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Over the weekend there were rock concerts around the world calling on western governments to forgive loans to developing countries. But what if the catch cry wasn't 'forgive poor debtors', but instead, 'punish bad lenders'?

And what if those lenders were held legally accountable for recklessly loaning money to crooked governments and tyrants – and then expecting ordinary citizens to pay the money back?

Program Transcript
This transcript was typed from a recording of the program. The ABC cannot guarantee its complete accuracy because of the possibility of mishearing and occasional difficulty in identifying speakers.

Damien Carrick: Today, forgiving debt in the developing world. Is Western generosity contributing to poverty?

Leaders of the world's richest countries are currently jetting towards Scotland for the G8 meeting. Meanwhile in Libya, leaders of the African Union are discussing the pros and cons of having conditions attached to aid. Already the US has agreed to provide more than $40 billion in debt relief to 18 of the world's poorest countries.

But the whole concept of debt forgiveness does assume the debts are, in fact, legitimate. There is a view gaining momentum that a lot of third world debt is in fact illegal.

Anita Barraud reports on a growing movement to cancel debt using legal avenues.

[excerpts from Live 8 concert]

Anita Barraud: Many would be thankful there were few sights of tight leather pants, mullets or puffed sleeves at this 21st century version of Bob Geldof's rock benefit. But it had all the rest: a lot of noise and the satisfied glow of musicians doing it for the poor in Africa.

But what if the world was really rocked on its axis and the song was not poor debtor, but bad lender? The G8 group of countries are the main stakeholders in the World Bank and International Monetary Fund (or IMF), the institutions responsible for lending to developing countries. The banks are now coming under increasing criticism, even from within their own ranks, about some irresponsible lendings. A group called Probe International, based in Canada, is investigating ways to invoke the Odious Debt Doctrine, a set of legal principles which argues that borrowings to corrupt regimes which are not used for the public benefit are illegal.

Heading the campaign is Probe International director, Patricia Adams.

Patricia Adams: I think the latest debt write-off was more about rescuing the lending institutions than it was about rescuing the poor countries. I think that the creditors are more and more nervous that the nature of the loans that they made over the last 50 years is going to come under more and more scrutiny and that, in fact, the debtors are going to start repudiating those debts. I think a lot of these loans that were made were not properly scrutinised, there wasn't proper public oversight, a lot of the money ended up in private Swiss bank accounts, went to projects that were never viable from the beginning and could never generate the wealth needed to repay the loans, and were given mostly for geopolitical reasons and also for patronage reasons, so that these institutions could award contracts to favourite firms in the northern countries.

Anita Barraud: Already, the Odious Debts Doctrine may have an unwitting promoter. Here's Paul Wolfowitz in April 2003, when he was the US Deputy Secretary of Defence. The US had just stormed into Iraq and overthrown dictator Saddam Hussein.

Paul Wolfowitz: I hope for example they'll think about the very large debts that come from money that was lent to the dictator to buy weapons and to build palaces and build instruments of repression. I think they ought to consider whether it might not be appropriate to forgive some or all of that debt so the new Iraqi government isn't burdened with it.

Anita Barraud: Paul Wolfowitz is now the head of the World Bank. His comment has given momentum to the Odious Debt Campaign, which aims to declare null and void up to US$300 billion owed by the poorest countries.

Patricia Adams: There's no doubt about it. The Odious Debt Principle has gained extraordinary momentum since Iraq. I think it's widely accepted in Iraq. The Iraqi National Assembly just prior to the recent election there rejected the offer from the Paris Club (the Paris Club is a very informal grouping of the rich country creditor nations); they offered 80% debt forgiveness to Iraq – that's unprecedented – and the Iraqi National Assembly rejected it. And they said, 'We don't accept responsibility for even 20% of the debts that Saddam Hussein accumulated.' So I think that Iraq has led the way and other countries are watching very closely and especially African countries, in saying, 'Well wait a minute, you know, we had dictators too, and lenders lent money to our dictators, why should we be held responsible for them?'

Anita Barraud: So what are the precedents for using the Odious Debts Principles?

Patricia Adams: Perhaps the most famous one was at the time of the Spanish American War when the Americans won, they defeated the Spanish, this is 1898, and during the peace negotiations, the Spanish said, 'Well you'll have to assume responsibility for the debts of Cuba. They said that to the Americans, the Americans said, 'No, we're not going to assume responsibility for those, because you borrowed the money in order to oppress the Cuban people, and to stop their legitimate attempts at self-government and self-determination.' And the Americans said, 'Well we're not going to accept responsibility, and as far as we're concerned, the creditors took the risk of their investment.'

