tag:theconversation.com,2011:/id/topics/debt-relief-26749/articlesDebt relief – The Conversation2023-09-19T14:47:48Ztag:theconversation.com,2011:article/2134132023-09-19T14:47:48Z2023-09-19T14:47:48ZBankruptcy is spiking among UK borrowers – but there are debt relief options if you are struggling financially<figure><img src="https://images.theconversation.com/files/548392/original/file-20230914-27-46idox.jpg?ixlib=rb-1.1.0&rect=0%2C7%2C4867%2C3561&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">
</span> <span class="attribution"><a class="source" href="https://www.shutterstock.com/image-photo/young-attractive-woman-looking-stressed-worried-1258658701">SB Arts Media/Shutterstock</a></span></figcaption></figure><p>UK households have one of the <a href="https://invezz.com/stocks/debt-countries/">highest debt levels in the world</a>. Steadily increasing in the last two decades, the <a href="https://themoneycharity.org.uk/money-statistics/">average total debt per household</a> (including mortgages) is £65,619 as of August 2023. This is £34,644 per adult, or around 103.5% of average earnings.</p>
<p>As indebtedness has steadily increased over the last two decades, household bankruptcies have quadrupled, reaching around 200,000 filings in 2022. One of the main reasons of this increase is arguably the <a href="https://www.legislation.gov.uk/uksi/2002/1307/made">2002 UK bankruptcy reform</a>, which made it easier for people to file for bankruptcy. </p>
<p><strong>Consumer bankruptcies are rising in the UK</strong></p>
<p>While the use of some types of debt relief agreements have fallen in the year to August 2023, <a href="https://www.gov.uk/government/statistics/monthly-insolvency-statistics-august-2023/commentary-monthly-insolvency-statistics-august-2023#company-and-individual-insolvencies-in-england-and-wales">according to the latest government figures</a>, registrations for the government’s <a href="https://www.theguardian.com/money/2019/jun/19/uks-problem-debtors-to-get-60-day-breathing-space">“breathing space” scheme</a> – which gives debtors 60 days relief from pursuit by creditors – grew by 19% over this time.</p>
<p>The <a href="https://www.bbc.co.uk/news/topics/cljev4jz3pjt">cost of living crisis</a> is probably one of the main reasons for this spike in bankruptcy figures. Families across the country have been struggling to keep up with the rising price of essential goods and <a href="https://www.bankofengland.co.uk/boeapps/database/Bank-Rate.asp">increased borrowing rates</a> since mid-2021. At the end of last year, UK pay adjusted for inflation also <a href="https://www.theguardian.com/business/2023/jan/17/real-terms-uk-pay-fell-fastest-20-years#:%7E:text=7%20months%20old-,Real%2Dterms%20UK%20pay%20fell%20at%20fastest%20rates%20for,years%20at%20end%20of%202022&text=Average%20real%2Dterms%20pay%20in,the%20cost%20of%20living%20crisis.">fell at the fastest rate</a> in 20 years.</p>
<p>Other factors can also trigger bankruptcy, however. Our <a href="https://onlinelibrary.wiley.com/doi/10.1002/ijfe.2859">recent study</a> highlights two main reasons. First, we found that people tend to go bankrupt strategically – if they can financially benefit from it. This often happens when a person’s debt is far greater than the assets they have to liquidate (or sell) as part of the bankruptcy. </p>
<p>Second, adverse life events such as divorce, serious health problems or sudden unemployment can cause financial distress. This often takes the form of loss of income and further borrowing. This affects people’s ability to repay their debt, eventually leading to bankruptcy.</p>
<h2>The options when struggling with debt</h2>
<p>Filing for bankruptcy is a formal process for cancelling your debts (also known as discharging, or <a href="https://aib.gov.uk/bankruptcy">sequestration</a> in Scotland) if you are having trouble making repayments. Consumer organisations such as <a href="https://www.citizensadvice.org.uk/debt-and-money/debt-solutions/bankruptcy/before-you-go-bankrupt/check-if-going-bankrupt-is-right-for-you/">Citizens Advice</a> in the UK can provide information to help you decide if bankruptcy is the right choice for you.</p>
<p>If you do decide to declare <a href="https://www.citizensadvice.org.uk/debt-and-money/debt-solutions/bankruptcy/">bankruptcy</a>, a court issues a bankruptcy order after an application by you or one of the people you owe money to (your creditors, for example a bank or a supplier if you are a business). Full discharge from debt usually happens 12 months after a bankruptcy order is granted.</p>
<p>But bankruptcy isn’t the only option if you’re struggling financially. A <a href="https://www.citizensadvice.org.uk/debt-and-money/debt-solutions/debt-relief-orders/">debt relief order</a> (DRO) is a simpler, faster process for people with low income, fewer assets and debts of less than £30,000. When a DRO ends, typically after 12 months, most of your debts will be written off but some types aren’t covered. So, it’s important to <a href="https://www.citizensadvice.org.uk/debt-and-money/debt-solutions/bankruptcy/how-bankruptcy-affects-you/check-which-debts-bankruptcy-covers/">check what types are included</a> under this arrangement. </p>
<p>Alternatively, you could enter into an <a href="https://www.citizensadvice.org.uk/debt-and-money/debt-solutions/individual-voluntary-arrangements-ivas/">individual voluntary arrangement</a> (IVA), which is a contract with your creditors. There is no maximum limit to the amount of debt that can be included in an IVA but at least 75% of your creditors have to agree to the plan. An <a href="https://www.citizensadvice.org.uk/debt-and-money/debt-solutions/administration-orders/">administration order</a> (AO) is a simpler version of this for people with debts of less than £5,000. In Scotland, a <a href="https://aib.gov.uk/protected-trust-deed">protected trust deed</a> (PTD) provides the same kind of agreement.</p>
<p>Under IVAs, AOs and PTDs, you agree to repay your debt based on a new repayment plan negotiated by an independent professional called an insolvency practitioner. The plan is approved by the court and your creditors have to stick to it too. The renegotiated repayments are usually made in the form of a single monthly payment or a one-off lump sum. </p>
<p>And during your repayment plan you cannot take out new credit without a written permission from your insolvency practitioner. Bankruptcy proceedings are shown in your <a href="https://www.citizensadvice.org.uk/debt-and-money/debt-solutions/bankruptcy/after-you-go-bankrupt/discharge-from-bankruptcy/">credit report for 6 years</a> and new lenders will be able to see that.</p>
<p>A <a href="https://www.citizensadvice.org.uk/debt-and-money/debt-solutions/debt-management-plans/">debt management plan</a> is a fourth option for people struggling financially. It is an agreement with creditors to stick to a new repayment plan, negotiated by a licensed debt management company. Unlike the other options, debt management plans are not legally binding, so any or all of your creditors don’t have to agree on a plan and they can chase you for repayments individually. This is known as <a href="https://aib.gov.uk/debt-arrangement-scheme">debt arrangement scheme (DAS)</a> in Scotland.</p>
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<img alt="Two women with a pad, paper, laptop and mugs at kitchen table." src="https://images.theconversation.com/files/548394/original/file-20230914-22-2polpx.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/548394/original/file-20230914-22-2polpx.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/548394/original/file-20230914-22-2polpx.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/548394/original/file-20230914-22-2polpx.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/548394/original/file-20230914-22-2polpx.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/548394/original/file-20230914-22-2polpx.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/548394/original/file-20230914-22-2polpx.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
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<span class="caption">A little breathing space can give you time to work out a plan for your finances.</span>
<span class="attribution"><a class="source" href="https://www.shutterstock.com/image-photo/woman-helping-her-same-sex-partner-2048169593">bbernard/Shutterstock</a></span>
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<h2>Getting some breathing space</h2>
<p>The UK government launched its <a href="https://www.gov.uk/options-for-dealing-with-your-debts/breathing-space">breathing space</a> scheme in May 2021. And it has clearly been useful for struggling individuals in the midst of the cost of living crisis – registrations <a href="https://www.gov.uk/government/statistics/monthly-insolvency-statistics-july-2023">increased by 28%</a> in the year to July 2023.</p>
<p>It allows you to seek legal protection from pursuit by your creditors for 60 days. During this period, most interest and penalty charges are frozen, enforcement action is halted and your creditors cannot contact you about your debts. But you still need to make your repayments.</p>
<p>A version of the scheme is also offered to individuals who are getting <a href="https://www.gov.uk/government/publications/debt-respite-scheme-breathing-space-guidance/debt-respite-scheme-breathing-space-guidance-for-creditors#:%7E:text=on%20their%20debts.-,Mental%20health%20crisis%20breathing%20space,-A%20mental%20health">mental health crisis treatment</a>. The protection from creditors is for the length of treatment plus 30 days. </p>
<p>Breathing space is a temporary protection and could be a helpful first step to give you some time to plan your finances, but what about after that? <a href="https://onlinelibrary.wiley.com/doi/10.1002/ijfe.2859">Our research shows</a> bankrupt individuals face difficulties borrowing again after bankruptcy. </p>
<p>If you completely discharge your debt, the impact on your borrowing ability is dramatic and swift but short lived – a year on average. But for debt restructuring, future borrowing limitations can last as long as three years.</p>
<p>That’s why it’s important to carefully consider your options if you can’t manage your debt commitments to make sure you find the best fit for your financial situation.</p><img src="https://counter.theconversation.com/content/213413/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>The authors do not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and have disclosed no relevant affiliations beyond their academic appointment.</span></em></p>The cost of living crisis is affecting UK households, but there are options to consider if you’re having problems repaying debt such as mortgages and credit cards.Alper Kara, Professor of Banking and Finance, Brunel University LondonAtilla Gumus, Senior Lecturer in Financial Economics, Nottingham Trent UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/2004902023-02-23T12:35:41Z2023-02-23T12:35:41ZSouth Africa’s bailout of Eskom won’t end power cuts: splitting up the utility can, as other countries have shown<figure><img src="https://images.theconversation.com/files/511919/original/file-20230223-2271-xuao0x.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">
</span> <span class="attribution"><span class="source">AFP via Getty Images</span></span></figcaption></figure><p>The announcement by the South African finance minister, Enoch Godongwana, of <a href="https://www.treasury.gov.za/documents/National%20Budget/2023/review/Annexure%20W3.pdf">debt relief</a> for the country’s troubled power utility, <a href="https://www.eskom.co.za/">Eskom</a>, is a step forward. It will fix one problem: Eskom has too much debt. But the plan won’t end power cuts which <a href="https://www.treasury.gov.za/documents/national%20budget/2023/speech/speech.pdf#page=9">have worsened in recent years</a>. </p>
<p>The international experience is that one way to end electricity shortages is to allow competitively-priced privately-funded generation at scale. This requires a reorganisation of South Africa’s electricity market <a href="https://www.gov.za/sites/default/files/gcis_document/201910/roadmap-eskom.pdf">along the lines announced</a> by the Department of Public Enterprises nearly four years ago. The crux of the plan was to split Eskom into three separate units – generation, transmission and distribution, with transmission remaining state-owned.</p>
<p>With the <a href="https://www.treasury.gov.za/documents/national%20budget/2023/speech/speech.pdf#page=10">announced conditions</a>, which include the requirement that Eskom prioritise capital expenditure in transmission and distribution during the debt-relief period, the finance minister has missed an opportunity to finally achieve this.</p>
<h2>What we can learn from other countries</h2>
<p>Other countries that have had power cuts offer South Africa lessons. China, for example, faced <a href="https://www.theguardian.com/world/2003/dec/05/china.jonathanwatts">rolling blackouts</a> between 2003 and 2006 because of <a href="https://journals.openedition.org/chinaperspectives/2783">an unexpected growth spurt</a>. In 2015, <a href="https://greekreporter.com/2015/04/28/nationwide-blackout-in-greek-tv-this-morning/">Greece</a> was in the middle of a financial crisis and its people could not afford the electricity supply, some of which came through a complex deal with Russia. And in <a href="https://apnews.com/article/911b4884559dc01ae604ce187c39c9ba">Colombia</a>, a drought in 1992 caused the main source of electricity supply – which came from a hydroelectric plant – to literally dry up.</p>
<p>All these countries experienced power cuts. But South Africa is the only country to have had <a href="https://theconversation.com/power-cuts-in-south-africa-are-playing-havoc-with-the-countrys-water-system-197952">power shortages for 15 years</a>. This is because the others moved quickly to rejig their electricity supply systems. </p>
<p>All three countries followed a similar route, as have many others. They untangled their single electricity companies, focusing on keeping parts of it under state control and opening up the rest to a mix of state and private companies.</p>
<h2>Complex to manage</h2>
<p>The electricity supply system has three parts. First is generation – generating electricity at a power plant. Second is transmission – moving it from the power plant to the municipality, usually on a high voltage line. Finally, distribution is about getting it the last few metres to a house or factory.</p>
<p>High-voltage transmission is what economists call a “natural monopoly”. It is more efficient if there is a single electricity grid for an area, rather than multiple grids. This part is best managed by a central body – in many countries a state-owned company. Because the transmission business can recover costs, it can use that income to increase transmission capacity, <a href="https://www.engineeringnews.co.za/article/only-six-solar-projects-advance-to-preferred-bidder-status-following-latest-renewables-round-2022-12-08/rep_id:4136">something that is urgently needed</a>. </p>
