external debt limits health interventions

228 Parasitology Today, vol, 3, no. 8, 1987

External Debt Limits Health Interventions

Bishakha Mukherjee

While the greatest burden of parasitic disease is borne by less developed countries (LDCs), the ability of these nations to intervene with effective control programmes is severely limited by their growing external debt. Latest statistics published by the World Bank show that the total LDC external debt exceeded US$1000 billion in 1986 (Table I), and adjustment programmes imposed by creditors leave little scope for investment in public health - a sector often regarded as providing little obvious financial return on investment.

To parasitologists, these problems have important consequences. In a decade of growing confidence in new or improved methods for diagnosis, treatment and control of parasitic diseases, there is less confidence that affected nations will be able to afford to implement these approaches in anything but small-scale trials. This has directly inhibited commercial development of some products where affected communities are not seen as able to repay the projected cost of development, and such problems seem destined to get worse, without appropriate restructuring of the health sector. Yet if one of our objectives is to reduce the burden of parasitic diseases - both in man and in livestock - we must surely seek ways to overcome financial as well as technical constraints. With this back- ground, we asked Bishakha Mukherjee to review the financial crisis faced by LDCs.

Available finance is now the critical health policy issue for the governments of most developing countries. Health interventions cost money and, increasingly, as a consequence of sharply changed economic circumstances, the financial resources which governments of less developed countries (LDCs) can devote to health care are becoming limited. Health systems throughout the world are in a state of flux and the ability of countries to purchase even essential drugs and medical equipment is heavily constrained. The economic crisis and stabilization policies adopted by most developing countries since the early 1980s in order to bring expenditures into line with available resources have affected government revenue and resource allocation and led to substantial cutbacks in overall spending in both absolute and relative terms. Between 1972-83, the proportion of central government expenditure on health in industrialized countries showed a marked increase; in developing countries the trend was downwards.

Economic growth rates have declined sharply or even turned negative in much

Table I. Outstanding External Debt of Developing Countries a 1980-87

Reporting Total c°um~riesb ($bn)

1980 573 650 1981 666 749 1 982 739 825 1 983 797 890 1984 833 929 1 985 (preliminary) 892 992 1986 (estimated) 932 1035 1987 (projected) 972 1080

a Except high income oil exporter~. b Countries which report according to standard format under the World Bank's Debtor Reporting System. Source: World Bank, World Debt Tables, 1986-87. Measuring the LIDC debt burden: in 1985 this was the equivalent of 45% of the GNP of developing countries- or I 1% of total OECD output.

of the Third World, particularly in Africa and Latin America. Deteriorating terms of trade, the rising burden - to intoler- able and unprecedented levels - of servicing debt, stagnating flows of aid and growing protectionism against the exports of developing countries in the industrial country markets have caused severe external payments problems.

Table 2. Debt Rati~

All countries Latin America,

Caribbean Low-income

Africa

Debt/ Debt /GDP exports 1980 1985 1980 1985 134 194 28 45

193 31 I 35 62

218 425 47 80

Source: World Bank, World Debt Tables, 1986-7.

The debt build-up began with the acceleration of trans-national banking and eurocurrency lending in the 1970s as commercial banks recycled surplus funds from the Organization of Petroleum Exporting Countries (OPEC) to developing countries whose external accounts deteriorated after the sudden rise in oil prices in 1973 I. Historical prece- dent suggested that external capital inflows were essential to development. The USA and other developed countries had enjoyed large capital transfers in the 19th century. In 1974, many developing countries were in the midst of large public-sector investment programmes that required imported capital goods. Bank loans to finance their purchase appeared to be an attractive option: they were relatively quick to arrange and had few strings attached.

Mexico's declaration of a temporary moratorium on debt service on 20 August 1982 dramatically transferred matters from the financial pages to crisis headlines, but the conditions that had eroded the debt-servicing capacity of developing countries had been deteriorating since 1978. With oil prices rising and export prices falling, the terms of trade for non-oil commodity exporters fell by 31% from 1978 to 1982; for countries exporting mostly agricultural products, such as much of low-income Africa, they fell by 35%.

1 9 8 0 1 9 8 3 1 9 8 6 1 9 8 9 The debt burden carried by developing countries has increased from $650 billion in 1980 to $1035 billion in 1986; by 1989 will it be too much to bear?