And then another one occurred about 20 years later in Costa Rica, where a new government took over and they believed that money that had been lent to a previous dictator – by a Canadian commercial bank in fact – that they should not have to accept responsibility for repaying it, because the money was used by the outgoing dictator for his retirement in a foreign nation. And they asked the Supreme Court Justice from US, Taft, to sit as arbitrator; he did, and his ruling was that, indeed, the dictator had not established his legitimate use of that money, therefore the bank's claim against the new government in Costa Rica must fail. So that's another very important case.

There are probably about a dozen such cases, leading up until about the 1920s or 30s, and then there haven't been as many cases since then that I know of. And I think one of the reasons for that is because the international financial institutions wouldn't allow it to happen. And if there was ever a situation where a government didn't want to repay a debt that they had inherited because they didn't believe it was legitimate, then the international institutions, being the IMF and the World Bank would threaten them, and say 'Well if you do that, then we're going to banish you from the world of international finance and you won't be able to get any credit.'

Anita Barraud: Patricia Adams, from Probe International, based in Canada.

It could be argued that corruption contributes to poverty, but shouldn't stop funds from flowing, even if a portion is siphoned off to support the lifestyle or armoury of a dictator or corrupt regime. There have been some moves to make lending and borrowing more accountable. In more recent years, the UN finance bodies have installed the heavily-indebted poor countries, or HIPC initiative. The scheme ties debt relief to anti-corruption and poverty reduction drives. Almost 30 countries in Africa and Latin America are under the scheme.

Vikram Nehru oversees the HIPC initiative. He's director of the Economic Policy and Debt Relief Program at the World Bank.

Vikram Nehru: Under the HIPC initiative, there has now been a reduction for these 27 countries that are receiving debt relief of the order of $54 billion in lower debt service payments over time. That's a very substantial reduction; in fact, taken together with other various debt reduction programs, their debts have been reduced by about two-thirds.

The other objective is to try and make sure that the resources that are saved from lower debt service payments are in fact used for poverty-reducing expenditures. When we do try and monitor these expenditures, this is much more difficult, but we do try and do it. And now I think there is sufficient evidence, not just put together by us, but also by NGOs and others, to show that poverty-reducing expenditures have increased quite substantially in these countries.

A third side benefit is that countries that have reached the completion point in HIPC are indeed countries that have far better policy performance than other countries. They have reached a certain standard of policy performance which does set them apart from the other HIPCs.

Anita Barraud: Such as independent judiciaries, education programs and the like?

Vikram Nehru: That's been a welcome benefit. But obviously that is what the World Bank works towards. I think we've learned that the sustainable growth in poor countries and a sustainable reduction in poverty rates comes about first of all through the good policies of the countries concerned, which includes the development of institutions and levels of governance that when they improve over time, do show records of improvement of performance in these countries. And finally I think we've also learned that these countries should have access to open markets around the world so that the produce, the exports that they produce can find buyers and that they can use those resources then for development purposes.

Anita Barraud: Vikram Nehru, from the World Bank, who was reluctant to discuss Odious Debts or the details of the recent debt relief package announced in the lead up to tomorrow's G8 meeting.

Patricia Adams welcomes the increased scrutiny, but points out that it's not just the borrower that needs more accountability; some lending institutions, western governments and companies also need to clean up their act.

Patricia Adams: For example, in Lesotho in southern Africa, the government decided to try to put a stop to international corruption on international projects and they charged one of their local officials who had been taking bribes with having taking bribes from international engineering firms and he's now in jail. And then they said, 'Well it takes two to tango, and we're going to start charging the companies that pay the bribes,' and the first company was a Canadian company. And that company was convicted, it appealed, it lost its appeal and it was fined, and now it has lost its right to compete for World Bank contracts. The problem is that that company never accepted its guilt, it never accepted its responsibility and it continued to get support from the Canadian government who argued the same thing. What's most shocking in this particular case is that the agent who moved the money from the Canadian company to the corrupt official in Lesotho was in fact a Canadian government official. And the Canadian government, for example, has not punished that company by saying, 'We're not going to give you public contracts because you were convicted of bribing a foreign official.' They have essentially said, 'Well, we think they've learned their lesson, they’re fine.' But I think as long as our governments in the north do not follow through on our rhetoric and say, 'If you bribe a foreign official, there will be serious consequences; jail terms, profound loss of business,' to make the consequences so severe that bribery will not originate from the northern companies, which it often does.

