December 22, 2009

Lessons From Timor-Leste: Time To Reform International Financial System?

Unlike nearly any other nation in the underdeveloped world, Timor-Leste has refused to borrow money from the international community.

At this year’s donors meeting in May, the Prime Minister, Mari Alkatiri, spelled out his Government’s position: “We are not ideologically opposed to borrowing money. But we are opposed to unsustainable borrowing”. These are wise words. A paper by the Committee for the Abolition of Third World Debt (CADTM) says that

“Despite the nations of the South having abundant natural and human resources, the burden of debt for larger developing nations has restricted their development, for smaller nations, it has suffocated it altogether. In 2000, the UNDP and UNICEF calculated that $80 billion a year for ten years would be enough to ensure that the entire population of the world had basic services such as decent food, access to drinking-water, primary education and access to basic health care. Yet in 2001 alone, developing countries spent $382 billion on debt repayments.

In general, indebtedness remains one of the biggest barriers to developing countries’ effort to build strong domestic economies and improve the living standards of their citizens.

“For every $1 owed in 1980, developing countries have since repaid $7.50 but still owe $4.

This is a massive transfer of resources from the South to the North that renders international institutions’ talk about “poverty reduction” and achieving “Millennium Development Goals” meaningless.

In addition to the perpetual merry-go-round of debt that developing countries find themselves trapped in there are also some apparent internal contradictions which impact developed nations and which seem incapable of resolution under existing policy settings:

  • The never ending battle by all nations to achieve a balance of payments surplus – despite the fact that by definition half the countries are likely to remain in deficit simply because someone has to import more than they export so that the others can export more than they import. New Zealand and other smaller economies have suffered from this more than most.  
  • As labour-saving technology enables the production of much greater volumes of goods and services with fewer labour hours how will the increased volume of production be consumed unless purchasing power (not directly linked to labour hours) is also increased commensurately?
  • As technology is used to increase productivity and national income it should be possible to reduce – rather than increase - the number of hours worked. France which has adopted a shorter working week is leading the way in productivity growth. Perhaps there are some lessons to be learned from such innovative social policy?

 We should at least have the debate.












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