<p>But China, Colombia and Greece all recognised that generation no longer needs to be a monopoly. Actually a monopoly in generation is bad for all the same reasons that all monopolies are bad. They typically charge more and produce less. You need a complicated regulatory system to get their prices right. Smaller generation companies are easier to manage.</p>
<p>Distribution is best left to a company as close to the end user as possible – in almost all countries, that is the municipality. In South Africa, it is a mix. For example, <a href="https://www.citypower.co.za/Pages/default.aspx">City Power</a> distributes electricity to customers in older parts of Johannesburg. But Eskom distributes electricity direct in outlying parts of the metros. </p>
<p>This means that Eskom has to do everything: generate electricity, transmit it on large power lines to the cities and then distribute it to individual customers. It is a “vertical monopoly”. This makes it a fiendishly complex company to manage. Very few countries have such an arrangement – most prefer to allow specialist businesses in each part of the system.</p>
<h2>Lessons for South Africa</h2>
<p>Here’s what happened when generation was untangled from the rest of the state-owned monopoly in China. Between 2003 and 2006, <a href="https://www.powermag.com/china-wrestles-with-power-shortages/">new generation companies</a> added over 237,500 MW to the Chinese grid. That’s the equivalent of delivering nearly 10 Eskoms in three years.</p>
<p>In 2019, the Department of Public Enterprises <a href="https://www.gov.za/sites/default/files/gcis_document/201910/roadmap-eskom.pdf">published a detailed and clear roadmap</a> to follow this route, separating Eskom into generation, transmission and distribution. Internally, <a href="https://www.eskom.co.za/eskom-divisions/">Eskom is already structured that way</a>. On 17 December 2021, the legally binding merger agreement was executed to transfer transmission to the <a href="https://www.eskom.co.za/medium-term-budget-policy-statement-unbundling-of-transmission-division/">National Transmission Company South Africa SOC Limited</a>.</p>
<p>But the very last step has not been taken, despite being <a href="https://www.energy.gov.za/files/policies/whitepaper_energypolicy_1998.pdf">government policy since 1998</a>. Every time the proposed separation comes closer to happening, there has been fierce resistance <a href="https://www.gtac.gov.za/wp-content/uploads/2022/02/Why-Lights-Went-Out-Politics-Institutions-and-Electricity-Reform.pdf">from both unions and Eskom management</a>. In 2018, it was because of loadshedding. During the years when there was no loadshedding and plants were being run too hard, it was because it was not urgent. And since the current electricity crisis, it is because there is loadshedding and Eskom <a href="https://www.engineeringnews.co.za/article/south-africa-transmission-firm-seen-hobbled-by-eskom-millstone-2022-06-21">is not financially viable</a>. But it is precisely because Eskom is in financial distress that the separation needs to be accelerated.</p>
<p>In 2023, two things make it possible to do the separation very quickly.</p>
<p>The first is <a href="https://www.eskom.co.za/resignation-of-eskom-group-chief-executive/">a new CEO</a>. If the government is serious about the separation, as it has regularly said it is, it doesn’t make sense to appoint a single new CEO. Separate CEOs should be appointed for the National Transmission Company and for the other businesses. An independent board of directors for the transmission company should also be appointed.</p>
<p>The second is a technical issue related to Eskom’s debt. At the moment, Eskom as a whole is liable for the Eskom debt. The debt holders need to consent to any change in the legal structure.</p>
<p>The national treasury has announced that approximately <a href="https://www.treasury.gov.za/legislation/bills/2023/%5BB5-2023%5D%20(Eskom%20Debt%20Relief).pdf">R254 billion (about US$14 billion) of Eskom debt</a> will be transferred to the national balance sheet in tranches over the next three years. Debt holders can be asked to approve the transfer of debt and the final piece of the restructuring at the same time. The legal and technical work has all been done – the National Transmission Company exists, and it just needs life and capital. It would have been far better to use the R254 billion (about US$14 billion) to help capitalise this critical new company.</p>
<p>Most debt holders will jump at the chance – certainty on the long promised new structure as it will go a long way to fix energy problems in the country. Also, it will improve the chances that debt holders will get their interest payments on the debt that isn’t transferred.</p>
<p>Unfortunately, <a href="https://www.treasury.gov.za/documents/National%20Budget/2023/review/Annexure%20W3.pdf#page=4">the conditions</a> that the national treasury has announced do not include the final unbundling. There is still an opportunity – the government’s conditions still have to be finalised. Eskom’s unbundling is one of the priorities of <a href="https://www.stateofthenation.gov.za/operation-vulindlela/electricity-sector">Operation Vulindlela</a>, a joint initiative of the presidency and national treasury aimed at accelerating structural reforms and measures that can support economic recovery.</p>
<p>Hopefully the government will learn from the international experience and use the R254 billion (about US$14 billion) to fundamentally fix the problem of a vertically integrated, inefficient and ineffective monopoly. And with that, end power cuts.</p><img src="https://counter.theconversation.com/content/200490/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Roy Havemann is at the Western Cape Treasury and was previously at National Treasury, He writes in his personal capacity. </span></em></p>South Africa’s minister of finance should have used the bailout of Eskom to fast-track its split and introduce the private sector into the electricity sector.Roy Havemann, Research Associate, Stellenbosch UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1895702022-08-31T10:05:09Z2022-08-31T10:05:09ZChina has waived the debt of some African countries. But it’s not about refinancing<figure><img src="https://images.theconversation.com/files/481575/original/file-20220829-22-ljs9ny.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Chinese president Xi Jinping addressing the China-Africa Summit via a video link from Beijing on 17 June 2020. </span> <span class="attribution"><a class="source" href="https://www.gettyimages.com/detail/news-photo/june-17-2020-chinese-president-xi-jinping-chairs-the-news-photo/1220782532?adppopup=true">Huang Jingwen/Xinhua via Getty Images</a></span></figcaption></figure><p>In mid-August, China’s Ministry of Foreign Affairs surprised the world with a <a href="https://twitter.com/Chinamission2un/status/1560394350361776130?ref_src=twsrc%5Etfw%7Ctwcamp%5Etweetembed%7Ctwterm%5E1560394569446989828%7Ctwgr%5E27018487452d760cb02bb7c5e6fe673a0923a51c%7Ctwcon%5Es2_&ref_url=https%3A%2F%2Fmultipolarista.com%2F2022%2F08%2F20%2Fchina-forgives-debt-africa%2F">series of announcements</a>. Wang Yi, Beijing’s most senior diplomat, promised extensive debt relief for some of the world’s poorest countries. The announcement was made at the ministerial meeting of the <a href="https://www.econstor.eu/bitstream/10419/248242/1/sais-cari-bp01.pdf">Forum for China Africa Cooperation</a>. </p>
<p>In addition to increasing food assistance to the continent, Wang committed to <a href="https://www.voanews.com/a/china-cancels-23-loans-to-africa-amid-debt-trap-debate-/6716397.html">no longer demanding repayment</a> of concessional loans that in the recent past had reached maturity, but which 17 African states had failed to pay off. </p>
<p>Outstanding balances on loans mostly extended by China’s Ministry of Commerce (or, less frequently, The Export-Import Bank of China) are thus slated to be <a href="https://www.pinsentmasons.com/out-law/news/china-to-forgive-23-belt-and-road-loans-to-17-african-countries">cancelled</a>.</p>
<p>Details about beneficiaries and credit lines are still to be released. But from an African standpoint this was welcome – if somewhat expected – news. </p>
<p>Wang’s proclamation was timely in light of the <a href="https://sdgpulse.unctad.org/debt-sustainability/">growing sense of a looming debt crisis</a> that threatens many developing countries. This includes a number on the African continent. Combined private and public external debt of African states more than quintupled between 2000 and 2020. Chinese public and private lenders <a href="https://www.reuters.com/world/africa/african-states-private-debts-three-times-that-owed-china-2022-07-11/">accounted</a> for 12% of the continent’s US$696 billion external debts in 2020. </p>
<p>The continent’s <a href="https://www.brookings.edu/wp-content/uploads/2019/04/africa_sovereign_debt_sustainability.pdf">average debt-to-GDP ratios exceeded 50%</a> prior to the pandemic. The most recent Africa Economic Outlook from the African Development Bank expects Africa’s <a href="https://www.afdb.org/en/documents/african-economic-outlook-2022">debt-to-GDP ratio to be 70% this year</a>. As of February 2022, 23 African countries were either in debt distress or at risk of it. </p>
<p>The recent economic meltdown and toppling of the <a href="https://www.nytimes.com/2022/05/14/world/asia/sri-lanka-rajapaksa.html">Rajapaksa family regime in Sri Lanka</a> rattled countries from Ghana to South Africa. The events stoked fears that panicked markets might question the solvency of African sovereigns next. </p>
<p>Ghana and South Africa are particularly worried about a vicious cycle of downgrades by the rating agencies, and rising trade imbalances. Other fears include worsening pressures on domestic currencies and chances of bondholders seeking to exit African markets. These would accelerate financial instability.</p>
<p>Africa will take whatever relief it can get under such circumstances.</p>
<p>The last time China forgave debt in Africa, at the end of 2020, it wrote off <a href="http://www.sais-cari.org/debt-relief">US$113 million</a> for various countries. This points to the need not to overstate the debt forgiveness.</p>
<h2>Geopolitics</h2>
<p>Beijing’s announcement was largely already priced into the strategy of many African central banks. Chinese interest-free loans are frequently cancelled. And it’s widely understood that when China extends such credit lines, they are rarely ever fully paid back. </p>
<p>Beijing certainly was not counting on the likes of Burundi, Congo or Mozambique to service these debts. And it has <a href="https://nairametrics.com/wp-content/uploads/2020/06/WP-39-Acker-Brautigam-Huang-Debt-Relief-2.pdf">regularly rescheduled loans to African sovereigns</a> worth billions in the last 20 years. </p>
<p>In addition, the impact of China’s latest move on Africa’s overall debt profile is likely to be limited. Beijing’s gesture will not reduce the increase in sovereign yields (interest on bonds). It will also not ease the downward pressure on exchange rates that so many African states have been <a href="https://www.economist.com/middle-east-and-africa/2022/04/30/debt-repayment-costs-are-rising-fast-for-many-african-countries">experiencing in the last year</a>.</p>
<p>This does not mean, however, that Wang Yi’s vows were not newsworthy. For some individual countries, this round of Chinese cancellations might have an impact. Most of Africa’s debts to China are owed by five states – Angola, Ethiopia, Kenya, Nigeria and Zambia. Any scrapping of outstanding balances could usefully help rebalance their liabilities away from an overdependence on Beijing.</p>
<p>For Africa’s very poorest countries – say, Madagascar or Niger – cancellations of even US$50 million would make a meaningful difference to their ability to pay for basic services. </p>
<p>But on the whole, the political significance of the latest developments is likely to be greater than their financial impact. </p>
<p>This is poignantly illustrated by the fact that Beijing’s debt relief proposals were accompanied by much fanfare, contrary to previous cancellations. This reflects the pressure China feels it is under in the <a href="https://www.econstor.eu/bitstream/10419/222271/1/1702649938.pdf#page=42">international debt debate</a>. </p>
<p>The Trump administration accused China of ensnarling developing countries by extending credit to debtors Beijing knows lack the solvency to pay it back. As (former) US vice-president Mike Pence <a href="https://trumpwhitehouse.archives.gov/briefings-statements/remarks-vice-president-pence-administrations-policy-toward-china/">put it</a> in 2018</p>
<blockquote>
<p>China uses so-called ‘debt diplomacy’ to expand its influence … offering hundreds of billions of dollars in infrastructure loans to governments from Asia to Africa to Europe and even Latin America.</p>
</blockquote>
<p>Such “debt traps” are deliberately being created so China can force poor African states to vote with it in the UN General Assembly, support its positions on Taiwan or acquire valuable real estate in Africa that can be converted into military bases. Or so the narrative goes. </p>
<p>The Biden administration has been less direct in its allegations of Chinese debt trap diplomacy. But it too has put Beijing on the defensive by accusing it of <a href="https://www.voanews.com/a/archive_yellen-says-concerned-debt-relief-could-aid-chinese-lenders/6206878.html">holding African states over a barrel through its creditor power</a>.</p>
<p>In addition, <a href="https://blogs.lse.ac.uk/africaatlse/2022/08/01/how-the-us-china-rivalry-is-undermining-efforts-to-address-africas-debt/">flagship initiatives of the World Bank and the International Monetary Fund</a> have been strongly shaped by allegations about <a href="https://www.heritage.org/global-politics/report/chinese-corruption-africa-undermines-beijings-rhetoric-about-friendship-the">China’s encouragement of parallel public finance accounting</a> and its <a href="https://www.piie.com/sites/default/files/documents/pb21-10.pdf">reluctance to accept Paris Club conventions</a> for facilitating debt restructurings. </p>
<p>Despite the fact that African liabilities to private creditors – especially bondholders – have <a href="https://www.tandfonline.com/doi/full/10.1080/00396338.2022.2078054">grown much more rapidly</a> in the last decade than debts owed to Beijing, the international perception is one of singular Chinese intransigence in helping to resolve Africa’s resurgent indebtedness.</p>
<h2>Beijing tries to push back</h2>
<p>China’s public relations problem thus has real world consequences and leaves it in a quandary. Although Foreign Minister Wang <a href="https://www.fmprc.gov.cn/eng/zxxx_662805/202208/t20220819_10745617.html">condemned</a> a “zero-sum Cold War mentality” in his comments accompanying the promised debt relief for 17 African countries, his rebuttal too was clearly intended to score some geopolitical gains.</p>