Anita Barraud: OK, so let's get to the practical issues. How could an Odious Debts Principles case be mounted? Who would mount it? There's been discussion about an Odious Debts Tribunal: how would this work?

Patricia Adams: In the case of Iraq there have been a number of lawyers, arbitrators, civil society organisations that have got together to hammer out the details for how one could proceed in Iraq, and it would be done under UN arbitral rules that are well established. There are many precedents for them, and the way it works is that the various parties – this would be the creditors and the borrowers, the Iraqi government and anybody who has a claim against the Iraqi government... and remember, most of the claims against the Iraqi government come from other governments, ninety per cent of them are from public institutions, so northern governments. Then both sides would appoint an equal number of jurists who would sit on a nine-member panel... I think actually they each appoint three and then those six then appoint three more. So it's all under very well-established UN rules that are well laid out for the arbitration of disputes like this.

Anita Barraud: So essentially you could envisage a civil court case being held within the sort of UN auspices against its own bodies?

Patricia Adams: Well that's an interesting twist, that's quite right.

Anita Barraud: Patricia Adams, Director of Probe International, based in Canada.

There are some who believe a civil case, using the Odious Debts Principles, doesn't go far enough – lending institutions should be made criminally liable. Professor Jeffrey Winters, from Northwestern University in Chicago, has conducted a 20 year study on the workings of the World Bank, especially in South-East Asia. He says the World Bank is aware that more than $10 billion, lent during the Soeharto regime in Indonesia lined the personal pockets of Soeharto and his cronies.

Jeffrey Winters believes there's enough evidence for Indonesia to mount a criminal debt case against the World Bank.

Jeffrey Winters: Well criminal debts are the portion of the money that countries borrow that is stolen by the country’s leadership. After all, built into the institutions like the World Bank, the Asian Development Bank, the various other regional banks... There are requirements that are built into what are called the Articles of Agreement; this is basically the constitutions of these bodies, and these are international bodies. And, for example, in the case of the World Bank, Article 3 states very specifically that 'the bank shall make arrangements to ensure that the money that it lends will be used for its intended purpose.' This is a legal mandate. It is binding on the institution to do this. If on the other hand, year after year that money is being stolen and it continues to lend, and it takes no action against those parties which are stealing – and by the way these parties that are working hand-in-glove with the World Bank itself, they have dinners together, they meet socially and so on – if no action is taken against those people who are stealing, then I believe the bank is liable.

Anita Barraud: And in fact you say that, in a sense, the World Bank and other such institutions are complicit in the corruption under the repressive regimes by lending money to these people and countries.

Jeffrey Winters: They are at least passively responsible. But over the decades, what happened was this: institutions like the World Bank and other what are called multilateral development agencies, were set up with a developmental purpose, but they also had a political purpose. And during the Cold War in particular, and now during the War on Terrorism, these resources that are pulled together multilaterally get deployed in a political way. So, for example, when the United States and Europe and Australia and other Western countries wanted to make sure that certain governments were going to be friendly to the west and were going to kill communists and so on, what they did is, they would plug an intravenous line through something like the World Bank into the regime to prop it up. Now a lot of that money which was going into the regime, was just called development money, had this political purpose of stabilising a friendly regime which happened also to be a dictatorship, and as the money was stolen, institutions like the World Bank had what I call a global 'don't ask, don't tell' policy; that is, they didn't really look, they didn't really want to know. Now that's fine. One can run one's foreign policy that way, I suppose, but the problem ends up being debt accumulated in this criminal form; that is, there are by now massive sums of money that went to regimes like Soeharto and others across the developing world, the Marcos regime and so on, and this money went into chalets and Swiss bank accounts and so on. The debt for all of that now sits on populations that themselves had no leverage. They were oppressed populations. The leverage was in the hands of the western governments, and in the hands of the World Bank.

Anita Barraud: Jeffrey Winters.

Vikram Nehru was working for the World Bank in Indonesia during the latter part of the Soeharto years. He's now the head of the Debt Relief Program of the World Bank. He acknowledges money did go astray, but the corruption was outweighed by the borrowing program's extraordinary success.