~)1987. Elsevier PublicatJons, Cambridge O169~758/87/$02.00

Parasitology Today, vol. 3, no. 8, 1987 229

Table 3. Debt by Type and Are~, 1985

Total ($ bn) Public ($ bn) Shares in total (%)

Public Official creditors

Multilateral Shares in public

Variable interest Concessional terms

Reporting Low-income LatinAmerica/ countries Africa Caribbean 892 46 384 632 37 272

71 80 71 30 67 16 12 25 8

44 5 67 22 53 5

"Public and publicly guaranteed debt. Source: World Bank, World Debt Tobies 1986-7.

At the same time, ~nternational interest rates rose with, increasing reliance on tight monetary policy in industrial countries, combined, in the USA, with a relaxed fiscal policy. The World Bank has calculated that the average rate on long-term loans to public and publicly guaranteed borrowers increased from an average of 7. I% from 1974 to 1978 to an average of 10% from 1979 to 1983. Rates on official loans, an important source of finanre for low- income countries, particularly in Africa, also rose, but less steeply. On short- term loans - a large component of Latin American debt mostly linked to the US Prime Rate or the London Interbank Offer Rate (LIBOR) - rates increased even faster, from an average of 12. I and 12.7% respectively in 1979 to 16.6 and 18.8% in 1981. As credit markets became tighter, the spreads above these rates charged to developing countries also rose.

With export earnings depressed, the increased cost of foreign borrowing helped to plunge many developing countries into debt crises. Austerity programmes laid down by the International Monetary Fund (IMF) as a prerequisite for extending credit to meet short-term balance-of-payments neecls became particularly onerous after the debt crisis broke on the international financial scene in 19822 . The control of domestic demand was the main thrust of IMF programmes. The IMF treated the balance-of-payments objective as over- riding and was reluctant to give weight to other government purposes. Con- sequently, growth was cut back and many social objectives fell by the wayside including those relating to health.

According to the World Bank the total debt of developing countries in 1986 was $1035 billion (Table I). Debt problems are concentrated in Latin America and sub-Saharan Africa although there are problem debtors, often oil exporters, scattered throughout other regions. The extent to which

LDCs simultaneously ran into debt-servicing difficulty can be seen from the for- mal debt reschedulings, which averaged four per year in the late 1970s, 13 in 1981,31 in 1983,21 in 1984,31inl985 and 24 in 19863 .

Latin American debt is the most seri- ous threat to the stability of the inter-

national banking system, but the burden of servicing debt relative to domestic income and export earnings is greater in some sub-Saharan African countries. The debt problem here has been superimposed on an underlying long- term crisis 4 of poverty and under- development. Among the many causes of the African crisis, those that stand out are adverse international economic factors. Within the last decade, many sub-Saha- ran countries have been hit by steeply declining commodity prices and external shocks such as higher oil prices, fluctuat- ing exchange rates and higher interest' rates. Over the last ten years, the prices of major commodities such as copper, iron ore, sugar, groundnuts, rubber, timber and cotton halve fallen signifi- cantly.

The problem has been compounded by growing difficulties in extracting development capital from the industrial world. At the same time, debt repay-

230 Parasitology Today, vol. 3, no. 8, 1987

ments and interest charges, as noted above, have risen. Debt service rose in sub-Saharan Africa as a whole from 15% of export earnings in 1980 to 3 I% in 1986. This combination of events has led

to a situation where net resource trans- fer to the area fell from an estimated $10 billion a year in 1982 to $ I billion in 1985 Adverse international and internal factors combined to cut per capita incomes in sub-Saharan Africa by 16% between 1980 and 1985.

The economic difficulties of African countries have had devastating social impacts. Declining per capita food pro- duction has contributed to increasing undernourishment. This has weakened much of the population, reducing their productivity and made more of them (especially children and the old) more susceptible to debilitating diseases and premature death. The goals of safe drinking water and sanitation remain elu- sive s.

The international community - and African policy-makers- have recognized that the resolution of the economic Crisis on the continent lies in part with appropriate adjustment of domestic policies But this needs to be heavily supple- mented by the international community with adequate capital flows, aid and trade arrangements. The World Bank estimates that even if external economic conditions are favourable over the next five years, and African Governments implement key policy reforms, a substantial gap will remain between the finance or debt relief available and the amounts needed to prevent a further deterioration in the living standards of low-income Africa. And in this grim equation it becomes difficult to argue for more public spending on health.

The enormity of the debt is an acute problem for many African countries, but its most visible impact has been in some middle-income countries- particularly in Latin America. About 30% of the total global debt is owed by four countries - Argentina, Brazil, Mexico and Venezuela. Their debts constitute roughly two thirds of the outstanding bank loans to developing countries.