<p>His desire to manoeuvre China out of the defensive position it finds itself in has also been evident in Beijing’s <a href="https://www.wsj.com/articles/zambia-restructuring-offers-clues-on-chinas-willingness-to-ease-debts-of-poor-countries-11659198874">recent concessions to help recurrent defaulter Zambia</a> restructure its liabilities. Chinese concessions played a key role in reaching a <a href="https://worldview.stratfor.com/article/what-zambian-debt-talks-could-mean-chinese-borrowers-africa">debt agreement for Zambia</a> that potentially sets a precedent for how Beijing could work with other lenders on similar assistance for other countries. The Zambian deal was done under the <a href="https://www.imf.org/en/About/FAQ/sovereign-debt#Section%205">G20 Common Framework for Debt Treatments</a>, which also requires an International Monetary Fund programme to receive effective relief. </p>
<p>This mix of concessions and pushback is contextualised by the fact that the sense of inevitable Chinese ascendancy that in the last decades accompanied Beijing’s overtures on the continent has somewhat faded in recent years. The scaling down of the ambitions of Xi Jinping’s Belt and Road Initiative (including <a href="https://www.scmp.com/news/china/diplomacy/article/3163576/end-line-chinas-big-belt-and-road-funding-africa">much reduced credit lines for African states</a> as Beijing prioritises domestic objectives) has perplexed many on the continent. So did the <a href="https://chinaglobalsouth.com/2021/12/01/surprise-that-china-did-not-commit-more-of-its-imf-special-drawing-rights-allocation-to-africa/">earlier decision</a> to only allocate to Africa US$10 billion in special drawing rights through the International Monetary Fund, while China has little obvious use for its quota of US$38 billion.</p>
<h2>Ignoring African priorities</h2>
<p>Wang Yi’s announced cancellation of loan balances that were unlikely to be serviced in full anyway therefore appears at this moment to be a low-cost political move for China to reaffirm its deep ties with African sovereigns and emphasise mutual goodwill. In the short term, that might be the case. </p>
<p>But fundamentally, Beijing’s decision does little to alter Africa’s growing indebtedness. Amid geopolitical posturing by China and the US, there is still little sign that global powers or the international financial institutions will finally tackle the <a href="https://www.tandfonline.com/doi/full/10.1080/00396338.2022.2078054">systemic drivers of the resurgence in African debt</a>. In that sense, China’s recent announcement is, unfortunately, business as usual.</p><img src="https://counter.theconversation.com/content/189570/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Harry Verhoeven does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>The latest cancellation reflects the pressure China feels it’s under in the international debt debate.Harry Verhoeven, Senior Research Scholar at the Center on Global Energy Policy, Columbia UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1652982021-08-11T12:29:32Z2021-08-11T12:29:32ZCredit ratings are punishing poorer countries for investing more in health care during the pandemic<figure><img src="https://images.theconversation.com/files/415530/original/file-20210810-19-178x8bn.jpg?ixlib=rb-1.1.0&rect=175%2C146%2C4607%2C3105&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Morocco wanted to spend more on health care. As a result, its credit rating was cut. </span> <span class="attribution"><a class="source" href="https://newsroom.ap.org/detail/VirusOutbreakMoroccoVaccination/14a66c3698cb4f118b52942707c17d6a/photo?Query=Morocco%20covid-19&mediaType=photo&sortBy=arrivaldatetime:desc&dateRange=Anytime&totalCount=210&currentItemNo=53">AP Photo/Abdeljalil Bounhar</a></span></figcaption></figure><p>Economic recovery from the COVID-19 pandemic <a href="https://www.un.org/development/desa/dspd/2020/07/recovering-from-covid19/">depends on sustained investment</a> in health care and social services. But while rich countries like the U.S. <a href="https://www.imf.org/en/Topics/imf-and-covid19/Fiscal-Policies-Database-in-Response-to-COVID-19">can borrow and spend relatively easily</a>, low-income nations face a major obstacle: their credit ratings. </p>
<p>A credit rating, like a credit score, <a href="https://theconversation.com/why-credit-ratings-matter-and-why-they-cant-be-ignored-69361">is an assessment of the ability of a borrower</a> – whether it’s a company or a government – to repay its debts. Lower credit ratings drive up the cost of borrowing.</p>
<p>This threat prompted <a href="https://group30.org/publications/detail/4799">some poorer countries to avoid tapping investors</a> for vital financing during the pandemic, while other governments that made plans to spend more on public services <a href="https://www.reuters.com/article/us-ratings-sovereign-idUKKBN2B92OY">were hit with credit ratings downgrades</a> from private companies. </p>
<p>My <a href="https://sase.confex.com/sase/2021/meetingapp.cgi/Paper/17513">forthcoming research</a> shows that when credit ratings fall, countries tend to spend less on health care. This should be a cause for concern as the delta variant of the coronavirus <a href="https://coronavirus.jhu.edu/map.html">drives up case counts across the world</a>. </p>
<h2>Punished for health care spending</h2>
<p>A wide gap has emerged between rich and poor countries in terms of how much they are spending to fight the coronavirus’s impact and shore up their health care infrastructure. </p>
<p>Governments in rich countries <a href="https://www.brookings.edu/opinions/how-to-balance-debt-and-development/">have provided trillions of dollars</a> in direct and indirect support for their economies, on average about 24% of their gross domestic product. Developing economies, on the other hand, have been able to spend only a tiny fraction of that, an average of about 2% of their GDP. </p>
<p>Recent research found that a country’s credit rating <a href="https://www.nber.org/papers/w27461">was the largest factor</a> in how much a government spent on COVID-19 relief. That is, the lower a country’s rating, the less it was able to spend on health care and other social services. </p>
<p>For instance, Ivory Coast and Benin are the only two countries in sub-Saharan Africa that <a href="https://www.brookings.edu/opinions/how-to-balance-debt-and-development/">have been able to borrow in international markets</a> since the pandemic began. Others chose not to borrow, at least in part, it seems, <a href="https://group30.org/images/uploads/publications/G30_Sovereign_Debt_and_Financing_for_Recovery_after_the_COVID-19_Shock-_Preliminary_Report_1.pdf">out of fear of the ratings downgrades</a> that might result. This has prevented them from financing much-needed spending. </p>
<p>The fear is justified. Countries that planned to increase spending, such as Morocco and Ethiopia, were punished for it. Morocco’s credit rating, for example, was downgraded to speculative grade, or “junk,” by <a href="https://www.reuters.com/article/morocco-rating-fitch-idUSL8N2HE5YL">Fitch</a> and <a href="https://www.bloomberg.com/news/articles/2021-04-02/morocco-cut-to-junk-by-s-p-kn0qnt09">Standard & Poor’s</a> because of its plan to spend more on social services. <a href="https://www.worldbank.org/en/news/feature/2016/08/17/analysis-how-do-credit-downgrades-affect-short-term-government-borrowing">The ratings cuts will make it much harder</a>, and more expensive, for it to borrow from international investors.</p>
<p>And Moody’s Investors Service <a href="https://www.reuters.com/article/ethiopia-bonds/update-1-moodys-downgrade-over-g20-common-framework-hits-ethiopian-bonds-idUSL5N2N52KD">slashed Ethiopia’s credit rating</a> after the country sought debt relief from a <a href="https://www.imf.org/en/About/FAQ/sovereign-debt#Section%205">new Group of 20 program</a> so that it <a href="https://www.bloomberg.com/news/articles/2021-07-07/ethiopia-in-negotiations-to-restructure-1-billion-more-of-debt-kqte6iuj?sref=Hjm5biAW">could spend more on supporting</a> its economy and citizens.</p>
<p>Overall, despite spending far less during the pandemic, poorer countries <a href="https://www.reuters.com/article/us-ratings-sovereign-idUKKBN2B92OY">were much more likely than wealthier ones to see their credit ratings cut</a> by Fitch, Standard & Poor’s and Moody’s – the three biggest private credit rating agencies. </p>
<p>Low-income countries are therefore forced to choose between keeping their credit ratings stable and undertaking critical social services spending. </p>
<p>In my own research, which is currently under peer review, I looked at ratings changes across a group of 140 countries from 2000 to 2018. I found that downgrades in credit ratings lowered public spending on health care. </p>
<h2>The IMF’s rating system</h2>
<p>Even the International Monetary Fund, which is the main global agency that oversees development finance, uses a rating system that tends to penalize governments for any increase in public spending. That includes spending invested in their health care systems. </p>
<p>The IMF evaluates the creditworthiness of countries through a system it calls its <a href="https://www.imf.org/en/About/Factsheets/Sheets/2016/08/01/16/39/Debt-Sustainability-Framework-for-Low-Income-Countries">debt sustainability framework</a>. Countries are classified into three levels of “<a href="https://www.imf.org/en/About/Factsheets/Sheets/2016/08/01/16/39/Debt-Sustainability-Framework-for-Low-Income-Countries">credit capacity</a>” - strong, medium or weak. </p>
<p>Weak countries are deemed to have a low ability to handle additional debt based on their current levels of indebtedness. No distinction is made <a href="https://www.brettonwoodsproject.org/2017/12/debt-sustainability-review-tinkering-around-edges-crises-loom/">between debt</a> that was a result of important long-term investments in social services like health and education and debt incurred by more wasteful spending. Countries are then required by the IMF to improve their ratings as a condition of aid, such as by putting the focus on debt repayment, short-term economic objectives and across-the-board spending cuts. </p>
<p>An op-ed in The Lancet <a href="https://doi.org/10.1016/S2214-109X(14)70377-8">blamed similar IMF-induced austerity</a> in the early 2000s for a reduction in health care spending in Guinea, Liberia and Sierra Leone, leaving them susceptible to the Ebola crisis in 2014. The three were the <a href="https://www.theguardian.com/world/2021/jun/19/guinea-ebola-outbreak-declared-over-by-who">worst-affected countries</a> in an epidemic that lasted two years and led to over <a href="https://www.cdc.gov/vhf/ebola/history/2014-2016-outbreak/index.html">11,000 deaths</a>. </p>
<h2>Ratings reform</h2>
<p>The IMF recently announced a <a href="https://www.nytimes.com/2021/07/09/us/politics/g20-imf-vaccines.html">plan to issue US$650 billion</a> in reserve funds that low-income countries can use to buy vaccines and expand health care. While that should help more countries not to have to choose between credit ratings and the well-being of their citizens during the pandemic, it’s only a short-term fix.</p>
<p>A recent United Nations report <a href="https://undocs.org/A/HRC/46/29">urged reform of how private credit ratings agencies are regulated</a>, arguing they lack accountability and make it hard for poor countries to fulfill their human rights obligations. A proposal to put a moratorium on the sovereign credit ratings of debt-burdened countries during crises <a href="https://www.reuters.com/article/us-emerging-debt-ratings/credit-downgrade-buffer-proposed-for-poor-nations-seeking-debt-help-study-idUSKCN2DG0US">would also help provide a buffer</a>. </p>
<p>Permanent changes in how the IMF and private credit ratings agencies evaluate debt, however, may be needed so that they’re not penalizing countries for making important investments in health care and other public services. That would help countries can build their health care infrastructure so that they aren’t caught off guard by the next pandemic.</p>
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<p class="fine-print"><em><span>Ramya Devan does not work for, consult, own shares in or receive funding from any company or organization that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Low-income countries that sought to spend more on health care during the pandemic have been hit with ratings downgrades, while others avoided borrowing entirely.Ramya Devan, Professor of Economics, Stockton UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1587592021-04-26T16:45:37Z2021-04-26T16:45:37ZCaribbean food security during COVID-19 can only be ensured through debt relief<figure><img src="https://images.theconversation.com/files/394870/original/file-20210413-19-1lw8ac8.jpg?ixlib=rb-1.1.0&rect=30%2C97%2C3959%2C2594&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">People visit fruit section of a grocery store on Guadeloupe, an island group in the southern Caribbean Sea.</span> <span class="attribution"><span class="source">(Shutterstock)</span></span></figcaption></figure><p>The pandemic and global trade disruptions have highlighted the growing vulnerability of Caribbean states when it comes to importing food items. Annually, <a href="https://caricom.org/believe-in-agriculture-rallying-call-at-cwa-2013-opening/">Caribbean states import food items valued at nearly US$5 billion for food security</a>. </p>
<p>International border closures to curb the spread of COVID-19 meant restricted access to these <a href="https://www.wfp.org/publications/caribbean-covid-19-food-security-livelihoods-impact-survey-round-1">imported food items which make up more than 80 per cent of the region’s food system</a>.</p>
<p>A <a href="https://www.wfp.org/publications/caribbean-covid-19-food-security-livelihoods-impact-survey-round-1">household survey</a> commissioned by Caribbean governments in April 2020 to explore the impact of the pandemic on regional food security revealed that global border closures increased barriers to food security by augmenting food prices and decreasing income and employment levels. The <a href="https://www.wfp.org/publications/caribbean-covid-19-food-security-livelihoods-impact-survey-round-1">survey data</a> also revealed that more than half of all respondents experienced income or job loss. </p>
<h2>The impact of international border closures on food security</h2>
<p>Tourism supports a large percentage of economic activity in the Caribbean. International border closures, which prompted the near-total shutdown of air and cruise travel to curb the spread of COVID-19, dealt a catastrophic blow to <a href="https://www.weforum.org/agenda/2020/05/caribbean-tourism-has-been-decimated-by-covid-19-but-the-private-sector-can-cushion-the-blow/">the Caribbean’s tourism industry</a>. </p>
<p>The <a href="https://www.imf.org/en/News/Articles/2021/03/11/na031221-how-the-caribbean-can-avoid-becoming-a-covid-19-long-hauler">decline in tourism led to</a> decreased spending by tourists, hotel and associated tourism service closures and job losses for community members. Such outcomes translated to <a href="https://doi.org/10.1080/00358533.2021.1875694">higher levels of indebtedness, unemployment and psychological stress</a>, disproportionately affecting vulnerable populations throughout the Caribbean.</p>
<p>All of these factors made many <a href="https://www.wfp.org/publications/caribbean-covid-19-food-security-livelihoods-impact-survey-round-1">residents anxious about their ability to ensure food security</a> in the coming months, because without money they cannot afford to buy food. </p>
