A new report[1] published today by World Development Movement[2] and Jubilee Debt Campaign[3] on climate debt makes the connection between overuse of the world’s resources and unjust financial debt and poverty in the Global South.

The climate debt crisis: Why paying our dues is essential for tackling climate change[4] describes how Western governments and their international financial institutions like the IMF and World Bank have heavily promoted extractive industries including oil and coal as a development strategy. The reality has often been higher levels of debt and increased dependency on fossil fuel extraction to pay off the debt. As the fossil fuels are almost always exported and consumed in developed countries, so it helps maintain traditional “energy security” and the flow of fuel northwards and westwards.

Excerpt from the report[5]:

“Developing countries rich in natural resources have in many cases been lured into taking on huge debts. Governments of poor countries expect large levels of future income from their extractive industries, so they often start to accumulate debts on the basis that they will have plenty of revenues in the future with which to repay them.

Once a country has high levels of debt, it needs to continue to earn enough hard currency to service that debt. In resource-rich countries, this usually means depending more and more on resource extraction. As well as setting conditions to their lending, the World Bank and IMF give ‘policy advice’. For example the World Bank seeks “to facilitate the extractive industries’ contribution to poverty alleviation and economic growth,”45 and has been involved in ‘reforming’ the governance of extractives sectors in more than 100 developing countries.46

Studies have shown a positive correlation between a large extractives sector and the size of a country’s debt, in particular in relation to oil. Research by Oil Change International[6]53 has demonstrated that, as oil wealth increases, so does a country’s debt burden. It found that doubling a country’s annual production of crude oil was predicted to increase the size of its external debt by 43.2 per cent of GDP.54 While large debts may be serviceable during the good times, if the prices of natural resources begin to fall, a government has less money with which to pay back its relatively more expensive debt.

Many oil-rich countries saw a rapid expansion of their debt burdens during the 1970s oil boom. Then, when oil prices fell back in the 1980s, bankers stopped lending to them and many of them fell into arrears, triggering penalty interest charges that made their debts grow even more. This has led to a vicious cycle where, in order to earn hard currency to service ever increasing debts, countries have to depend more on their extractives industries even where these contributed to their debt crisis in the first place. This vicious circle helps to explain why some of the countries richest in natural resources are actually the poorest.

For example, highly oil-dependent Nigeria was one of those countries that saw its debt burdens hugely increase during the 1970s oil boom. The subsequent fall in prices in the 1980s left Nigeria unable to service its debts, triggering penalty interest charges of staggering proportions.

Nigeria borrowed $13.5 billion from Paris Club creditors (a group of nineteen of the world’s wealthy countries) between 1965 and 2003. However, it paid back some $45 billion because of penalties and interest accrued.55 With half of its debt made up of interest on arrears and penalties, in 2005 Nigeria still had $30 billion to repay. A debt relief deal was agreed with the Paris Club, where $18 billion was cancelled, but Nigeria has to repay the remaining $12 billion. The Paris Club and other creditors failed to acknowledge their role in creating unsustainable and unjust debts. There is little to prevent such a build-up reoccurring. “

Endnotes:
  1. new report: http://blog.platformlondon.org/content/%E2%80%9D
  2. World Development Movement: http://www.wdm.org.uk/%E2%80%9D
  3. Jubilee Debt Campaign: http://www.jubileedebtcampaign.org.uk/%E2%80%9D
  4. The climate debt crisis: Why paying our dues is essential for tackling climate change: http://www.wdm.org.uk/climatedebtreport%E2%80%9D
  5.  the report: http://www.wdm.org.uk/sites/default/files/climatedebtcrisis06112009_0.pdf%E2%80%9D
  6. Oil Change International: http://priceofoil.org/%E2%80%9D