carried out in the creditor countries, such as Norway. This country has just recognized its co-responsibility in the “illegitimate debt” of a number of countries (Ecuador, Egypt, Jamaica, Peru, and Sierra Leone) and decided unilaterally to cancel sixty-two million euros of credits held on these countries.5 In the case of Ecuador, a commission of civic oversight of corruption, with the support of various associations, obtained in 2002 an audit on the sale of Norwegian ships to the government of Ecuador in the 1970s. The commission concluded that the credits for “loans for development aid” in this case were illegitimate (as they did not help Ecuador but rather Northern industry), that no technical or financial evaluation had been undertaken in the creditor country (either by the agency for cooperation or the agency for export credit), that the increase in the debt was due to unfavorable conditions introduced during the renegotiation, and that no one knew where the ships were nor how much was still owed. After the commission had recommended cessation of repayment, in October 2006, and following an intense campaign by Ecuadorian and Norwegian social movements, the Norwegian government announced cancellation of this debt, for which it recognized co-responsibility.6

Mobilizations to cancel/repudiate external debt also need to be initiated within debtor counties and by their governments—although little progress has been made until now, even by the progressive states. The boldest decision so far has been to interrupt repayment in order to renegotiate external debt, as Argentina did in 2002.

The Heavily Indebted Poor Countries (HIPC) Initiative, launched by the G7 in Lyon in 1996, then strengthened in Cologne in September 1999, can never solve the problem. This initiative concerns a very limited number of poor countries, and its aim is to make the debt burden “sustainable” without questioning its legality or legitimacy. The exchange of debt against assets (debt equity swaps) does not constitute a solution either, because these are often used to support programs of privatization and changes in the national structures of capital ownership in favor of foreign transnational companies. The proposal to buy back debts between developing countries in the framework of South-South alternative cooperation is interesting but limited, because it merely transfers the burden of debt from one country of the South to another.
In these circumstances, the most effective solution is the launch of debt audits—insisting that the states identify each component of debt, including those qualified as “odious,” and demand, if necessary, cancellation of payments.7 Even progressive third world governments are at present trying to renegotiate their debts under the least disadvantageous conditions in order not to interrupt repayment flows. Sometimes, debt service repayment to the IMF is even made ahead of schedule. This is certainly no solution, since dependence will persist for as long as economic policies, imposed by the IMF, continue to be followed. Furthermore, the foreign currencies borrowed on financial markets to pay the IMF are often at even higher interest rates. The country’s dependence is then displaced towards financial markets, further complicating the picture.

These proposals for audit, development of appropriate legislation on external debt, and cancellation of debt, would prove effective in terms of development policies if they were accompanied by profound changes of the international monetary and financial system that challenged the roles of the IMF, the World Bank, and the WTO. Among these necessary measures, let us list: the modification of the rules of access to the markets and to the international monetary and financial systems; the building of regional systems to stabilize exchange rates; control and taxation of capital movements (particularly speculative); abolition of tax havens; and the establishment of international tribunals responsible for judging the social, economic, and cultural implications of third world debt—including ecological crimes. An international law on debt needs to be enacted. And this should be supplemented, as necessary, by measures requiring the transnational companies and their local allies to pay to the countries of the South reparations for their “ecological debts.”


1.   Figures are for 1980–2006. Calculation by the authors based on the data provided by the International Monetary Fund: IMF, 2006, World Economic Outlook Database, September, Washington D.C. It is the sum of annual values drawn from the line “External Debt: Total Debt Service” from the group “Other Emerging Market and Developing Countries,”
2.   Calculation by the authors based on the same IMF data.
3.   Calculation by the authors based on IMF data on Africa.
4.   CETIM et al., Menons l’Enquête sur la dette (Genève: Éditions du CETIM, 2006).
5.   CADTM, “CADTM Applauds Norway’s Initiative Concerning the Cancellation of Odious Debt and Calls on All Creditor Countries to Go Even Further,” (October 10, 2006),
6.   CADTM, “CADTM Applauds Norway’s Initiative.”
7.   CETIM et al., Menons l’Enquête sur la dette.

2007, Volume 59, Issue 02 (June)
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