Testimony by Fr. Hehir before House Committee on Banking and Finance on HIPC, June 25, 1999

on Behalf of

Most Reverend Theodore E. McCarrick,
Archbishop of Newark and Chairman
of the International Policy Committee, USCC,

and

Most Reverend John H. Ricard, SSJ
Bishop of Pensacola-Tallahassee and Chairman,
Catholic Relief Services

Before the House Committee
on Banking and Financial Services

June 15, 1999

I am Bryan Hehir, Professor of the Practice of Religion and Society at the Center for International Affairs, Harvard University, and Counselor to Catholic Relief Services. I am here today to present the testimony of Archbishop Theodore McCarrick, Chairman of the International Policy Committee of the United States Catholic Conference, and Bishop John Ricard, Chairman of Catholic Relief Services, who are unable to appear before the Committee today.

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This testimony is offered on behalf of the U.S. Catholic Conference, the public policy agency of the Catholic bishops of the United States, and Catholic Relief Services, the development and relief agency of the bishops presently working in over 80 countries throughout the world.

At its meeting on March 24, 1999, the Administrative Board of the U.S. Catholic Conference adopted the statement A Jubilee Call for Debt Forgiveness. This statement reflects the bishops' concern that the urgency of debt relief remains as great today as it was in 1989 when they issued their first statement on the moral issues surrounding Third World debt.

They see the debt crisis today as one critical aspect of a much wider problem of development that must be addressed if large segments of the world's population are to avoid a future of marginalization, despair and hopelessness.

The timing of the new statement reflects the Bishops' observance of the approach of the Great Jubilee in 2000, which offers a time to make new beginnings and right old wrongs. Pope John Paul II has called repeatedly for forgiving international debt as a sign of true solidarity with the world's poor. The U.S. bishops join their voice with his and those of the Catholic Church in developing countries to inform the public about the moral urgency of the debt question and to offer considerations about responding to it. Just yesterday, the Treasurer of the U.S. Catholic Conference, Bishop Robert J. Banks of Green Bay, Wisconsin, along with fifteen bishops from industrialized and developing countries, met with Germany's Chancellor Gerhard Schroeder to discuss the issue prior to the G-8 meeting that will be held at the end of this week. The group called on heads of state and government ". . . to take prompt and comprehensive action to reduce substantially or cancel altogether the debts of poor countries and to restore just relations among peoples." Furthermore, they said: "This task must be tackled with the utmost resolve. Courage and far-sighted leadership are required." (Cologne, June 13, 1999.)

In today's testimony we seek to share with the Committee, first, the moral and ethical perspective on the issue of international debt as expressed in A Jubilee Call for Debt Forgiveness and, second, comments on H.R.1095, the Debt Relief for Poverty Reduction Act of 1999, in light of that perspective. Our views are based both on Catholic social teaching and the experience of Catholic Relief Services which has served the poor throughout the world for more than a half-century.

We would like to suggest a set of principles and perspectives that offer a framework for considering the moral dimensions of the problem of poor country debt:

Human Dignity. A fundamental principle is respect for the life and dignity of every person. All persons are precious, no matter how young or old, how rich or poor, no matter what their gender, religion, race or nationality. Ultimately, debt policies must be measured by how well they protect human life and respect human dignity and human rights.

Common Good. Debt policies must take into account the common good of the whole society, not just segments of it. Thus, policy-makers must answer the question: to what extent does the debt burden undermine the ability of governments to fulfill their obligation to promote the common good by forcing them to spend scarce resources on debt service at the expense of meeting critical needs of their people? Moreover, policy- makers must also consider the global common good. It is neither in our own interest nor in keeping with a just global order to tolerate a situation in which an onerous debt burden contributes to the economic marginalization of so many countries and people.

Solidarity. Concern for basic human dignity and the global common good must be shaped by the virtue of solidarity. In the case of debt this translates into the commitment to work for policies to relieve its burden in order to give new hope to the poorest. Debtors and creditors need to assume joint responsibility for finding fair and workable solutions to the problem of debt. They are "co-responsible" not only because they share the blame for the debt crisis, but also because those who have the capacity to resolve the crisis must work together to find a just and effective solution.

