The Economist on Clinton Debt Plan (fwd)

[Robert Weissman <rob@essential.org>]

The Economist, March 20, 1999

For this relief, some thanks 

                President Clinton has called for poor countries to be released
                from some of their debts. About time too 

            AS  BANDWAGONS go, the campaign
             for more debt relief  for the poorest
             countries has gathered an
               impressive head of steam, as well as an odd crew of
               passengers: aid workers and finance ministers, pop
               stars and bishops, Muhammad Ali and the Dalai
               Lama. Now Bill Clinton has hopped aboard, telling
               a meeting of African nations in Washington this
               week that he wanted more debt to be forgiven (see
               article). When such a coalition of popularity-seekers
               unites behind such a simple demand—couched,
               moreover, in such sanctimonious terms—it is
               tempting to believe it must be wrong. It is not.
               Rather, debt relief needs to go faster and further
               even than its proponents envisage. 

               It has long been obvious that several countries,
               especially in Africa, cannot repay their debts. Their
               (occasional) efforts to do so impoverish already
               destitute people, and blight their hopes of economic
               take-off. Ten years of efforts to put this right have
               yielded some results. The Paris Club of official
               creditors has offered steadily better terms to poor
               countries. Commercial banks have become used to
               buying back their loans at deep discounts. Most
               significantly, a “Heavily Indebted Poor Countries”
               (HIPC) initiative was launched in 1996 by the World
               Bank and the IMF. This broke a taboo on the
               restructuring of debt to multilateral agencies, and set
               up a framework for systematic debt reduction in
               return for overdue economic house-cleaning. 

               Some 40 countries have now been classified as
               HIPCs. They owe about $170 billion, less than half
               all low-income-country debt. On average their
               debts exceed their annual export earnings more than
               fourfold. 

               Yet under the HIPC initiative, the process of debt
               relief remains painfully slow. A country must pursue
               IMF-mandated reforms for three years before
               donors agree to reduce its debts to “sustainable”
               levels—and they will actually do it only after a
               further three years of good behaviour. So far, only
               eight have qualified; and just two—Uganda and
               Bolivia—have actually received any debt relief. This
               is at a time when falling commodity prices are
               denting export earnings for many. Even lower
               interest rates provide little help, since most debt is at
               fixed concessional rates anyway. 

               There are good reasons for caution before forgiving
               debts. Most countries are poor not because they
               are in debt, but because they are run by
               incompetent and corrupt governments. Many
               borrowed unwisely and squandered the proceeds
               on personal enrichment, grandiose projects, or
               weapons to bully citizens or frighten neighbours. If it
               is sensible to make aid conditional on its being
               well-spent, so it is with debt relief. Bankrupt
               countries, it is often noted, do not enjoy the sort of
               protection from creditors that many jurisdictions
               afford to bankrupt companies. But nor can creditors
               send in the receivers or sack the management. 
                
               Fact from fiction 

               There is a less good reason why debt relief is
               producing such meagre results: that the
               starting-point is too stingy. Many of the calculations
               surrounding HIPC debt are based on the fiction that it
               might one day be repaid. In fact many countries are
               defaulting on their bilateral debt, even as they repay
               multilateral lenders. After going through the HIPC
               process, their annual debt service ends up little
               smaller—it is merely shared differently among their
               creditors. Clearly, this is absurd: debt relief should
               free resources, not merely redirect them. 

               Mr Clinton is the latest world leader to propose a
               bolder initiative to forgive more loans. His belated
               gesture should be cheered. It is not a pretty solution:
               it is unfair to poor countries that just fail to qualify; it
               is even more unjust to those that have, in the past,
               striven to be good debtors. But these are all
               arguments for more generosity to the
               deserving—not for continuing to punish the poor for
               the sins of their undeserving past rulers.