Getting Debt Relief Right

M. A. Thomas

From Foreign Affairs, September/October 2001

Article preview: first 500 of 3,547 words total.

Summary:  Many argue that forgiving international debts will help relieve poverty in the world's poorest countries. But an enormous amount of money is already given to aid the poor, with little of it reaching those in need. Widespread corruption, weak political institutions, and a lack of accountability all hinder the provision of important social services in developing countries. The international community must figure out a way to ensure the proper use of debt-relief dollars-before the problems plaguing many of the world's poorest countries grow any worse.

M. A. Thomas is Associate Director of the Center for Institutional Reform and the Informal Sector in the Department of Economics at the University of Maryland at College Park.

BLESSED ARE THE POOR?

Today 41 of the world's poorest countries are bankrupt. These nations, identified by the World Bank as "heavily indebted poor countries" (HIPCS), owe some $170 billion to foreign creditors, while half of their 600 million citizens get by on less than $1 a day. Nine out of ten HIPCS cannot sustain their debts, given their low export earnings and GNPs. Unless some of this debt is forgiven, they will be paying in perpetuity. Their creditors, on the other hand, include the wealthiest countries in the world, as well as the international financial institutions that are meant to support economic development.

In the spirit of the Jubilee (a semicentennial forgiveness of debts described in the Old Testament), a diverse and powerful coalition of political and religious leaders, Nobel Peace Prize winners, economists, rock stars, and rioting activists has rallied for a complete debt write-off. Arguing that high interest payments "crowd out" government spending on the poor, these advocates claim that forgiving national debts will help relieve the world's worst poverty. Using powerful emotional rhetoric, they offer heart-wrenching descriptions of the millions of people lacking security, adequate food, clean water, and basic health care and education. But as moving as this testimony may be, the reality is that the windfall of the current HIPC Initiative -- a $28 billion debt-relief package administered by the International Monetary Fund (IMF) and the World Bank -- does not go to the poor. Instead, it goes to the same governments that racked up the debt in the first place, many of which are weak, corrupt, and authoritarian -- hardly the best intermediaries to carry out a philanthropic agenda.

IN THE RED

During the late 1970s, many HIPCS experienced a surge in the prices of their primary export commodities, such as oil, cocoa, tin, and coffee. Based on exceptionally strong export earnings, these countries borrowed from private banks and official export credit associations and then dramatically expanded government spending. But commodity prices quickly tumbled in the 1980s, and as a result, many HIPCS suffered dramatic downturns in their terms of trade (the prices of exports relative to imports). Ethiopia, for example, suffered a 90 percent degradation in its terms of trade between 1980 and 1993, while Cote d'Ivoire's terms of trade fell by nearly half. Meanwhile, a serious drought persisted in the Sahel, and high population growth continued across the board.

Under such circumstances, many HIPCS had trouble paying their creditors, both foreign and domestic. Borrowers and lenders alike initially saw this setback as temporary; HIPCS continued to borrow to make up the shortfall and stimulate economic growth based on optimistic predictions of recovering export prices. But even when it became clear that prices would not return to their previous highs, some countries were reluctant to cut government spending. They continued to borrow from other governments and multilateral institutions such as the IMF, the World Bank, and the African Development Bank. During the 1980s, long-term HIPC debt more than tripled before peaking ...

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