Option for the Poor. One way to judge the moral character of a society is to look at how the poor and vulnerable are affected by economic, social and political decisions. Considerations of justice and charity call upon us to give priority to the needs of the most vulnerable. When we look at the condition of those in debtor nations who had no voice in incurring the debts and who often derived no benefit from them, we must ask ourselves whether they have been well or poorly served by the choices made by both creditors and debtors in contracting the external debt and in dealing with the consequences.

The principles I have just outlined should in no sense be seen as undermining the contractual obligations of debtors and lenders. On the contrary, the presumption is that when countries, like individuals, contract a loan they have the obligation to repay it. But in some circumstances, this presumption may be overridden. One such instance is when a country cannot pay its debt without critical reductions in spending for health, education, housing, social safety nets, and other basic needs, and when debt becomes a serious obstacle to development. In the United States, when individuals, corporations, or even local governments incur debts beyond their ability to pay, they are afforded a way out through bankruptcy. There is no such remedy available to countries, but certainly similar considerations should apply to the poorest of nations. To focus only on the terms of a loan -- rather than the conditions under which it was contracted, the purposes for which it was used, or the impact on individuals today as the terms of repayment are set and enforced-- is to isolate a narrow understanding of commutative justice from broader considerations of social justice. We are not for debt relief for its own sake; we are for debt relief that will alleviate poverty in the poorest countries.

These themes drawn from Catholic social teaching compel us to renew our calls for debt forgiveness as a step toward relieving the intolerable burden of poverty on "the least of these" in the global human family. We fully recognize that overcoming poverty and inequitable development will take more than debt relief. It will require private and public investment, foreign assistance, fair trade, better monitored and regulated flows of capital, economic policies that favor growth, government decision-making that is open and accountable, and the growth of a vibrant and involved civil society in developing countries. Nevertheless, debt relief is often a prerequisite for long-term sustainable development of the poorest countries and may help stabilize burgeoning democracies.

The United States, the wealthiest, most powerful country in the world, has a special responsibility to help find a solution to the debt problem and to promote human development in countries that cannot meet their basic needs or that risk being left in the margins of the global economy. With its resources and as the largest shareholder, the United States is in a strong position to provide the leadership in international lending institutions that can make a difference. Through debt relief, the United States can directly contribute to overcoming poverty and inequitable development to help achieve justice in the international economic system.

We welcome the initiatives undertaken thus far to address this challenge. The leaders of international financial institutions have been increasing their focus on poverty and debt. The relatively recent Heavily Indebted Poor Countries (HIPC) Initiative of the World Bank and the IMF represents an important effort to address the problem of debt. It is the first program which deals with a poor country's debt on a comprehensive basis. However, it should be strengthened and complemented by other efforts that lead more quickly and clearly to fundamental and meaningful debt relief, with poverty reduction as its basic goal. In this regard, we are encouraged by the recent Administration proposal for deeper debt relief for poor countries as well as new debt relief initiatives announced by other members of the G-8, particularly the United Kingdom and Canada. We hope that the Clinton Administration will build on what appears to be a growing international sentiment for enhanced debt relief and work for a consensus at the upcoming Cologne meeting that moves to broader, deeper, more rapid debt relief, and most importantly, debt relief that is effectively directed to poverty reduction, as proposed in H.R. 1095.

Let me turn now to H.R. 1095. On March 24, 1999, we wrote to each of you urging your co-sponsorship of this bill. Together with dioceses, parishes, and various Catholic groups, our own Catholic Campaign on Debt is working with many other organizations in the United States for the enactment of H.R. 1095.

Why have we made this debt relief bill such a high priority? The reason is that major provisions of the bill go a long way towards fulfilling the criteria enunciated in A Jubilee Call for Debt Forgiveness for evaluating and guiding decisions about debt relief. Let me summarize the main criteria and relate them to the provisions of H.R. 1095. Based on the principles which I have outlined here today, we believe that debt relief programs should:

• Include the full range of poor countries that are required to make what we believe are unacceptable sacrifices in human development in order to repay their debt, and provide deeper and more timely relief.

As we have stressed, concern for the human consequences of debt should be at the core of debt relief initiatives. To date, creditors have determined which countries should be eligible for debt reduction, and how much reduction they should receive, on the basis of the "sustainability" of their debt burden. Under the HIPC Initiative, sustainability is most often defined in terms of ratios of debt to export earnings. Although these ratios attempt to capture the financial burden of debt in a particular country, they do not take into account the human cost of continuing to service the debt.