Vikram Nehru: Where the World Bank has given evidence that money has been misused, it has taken immediate action. In fact all this information is on our website. For example, where there has been misuse of resources by contractors for example, those contractors have been blacklisted and indeed some contractors have been blacklisted from all World Bank projects wherever they are financed. In addition, where we found such misuse of resources, we have immediately given the names of the individuals concerned to the authorities in the country for appropriate legal action and where we found the resources had been misused, we have demanded that those resources be immediately refunded to the Bank, because clearly that is not something that the Bank would condone.

Anita Barraud: But it's happened consistently and over many years where money has been linked to people like Soeharto, or Marcos in the Philippines in the past, and there's money missing from there which the people of the Philippines and the people of Indonesia are still paying off; money which they've never seen and has never been used for their own benefit.

Vikram Nehru: No, in the case of Indonesia, from 1968 onwards, has seen a most remarkable economic performance. Between 1968 and 1998 there was a reduction in the poverty rate from over 60% to below 12%. The economy grew at something like 7.8% a year on average for those 30 years. The Bank had announced a large program during that period, and I think the economic performance of Indonesia shows that this was very... in fact has been one of the most remarkable records of poverty reduction in the world. It is true that towards the end of that period, there was increasing evidence of corruption in that country, and where there was evidence of corruption that was found in World Bank projects, the Bank took immediate action.

Anita Barraud: Vikram Nehru, from the World Bank.

Professor Winters disputes the idea that Indonesia's successful development was due to World Bank loans. He points out that the Asian region was at the time described as a 'Tiger economy'. A lot of Indonesia's success can be attributed to free markets. Part of the recent debt relief package included opening trade to Africa. Most of the leaders of the G8 are not enthusiastic about reducing trade barriers to Africa. As for the new tied aid or tied debt relief programs installed by the World Bank and IMF, despite the rhetoric, Professor Winters says there's little transparency, even today, at the grassroots level where it really counts.

Jeffrey Winters: What has not been done is real oversight and auditing mechanisms put in place at the grassroots level, where projects are actually done. Institutions like the World Bank still defer to local governments and in most instances, what the World Bank receives is a balanced Microsoft Excel spreadsheet where incoming money equals outgoing money and there is not a clear idea of what happens in the middle. And this would involve auditors. And I have proposed in front of the US Senate in testimony last year, I have proposed an international auditing agency be set up, and the sole purpose of that agency... and it should be separate from the World Bank and the multilateral development agencies, but all their lending should fall under the purview of this agency. The idea is that this would be a group of international auditors who have no relationship to the World Bank, also no relationship to the private sector corporations who do the projects, the multinational corporations, and then one's career path in the international auditing agency would be linked to how much you find. Right now, there's no incentive in the system anywhere for anyone to actually find stolen money. And I know people inside the Bank... by the way, I've been very critical of the World Bank but I should say that one of the reasons I have been able to find out so much in my research about what goes on inside the Bank, is that people in the Bank want change and they have been fighting a losing battle for decades. And with their people called Task Managers, who have upset the World Bank by actually going to projects in Africa and in Asia and going to the ground level and saying for example, 'You told us that you bought 50 air conditions. May I see the air conditioners?' And suddenly there's pandemonium, because the air conditioners were not bought. Asking just simple questions; a road is put in, and then a Task Manager would go and drill a core and see was a standard amount of stand, rock, cement and other kinds of things used? And you can tell, just by drilling a core. And what tends to happen is maybe a $100 million highway is allocated, but a $50 million highway is actually put in. The other $50 million is stolen, then the highway which is supposed to have an endurance of maybe five to ten years, breaks down in two years, and then you have another World Bank follow-on project to repair the highway that was put in. And this is how it goes, year after year.

Anita Barraud: Professor Jeffrey Winters from Northwestern University in the US, who says unlike the Odious Debts Doctrine, there are no precedents for a criminal debt case. He believes Indonesia would find clear evidence to support a criminal debts action, as there's already a well-documented paper trail. However he acknowledges that most countries who could successfully argue such a case don't have the political will to bring an action, fearing sanctions.

