Many of the world’s poorest countries accumulated debt in the 1970’s and 1980’s, after suffering from worldwide oil shocks, high interest rates, weak commodity prices and recessions that marked this period of history. At the time, development experts recommended that governments of poor countries should borrow money from the World Bank and the IMF, among others, to industrialize their economies by investing in industry and infrastructure, and by replacing goods and servicesA good is a tangible item that someone has made, mined, or grown. A service is a form of work, assistance, or advice that provides something of value to someone else but does not produce a tangible item. from abroad with goods and servicesA good is a tangible item that someone has made, mined, or grown. A service is a form of work, assistance, or advice that provides something of value to someone else but does not produce a tangible item. produced within the country.
Unfortunately weak commodity prices decreased the value of poor country exports and high oil prices increased the price of imports, both further increasing debt. In addition, many low and middle income countries were living beyond their means, with high trade and budget deficits, as well as low saving rates. Weak public sector management and corruption contributed to improper or inefficient use of loans, further decreasing the capability of these countries to pay back the borrowed money. Problems, such as droughts, civil war, weak economic policies, all exacerbated the situation. Eventually poor countries were taking out new loans to pay back old ones.
The World Bank and IMF were the main lenders to these poor countries because private lenders believed that these countries were too risky. Realizing the magnitude of the problem, in 1988, the World Bank began to forgive some debt. In the 1990’s, some major industrial countries started to cancel bilateral debt payments as well. By 1994, more than $15 billion of Africa debt was forgiven. Nonetheless the region still owed $235 billion to foreigners, including donor countries, regional banks and multilateralmultiple countries working together to on a specific issue institutions.
In 1996, the World Bank and IMF created the Debt Relief for Heavily Indebted Poor Countries (HIPC) Initiative, recognizing the need for debt relief from multilateralmultiple countries working together to on a specific issue institutions. Through this initiative, eligible countries are required to introduce specific economic reforms, such as restructuring and privatization of state-run enterprises and creating a sound legal system, in return for debt relief. The Initiative requirements were quite stringent and, by 1998, only two of the 40 eligible countries received actual debt cancellation. In 1999, the World Bank enlarged the program to encompass more countries and take into account other ongoing efforts for poverty reduction in eligible countries. Critics were still not satisfied.
Rallies, concerts and campaigns, sponsored by U2’s Bono and by NGOs, such as Oxfam, raised public awareness and pressured countries to respond. The G-8 meeting in 2005 brought 100 percent cancellations of debt owed to the African Development Fund, the World Bank, and the IMF by 18 countries who were eligible for the HIPC initiative.