For example, in Ghana, CRS has long provided food assistance to schools, through United States P.L. 480 Title II, in order to encourage school enrollment, especially for girls, and to improve the nutrition of students and teachers. The government of Ghana partnered with CRS in this endeavor, agreeing to pay half the cost of storing, handling, and transporting the food. But because of budget constraints due to debt service and a structural adjustment agreement, the government has failed to make payments since 1996. The government recently committed to pay a smaller portion of those costs, twenty percent, but it is doubtful whether they will be able to do so.

Moreover, to be useful, debt relief must be substantial and timely enough to make a difference. While simply suspending debt payments for a short period or rescheduling debt service can take some pressure off an indebted country in the short run, it will not reduce the country's indebtedness in the long run. In cases where the relief from current levels of actual debt service payments is negligible, even the best efforts to ensure that it reaches impoverished people will be inconsequential. And, when debt relief can be delayed up to six years, as in the current HIPC Initiative, so too are investments in education, health, and other services. Each day of postponement leaves the basic needs of a society's most vulnerable unfulfilled.

Take the case of Honduras. Even before the devastation wrought by Hurricane Mitch last fall, Honduras' health care system was woefully inadequate. At the national teaching hospital in Tegucigalpa, for example, children in the oncology ward were kept alive with manual respirators. This antiquated equipment was, and still is, operated round the clock by weary parents who keep vigil at the child's bedside. So underfunded is the public health system that, in most cases, patients awaiting surgery must bring with them the medical supplies needed to perform the procedures. And while the quality of the nation's health care system is appalling, the condition of care in the rural areas is markedly worse.

For 1998, prior to the hurricane and in spite of enormous social needs, the government of Honduras had allocated well over 30 percent of its budget to servicing its debt to external creditors. The hurricane obviously made such allocation impossible. While the Honduran government is highly appreciative of the funding provided by the United States and other governments for a moratorium on debt payments, the moratorium is only a respite. The huge debt stock -- around $4 billion -- remains, and our information indicates that even after the hurricane, Honduras does not meet the eligibility requirements for HIPC debt relief.

H.R. 1095 would be a major advance over current programs, substantially increasing the number of countries eligible for relief (Honduras, for example, would qualify), and greatly reducing the share of government revenues which eligible countries would have to devote to debt service payments. It also shortens the time period before receiving relief to a maximum of three years. With these provisions, H.R.1095 would greatly assist in removing external debt as a roadblock to the ability of the world's most vulnerable countries to address the needs of the large percentage of their citizens living in poverty.

• Ensure that resources freed through debt relief are, in fact, used for poverty reduction; include mechanisms of accountability, so as to overcome corruption and other obstacles that prevent debt relief from benefiting the poor.

As we said, our interest is not debt relief for its own sake. Rather, it is to free up funds for investment in sustainable, equitable economic growth and human development in order to make a meaningful improvement in the lives of the most vulnerable. H.R. 1095 requires that recipient governments channel the fiscal savings from debt relief through a human development fund dedicated to poverty reduction and environmental protection. The operations, financial transactions and accounts of the fund are to be monitored by an oversight body which includes representatives of civil society. The fund concept and the arrangements for its operation and monitoring follow a model developed in Uganda that has, by all accounts, been working well. Other governments have begun to explore how to channel savings from debt relief to poverty reduction. Zambia is now considering a proposal to channel debt relief that it receives to AIDS programs throughout the country. This type of strategy -- especially in a country in which the average lifespan is 37, twenty percent of adults are HIV-positive, and one million children will be orphaned by AIDS by the year 2000 -- is vital.

The fund is an extremely important component of H.R. 1095. The competition for scarce resources in a low income country can be intense, and corruption is often a serious problem. Debt relief would be meaningless if the resources it frees up go into the pockets of unprincipled government officials, projects that do not benefit the people, or excessive military purchases. Given the weak position which the poor inevitably occupy in society, special arrangements are essential to assure that their interests are protected. Without the human development fund or a similar arrangement, it would be virtually impossible to have confidence that the poor, who make up the large majority of the population of the affected countries, would be the principal beneficiaries of the debt relief.

• Foster the active participation of civil society in decision-making processes.