<figure class="align-center ">
<img alt="Shopping centre" src="https://images.theconversation.com/files/394874/original/file-20210413-21-1wwwzh1.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/394874/original/file-20210413-21-1wwwzh1.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/394874/original/file-20210413-21-1wwwzh1.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/394874/original/file-20210413-21-1wwwzh1.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/394874/original/file-20210413-21-1wwwzh1.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/394874/original/file-20210413-21-1wwwzh1.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/394874/original/file-20210413-21-1wwwzh1.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">Pictured is the largest grocery store in San Jose De Ocoa, Dominican Republic.</span>
<span class="attribution"><span class="source">(Shutterstock)</span></span>
</figcaption>
</figure>
<h2>The downward economic spiral</h2>
<p>Downward growth spirals across vital economic sectors like tourism prompted Caribbean states to turn to international development institutions such as the <a href="https://www.worldbank.org/en/country/caribbean">World Bank</a> and the <a href="https://caricom.org/tag/imf/">International Monetary Funds (IMF)</a> for emergency loans during the pandemic. </p>
<p>Alicia Bárcena, executive secretary of the <a href="https://www.cepal.org/en">Economic Commission for Latin America and the Caribbean</a>, highlighted concerns back in April, 2020 about the <a href="https://www.cepal.org/en/pressreleases/borrowing-not-option-caribbean-countries-access-concessional-funding-and-debt-relief">emergency loans</a> stating “borrowing is not the answer to confront this crisis. Caribbean countries need grant support fast. There is need for urgent intervention to ensure liquidity.” </p>
<p>According to Bárcena, <a href="https://www.cepal.org/en/pressreleases/borrowing-not-option-caribbean-countries-access-concessional-funding-and-debt-relief">Caribbean countries are spending between one per cent and four per cent of GDP to tackle the COVID-19 crisis</a>. Growing external debt burdens to replace income and ensure social outcomes, like food security, worsened the Caribbean’s debt to GDP ratio, which averaged <a href="https://www.cepal.org/en/pressreleases/borrowing-not-option-caribbean-countries-access-concessional-funding-and-debt-relief">68.5 per cent in 2019</a>.</p>
<h2>The growing debt problem</h2>
<p>The rising debt burden facing Caribbean states is largely because <a href="https://www.cepal.org/sites/default/files/publication/files/5056/S0700131_en.pdf">most hotels and restaurants in the region’s tourism sector import bulk supplies of low-priced food items</a>. The priority for cheap imported food for tourist consumption means that as much as <a href="https://traveltips.usatoday.com/effects-tourism-caribbean-63368.html">80 cents from every dollar generated in the Caribbean’s tourism sector leaves the region each year</a>.</p>
<p>While the pandemic disrupted tourism growth, the extreme external <a href="https://www.cepal.org/en/pressreleases/pandemic-prompting-higher-debt-levels-regions-countries-and-jeopardizing-sustainable">debt levels facing Caribbean states are increasing</a>. And governments are becoming more responsible for social outcomes like food security.</p>
<p>Over the past 12 months, <a href="https://www.imf.org/en/Topics/imf-and-covid19/COVID-Lending-Tracker#WHD">the IMF provided more than US$1 billion to Caribbean countries</a>. </p>
<p>Relative to annual foreign exchange earnings in a thriving island economy, US$1 billion in emergency loans seems immaterial. However, in just paying the interest on external debt accumulated on emergency loans offered by development institutions like the IMF, some Caribbean island states allocate up to <a href="https://www.miamiherald.com/news/nation-world/world/americas/article231234653.html">54 per cent of their annual budgets to external debt servicing</a>. </p>
<p>Small islands, like the <a href="https://ewnews.com/pm-food-assistance-costs-soar-to-1-mil-more-than-110k-in-need">Bahamas are spending up to US$ 1 million each week on food assistance programs</a> — all while increasing financial support on health spending for COVID tests, treatment, vaccinations, surveillance and protective equipment. </p>
<p>In shifting the responsibility for social welfare from people to the state, COVID-19 is worsening the growing external debt problem across small Caribbean states. </p>
<figure class="align-center ">
<img alt="Shopping centre with cars" src="https://images.theconversation.com/files/394880/original/file-20210413-19-11pk2z5.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/394880/original/file-20210413-19-11pk2z5.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=401&fit=crop&dpr=1 600w, https://images.theconversation.com/files/394880/original/file-20210413-19-11pk2z5.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=401&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/394880/original/file-20210413-19-11pk2z5.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=401&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/394880/original/file-20210413-19-11pk2z5.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/394880/original/file-20210413-19-11pk2z5.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/394880/original/file-20210413-19-11pk2z5.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">Coki Point Plaza, a shopping centre in St. Thomas, U.S. Virgin Islands.</span>
<span class="attribution"><span class="source">(Shutterstock)</span></span>
</figcaption>
</figure>
<h2>Food security in the post-Covid-19 economy</h2>
<p>In April 2020, Antigua and Barbuda’s Prime Minister, <a href="https://www.cepal.org/en/pressreleases/borrowing-not-option-caribbean-countries-access-concessional-funding-and-debt-relief">Gaston Browne, issued a call to international development institutes</a>, like the IMF, for alternative development approaches, he said: </p>
<blockquote>
<p>“The economic burden for our countries has been unsustainable because of the high levels of debt. We don’t have the capacity for printing money and our policy instruments are very limited. What is required at this point is some level of support from international financial institutions, such as the International Monetary Fund and the World Bank.”</p>
</blockquote>
<p>Debt relief would improve Caribbean states response to global crises. Less debt means that governments can increase spending on social services that would improve economic conditions to ensure food security. It really is the only solution. </p>
<p>A post-pandemic recovery pathway to ensure Caribbean food security involves the IMF and other development entities recognizing the unsustainable debt situation across Caribbean island states and including the region in considerations extended to other developing countries for <a href="https://www.worldbank.org/en/news/statement/2020/03/25/joint-statement-from-the-world-bank-group-and-the-international-monetary-fund-regarding-a-call-to-action-on-the-debt-of-ida-countries">debt relief</a>.</p><img src="https://counter.theconversation.com/content/158759/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Kasmine Forbes does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Debt relief would improve Caribbean states’ response to global crises.Kasmine Forbes, PhD Candidate, Geography and Planning, Queen's University, OntarioLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1569482021-04-20T05:11:19Z2021-04-20T05:11:19ZSometimes people can do with a break: 3 ways tax debt relief rules are too tough<figure><img src="https://images.theconversation.com/files/391321/original/file-20210324-23-177otlr.jpg?ixlib=rb-1.1.0&rect=0%2C404%2C6000%2C3206&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">
</span> <span class="attribution"><span class="source">Rawpixel.com/Shutterstock</span></span></figcaption></figure><p>When Debbie (not her real name) lost her main client and was left without a reliable income, the sole trader sold her home and adjoining investment unit to pay off her debts and ensure she had the means to support her daughter and herself.</p>
<p>But things didn’t work out as she had hoped. </p>
<p>A year later she was still mired in debt – only now to the Australian Tax Office, owing more than A$70,000 in capital gains tax from the sale of the investment property. By the time the payment deadline came, she still owed about A$61,000 plus A$13,500 in ATO-charged interest. </p>
<p>So she applied for tax relief under the “serious hardship” relief provisions that have been part of Australian tax law since 1915. </p>
<p>Her case might seem exactly the sort of reason why Australia’s <a href="https://www.legislation.gov.au/Details/C2021C00169">Taxation Administration Act</a> gives the Commissioner of Taxation discretion to release individuals “in whole or in part” from tax debts, if they will “suffer serious hardship” by being required to pay. </p>
<p>Debbie had always paid her taxes on time. A single mother, she had never drawn child-support payments. She was not in good health, having had breast cancer and depression. But her application was rejected. Twice. </p>
<p>Because Debbie’s claim had a fatal flaw, according to the rules governing the tax commissioner’s discretion. She couldn’t show that having her tax debt waived would, on its own, save her from serious financial hardship. </p>
<p>That is, the rules effectively say a tax debt can only be waived if it is the only debt pushing a person into serious hardship. But even without the tax debt, Debbie couldn’t meet her living expenses. Her application was therefore rejected.</p>
<p>So, perversely, the greater the financial hardship a person finds themselves in, the less likely a tax debt will be waived.</p>
<p>This, and a few other significant quirks, is why the ATO’s tax relief rules need reform.</p>
<h2>No published data since 2013</h2>
<p>We know Debbie’s story because she is one of a very small number that have appealed the tax commissioner’s decision to the federal Administrative Appeals Tribunal. </p>
<p>Just 34 appeals have been made in the past 50 years, according to <a href="https://www.sydney.edu.au/content/dam/corporate/documents/sydney-law-school/research/publications/slrv43n1mar2021final.pdf">our analysis</a>. All but four lost those appeals. </p>
<p>One interpretation of these numbers is the tax office almost always makes the right decision – granting relief when appropriate and denying it when not. We’re not convinced.</p>
<p>How many people apply and are granted relief in any year? We don’t know. </p>
<p>The Australian Tax Office hasn’t published those figures since 2013. The numbers for that year show about 15,000 people applied. About 2,500 were granted full or partial tax debt forgiveness.</p>
<p>We can only speculate about why this data is no longer published. But one effect is to minimise awareness that people in financial hardship can apply for tax debt relief. Our <a href="https://www.aph.gov.au/DocumentStore.ashx?id=5bf846c5-135e-43d6-8f9b-6253b61a7f36&subId=684946">research suggests</a> many more than 15,000 people could potentially qualify.</p>
<h2>Perverse rules</h2>
<p>But the perversities of the rules mean those most needing help don’t necessarily get it, as shown by the 34 cases we have examined.</p>
<p>The median tax debt in those cases was about A$80,000. A majority (19 of the 34) represented themselves, while the tax office was represented by lawyers.
The reasons they found themselves in debt were generally complex – involving serious mental and physical health problems, relationship breakdowns, carer responsibilities preventing full-time return to work, and so on. Seven were self-employed.</p>
<hr>
<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/hard-bump-ahead-drop-in-insolvencies-and-bankruptcies-is-a-ticking-time-bomb-155744">Hard bump ahead? Drop in insolvencies and bankruptcies is a ticking time bomb</a>
</strong>
</em>
</p>
<hr>
<p>Looking at the reasons most of these claims were rejected, we see the need for three key reforms.</p>
<p><strong>1. The greater the hardship, the less relief offered</strong></p>
<p>As outlined above, the tax commissioner can release someone from a tax debt only when it is “solely” the payment of that tax debt that will cause “serious hardship”. </p>
<p>This was the case in the two appeals that succeeded. In cases such as Debbie’s, no relief was granted because waiving the tax debt would not resolve all the person’s financial troubles.</p>
<p>This causal link should be removed.</p>
<p><strong>2. Penalised for paying other debts</strong></p>
<p>This leads to the second reform. Evidence of a person paying off other debts is grounds to disqualify them from tax debt relief.</p>
<p>The rationale is that tax obligations shouldn’t be treated as less important than other debts. But it has the perverse outcome that someone who pays off a credit card debt before their tax is effectively barred from serious hardship relief. </p>
<p>Rather than a “one strike and you’re out” approach, the law should recognise degrees of culpability - distinguishing between someone who deliberately and intentionally disregards their obligations and someone who gets in financial trouble due to losing their job, sickness, business failure, relationship breakdown and so on. </p>
<p><strong>3. GST-related debts are excluded</strong></p>
<p>Arguably the most problematic aspect of the rules is they make no provision for financial difficulties arising from being a sole trader or running a small business. In particular, the rules exclude forgiving GST debts. </p>
<p>On one level this makes sense. GST is meant to be collected with every invoice, then forwarded to the tax office with quarterly Business Activity Statements. A GST debt is therefore pocketing other people’s tax.</p>
<p>But these days many people are forced into being small business people, such as through working as contractors. They can be overwhelmed by the paper work, and not have the cash to pay a bookkeeper to do it for them. In our experience from <a href="https://www.aph.gov.au/DocumentStore.ashx?id=5bf846c5-135e-43d6-8f9b-6253b61a7f36&subId=684946">running a tax clinic</a>, people who come to us for help on average are eight years behind on tax returns and seven years on business activity statements. </p>
<p>The rules should recognise this reality and allow GST-related tax liabilities to be forgiven in some circumstances.</p>
<hr>
<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/performers-and-sole-traders-find-it-hard-to-get-jobkeeper-in-part-because-they-get-behind-on-their-paperwork-137997">Performers and sole traders find it hard to get JobKeeper in part because they get behind on their paperwork</a>
</strong>
</em>
</p>
<hr>
<h2>Time for a serious rethink</h2>
<p>When someone is genuinely experiencing serious financial hardship, it is futile to chase them for money they cannot pay. Forcing them into bankruptcy doesn’t help anyone.</p>
<p>We need more compassionate rules that reflect the reality of why people find themselves in debt. </p>
<p>Such reform has been made even more urgent by the COVID economic crisis.
