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. When such a coalition of popularity-seekers united behind such a simple demand – couched, moreover, in such a sanctimonious term – 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.
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.
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 the undeserving past rulers. 1999 The Economist Newspaper Group, Inc. Reprinted with permission. Further reproduction prohibited. www.economist.com