In the 1970s, Latin America's economic growth was fuelled by external borrowing - primarily from banks flush with OPEC deposits and happy to lend to growing countries rich in natural resources. Then major changes in international conditions - high interest rates, languishing exports and the drying up of capital flows - made the debt unsustain- able. Bankers, alarmed by deteriorating creditworthiness, cut back lending 6. The problem was exacerbated by a flight of indigenous capital from developing

countries. The ensuing crisis forced governments into austerity policies to cut imports, by as much as 40% in real terms over three years. Per capita incomes were reduced by an average of 8%; much of the burden was carried by the poor, as real wages fell and unemploy- ment rose.

Moreover, the lack of new international credit and the continuing burden of debt service forced these countries to service their debts by running trade surpluses. These have been achieved by drastically curtailing imports and hence investment and growth. The overall aim was to earn more foreign exchange to permit continuing levels of debt service and consume less at home. This situation became inevitable as developing countries began paying out more in interest than they were receiving in new loans. The net transfers from seven major Latin American countries to creditors rose to almost $39 billion in 1984, and in that year, according to the UN Economic Commission on Latin America, 35% of export earnings went to pay interest on overseas debt. This massive drain repre- sents 5-6% of the region's gross domestic product, around a third of the internal savings and nearly 40% of export earnings. It has been achieved by adjustment policies that impose severe and regres- sively skewed cuts in wages, social services, investment, consumption and employment, further aggravating social inequity and inflicting widespread poverty.

Therefore, debtor countries have been using their natural resources not for development or to raise living standards, but to meet the financial require- ments of creditors in industrialized countries. To require poor countries simultaneously to curb their living standards, accept growing poverty and export growing amounts of scarce resources to maintain external creditworthiness reflects priorities few demo- cratically elected governments are likely to be able to tolerate for long. It is a per- verse situation where debt service has to be placed before the fundamental needs of the people.

As for the health sector, the repercus- sions of the cutback in funding affect the population acutely because of the way health indicators move and the impact of health on other areas of human behaviour such as education and work. In nine of 14 Latin American countries for which data are available for 1984, per capita spending by governments on health declined between 1980 and 1984. The worsening of the health situation cannot be reversed in the short-term. At the same time, a reduction of expendi-

ture obliges low-income families to use their own funds for medical care, reducing still further their meagre resources for basic necessities. The individual situa- tions of the countries vary, of course. In some the effects of adjustment policies have necessitated measures to maintain minimum levels of health and nutrition. Given the present financial austerity, it is hard to see how much more the countries can devote to measures of this kind, which in any case do not afford lasting solutions.

Debtors are now becoming less and less willing to postpone the recovery of their living standards. As a former Mexi- can Finance Minister said in January 1986: 'The limit of the responsibility to our creditors is the responsibility to our people'. This was echoed in the Vatican's 1987 Pontifical Commission on Justice and Peace Report, which called for a resolution of the debt problem which did not impose unbearable demands on developing countries, noting that 'no government can morally demand of its people privations incompatible with human dignity'. The mood of impatience has recently become evident: in mid- 1985 Fidel Castro urged Latin America's leaders not to pay the amounts due; early this year Brazil unilaterally sus- pended interest payments on its debt; and Peru - subsequently followed by Nigeria, Zaire and Zambia - announced a ceiling for debt service.

Growing numbers of creditor banks and governments in developed countries are realizing that many debtors will simply not be able to keep servicing their debts unless the burden is eased. Meas- ures under discussion include additional new lending, writing off part of the debt, longer-term rescheduling and conver- sion to softer terms. But a necessary sense of urgency is lacking. Any such measures must incorporate the legiti- mate interests of creditors and debtors and represent a fairer sharing of the burden of resolving the debt crisis if large parts of the developing world are to avert economic and social catastrophe.

Bishakha Mukherjee is Senior Economics Ol~cer at the Commonwealth Secretariat, Marlborough House, Pall Mall, London SW I Y 5HX, UK. References I Managing Third World Debt (1987) All Party Par~

liamentary Group on Overseas Development 2 Feinberg, R,E, and Kallab, V. (eds) Adjustment

Crisis in the Third World (1984) Overseas Development Council, Washington DC

3 World Debt Tables 1986~7 (1987), World Bank 4 Persistent Indebtedness: The Need #or Further

Action (1987) Commonwealth Secretariat 5 Our Common Future (1987) The World Com-

mission on Environment and Development 6 The Debt Crisis and the World Economy (I 984)

Commonwealth Secretariat

external debt limits health interventions

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