Federal government subsidies and relaxation of normal rules have enabled many small businesses to stay afloat during the COVID crisis.</p>
<p>It hardly makes sense, given all the public money spent in other ways, for outdated tax-relief laws to force people into insolvency and bankruptcy now.</p><img src="https://counter.theconversation.com/content/156948/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Ann Kayis-Kumar is Founding Director of UNSW Tax Clinic, which receives funding from the Federal Government's National Tax Clinic Program. </span></em></p><p class="fine-print"><em><span>Kevin O'Rourke chairs the Indirect Tax Committee for Chartered Accountants Australia and New Zealand.</span></em></p><p class="fine-print"><em><span>Michael Walpole receives funding from the Australian Research Council and is also involved in the running and promotion of the UNSW Tax Clinic which receives funding from the Federal Government's National Tax Clinic Program.</span></em></p>Australia’s tax relief rules are outdated. Here are three key points for reform.Ann Kayis-Kumar, Associate Professor, UNSW SydneyKevin O'Rourke, Lecturer, UNSW SydneyMichael Walpole, Professor, UNSW SydneyLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1406432020-07-28T14:15:14Z2020-07-28T14:15:14ZWhy African countries are reluctant to take up COVID-19 debt relief<figure><img src="https://images.theconversation.com/files/349599/original/file-20200727-25-48a1h9.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">IMF managing director Kristalina Georgieva and World Bank group president David Malpass have offered debt relief to developing countries</span> </figcaption></figure><p>A debt service relief package has been approved by some of the world’s biggest lenders for more than 25 African countries. The arrangement includes the <a href="https://www.worldbank.org/en/news/factsheet/2020/06/02/world-banks-response-to-covid-19-coronavirus-in-africa">World Bank</a>, the <a href="https://www.imf.org/en/Topics/imf-and-covid19/COVID-Lending-Tracker#AFR">International Monetary Fund</a>, <a href="https://www.theafricareport.com/26370/coronavirus-g20-states-postpone-some-of-africas-debts-but-%20block-cancellation/">the G20</a>, the African Development Bank, and all <a href="https://www.imf.org/en/About/Factsheets/Sheets/2016/08/01/16/11/Debt-Relief-Under-the-Heavily-Indebted-Poor-Countries-Initiative">Paris Club creditors</a>.</p>
<p>The goal was to free up more than $20 billion that governments could use to buttress their health services. </p>
<p><a href="https://www.telegraph.co.uk/global-health/science-and-disease/ugandas-president-calls-africas-debt-cancelled-free-cash-virus/">Some</a> have called for outright debt cancellation to lessen the debt burden on African countries as they emerge from the crisis of the COVID-19 pandemic. Most African states will have high public debt as they use all available lines of credit to secure resources to fight the pandemic.</p>
<p>But private creditors that hold commercial debt have not been willing to participate in debt relief. They have <a href="https://af.reuters.com/article/topNews/idAFKBN22R20E-OZATP">criticised</a> the G20’s call for freezing all debt repayments. Countries have also been priced out of the Eurobond market by high interest rates. Bond yields have spiked to over double the cost for most countries intending to issue Eurobonds. </p>
<p>Of the 25 countries eligible for the debt relief, only four have requested assistance – Cameroon, Côte d'Ivoire, Ethiopia and Senegal. The majority have either <a href="https://www.ft.com/content/3b4a5684-81e5-4ed0-9a9a-660d85f024e9">refused</a> to apply, or have not yet requested a debt moratorium.</p>
<p>The reasons for this are understandable. Poor countries know that the debt markets are not largely favourable to them. And they acknowledge the risk of being punished by existing creditors, prospective investors and rating agencies if they seek a debt moratorium. </p>
<h2>Risk of rating downgrade</h2>
<p>A number of countries haven’t openly rejected the offer to participate in the debt moratorium. For its part <a href="https://kfgo.com/2020/05/15/exclusive-kenya-eschews-g20-debt-relief-initiative-over-restrictive-terms/">Kenya</a> has openly indicated its lack of interest. </p>
<p>Here are the reasons why most African countries are opting against participating in the multilateral debt suspension. </p>
<p>First, there is an implication that countries that are requesting debt suspension have borrowed irresponsibly. They will be viewed as high-risk and irresponsible borrowers in the future. </p>
<p>Second, countries will be <a href="https://www.treasury.go.ke/eurobond/Project%20Fahari.pdf">in breach</a> of the terms of Eurobond contracts that they currently hold. The <a href="https://www.ise.ie/debt_documents/Prospectus%20-%20Standalone_dfd49e7a-f8b0-4674-9032-ce0a76a0b1c7.pdf?v=1492015">Eurobond prospectuses</a> and contract terms prohibit countries from seeking a suspension of debt payments under multilateral initiatives. Eurobond default clauses indicate that non-payment of external debt, including seeking a moratorium, would be considered as defaulting. This would automatically trigger an immediate demand for countries to pay the entire value of outstanding Eurobonds.</p>
<p>Third, governments fear that the debt moratorium would lead to credit rating downgrades because of the Eurobond terms of defaulting. Moody’s placed <a href="https://www.moodys.com/research/Moodys-places-Cameroons-B2-rating-on-review-for-downgrade--PR_425269">Cameroon</a>, <a href="https://www.moodys.com/research/Moodys-places-Cte-dIvoires-Ba3-ratings-on-review-for-downgrade--PR_425737">Côte d'Ivoire</a> and <a href="https://www.moodys.com/research/Moodys-places-Senegals-Ba3-ratings-on-review-for-downgrade--PR_426332">Senegal</a> under rating review for downgrade and have downgraded <a href="https://www.moodys.com/research/Moodys-downgrades-Ethiopias-rating-to-B2-rating-on-review-for--PR_423739">Ethiopia</a> precisely because of their participation in the <a href="https://www.worldbank.org/en/topic/debt/brief/covid-19-debt-service-suspension-initiative">G20 Debt Service Suspension Initiative</a>. </p>
<p>A rating downgrade would erode the benefits accrued from the debt relief as countries would have to pay more interest on the same volume of debt. The United Nations has <a href="https://www.ft.com/content/7d51d373-c12e-4440-a408-e61a939e3a3c">criticised</a> rating agencies for worsening debt sustainability in poor countries. The debt relief was expected to free up about $20 billion in total, about the <a href="https://qz.com/africa/1588751/the-size-of-africas-growing-debt-isnt-its-biggest-problem/">same amount</a> that is due in interest and principal repayment within six months to private creditors. </p>
<p>It will further hinder countries’ ability to finance budget deficits in the medium term through access to global capital markets. Given that the pandemic will increase public spending when tax collection and revenue generation are being forgone, budget deficits will swell. Access to global capital will be key in financing the post COVID-19 economic recovery of African countries.</p>
<p>Lastly, there are concerns that the terms of the multilateral debt relief and loan packages will restrict future policy direction. The debt moratorium is being granted on condition that the funds are spent only on critical public services. Other conditions include adhering to existing policies, reporting requirements, multilateral oversight and transparency. Countries under the debt relief programme are not allowed to incur debt from any other creditors during this time and they should use savings only to address shocks from the pandemic. </p>
<p>The World Bank has devised <a href="https://www.worldbank.org/en/news/factsheet/2020/05/11/debt-relief-and-covid-19-coronavirus">customised fiscal policy</a> responses that support weathering the crisis in the short term and economic recovery in the medium term for countries receiving the relief. The IMF loans and the G20’s debt suspension funds <a href="https://www.imf.org/en/About/FAQ/imf-response-to-covid-19">will not be used to pay</a> high interest to private lenders. These conditions constrain both a country’s fiscal space and policy flexibility.</p>
<h2>Solutions</h2>
<p>The main purpose of maintaining a good credit rating is to access international funds at relatively low interest rates. For African countries, the Eurobond issuance is a more attractive option than the traditional multilateral borrowing, whose conditionalities are usually restrictive. </p>
<p>In all current Eurobond contracts, countries are deemed to have defaulted if they cease to be members of the IMF or if they are no longer eligible to use resources of the Bretton Woods institution. When terms of Eurobond contracts become equally restrictive and bond yields more expensive, it defeats the purpose of diversifying from multilateral loans. </p>
<p>This is what African countries should do.</p>
<p>First, countries that have the capacity to forgo debt relief should do so to avoid losing investor confidence in the future. The net benefit of a low borrowing cost will accrue in the long term.</p>
<p>Private creditors should not be pressured to accept the blanket debt relief agreement for commercial debt that was incurred through market conditions and fundamentals. Current Eurobond covenants should be honoured to maintain the credibility and integrity of African sovereign borrowers. </p>
<p>Second, countries that are facing challenges to fund their repayments should approach negotiations with their commercial creditors with caution. Specifically, they should ensure that they safeguard their sovereign credit ratings and avoid defaulting.</p>
<p>Lastly, this episode should provide lessons for African governments to bargain for competitive interest rates and accept only favourable bids during Eurobond issuing. The oversubscription of African Eurobonds is not an absolute sign of attractiveness. It also reflects the overpricing of issued instruments.</p>
<p>Governments should take control of the bond issuance process to structure bonds with favourable terms. This process should not be entirely entrusted to syndicates of investment bankers who have a profit motive and get huge bonuses for oversubscriptions. This will lessen the policy restrictive terms and high interest burden in the future.</p><img src="https://counter.theconversation.com/content/140643/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Misheck Mutize is the Lead Expert consultant with the African Peer Review Mechanism (APRM) on support to African Union member states on credit rating agencies</span></em></p>African countries should tread carefully over the debt relief offered by multilateral institutions and other lenders. It could prove very costly in the medium to long term.Misheck Mutize, Post Doctoral Researcher, Graduate School of Business (GSB), University of Cape TownLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1253662019-10-28T14:57:24Z2019-10-28T14:57:24ZAfrican countries are behind on progress towards poverty reduction goals<figure><img src="https://images.theconversation.com/files/298096/original/file-20191022-117981-ggwaej.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">African countries have an opportunity to reduce poverty with new policies</span> <span class="attribution"><span class="source">Wikimedia Commons</span></span></figcaption></figure><p>In their annual meeting at the United Nations in 2005, world leaders agreed on a common economic <a href="http://mdgs.un.org/unsd/mdg/Host.aspx?Content=Indicators/OfficialList.htm">agenda</a>. This was to halve – between 1990 and 2015 – the proportion of the world’s population living on less than one dollar a day. It’s been nearly 15 years since this resolution. </p>
<p>The world has certainly seen economic progress but it is not even. And countries in Africa lag behind the global average.</p>
<p><a href="https://www.credit-suisse.com/corporate/en/research/research-institute/global-wealth-report.html">Global wealth</a> has more than doubled from US$170 trillion in 2000 to $360 trillion in 2019. Global wealth per adult is at a record high of $70,850. </p>
<p>Mean wealth per adult in Africa is $6,488. In Mozambique it is as low as $352.</p>
<p>The proportion of the world’s people living on less than two dollars a day (an updated measure of extreme poverty) has more than <a href="https://ourworldindata.org/grapher/poverty-decline-without-china?time=1981..2015">halved</a> from 35.9% in 1990 to 10% in 2015. But in sub-Saharan Africa the figure still stands at 41%, according to the <a href="https://www.worldbank.org/en/news/press-release/2018/09/19/decline-of-global-extreme-poverty-continues-but-has-slowed-world-bank">World Bank</a>. The bank <a href="https://www.worldbank.org/en/publication/poverty-and-shared-prosperity">estimates</a> that 87% of the world’s poorest people will live in the region by 2030 if the trends continue.</p>
<p>Life expectancy has been <a href="https://data.worldbank.org/indicator/SP.DYN.LE00.IN">growing</a> by 16 weeks a year so that those born today are likely to live 20 years longer than a child born in 1960. In Africa, average life expectancy remained at a level that the rest of the world passed in 1974 and is <a href="https://data.worldbank.org/indicator/SP.DYN.LE00.IN?locations=ZG">rising</a> at a snail’s pace. </p>
<p>The continent still <a href="https://www.bbc.com/news/world-africa-48674909">pays</a> up to 30 times more than the rest of the world for generic medicine, despite a world-wide <a href="https://www.marketwatch.com/story/prescription-drug-prices-arent-rising-theyre-falling-for-the-first-time-in-47-years-2019-03-12">decline</a> in drug prices. And energy prices in Africa are more than three times <a href="https://www.cnn.com/2018/10/18/perspectives/africa-affordable-electricity/index.html">higher</a> than in the United States. </p>
<figure class="align-center ">
<img alt="" src="https://images.theconversation.com/files/297634/original/file-20191018-56198-1ua5b0m.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/297634/original/file-20191018-56198-1ua5b0m.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=436&fit=crop&dpr=1 600w, https://images.theconversation.com/files/297634/original/file-20191018-56198-1ua5b0m.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=436&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/297634/original/file-20191018-56198-1ua5b0m.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=436&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/297634/original/file-20191018-56198-1ua5b0m.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=548&fit=crop&dpr=1 754w, https://images.theconversation.com/files/297634/original/file-20191018-56198-1ua5b0m.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=548&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/297634/original/file-20191018-56198-1ua5b0m.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=548&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">Graph global poverty rate, 1981 - 2015.</span>
<span class="attribution"><span class="source">Our World in Data</span></span>
</figcaption>
</figure>
<p>African countries have missed important opportunities in the past two decades that could have ensured these graphs looked different.</p>
<h2>Interlocking problems: debt and aid</h2>
<p>In 2004 UK Prime Minister Tony Blair <a href="http://www.commissionforafrica.info/wp-content/uploads/2005-report/11-03-05_cr_report.pdf">initiated</a> the Commission for Africa, to “carefully study all the evidence available to find out what is working and what is not.” </p>
<p>The Commission’s main findings were:</p>
<blockquote>
