Debt-for-Education Swaps: Part III

Monumental Palacio Sarmiento houses Argentina's Ministry of Education. It is named after the grandfather of the education system, Domingo Faustino Sarmiento, the nation's President from 1868 to 1874.

In my last two posts I summarized some of the research I have done over the past 6 months for my job at the OEI. I briefly explored Latin America’s cash starved education systems and the spiralling debt crisis.

In short, I argued that the region is caught in a development trap because it spends too little on education and far too much on servicing an unpayable, and in some cases illegitimate, debt.

Given this context, a couple of years ago at the UNESCO’s 32^nd annual conference, Argentina’s and Brazil’s Ministers of Education proposed swapping debt for education investment. With support from Venezuela and Uruguay, they called upon rich countries to forgive a portion of the debt provided that the money goes to improving the quality and access to education.

Since then, a regional movement has emerged in support of debt-for-education swaps.

The rationale behind these swaps is two-fold. Firstly, by reducing the debt, developing countries are given breathing room to fund critical education projects. Secondly, by fuelling development in the long run, swaps should contribute to healthier economies that borrow more responsibly, thus preventing debt crises from recurring.

While debt-for-education swaps offer an innovative approach to some of Latin America’s greatest problems, debt swaps are not new nor are they the ultimate solution.

In the mid 1980s debt-for-equity swaps emerged as part of privatization programs that swept the region. In Argentina, Mexico and Chile, in particular, the debt governments owed to private creditors was bought by foreign investors on what’s called the secondary market. The debt was then converted by the government into an equity investment in a recently privatized enterprise in the developing country.

Debt-for-equity swaps, as many privatization programs, have been heavily criticized for various reasons. In some cases, public companies were sold off to foreigners or friends at far below their market price. In other situations, a state monopoly was simply replaced by a private one, providing little improvement in product quality and customer service. When privatization programs lost their popularity, so did debt-for-equity swaps.

During this period, debt-for-nature swaps became popular as well. In these transactions, development organizations (NGOS and IGOs) bought developing country debt on the secondary market. The development organization then negotiated with the developing country government to exchange the debt obligation at a discount for an environmental project approved by the country and implemented by the development organization. Conservation organizations, such as WWF, often used these funds to manage protected national parks, particularly rainforests.

Drawing upon the success of debt-for-nature swaps, other development organizations soon became interested in debt swaps. UNICEF began debt-for-child-survival swaps across the developing world. UNAIDS is now advocating debt-for-AIDS swaps.

After a couple of individual transactions in Indonesia and Pakistan, debt-for-education swaps emerged as a multilateral initiative in the aftermath of several recent economic crises in Latin America. Perhaps no other country was hit harder by recession than Argentina. I think this article, Despair in Once-Proud Argentina, starkly captures the crisis at its peak. While there has been significant macroeconomic progress made since the article was written (for instance, the country recently surpassed its all time high GDP level reached in 1998), job opportunities and wages of the poor and middle class remain dismal.

In the midst of constant protests, strikes and work stoppages, the current administration repeatedly reminds the public that rebuilding what was destroyed over the past three decades will be a slow process. For instance, the government’s commitment to education is seen in its pledge to increase education investment as a percentage of national wealth from its current 4% figure to 6% by 2010. This figure will place the country on par with the most advanced education systems in the world.

Promoting debt-for-education swaps as a regional initiative is a cornerstone of Argentine policy. Currently, Argentina is in the process of negotiating a $78 million debt swap with the Spanish government. This sum would be used to fund approximately 200,000 scholarships for children out of the school system in the country’s poorest regions - the northern provinces and the slums surrounding Buenos Aires. Ecuador recently ratified a $50 million debt swap with Spain which will be put towards education and other social spending.

In the past couple of months I travelled to Brazil to present the research I’ve done on the subject. I was pleased to find out that high ranking government officials, Lula included, UNESCO, people at BOVESPA (the Brazilian stock exchange), and high profile private sector leaders are behind the initiative.

Support from a regional giant like Brazil means that there is a growing recognition that calls to not pay the debt or demands for debt cancellation are not very productive.

What makes debt swaps more appealing than no-strings-attached debt cancellation?

While neither transaction injects new money into a country, the innovative and development-focus of debt-for-education swaps makes them more constructive and marketable. When debt is simply cancelled, there is no guarantee that the funds will be put to a worthwhile and ethical use.

Debt swaps are envisioned as a tool for directly reaching the country’s neediest population. The fund created by the swap is to be managed by an accountable committee composed of debtor and creditor government representatives, as well as civil society members. The funds are not to be injected in the general education budget. Instead, they are to be supervised through an extra-institutional mechanism that is both transparent and measurable.

Yes, the initiative sounds promising on paper. The Argentina-Spain swap will hopefully be finalized in October, barring complications Spain may have with its fellow Paris Club members (the group of the world’s main creditor governments) who generally have to agree upon who is eligible for debt relief. If this process goes well, I hope to one day meet some of the children who benefit from the project.