Time To Reform The Reforms


By David Malin Roodman

Debt Channel
July 25, 2001
Among the rioting, street violence and angry protests that will be forever associated with Genoa, there was actually an agenda being discussed. Third world debt activists called on the world's richest governments to cancel more debt of the poorest ones. And in the polite, tortured language of diplomacy, heads of state refused to budge.

A fundamental reason for this stalemate, is that current debt cancellation programmes are failing. And neither side wants to explain why.

Two years ago, in Cologne, Germany, G8 launched the enhanced Debt Initiative for Heavily Indebted Poor Countries (HIPC). Under the HIPC initiative, 41 nations, 33 of them African, could see their foreign debts fall by an average of 55 percent. In return for cancellations, debtors must agree to implement structural adjustment policies, balance their budgets, reduce trade barriers and privatise state companies. At the same time they are expected to put savings from debt relief into poverty-fighting plans designed in consultation with non-government organisations, such as charities and churches. To cement the deal, rich governments pledged $2.5 billion to a HIPC Trust Fund to reimburse multilateral lenders, such as the World Bank, for their share of the debt cancellations.

The plan was a political winner. Politicians and activists from Jesse Helms to Jesse Jackson applauded the generosity of the cancellations and found reassurance in debtors' commitments to economic probity, poverty reduction, and democracy.

But the HIPC programme is failing because it is built on faulty assumptions. Key among these is the belief that the poorest countries can actually repay most of their debts. The assumption, once stated, is obviously false. The US Treasury estimates that 91 percent of its $3.8 billion in HIPC debt cannot be repaid.

But who will tell the people? Rich-world politicians prefer not to point out that their debt cancellation promises are largely empty: after the promised write-offs, debtor nations will still owe more than they can pay. Multilaterals are loathe to highlight how decades of lending to an entire continent - Africa - have almost completely gone to waste. And the truth discomforts many activists too because it severs their most powerful weapon, the simple rhetorical link between debt and poor children. Cancelling debt that will never be repaid anyway cannot free-up money to help those children.

Another false assumption in the HIPC program is that debtors are almost entirely to blame for the crisis. Thus they must bear the burden of reform. But, in the blunt words of the jailed Deputy Prime Minister of Malaysia, for every bad borrower there is a bad lender. The underlying problem among lenders, from the UK government to the International Monetary Fund, has been the tendency to lend for the wrong reasons. During the Cold War, for instance, the US government poured credits into its ally Zaire even though it knew President Mobutu Sese Seko was pocketing much of the money.

Meanwhile, The World Bank and other multilateral development banks have long prized their own growth above all else. The incentives and values that permeate their organizations have pressed individual employees to worry more about pushing loans than whether those loans will be used well.

The HIPC program entrenches this culture by granting the multilaterals $2.5 billion almost carte blanche. Cast as "buying" debt relief, the HIPC Trust Fund actually bails out the development banks without forcing them to reform, thus rewarding the recklessness that engendered the current crisis and setting the stage for the next one. Meanwhile, countries such as Uganda are supposed to jump through hoops in exchange for little real debt relief.

In conclusion, the HIPC initiative is designed by and for creditors, and will do the debtors little good.

So what would an effective debt cancellation program look like? An independent international body would estimate how much of each poor country's debt is unpayable and cancel it immediately and unconditionally, not out of generosity but out of realism. Critics would lambaste these blank cheques for dictators. But the cheques have already been cashed. For purposes of repayment, the money is gone.

As for debt deemed payable, lenders should cancel it more discretionarily, in the spirit of President Bush's new proposal to make new loans and grants more selective. Complete write-offs for governments, such as those of Uganda and Ghana, that are committed to reform could free-up valuable funds to combat AIDS and illiteracy. Similarly, in making new contributions to multilateral lenders, rich governments should look for demonstrated commitment to internal reform to reduce the pressure to lend.

Only such a package can protect taxpayers' money, press both creditors and debtors to reform, and bring the third world debt crisis to a lasting end.

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