<p>The problems… are interlocking. They are vicious circles which reinforce one another. …Africa will never break out of the deadlock with piecemeal solutions and policy incoherence. They must be tackled together. To do that Africa requires a comprehensive ‘big push’ on many fronts at once; which requires a partnership between Africa and the developed world…. Africa is very unlikely to achieve the rapid growth in finance and human development necessary to halt or reverse its relative decline without a strong expansion in aid.</p>
</blockquote>
<p>Blair then called for two simultaneous actions: <a href="https://www.theguardian.com/world/2005/jun/07/hearafrica05.development">forgiving</a> the continent’s debt, and doubling development assistance. This call was partly heeded. </p>
<p><a href="https://www.un.org/africarenewal/magazine/october-2005/industrial-countries-write-africas-debt">Fourteen</a> African countries <a href="https://www.theguardian.com/politics/2005/jun/11/uk.g8">benefited</a> from the 2005 multilateral debt relief initiative. That relief <a href="https://www.theguardian.com/politics/2005/jul/01/uk.g8">saved</a> Nigeria – the region’s largest economy – $31 billion. A host of other countries benefited too, <a href="http://siteresources.worldbank.org/INTDEBTDEPT/Resources/mdri_eng.pdf">ranging</a> from Benin ($690 million) to Ghana ($2.938 billion).</p>
<p>But these countries didn’t make the most of the relief they’d been given. <a href="https://www.cgdev.org/blog/chart-of-the-week-new-african-debt-crisis">Debt</a> in many African countries is on the rise again. What’s more concerning is that debt isn’t being incurred for useful purposes, such as plugging the infrastructure gap. Instead, according to an IMF <a href="https://www.imf.org/en/Publications/Policy-Papers/Issues/2018/03/22/pp021518macroeconomic-developments-and-prospects-in-lidcs">report</a>, the rise is being driven by corruption and mismanagement.</p>
<p>As for aid, since 2005 the flow to Africa has risen by 50%, reaching $49.27 billion in 2017. African countries <a href="https://data.worldbank.org/indicator/DT.ODA.ODAT.CD?locations=ZG">received</a> more than half a trillion dollars ($0.62 trillion) in aid in the decade and a half after Blair’s appeal.</p>
<p>However, the continent now <a href="https://data.worldbank.org/indicator/DT.ODA.ODAT.CD?locations=ZG">gets</a> less donor aid per recipient than most regions in the world: an average of 14 cents per person per day. This is because its rapidly <a href="https://www.prb.org/2018-world-population-data-sheet-with-focus-on-changing-age-structures/">rising</a> population size in recent decades is not being matched by the size of aid inflows.</p>
<p>Added to this is the fact that many African countries have failed to stem the flow of illicit money from the continent. An <a href="https://gfintegrity.org/wp-content/uploads/2014/05/gfi_afdb_iffs_and_the_problem_of_net_resource_transfers_from_africa_1980-2009-highres.pdf">estimated</a> $30.4 billion was transferred from African countries between 2000 to 2009.</p>
<p>Such outflows strip countries of desperately needed financial resources for investment in hospitals, schools and roads.</p>
<p>To stop this trend, Africa needs the help of advanced countries, because some of these countries have been and still serve as havens for illicit funds originating from repressive African regimes and despots. </p>
<p>In “Overcoming the Shadow Economy,” Joseph Stiglitz and Mark Pieth forcefully <a href="https://www8.gsb.columbia.edu/faculty/jstiglitz/sites/jstiglitz/files/Overcoming%20the%20Shadow%20Economy.pdf">argue</a>:</p>
<blockquote>
<p>In a globalised world, if there is any pocket of secrecy, funds will flow through that pocket. That is why the system of transparency has to be global. The US and EU are key in tipping the balance toward transparency, but this will only be the starting point: each country must play its role as a global citizen in order to shut down the shadow economy—and it is especially important that there emerge from the current secrecy havens some leaders to demonstrate that there are alternative models for growth and development.</p>
</blockquote><img src="https://counter.theconversation.com/content/125366/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Zuhumnan Dapel does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>If trends continue, 87% of the world’s poorest people will live in sub-Saharan Africa by 2030.Zuhumnan Dapel, Consultant @ODIdev. Priors: IDRC Fellow at the Center for Global Development; Public Policy Fellow, Woodrow Wilson Center Washington DC. Twitter: @dapelzg, Scottish Institute for Research in EconomicsLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/575372016-06-16T09:54:32Z2016-06-16T09:54:32ZWhy it’s so hard for students to have their debts forgiven<figure><img src="https://images.theconversation.com/files/126805/original/image-20160615-14027-1qpuo7m.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Forgive me, for I have borrowed.</span> <span class="attribution"><a class="source" href="https://www.flickr.com/photos/43005015@N06/6285016967/in/photolist-azomzv-q7onw-5zEzVz-rr7qEJ-mCFiyY-q7pLU-oTwqGx-eRbbko-rr7mFm-4uut9f-q7qrz-q7qDe-4uutod-4uur3E-5Z3pA9-5zEyVP-7Wxo2N-q7qJU-4tgN59-5zJRkU-q7pFH-paL6Mg-q7p1S-eQYNVp-4tgLPy-5zJRAs-4tcK5p-4uuna3-q7oB5-q7oaQ-9hgiRR-4tgRbS-p8ZHNq-9GsCXR-4uuqsN-4uqoZg-pvFjj6-q7nGp-9rD5jc-q7qqf-q7pHi-9hgibn-q7oa8-eQYNVX-4uqnxZ-q7qzb-9GsCSn-mCEaBr-dcsp6W-q7oEy">Peg Hunter/Flickr</a>, <a class="license" href="http://creativecommons.org/licenses/by-nc/4.0/">CC BY-NC</a></span></figcaption></figure><p>Outstanding student loan debt in the United States <a href="https://research.stlouisfed.org/fred2/series/SLOAS#">reached a record US$1.35 trillion</a> in March, up six percent from a year earlier. </p>
<p>About 10 million people who borrowed from the government’s main student loan program – 43 percent – <a href="http://www.wsj.com/articles/more-than-40-of-student-borrowers-arent-making-payments-1459971348">are currently behind or no longer making payments</a>, with more than a third of them in default. Some students are especially at risk, <a href="http://www.brookings.edu/about/projects/bpea/papers/2015/looney-yannelis-student-loan-defaults">such as those who attended for-profit institutions</a>. </p>
<p>Meanwhile, the loan default rates widely reported by the U.S. Department of Education <a href="https://btl.bayloralumniassociation.com/wp-content/uploads/2015/05/Student-Debt-Crisis-Cloud-and-Fossey.pdf">fail to account</a> for borrowers who default more than three years after repayment begins. These rates also fail to account for the millions of borrowers who are struggling or unable to repay their loans but aren’t included in the numbers because they’ve claimed an economic hardship deferment.</p>
<p>These unsettling numbers raise the question of what happens to borrowers unable to repay their student loans.</p>
<h2>The ‘undue hardship’ issue</h2>
<p>While individuals with debt they cannot repay often turn to bankruptcy, this discharge option is frequently unavailable in the case of student loans. Such debtors <a href="http://www.studentloanborrowerassistance.org/bankruptcy/">must first demonstrate “undue hardship,”</a> an exacting standard few borrowers are able to satisfy and one not applied to most types of unsecured debt in bankruptcy. </p>
<p>Credit card debt, for example, can be easily discharged as long as a person qualifies to file for bankruptcy protection. The standard also leaves student-loan debtors without the types of options open to businesses in bankruptcy to work with creditors to reduce debt.</p>
<p>Some student-loan borrowers may soon have some relief, however. The Department of Education <a href="http://www.ed.gov/news/press-releases/education-department-proposes-new-regulations-protect-students-and-taxpayers-predatory-institutions">proposed a new rule</a> this week, for example, that would make it easier for students who are defrauded by their colleges to have their debt forgiven. </p>
<p>That’s a step in the right direction. But more needs to be done.</p>
<p>As higher education legal scholars who have been examining these issues for many years, we have a special interest in the ways in which laws and legal standards support or harm students. The general inability for Americans to discharge student loans under current bankruptcy law represents an issue affecting millions of borrowers and their families. </p>
<p>This and the growing mountain of debt have prompted <a href="http://www.npr.org/2014/03/27/294858103/senator-warns-of-a-student-loan-bubble">lawmakers and other observers to warn</a> of another bubble in the making, with potentially disastrous consequences. </p>
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<h2>How undue hardship was established</h2>
<p>The federal role in student loans can be traced back to the <a href="http://www.britannica.com/topic/National-Defense-Education-Act">National Defense Education Act of 1958</a>, which made federal loans available to all students.</p>
<p>In 1965, the federal government shifted from making loans to <a href="https://studentaid.ed.gov/sa/about/data-center/lender-guaranty">serving as a guarantor of student loans</a>. An overhaul of federal loan policy in 2010 made direct loans from the federal government the only federally guaranteed student loan program, although loans from other lenders, often referred to as private student loans, are still available.</p>
<p>Until the 1970s, student loan debt received the same treatment in bankruptcy proceedings as other types of unsecured debt. Concerns arose, however, that unscrupulous borrowers had sought to discharge their student loans after obtaining lucrative positions in such fields as medicine and law. </p>
<p><a href="http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1121226">Evidence suggests</a> no widespread pattern of abuse existed, but Congress directed in 1976 that federally guaranteed loans could not be discharged in bankruptcy during the initial five years of the repayment period, absent a showing of undue hardship. Congress extended the undue hardship requirement to seven years in 1990, and in 1998 made the standard applicable throughout the loan’s life. And in 2005, Congress also extended the undue hardship standard to private student loans not guaranteed by the federal government. </p>
<p>Congress did not define the term undue hardship, leaving it to the bankruptcy courts to interpret its meaning. Most courts have adopted the <a href="http://www.thebankruptcysite.org/resources/bankruptcy/debt-relief/student-loans-bankruptcy-the-brunner-test">so-called Brunner test</a> (named after a famous court ruling), which requires student loan debtors to make three showings. First, they must prove that they cannot pay off their student loans and maintain a minimal standard of living. Second, they must show additional circumstances that make it highly unlikely they will ever be able to repay their student loans. And finally, debtors must demonstrate that they have made a good faith effort to pay their student loans.</p>
<p>This stringent standard can lead to disheartening results. For example, in one case, a <a href="http://www.condemnedtodebt.org/search/label/student%20loan%20bankruptcy">bankruptcy judge denied discharge</a> under the undue hardship to a student loan debtor in her 50’s who had a record of homelessness and lived on $1,000 a month.</p>
<p>In practice, most courts <a href="http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2256463">have applied</a> the Brunner test, or similar standards, in ways that make discharge in bankruptcy especially difficult for many student loan borrowers. In fact, a <a href="http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1894445">2012 paper calculated</a> that 99.9 percent of bankrupt student loan debtors do not even try to discharge them. Among the reasons for this low percentage is likely the difficult standard to qualify for a discharge.</p>
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<h2>Some courts push back</h2>
<p>Recently, however, a few bankruptcy courts have interpreted the Brunner test more leniently. </p>
<p>In perhaps the most <a href="http://cdn.ca9.uscourts.gov/datastore/bap/2013/04/16/RothV%20ECMC%20opinion-FINAL%20AZ-11-1233.pdf">well-known example</a>, a panel of judges reviewing a bankruptcy decision discharged the student loan debts of Janet Roth, a 68-year old woman with chronic health problems who was subsisting on Social Security income of $780 a month.</p>
<p>Roth’s creditor argued that she could not pass the good-faith prong of the Brunner test because she had never made a single voluntary payment on her student loans. But the panel rejected this argument on the grounds that Roth had lived frugally and had never earned enough money to pay back her student loans in spite of her best efforts to maximize her income.</p>
<p>The panel also rejected the creditor’s arguments that Roth should be placed in a long-term income-based repayment plan that would extend for 25 years. Roth’s income was so low, the creditor pointed out, that she would not be required to pay anything on the student loan anyway. Nevertheless, a remote possibility existed that Roth’s income would rise in the future, permitting her to make at least token payments.</p>
<p>In the court’s view, putting Roth on a long-term repayment plan seemed pointless. Applying a common law principle of basic fairness, the court stated “that the law does not require a party to engage in futile acts.”</p>
<p>One of the judges in the Roth case filed a separate opinion agreeing with the judgment but suggesting that courts should abandon the Brunner test altogether. He argued courts should replace it with a standard in which bankruptcy judges “consider all the relevant facts and circumstances” to determine whether a debtor can afford to repay student loan debts “while maintaining an appropriate standard of living.” </p>
<p>Such a standard would be more closely aligned with how most other types of debt are eligible for discharge in bankruptcy.</p>
<p>So far, federal appeals courts have not taken up the suggestion to scrap the Brunner test, although several lower courts have begun applying it more humanely. The Brunner test, however, is a subjective standard, and debtors experience widely different outcomes when they attempt to discharge their student loans in bankruptcy.</p>
<h2>Moving toward a more humane standard</h2>
<p>Recent actions by the Obama administration on the issue – including this week’s <a href="http://www.ed.gov/news/press-releases/education-department-proposes-new-regulations-protect-students-and-taxpayers-predatory-institutions">announcement</a> on “predatory” colleges – has accompanied the judicial activity.</p>
<p>For example, in 2015 the Department of Education offered <a href="https://www.ifap.ed.gov/dpcletters/GEN1513.html">guidance</a> on when loan holders should “consent to or not oppose” undue hardship petitions involving government-backed student debt in bankruptcy proceedings. </p>
<p>The department also recently announced <a href="http://www.ed.gov/news/press-releases/us-department-education-acts-protect-social-security-benefits-borrowers-disabilities">an initiative</a> to address problems in making loan forgiveness available to individuals who are permanently disabled. </p>
<p>In the case of private student loans, the <a href="http://www.reuters.com/article/us-usa-obama-studentloans-idUSKBN0EK1UF20140609">Obama administration has urged</a> Congress to make such loans no longer subject to the undue hardship standard.</p>
<p>Courts and federal agencies can help to humanize interpretation and application of the undue hardship standard and make discharge a more realistic option for some borrowers. Ultimately, however, authority rests with Congress to make any substantive changes to the treatment of student loan debt in bankruptcy.</p>