[song]

Anita Barraud: Placing public institutions such as the World Bank in the dock, whether civil or criminal, requires expensive investigations, including forensic audits, as well as the political will. There's another more pragmatic approach. Professor Helen Hughes, Senior Fellow at the Centre for Independent Studies in Sydney, worked as an economist in the World Bank for 15 years, mainly in East Asia. She's well-known for her strong views on aid to failing Pacific states. Professor Hughes says public institutions should act in the same way as in the private sector. If money is lent and is not performing, it should be written off. She believes the campaigns for Odious and Criminal Debts are missing the point. Nor is she a fan of the World Bank's attempt at tied aid programs. As far as the debt forgiveness campaign, spearheaded by rock stars, she reckons it's actually contributing to poverty in Africa.

Helen Hughes: I tell you what I call it: 'rock economics'. The whole sort of performance of that rock concert, the last rock concert was in '85, and since then, Africa has got much worse. Conditions for ordinary Africans have got much worse. And I think that's because the economics espoused in '85 were wrong, and I think they're wrong again. It's no good just wishing poverty away and I don't think that the sort of policies that are being promulgated now are going to make any difference. On the contrary, I think that there's a danger there that African dictators will say, 'Well all our debt's been forgiven; that's fine, we can start borrowing again.' That's what they did in the '90s.

Anita Barraud: You're very critical of the HIPC scheme, the Heavily Indebted Poor Countries initiative, why so? I would have thought that aid and lendings tied to better governance and transparency would be a good thing.

Helen Hughes: It is such a scam. And it is being paid for – now there is where I become very critical – it is being paid for by the successful developing countries. A large part of the debt service that has been taken over from African countries under the HIPC scheme comes out of the profits of the World Bank and the International Monetary Fund on loans to countries like Bangladesh, India, China, Malaysia and so on, where people are paying back the loans.

Anita Barraud: So you're saying it's stealing from Peter to pay Paul?

Helen Hughes: Good performers to pay people like Mugabe and the people who reign Uganda, they haven't been able to do anything about the Lord's Army, which is stealing children and turning them into murderers. And a place like Ghana, which is one of their shining HIPC countries, Ghana has 88 Cabinet Ministers. They each have a car, a secretary, a free house, and so on.

Anita Barraud: What then is your opinion on the movement to invoke the Odious Debts set of principles, to recover or wipe out those debts?

Helen Hughes: I think those debts should be wiped out. It's the way you do it. I mean the World Bank consists of individuals, like me. Finding out who was responsible, you know, Bob Macnamara's now in his late 80s; are you going to put him in court? I think it's an absurd idea. But the core of the idea, that the institutions that lent that money in the past, and are continuing to lend it now, should be made responsible for the outcome of their loans.

Anita Barraud: Well I guess this was both Jeffrey Winters and Patricia Adams behind these principles is to reform these public international financial institutions.

Helen Hughes: Well I think economic principle is much simpler than the legal principle. That is, that you have to write off non-performing loans. It's very difficult, because there is a sort of aid industry conspiracy to cover up what your legal colleagues would call the criminality of the lending. It is very difficult to find consultants to examine say lending to Uganda who has not at some stage been involved with the World Bank, the International Monetary Fund, the other development banks or the NGOs. It's all one clique of people.

Anita Barraud: You talk about looking forward, wiping of debts and just moving forward. But how can the World Bank be taken seriously as a credible institution, alleviating poverty and so on, if it's not prepared to be made accountable or scrutinised for its past policies?

Helen Hughes: It can't. If foreign investment came from commercial banks, it would be much more carefully scrutinised. You will never get a public bank to scrutinise its lending. It'll become a bureaucracy of one sort or another, and it will never avoid odious or criminal lending. The sensible thing to do would be rather than cancelling the loans, abolish the banks.

Damien Carrick: And with that radical solution to debt relief from Professor Helen Hughes, we end Anita Barraud's story. That's The Law Report for this week. A big thank you to technical producer Brendan O’Neill.

Vikram Nehru,
Director, Economic Policy and Debt Relief Department, World Bank

Jeffrey Winters,
Professor Political Economy, Northwestern University, Chicago; Co-editor, Reinventing the World Bank, published by Cornell University Press

Professor Helen Hughes,
Senior Fellow, Centre for Independent Studies, Sydney, Emeritus Professor, ANU

Patricia Adams,
Executive Director, Probe International, Canada, Author, Loose Lending, Corruption, And the Third World's Environmental Legacy, published by Earthscan

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