There is widespread agreement that the participation of churches, associations, philanthropic organizations, and other non-governmental organizations is essential to formulating national development plans that reflect the needs and priorities of the poor. Similarly, civic organizations can play an indispensable role in helping their government define and meet appropriate conditions for debt relief. Given their knowledge of the local situation through day-to-day contact with people at the grassroots level, they can offer insights regarding local needs, priorities and capabilities that should be taken into account by foreign creditors if the conditions they require for debt relief are to be effective and respectful of local needs for development and poverty alleviation.

After the unprecedented destruction caused by Hurricane Mitch in Honduras, CRS is working closely with the Catholic church and civil society organizations on reconstruction projects. Because of the heavy burden of external debt in Honduras, a growing part of CRS's work has been promoting awareness of the role that debt plays in preventing the reconstruction and long-term development of the country. As a result, CRS/Honduras is working with the government of Honduras to advocate deeper debt relief with international lenders.

H.R. 1095, we believe, addresses the issue of participation appropriately by requiring that all decisions under the HIPC Initiative that have to do with the terms and conditions of debt relief for a country shall be subject to participatory procedures, including the participation of civil society.

• Ensure that economic reform policies associated with debt relief make adequate provision for those adversely affected and have poverty reduction as a central goal.

In the hope of strengthening fragile economies, the major creditors require that a country implement stabilization and adjustment policies before becoming eligible for debt relief. These policies are designed to stabilize faltering economies by reducing inflation and correcting disequilibria in the balance of payments; increasing growth by making economies more productive and efficient, principally by opening them to market forces; and increasing the role of the private sector and reducing the size of government.

We know that, in the short run, these policies can have a strongly negative impact on the poor, such as when health, education, and other social expenditures are cut back in order to meet targets for reducing fiscal deficits. In the long run, however, stabilization and structural adjustment policies may help a country become more competitive in the global arena and may create opportunities for economic growth and job creation.

There are many approaches to economic reform. Whatever approach is chosen, every effort must be made, in consultation with civic institutions, to ensure that reform programs are designed and implemented in ways that make poverty reduction a central goal, and make provision for a social safety net to protect the poor and vulnerable who may otherwise suffer the most from the reforms in the short run.

H.R. 1095 has several provisions which address our concerns about economic conditionality. The first says that HIPC-related economic reforms should "incorporate effective measures for poverty reduction and environmental protection." The second establishes as a condition of HIPC debt relief that the recipient country adopt a plan of action for human development which includes policies, programs, and projects designed to reduce poverty and prevent the degradation of the environment. The third calls for transparency and civil society participation in the decision-making on all conditions of debt relief. The requirement of transparency and participation is particularly important to assure that poverty reduction measures are openly discussed and seriously considered, and that the reform measures adopted reflect the input of the sectors of the society that will be affected by them.

• Contain full funding, with costs shared equitably among creditor governments and international financial institutions.

At their meeting with Chancellor Schroeder two days ago, church leaders strongly urged world leaders to summon the political will ". . . for the policy changes, legislation and funding required for broader, deeper, and quicker debt reduction." H.R. 1095 authorizes the appropriation of the funds necessary to cover the cost to the United States of the bill's bilateral and multilateral debt relief. The principle of equitable cost-sharing is embodied in the bill. It urges the President to immediately begin diplomatic efforts to ensure that all creditors -- bilateral, multilateral and private -- draw on their own resources to finance debt reduction under a strengthened HIPC "to the extent possible without diverting funds from other high priority poverty alleviation programs." In the bill's provisions for bilateral debt relief, it calls for immediate efforts with other bilateral creditors to have them grant at least the same percentage reduction in the debt of eligible countries as the bill requires the United States to provide.

Before closing, we would like to make one additional point, and that is that debt relief is in the United States' own economic interest. Giving a country a fresh start through debt relief can help make it more attractive for U.S. investment and for the expansion of export markets. Without debt relief the financial situation of many countries will become increasingly unstable and prevent their full participation in the global economy.

Our main proposition, however, is that as Americans and fellow human beings we are compelled to act in solidarity with these poor nations. The United States must help them address the causes of poverty, move their economies to a sustainable path of job-creating growth and poverty reduction, and aid in their emergence as self-reliant members of the world community. We believe that H.R. 1095, the Debt Relief for Poverty Reduction Act of 1999, can make a major contribution to accomplishing these objectives, and we hope that you will agree to support this pivotal legislation.