Philippine disaster relief comes with a catch: more debt

Analysis: What’s the role of loans in helping poor countries recover from disasters?

Typhoon Haiyan hit the Philippines in November.
Dondi Tawatao/Getty Images

After Typhoon Haiyan devastated the Philippines late last year, many news outlets reported that hundreds of millions of dollars had been pledged by foreign governments and banks to help the country rebuild. But there was a less-reported catch: The storm-battered country would to have to pay back much of that money — at least $1 billion.

Loans like those made to the Philippines have been a standard part of the post-disaster playbook for decades. Proponents, who often describe the loans in more attractive terms, such as "financing" or "assistance," say the money helps impoverished nations recover from storms, earthquakes and other catastrophes while helping build credit and develop economies over the long term. Others counter that it's a politically safe way for donor countries to appear compassionate while reassuring their own citizens and creditors that the money —at least theoretically — will be paid back. Critics say the loans are nothing more than new debt imposed at a time when poor countries are most vulnerable.

"The more debt you have, the harder it will be to rebuild," says Tim Jones, a senior policy officer for the Jubilee Debt Campaign, which opposes such loans. "The problem comes … in 10 years' time, when the loan has to be repaid."

There is wide agreement that such loans are a bad idea when it comes to countries like Haiti, among the poorest in the world. Haiti was already burdened with more than $1.8 billion of external debt prior to the 2010 earthquake that left an estimated 2 million people homeless. The country's debt problems go back to an oppressive indemnity levied by France after the former colony won its independence in 1804; many of the more recent loans were taken out by the brutal Duvalier-family dictatorship, which ruled the country from 1957 to 1986. Lenders had long known Haiti could never pay back its loans, which were a major drag on the country's already moribund economy, and forgave $600 million in debt the year before the quake. After the disaster, the remaining debt was canceled outright, and donor nations described the forgiven debt as disaster relief, even though it represented money that had, at best, not existed for decades. 

The Philippines has both a bigger economy and higher per capita GDP than Haiti, and its economy is growing. But the archipelago nation, in the western Pacific, continues to battle a monstrous debt load close to the size of the country's entire economy. That has long contributed to its poverty and vulnerability to disasters by limiting what the governments can spend on infrastructure, particularly in outlying areas such as those hit by Typhoon Haiyan (known locally as Yolanda).

As in Haiti, much of the Philippines' debt can be traced back to a dictatorship — in this case, that of Ferdinand Marcos, who, like Jean-Claude Duvalier, was overthrown in 1986. Marcos piled up loans from the World Bank, the International Monetary Fund and assorted friendly countries, including the United States. Some funds were spent on ridiculous projects, like a never used nuclear power plant built next to a volcano, or stolen outright by Marcos. After he was overthrown and convicted of corruption, successor governments were stuck with the bill.

Recent Philippine governments have been able to reduce a debt burden that was once nearly double the country's GDP to about 91 percent, with about a third owed directly to foreign countries and banks. But that has meant billions of dollars in annual payments, totaling as much as a quarter of yearly government revenue, often to pay back loans that were never translated into anything of value for Filipinos.

So when the World Bank and Asian Development Bank offered packages of new loans totaling as much as $500 million each after the typhoon, the country faced a dilemma: Should it take the money so it could rebuild now — with easy terms such as a 10-year grace period for repayment and an interest rate of less than 1 percent in the case of the World Bank — or should it try to limit the burden on future generations?

Manila took the money. Planning Secretary Arsenio Balisacan defended the decision to reporters, arguing that the rates offered by the multilateral agencies were better than they could get at commercial banks. If the loans ultimately increased the country's deficit, he told The Philippine Star newspaper, "The market will understand."

Dictatorships' debts

It's too early to say how helpful the money will be in the near term. So far, the disaster zones on the islands of Leyte and Samar, well south of the relatively untouched capital, have not been feeling flush. Only about a quarter of the estimated 1.3 million displaced families have received any form of shelter assistance as of January, according to the Shelter Cluster, which coordinates aid from major relief organizations. Aid workers say they have only enough funds to provide 9 percent of storm survivors a roof durable enough to withstand another major typhoon. The Washington Post reported earlier this month that in hard-hit areas like Tacloban, survivors unable to wait any longer were returning to the disaster zone to "construct weaker, leakier and sometimes rotting versions of their old homes."

Anti-debt activists say the real problem with loans is that survivors and governments dealing with natural disasters will, at best, use them to replace lost infrastructure, not create new wealth that will make it easier to pay back the money and other debts. Jones argues that it would be more helpful to disburse the money in the form of unrestricted grants. His group has called for a suspension of debt payments in the Philippines until a thorough audit can be completed in order to determine how much of the debt can be traced back to bad loans, such as those made to the dictatorship, and thus be canceled.

World Bank officials respond that it's up to the countries in question to decide whether they should accept such loans. A secondary deterrent is that doing so could hurt a country's credit rating.

Even with the debt, the typhoon and a 7.2-magnitude earthquake in October, the Philippine economy is projected to continue growing at its current rate of about 7 percent a year. That can be misleading, however, since not everyone is sharing benefits. Balisacan noted in a June 2013 speech that more than 60 percent of the country's economic growth is in the region around Manila. Outlying areas, including Leyte and Samar, have not been as fortunate.

As some European countries and the United States have shown, it's possible to carry large amounts of debt and still have a growing economy. (Though Greece, Ireland, Italy and Spain may say that is not a risk-free scenario.) But countries without a seat at the decision-making table can face a more precarious situation. Caribbean countries such as Jamaica and Grenada have some of the world's highest debt burdens. These island nations, like the Philippines, regularly suffer from natural disasters but, unlike Haiti, are too prosperous for debt-relief programs. They are out of the headlines today but could be back very soon. As a Jamaican lawmaker recently wrote, those burdensome loans mean less money to prepare for future calamities, leading to "devastation when disasters strike and greater levels of debt long after they pass."

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