<p>While <a href="https://www.washingtonpost.com/news/grade-point/wp/2016/02/09/can-alexander-and-murray-recapture-bipartisan-magic-to-pass-higher-education-legislation/">likely on hold until after the November elections</a>, the pending reauthorization of the Higher Education Act – the centerpiece of federal higher education policy – presents a key opportunity for Congress to review the undue hardship standard. At a minimum, Congress should give serious consideration to abolishing the standard for private student loans. </p>
<p>Other options include reinstating limits on how long the undue hardship standard should apply to federal student loans or directing courts to adopt a more flexible test for discharge in bankruptcy, such as that advocated in the separate opinion in the Roth case. </p>
<p>With so many student loan borrowers struggling, circumstances suggest the need for Congress to take decisive action on this critical issue on public policy and humanitarian grounds.</p><img src="https://counter.theconversation.com/content/57537/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>The authors do not work for, consult, own shares in or receive funding from any company or organization that would benefit from this article, and have disclosed no relevant affiliations beyond their academic appointment.</span></em></p>About 10 million borrowers in the government’s main student loan program are struggling to make their payments, yet unlike other types of debt, it’s next to impossible to have it forgiven.Neal H. Hutchens, Professor of Higher Education, University of MississippiRichard Fossey, Paul Burdin Endowed Professor of Education, University of Louisiana at LafayetteLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/597542016-05-24T08:57:58Z2016-05-24T08:57:58ZA false morality tale blocks the resolution of the Greek debt crisis<p>Optimists hope that Greece will soon be able to put its crisis behind it following the latest meeting of eurozone finance ministers. The optimism is not unfounded. Key lenders like the <a href="http://www.imf.org/external/pubs/ft/scr/2016/cr16130.pdf">IMF</a> and the <a href="http://www.theguardian.com/world/2016/may/08/greece-has-basically-achieved-reform-goals-says-jean-claude-juncker">European Commission</a> have stopped <a href="http://www.ft.com/intl/cms/s/0/c5a7e9fe-201a-11e6-aa98-db1e01fabc0c.html?siteedition=intl#ft-article-comments">pretending</a> that Greek debt is sustainable. More importantly, the obvious is at last recognised – that Greece cannot exit its debt crisis until the very problem of its debt is addressed. </p>
<p>Yet <a href="https://mainlymacro.blogspot.co.uk/2015/07/the-ideologues-of-eurozone.html">economic</a> <a href="https://ineteconomics.org/ideas-papers/blog/joseph-stiglitz-deep-seatedly-wrong-economic-thinking-is-killing-greece">sense</a> has been largely irrelevant in the unfolding of the Greek drama. Following a <a href="http://ser.oxfordjournals.org/content/11/3/601.full.pdf+html">typical pattern</a> in the <a href="http://www.mhpbooks.com/books/debt/">history of debt crises</a>, it is a tale that has been predominantly framed and managed in terms of morality. </p>
<p>For example, Wolfgang Schäuble, Germany’s finance minister, <a href="http://www.wsj.com/articles/germanys-schauble-sees-no-need-for-immediate-decision-on-greece-payments-1457438844">insists</a> that he cannot support Greece’s claim for relief because he lacks “a proper argument for the German lawmaker and the German public”. The truth is that there are overwhelming economic arguments for debt relief, including the fact that the current plan is <a href="http://www.theguardian.com/business/ng-interactive/2015/apr/29/the-austerity-delusion">self-defeating</a>. The requirement that Greece generates <a href="https://www.project-syndicate.org/commentary/greece-referendum-troika-eurozone-by-joseph-e--stiglitz-2015-06?barrier=true">massive budget surpluses</a> will only accelerate the <a href="http://www.politico.com/agenda/story/2015/07/greece-death-spiral-ahead-000152">death spiral</a> of the Greek economy, inevitably deteriorating its debt-servicing capacity.</p>
<p>But it is vain to fight with economic reason, when the problem is, <a href="http://www.theguardian.com/commentisfree/2015/jul/16/jurgen-habermas-eu-greece-debt-deal">among</a> <a href="http://www.iwh-halle.de/d/publik/iwhonline/io_2015-07.pdf">other</a> <a href="https://www.rt.com/news/310223-Strauss-Kahn-Greek-deal/">things</a>, profoundly governed by moral sentiments. An important issue when it comes to resolving the crisis is whether the Greek population – which has been <a href="https://pogiblog.atlatszo.hu/2015/06/27/corrupt-lazy-greeks-debunking-ethnic-stereotyping-substituting-economics/">systematically</a> <a href="http://ser.oxfordjournals.org/content/11/3/601.full.pdf+html">morally downgraded</a> – deserves debt relief. </p>
<p>The underlying moral struggle and associated <a href="http://www.ft.com/intl/cms/s/0/c5a7e9fe-201a-11e6-aa98-db1e01fabc0c.html?siteedition=intl#ft-article-comments">political impasse</a> was recently captured <a href="http://www.nytimes.com/2016/05/14/opinion/time-to-end-the-greek-debt-tragedy.html?_r=0">in a New York Times editorial</a>: </p>
<blockquote>
<p>The problem is Germany, Greece’s main national creditor: German federal elections will take place next year, and many German citizens feel that their hard work and thrift should not be squandered on rescuing the Greeks from the pain of their fiscal sins. </p>
</blockquote>
<p>According to the <a href="https://theconversation.com/why-weve-been-discussing-the-greek-bail-out-in-the-wrong-way-39884">dominant narrative</a> that has shaped public imagination, Greeks have been repeatedly rescued in order to maintain a profligate lifestyle. Against this backdrop, it is understandable that the prospect of debt relief is resisted on moral grounds. </p>
<p>But the underpinning story is flawed. </p>
<h2>False logic</h2>
<p>The root cause of Greece’s fiscal problem was public expenditure on a bloated and dysfunctional public sector, structurally designed to service <a href="http://eprints.lse.ac.uk/33826/">political clientelism</a> – not the Greek citizen. Greek cronyism was in turn heavily fed by profit-seeking institutions. They <a href="http://www.ft.com/intl/cms/s/0/8db1ae58-23b9-11e5-9c4e-a775d2b173ca.html#axzz498p15b5s">recklessly bought debt</a> from the eurozone periphery that was back then <a href="http://www.nytimes.com/2011/07/22/business/global/europes-new-bank-rules-still-favor-government-debt.html">treated as risk-free</a>. </p>
<p>But investors had underestimated how the waves triggered by the 2008 global financial crisis would affect the <a href="http://www.tandfonline.com/doi/abs/10.1080/09644008.2012.739614?journalCode=fgrp20">poorly designed</a> European monetary union. It was an accident waiting to happen and was first felt in Greece in 2010 when it became increasingly evident that Greek bonds could not be paid in full. </p>
<p>Shockingly enough, the solution was neither to have investors shoulder the consequences of their bad bets, nor to drastically fight the budgetary cause of the Greek deficit. <a href="http://www.independent.co.uk/news/business/comment/greece-crisis-imf-was-pushed-around-by-angela-merkel-and-nicholas-sarkozy-and-now-it-is-being-10356247.html">Defying even the IMF rulebook</a>, Europe’s political elites decided to keep both a dysfunctional state and an unsustainable sovereign debt in place. This was possible by financing Greek clientelism; but more importantly (and <a href="https://global.handelsblatt.com/edition/423/ressort/politics/article/study-finds-greek-bailouts-saved-banks-not-people">disproportionately</a>), by bailing out private investors – <a href="https://www.foreignaffairs.com/articles/greece/2015-07-07/pain-athens">especially</a> <a href="http://www.newyorker.com/news/john-cassidy/greeces-debt-burden-the-truth-finally-emerges">French and German banks</a>. </p>
<p>Of course, what was essentially a reimbursement of imprudent buyers of public debt has been deceptively depicted as a lofty act of European solidarity towards the Greek population. Greeks supposedly received money that could be fully repaid in due course. Likewise, Greek politicians equally misleadingly portrayed bailouts as “success stories” <a href="http://www.theguardian.com/world/2011/jul/17/greece-not-bankrupt-papandreou">helping Greece</a> from <a href="https://theconversation.com/why-weve-been-discussing-the-greek-bail-out-in-the-wrong-way-39884">going bankrupt</a>. </p>
<p>By not dealing with the essence of the debt crisis, the 2012 and 2015 bailouts were unavoidable in order to refinance an unpayable debt and recapitalise Greek banks (that were since suffering the side-effects of disastrous crisis management). And while the early bailout of debt was described as a bailout of Greeks, the subsequent <a href="https://rwer.wordpress.com/2015/07/15/stop-the-frenzy-please-its-just-about-rolling-over-the-debt/">rolling over</a> of the debt is even more <a href="http://www.ft.com/intl/cms/s/0/395ae5a0-142c-11e5-9bc5-00144feabdc0.html#axzz498p15b5s">misleadingly</a> portrayed as an endless influx of <a href="http://blogs.ft.com/brusselsblog/2015/06/25/leaked-greece-bailout-plan-sent-to-eurogroup/">desperately-needed</a> <a href="https://www.yahoo.com/news/eurozone-ministers-approve-first-tranche-greek-bailout-funds-181037147.html?ref=gs">injections of cash</a>. </p>
<p>Moreover, the conditions imposed on Greece in return for <a href="http://www.theguardian.com/world/2015/jun/29/where-did-the-greek-bailout-money-go">supposedly</a> <a href="http://www.cnbc.com/2015/06/16/cramer-greece-on-a-death-spiral-of-total-insanity.html">generous help</a> had <a href="https://theconversation.com/greek-parliament-passes-debt-agreement-but-european-democracy-is-on-its-knees-44624">little to do with economics</a>. Greece undoubtedly stands in needs of structural reforms (necessary for the modernisation of the Greek state – <a href="http://www.wsj.com/articles/real-greek-drama-is-about-reforms-not-debt-relief-1463000335">not</a> the resolution of the debt crisis). But <a href="http://prospect.org/article/what-reform-strange-case-greece-and-europe">the “reforms” demanded from Greece</a> are mostly a mix of <a href="http://www.wsj.com/articles/SB10001424127887324235104578239563893526152">destructive austerity</a> and <a href="http://www8.gsb.columbia.edu/chazen/globalinsights/node/300">punitive policies</a>. They might be best understood as moral reforms of the sort commanded by a <a href="http://www.d.umn.edu/cla/faculty/jhamlin/1095/The%20Protestant%20Ethic%20and%20the%20Spirit%20of%20Capitalism.pdf">Calvinist ethic</a>. </p>
<p><a href="http://www.huffingtonpost.gr/christos-papadimitriou/story_b_7627596.html">Predictably</a> <a href="http://www.ft.com/intl/cms/s/0/9a030cee-24f5-11e2-86fb-00144feabdc0.html#axzz498p15b5s">enough</a>, not allowing Greece to sustainably restructure its debts on the one hand, while imposing unreasonable “bailout conditions” on the other, marked the <a href="http://www.nytimes.com/interactive/2015/07/09/business/international/is-greece-worse-off-than-the-us-during-the-great-depression.html">greatest economic collapse in modern times</a>. All the while Greece is <a href="http://www.wsj.com/articles/real-greek-drama-is-about-reforms-not-debt-relief-1463000335">again blamed</a> for failing to recover. </p>
<h2>Reshaping our moral imagination</h2>
<p>In moving beyond a false morality tale, it is high time we start appreciating that recovery is not possible precisely because of the bailout programmes – not in spite of them. In so doing, we must restructure the way the crisis is framed, since the very words we use nurture an irresistible inclination to blame Greece for not achieving what successive “rescue aids” and “reforms” actually render impossible. </p>
<p>The associated fallacy that Greece is paying for its own fiscal sins must also be put to bed. This was mostly true until 2010. But if punitive economics could be somehow justifiable in the offset of the crisis, they have since become root causes of the current state of the Greek economy. German leadership cannot for much longer afford to claim a higher moral ground and put the blame squarely on Greece – let alone pretend to be the saviour of an ungrateful and defiant population. </p>
<p>I do not even go so far as to contend that Greece deserves debt relief on moral grounds. What I more moderately maintain is that the debt problem is unlikely to be resolved soon due to a moral imagination that has been misguided by the toxic belief that Greece has repeatedly received generous help, and is still suffering for its original fiscal sins. As an antidote, we need to disarm the vindictive morality tale that has been deceptively constructed and allow economic sense to take center stage.</p><img src="https://counter.theconversation.com/content/59754/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Stratos Ramoglou does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Economic sense has been largely irrelevant in the unfolding Greek drama. Instead, morality has been at its heart.Stratos Ramoglou, Associate professor, University of SouthamptonLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/579922016-04-26T04:28:26Z2016-04-26T04:28:26ZHow and why China became Africa’s biggest aid donor<figure><img src="https://images.theconversation.com/files/119252/original/image-20160419-13901-1ck06xy.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">China's President Xi Jinping on a state visit to Zimbabwe. </span> <span class="attribution"><span class="source">REUTERS/Philimon Bulawayo</span></span></figcaption></figure><p>The foreign aid arena in Africa has traditionally been dominated by the Organisation of <a href="http://www.oecd.org/">Economic Co-operation and Development</a> (OECD) countries. However, over the past three decades non-traditional donors such as China, have emerged.</p>
<p>The increasing importance of non-traditional donors has meant that the economic and political stronghold of western countries in sub-Saharan Africa has gradually ebbed. China is now the <a href="http://onlinelibrary.wiley.com/doi/10.1111/j.1468-2346.2008.00765.x/pdf">largest non-traditional contributor of aid</a> to sub-Saharan African countries.</p>
<p>In the 1960s Africa provided China with an opportunity to increase its political and diplomatic reach. Chinese interest in the continent came about in part as a result of political <a href="http://digitalcommons.law.umaryland.edu/cgi/viewcontent.cgi?article=1028&context=mscas">tensions</a> between China and the Soviet Union as well as increased American and Japanese <a href="http://press.uchicago.edu/ucp/books/book/distributed/N/bo8927418.html">competition in Asia</a>. In addition to political motives, Africa presented China with economic opportunities. While the initial motive for Chinese aid was to strengthen diplomatic ties, the resource motive became an important factor.</p>
<h2>China’s aid policy</h2>
<p>At the onset, China’s aid policy was premised on equality between partners, mutual benefit, respect for sovereignty, respect for obligations and enhancing the self-reliance of Chinese aid recipients. According to China’s 2011 <a href="http://www.unicef.org/eapro/White_Paper_on_China_Summary.pdf">white paper on foreign aid</a>: </p>
<blockquote>
<p>The main areas of support for China has been in projects in agriculture, industry, economic infrastructure, public facilities, education and medical and health care, with the intent on improving recipient countries’ industrial and agricultural productivity, laying a solid foundation for their economic and social development, and improving basic education and health care. </p>
</blockquote>
<p>China’s aid policy in Africa underwent major reforms between 1994 and 1995.
