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Surge and plunge of the Paris Club
The Paris Club has been an informal association of the 19 richest countries since its inception in 1956. Being a political body by birth, it did well for itself for a long time, but then a time comes when all political beings have to make way for others.
For decades, the Paris Club was taken to be as permanent as the Eiffel Tower. When its golden anniversary was celebrated on June 14, several luminaries from the financial market praised the benign role it played for years.
Mr Jean Claude Trichet, President of the European Central Bank, fondly recalled how the club, a "non-institution" that was not bound by treaty, charter or written rules, could achieve so much. Not to be left out, Prof Stanley Fischer, who was associated with the club for years as a senior functionary of the International Monetary Fund, narrated its achievements. He was equally proud that, operating without a written constitution, it had displayed remarkable pragmatism and flexibility in handling a variety of debt problems.
Significantly, the response from the developing countries was muted. A statement issued by the European Network on Debt and Development (EURODAD) and signed by over 40 other civil society organisations, condemned the club as "a cartel of official creditors whose role is to maximise overall returns on their loans."
Stark role change
The stark difference in perception on the role of the Club should not surprise those who have followed the development dialogue in recent decades.
The Club was formed in 1956 during a meeting in Paris of creditor nations for Argentina. Since its formation, it has been an informal club of the 19 richest countries. Though it did not exist formally or was the result of any charter or treaty, it has operated as one of the most powerful organisations. Its decisions have affected the lives of millions of people in poor countries, especially in Latin America and Africa.
Its operations were modest in the late 1950s when the world was relatively untroubled. With a succession of financial crises that engulfed developing countries in later years, its activities accelerated. It dealt with 26 rescheduling from 1956 to 1976. This figure rose to 150 more in the next two decades. Latest data suggest that the club dealt with 402 agreements involving 83 countries, valued at $506 billion. Statistically, it seems impressive.
In its early years, it was obsessed with `moral hazard' and believed that debtors were morally and legally bound to repay all debt on schedule. It would not consider rescheduling or remission of debt. Until late 1980s, the club members and officials were debt collectors.
In later years, this attitude softened for two reasons: One was that basically the club was a political animal and sought to serve the non-economic interests of its owners vis-à-vis client states. And, the other was that, in the background of developments in international economy, the club was getting more involved with other agencies such as the IMF, the World Bank, UNCTAD, the OECD, regional development banks, the London Club and a host of consultancy groups and civil society organisations. By design or chance, the Paris Club forged links with most other agencies and groups and played the role of a mysterious broker. As a bargain, it had to imbibe the changes in debt regime and operational style.
Three sets of actors
Dr Thomas M. Callaghy of the University of Pennsylvania describes how the Club had to contend with three sets of actors: creditor governments and the World Bank; the network of NGOs engaged in normative debates over debt relief; and epistemic community of economists and development theorists who served as consultants for governments on both sides of the debt battle. As he describes, "These three sets of actors have constituted a triple helix of connections, which have led to important yet limited innovation in the way sovereign debt regime functions." (Innovation in the Sovereign Debt Regime: From Paris Club to Enhanced HIPC and Beyond, The Operations Evaluation Department, World Bank, 2004.)
The Club could indeed have gained much from these links. Sadly, it could not for reasons such as its ownership by the richer countries and their overarching concerns to safeguard their own economic interests; the dominance of an economic ideology under the rubric of Washington Consensus calling for structural adjustment policies; and the relative weakness of developing countries in the ongoing negotiations. These led to a situation where the Paris Club became the mask of the Fund and "The IMF became the gatekeeper for the Paris Club."
These led to shifts in the Club's policies. They moved away from its earlier systematic treatment of multilateral debt to concepts of debt sustainability. The concept was never spelt out. In more recent years, as its involvement with the Washington Sisters deepened, the Club's debt management programme focused solely on poverty reduction. As Prof Callaghy says, "The process led to shifting the centre of gravity of debt regime from the Paris Club to the IMF and the World Bank."
In short, in all its programmes, the Club was a creature of the IMF. It was engaged for years in an unduly long and exasperating debate on debt remission brought out by the Highly Indebted Poor Countries (HIPC) Initiative in 1996. Operationally, the relief would not be available unless the country concerned got the clearance from the Fund. Thus, negotiations shifted from Washington to Paris or back and forth. At the end of these, the recipient countries did not get much relief.
What was required was a new developmental or growth oriented policy and not the shuffling of debt to suit the budgets of the donors or the balance-sheets of bankers. There is growing realisation that the policies pursued under the auspices of the Washington prescriptions have caused more misery than growth or poverty reduction. Developing countries have been moving away from the Fund and the Bank, as they are unable to bear the onerous and humiliating conditions imposed on them.
There is thus a significant trend that the IMF itself is getting marginalised and developing countries are moving away from the Fund and repaying their debts in advance. They get their resources from banks or other sources.
In the same process, the Paris Club is also meeting a similar fate. Its role is bound to decline. This fear was echoed in the halls in Paris during the golden jubilee celebrations.
There is another ghost, which is threatening the Club China. With its vast reserves of foreign exchange reserves, China has been pursuing aggressively its programmes of financing in Africa to seek access to oil, mineral and natural resources. It has become the principal investor in countries such as Sudan, Nigeria, Angola, Zambia and Zimbabwe.When the IMF and Western countries were pressing Angola to improve transparency in its oil sector, a loan from China helped Angola meet the challenge.
In Nigeria also, but for the role of China in its oil sector, it is unlikely that the Paris Club would have written off $30 billion of debt.
It is evident that the Paris Club turned its attention to Africa more to contain Chinese expansion than out of genuine humanitarian concerns. This may be said of the much-hyped "Make Poverty History" programmes also.
The fear expressed in the Paris Club meeting was that the new sources of loan from China or Brazil or Venezuela are political. Perhaps. But it would call for more than faith to say that the Paris Club's behaviour was apolitical. It was a political animal by birth and remained so for decades. A time comes in its history when it has to make way for others.
(The author, a former Finance Ministry official, has extensive experience in international, financial and trade issues.)
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