Debt relief favours the indebted
- From: ano457@xxxxxxxxx
- Date: 2 Aug 2005 15:13:13 -0700
Debt relief favours the indebted
28 June 2005
Financial Times
There is no case for putting money in the hands of the government of
Zimbabwe and little point in giving it to the government of Congo. The
emotive interventions of pop stars and religious leaders has not
necessarily advanced the vital cause of poverty reduction.
The bleeding-heart view of third-world debt imagines subsistence
farmers working to pay grotesque salaries to Wall Street financiers.
The hard-nosed view says, in words used for an earlier debt crisis by
Calvin Coolidge, US president from 1923 to 1929, "They hired the
money, didn't they?"
Neither picture bears any relation to reality. Those farmers did not
incur the debt, nor are they repaying it. The money lent to the Highly
Indebted Poor Countries has gone and cannot be recovered. Most private
sector lenders extricated themselves years ago. The contentious debt is
owed to international agencies - the World Bank, International
Monetary Fund and African Development Bank - whose shareholders are
the governments of rich countries.
Most of this debt is ostensibly being serviced but this is true only on
the surface. The only way to repay debt is to earn more than you spend
and, for countries, this means exporting more than you buy from abroad.
With one or two exceptions, such as Bolivia, which benefits from high
copper prices, the HIPC governments cannot run a trade surplus now or
in the foreseeable future. Their external deficits are covered by aid
and new borrowing. Rich countries are giving and lending the money they
are repaying.
Would it not be better if this merry-go-round stopped? Not necessarily.
When debt relief comes as an addition to total aid flows, funds are
released to HIPC governments, which then have more to spend on their
own projects. When such relief redistributes existing aid, it shifts
resources to these governments from other potential recipients. The
outcome will be somewhere between the two: there will be some new
money, but nothing like as much as the headline figure. This grubby
reality of rearrangement and spin, rather than a latter-day miracle of
loaves and fishes, is how a modest commitment by the British and US
governments has been turned into a reported $40bn of debt cancellation.
The effect of debt relief is to favour HIPC countries as recipients of
aid and HIPC governments as channels of aid. Such a distribution is
problematic. Most of these countries are highly indebted because of
long histories of dreadful government. Many of their leaders - as in
Tanzania - were well-intentioned but hopeless. Others - as in
Democratic Republic of Congo - were thieves and murderers. Their
people were innocent victims.
Yet other countries, outside the HIPC group, may be more needy, or more
able to use aid effectively. States such as India are poor but have
been better governed. Nigeria does not qualify for HIPC status because
of the sheer scale of the larceny of its former rulers. And other
countries, such as Afghanistan, have never had a government to which
people would lend. There is no compelling reason why poor countries
that have run up large debts should receive preferential treatment
relative to poor countries that have not, and some justification for
the opposite bias.
Debt relief not only favours HIPC countries, but specifically gives
spending freedom to their governments. The aid it offers goes for
general public purposes, and donors have less control over its
distribution. Some debt campaigners claim that empowering local
politicians in this way is an advantage of this form of aid.
Occasionally this is true. There is a case for rewarding the numerous
improving governments of southern Africa. There is benefit in enabling
honest and capable politicians to show benefits to their electorate.
But there is no case for putting money in the hands of the government
of Zimbabwe and little point in giving it to the government of Congo.
The only policies that make sense are case by case, country by country.
Treating debt as a moral issue is wrong: neither leaders nor borrowers
emerge with any credit from the process through which these debts
accrued. It also gets in the way of the pragmatism necessary to ensure
that the inevitable process of write-offs yields the maximum advantage
to the impoverished population of those countries. The emotive
interventions of pop stars and religious leaders has not necessarily
advanced the vital cause of poverty reduction.
.
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