These were effected in <a href="https://global.oup.com/academic/product/the-dragons-gift-9780199550227?cc=za&lang=en&">three main ways</a>: </p>
<ul>
<li><p>New instruments that linked aid, trade and investment between China and Africa were introduced and implemented,</p></li>
<li><p>Programmes that combined foreign aid with economic cooperation were developed and financed, and</p></li>
<li><p>China refined its portfolio of tools to aid domestic restructuring. </p></li>
</ul>
<p>The restructuring also saw the creation of three policy banks. These were China’s development Bank, China Export-Import bank and China Agricultural Development bank. They were all state owned and enabled the government to provide targeted finance. The new policy opened the door to an <a href="https://global.oup.com/academic/product/the-dragons-gift-9780199550227?cc=za&lang=en&">economic and trade strategy</a>. It enabled Chinese investments in manufacturing and agriculture, and growth in Chinese assembly factories. It also created increased demand for Chinese exports and allowed China’s incursion into the exploration and investment in minerals and forest resources in Africa.</p>
<h2>Resources as a driver</h2>
<p>By 1976 Chinese resource interest was apparent in numerous sub-Saharan African countries. <a href="http://digitalcommons.law.umaryland.edu/cgi/viewcontent.cgi?article=1028&context=mscas">Examples include</a> the construction of the Tan Zam railroad in Zambia in part to facilitate China’s access to copper. There was also the construction of roads in countries like Ethiopia to assist the movement of cotton exports to China. China’s view of the resource possibilities in sub-Saharan Africa continues today.</p>
<p><a href="http://www.brookings.edu/research/opinions/2014/02/07-china-aidto-%20africa-sun">Since 2001</a> the need to boost Chinese domestic economic growth has further driven China’s interest in sub-Saharan Africa’s natural resources.</p>
<p>Examining what drives Chinese aid allocation to sub-Saharan Africa, empirical evidence suggests that China provides more foreign aid to oil-rich sub-Saharan African countries than those that are not oil rich. Almost half of the top ten recipients of Chinese aid in the past ten years gave access to oil wells and granted first rights to prospect for oil in return. Examples include Angola and Nigeria.</p>
<h2>Providing billions in debt relief</h2>
<p>From 2000 onwards China further cemented itself as a major aid role player in Africa. It established <a href="http://www.focac.org/eng/">the forum</a> on China–Africa cooperation (FOCAC) which included 44 African countries. It undertook to <a href="https://global.oup.com/academic/product/the-dragons-gift-9780199550227?cc=za&lang=en&">provide financing</a> for debt relief, training programmes and investments. The China-Africa Business Council was also established, which negotiated the cancellation of US$1.2 billion in debt.</p>
<p>A number of developments made 2006 a watershed year. These included:</p>
<ul>
<li><p>the publication of a white paper on African policy,</p></li>
<li><p>the announcement that debt of $1.4 billion would be cancelled,</p></li>
<li><p>the creation of a $5 billion fund made up of soft and commercial loans;</p></li>
<li><p>an undertaking to double aid by 2009, and</p></li>
<li><p>an <a href="http://press.uchicago.edu/ucp/books/book/distributed/N/bo8927418.html">agreement to</a> build 30 hospitals and train 15,000 people. </p></li>
</ul>
<p>Between 2000 and 2012, China undertook more than 1,700 projects in over 50 African countries amounting to upwards of $75 billion. While this amount is less than the $90 billion committed by the US in the same period, it still represents a significant <a href="http://press.uchicago.edu/ucp/books/book/distributed/N/bo8927418.html">alternative source of aid financing</a> for the continent.</p>
<h2>Where the money goes</h2>
<p>China’s aid in sub-Saharan Africa is varied and can be found in almost all sectors from telecommunication to health. The largest amount of aid funding goes towards the transport, storage, energy and communications sectors. A significant share, about 70%, is geared towards infrastructure development. </p>
<p>Chinese aid in infrastructure outweighs <a href="http://www.one.org/us/2013/04/30/6-surprising-facts-aboutchinese-aid-to-africa/">that of other donors</a>. It accounts for over 30% of total value of infrastructure projects in Africa. Sub-Saharan Africa’s education and health sectors have also benefited significantly. But the amount committed to these two sectors lags behind others such as transport and energy. This is possibly due to the fact that a significant amount of western aid is focused on these two sectors (see table 1).</p>
<figure class="align-center ">
<img alt="" src="https://images.theconversation.com/files/119239/original/image-20160419-13905-1dhupjg.PNG?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/119239/original/image-20160419-13905-1dhupjg.PNG?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=480&fit=crop&dpr=1 600w, https://images.theconversation.com/files/119239/original/image-20160419-13905-1dhupjg.PNG?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=480&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/119239/original/image-20160419-13905-1dhupjg.PNG?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=480&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/119239/original/image-20160419-13905-1dhupjg.PNG?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=603&fit=crop&dpr=1 754w, https://images.theconversation.com/files/119239/original/image-20160419-13905-1dhupjg.PNG?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=603&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/119239/original/image-20160419-13905-1dhupjg.PNG?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=603&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">Table 1: Foreign aid.</span>
</figcaption>
</figure>
<p>In terms of the largest sub-Saharan Africa recipients of Chinese aid, Nigeria, Ghana and Sudan have been the top recipients in the past decade. The <a href="http://www.cgdev.org/sites/default/files/chinese-development-finance-africa_0.pdf">three countries combined</a> received about $250 million in aid. The majority goes to energy infrastructure such as oil pipelines.</p>
<h2>Governance myth debunked</h2>
<p>Prominent in the aid debate is the notion that western donor countries are more concerned about the degree of governance in recipient countries. Their Chinese counterparts are assumed to overlook the level and type of governance.</p>
<p>At first glance this might be seen to be true. But it is not necessarily the case. </p>
<p>For both types of donors, recipient country governance is important. This conclusion is drawn from looking at the determinants of American and Chinese foreign aid to 31 countries in sub-Saharan Africa. In the case of the US, both political rights and civil liberty are considerations in its aid allocation decisions to the region. For China, political rights are more important than civil liberty in influencing who receives aid. </p>
<p>Although the benefits of Chinese aid in sub-Saharan Africa are clear in health and infrastructure projects, including the provision of medicine, the training of health workers as well as the construction of transport infrastructure, there are some drawbacks to the aid. While China provides aid for different projects over a wide spectrum, for the most part it is focused on a few specific sectors. As a result pertinent issues that enable domestic resource generation in the region are not necessarily addressed. This suggests that there is a need to re-assess the type of Chinese aid sub-Saharan countries accept and to make sure that the aid ties in with these countries’ development agendas.</p>
<p><em>This is an extract from a working paper titled “The political and economic dynamics of foreign aid: A case study of United States and Chinese aid to Sub-Sahara Africa”. [Kafayat Amusa, Nara Monkam and Nicola Viegi]</em></p><img src="https://counter.theconversation.com/content/57992/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>The authors do not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and have disclosed no relevant affiliations beyond their academic appointment.</span></em></p>The increasing importance of non-traditional donors such as China has meant that the economic and political stronghold of Western countries in sub-Sahara Africa has gradually ebbed.Kafayat Amusa, Lecturer in Economics, University of South AfricaNara Monkam, Director Research at ATAF, and PhD supervisor, University of PretoriaNicola Viegi, Professor of Monetary Economics, University of PretoriaLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/577212016-04-20T20:13:11Z2016-04-20T20:13:11ZLimits to growth: policies to steer the economy away from disaster<figure><img src="https://images.theconversation.com/files/119406/original/image-20160420-25592-rinu4n.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">The earth is a finite place. </span> <span class="attribution"><span class="source">Earth image from www.shutterstock.com</span></span></figcaption></figure><p>If the rich nations in the world keep growing their economies by 2% each year and by 2050 the poorest nations catch up, the global economy of more than 9 billion people will be around <a href="http://www.amazon.com/Prosperity-without-Growth-Economics-Finite/dp/1849713235">15 times larger</a> than it is now, in terms of gross domestic product (GDP). If the global economy then grows by 3% to the end of the century, it will be 60 times larger than now.</p>
<p>The existing economy is already <a href="http://science.sciencemag.org/content/347/6223/1259855">environmentally unsustainable</a>. It is utterly implausible to think we can “decouple” economic growth from environmental impact so significantly, especially since recent decades of extraordinary technological advancement have only increased our impacts on the planet, <a href="http://www.pnas.org/content/112/20/6271.abstract">not reduced them</a>. </p>
<p>Moreover, if you asked politicians whether they’d rather have 4% growth than 3%, they’d all say yes. This makes the growth trajectory outlined above all the more absurd.</p>
<p>Others have shown why limitless growth is a recipe for <a href="http://sustainable.unimelb.edu.au/sites/default/files/docs/MSSI-ResearchPaper-4_Turner_2014.pdf">disaster</a>. I’ve argued that living in a <a href="https://theconversation.com/life-in-a-degrowth-economy-and-why-you-might-actually-enjoy-it-32224">degrowth economy</a> would actually increase well-being, both socially and environmentally. But what would it take to get there? </p>
<p>In a <a href="http://d2hqr0jocqnenz.cloudfront.net/cdn/farfuture/RFOgKDaIzpgM9yjt1sW6ZSXfvlC5ZrJve7xLCgiDqh4/mtime:1461028632/sites/default/files/docs/MSSI-IssuesPaper-6_Alexander_2016.pdf">new paper</a> published by the Melbourne Sustainable Society Institute, I look at government policies that could facilitate a planned transition beyond growth – and I reflect on the huge obstacles lying in the way. </p>
<h2>Measuring progress</h2>
<p>First, we need to know what we’re aiming for. </p>
<p>It is now widely recognised that GDP – the monetary value of all goods and services produced in an economy – is a <a href="http://thenewpress.com/books/mismeasuring-our-lives">deeply flawed</a> measure of progress. </p>
<p>GDP can be growing while our environment is being degraded, inequality is <a href="https://en.wikipedia.org/wiki/Capital_in_the_Twenty-First_Century">worsening</a>, and social well-being is <a href="http://www.amazon.com/The-Spirit-Level-Equality-Societies/dp/1608193411">stagnant or falling</a>. Better indicators of progress include the <a href="http://rprogress.org/sustainability_indicators/genuine_progress_indicator.htm">Genuine Progress Indicator</a> (GPI), which accounts for a wide range of social, economic and environmental factors. </p>
<h2>Cap resources and energy</h2>
<p>Environmental impact is driven by demand for resources and energy. It is now clear that the planet cannot possibly support current or bigger populations if developing nations used the same amount of resources and energy as developed nations. </p>
<p>Demand can be reduced through efficiency gains (doing more with less), but these gains tend to be reinvested in <a href="http://www.pnas.org/content/112/20/6271.abstract">more growth and consumption</a>, rather than reducing impacts. </p>
<p>A post-growth economy would therefore need diminishing “resource caps” to achieve sustainability. These would aim to limit a nation’s consumption to a “fair share” of available resources. This in turn would stimulate efficiency, technological innovation and recycling, thereby minimising waste.</p>
<p>This means that a post-growth economy will need to produce and consume in far less resource-intensive ways, which will almost certainly mean reduced GDP. There will of course be scope to progress in <a href="http://simplicityinstitute.org/wp-content/uploads/2015/04/TheCaseforSimplicitySimplicityInstitute.pdf">other ways</a>, such as increased leisure time and community engagement. </p>
<h2>Work less, live more</h2>
<p>Growth in GDP is often defended on the grounds that it is required to keep unemployment at <a href="http://www.theaustralian.com.au/business/business-spectator/faster-growth-needed-for-jobs-rba/news-story/aaeda6b567f77ad705893fad83576e75">manageable levels</a>. So jobs will have to maintained in other ways.</p>
<p>Even though GDP has been growing quite consistently in recent decades, many Westerners, including <a href="http://www.abc.net.au/news/2014-11-19/researcher-warns-of-health-impacts-of-long-work-hours/5901092">Australians</a>, still seem to be locked into a <a href="http://www.amazon.com/Work-Leisure-Environment-Overwork-Consumption/dp/1847201032">culture of overwork</a>. </p>
<p>By <a href="http://www.neweconomics.org/publications/entry/time-on-our-side">reducing the average working week</a> to 28 hours, a post-growth economy would share the available work among the working population. This would minimise or eliminate unemployment even in a non-growing or contracting economy. </p>
<p>Lower income would mean we would have less stuff, reducing environmental impact, but we would receive more freedom in exchange. <a href="https://www.createspace.com/5461040">Planned degrowth</a> is therefore very different to unplanned recession.</p>
<h2>Redirect public spending</h2>
<p>Governments are the most significant player in any economy and have the most spending power. Taking limits to growth seriously will require a fundamental rethink of how public funds are invested and spent.</p>
<p>Among other things, this would include a swift <a href="https://theconversation.com/unburnable-carbon-why-we-need-to-leave-fossil-fuels-in-the-ground-40467">divestment</a> from the fossil fuel economy and reinvestment in renewable energy systems. But just as important is investing in efficiency and reducing energy demand through behaviour change. Obviously, it will be much easier to transition to 100% renewable energy if energy demand is a fraction of what it is today. </p>
<p>We could fund this transition by redirecting funds from military spending (climate change is, after all, a <a href="https://www.climatecouncil.org.au/climatesecurity">security threat</a>), cutting <a href="http://www.theguardian.com/environment/2015/may/18/fossil-fuel-companies-getting-10m-a-minute-in-subsidies-says-imf">fossil fuel subsidies</a> and putting an adequate price on carbon. </p>
<h2>Reform banking and finance</h2>
<p>Banking and finance systems essentially have a “<a href="http://www.paecon.net/PAEReview/issue57/Trainer57.pdf">growth imperative</a>” built into their structures. Money is loaned into existence by private banks as interest-bearing debt. Paying back the debt plus the interest requires an expansion of the monetary supply. </p>
<p>There is so much <a href="http://www.economist.com/content/global_debt_clock">public</a> and <a href="http://www.businessinsider.com.au/new-record-the-rise-and-rise-of-australian-household-debt-2015-2">private</a> debt today that the only way it could be paid back is via decades of continued growth. </p>
<p>So we need <a href="http://positivemoney.org/wp-content/uploads/2015/06/Our-Money-A4.pdf">deep reform</a> of banking and finance systems. We’d also need to <a href="https://theconversation.com/the-debt-jubilee-an-old-testament-solution-to-a-modern-financial-crisis-11816">cancel debt</a> in some circumstances, especially in developing nations that are being <a href="http://www.globalpolicyjournal.com/blog/12/12/2013/donors%E2%80%99-dilemma-aid-reverse-how-poor-countries-develop-rich-countries">suffocated by interest payments</a> to rich world lenders. </p>
<h2>The population question</h2>
<p>Then there’s population. Many people assume that population growth will slow when the <a href="http://www.scientificamerican.com/article/fast-growth-can-solve-climate-change/">developing world gets rich</a>, but to globalise affluence would be environmentally catastrophic. It is absolutely imperative therefore that nations around the world unite to confront the population challenge directly. </p>
<p>Population policies will inevitably be controversial but the world needs bold and equitable leadership on this issue, because current trends suggest we are heading for <a href="http://science.sciencemag.org/content/early/2014/09/17/science.1257469.abstract">11 billion</a> by the end of this century. </p>
<p>Anyone who casually dismisses the idea that there is a limit to how many people Earth can support should be given a <a href="http://simplicitycollective.com/earth-as-a-petri-dish-the-problem-of-growth">Petri dish</a> with a swab of bacteria. Watch as the colony grows until it consumes all of the available nutrients or is poisoned by its own waste.</p>
<p>The first thing needed is a global fund that focuses on providing the education, empowerment and contraception required to minimise the estimated <a href="http://www.who.int/whr/2005/chapter3/en/index3.html">87 million</a> unintended pregnancies worldwide every year. </p>
<h2>Eliminating poverty</h2>
<p>The conventional path to poverty alleviation is the strategy of GDP growth, on the assumption that “a rising tide will lift all boats”. But, as I’ve argued, a rising tide will sink all boats. </p>
<p>Poverty alleviation must be achieved more directly, via redistribution of wealth and power, both nationally and internationally. In other words (and to change the metaphor), a post-growth economy would eliminate poverty not by baking an ever-larger pie (which <a href="http://www.theguardian.com/global-development-professionals-network/2015/nov/01/global-poverty-is-worse-than-you-think-could-you-live-on-190-a-day">isn’t working</a>) but by sharing it differently. </p>
<p>The richest 62 people on the planet own more than the poorest <a href="http://www.theguardian.com/business/2016/jan/18/richest-62-billionaires-wealthy-half-world-population-combined">half of humanity</a>. Dwell on that for a moment, and then dare to tell me that redistribution is not an imperative of justice.</p>
<h2>So what’s stopping us?</h2>
<p>Despite these post-growth policy proposals seeming coherent, they face at least four huge obstacles – which may be insurmountable. </p>
<p>First, the paradigm of growth is deeply embedded in national governments, especially in the developed world. At the cultural level, the expectation of ever-increasing affluence is as strong as ever. I am not so deluded as to think otherwise.</p>
<p>Second, these policies would directly undermine the economic interests of the most powerful corporations and institutions in society, so fierce resistance should be expected.</p>
<p>Third, and perhaps most challenging, is that in a globalised world these policies would likely trigger either capital flight or economic collapse, or both. For example, how would the stock markets react to this policy agenda?</p>
<p>Finally, there is also a geopolitical risk in being first to adopt these policies. Reduced military spending, for instance, would reduce a nation’s relative power. </p>
<p>So if these “top-down” policies are unlikely to work, it would seem to follow that if a post-growth economy is to emerge, it may have to be driven into existence <a href="http://simplicityinstitute.org/wp-content/uploads/2011/04/TransitionMovement.pdf">from below</a>, with communities coming together to build the new economy at the grassroots level. </p>
<p>And if we face a future where the growth economy grows itself to death, which seems to be the most <a href="http://sustainable.unimelb.edu.au/sites/default/files/docs/MSSI-ResearchPaper-4_Turner_2014.pdf">likely scenario</a>, then building up local resilience and self-sufficiency now will prove to be time and energy well spent. </p>
<p>In the end, it is likely that only when a deep crisis arrives will an ethics of <a href="https://www.createspace.com/5625313">sufficiency</a> come to inform our economic thinking and practice more broadly.</p><img src="https://counter.theconversation.com/content/57721/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Samuel Alexander does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>The global economy is already unsustainable – let alone if it gets bigger.Samuel Alexander, Research fellow, Melbourne Sustainable Society Institute, The University of MelbourneLicensed as Creative Commons – attribution, no derivatives.