Global Policy Forum

To Start a Corner Shop You Need Two Roads

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by Ethel Hazelhurst

Financial Mail (South Africa)
June 15, 2001

A mountain of controversial unpaid and unpayable sovereign debt continues to dominate debates in international development forums. A legacy of cold war geopolitics and economic mismanagement by some of the world's poorest countries, the debt of the heavily indebted poor countries (HIPC) is being reduced - in absolute terms. But the HIPC initiative has been less successful in cutting the ratio of debt-service costs to export revenue to sustainable levels, because of falling commodity prices. In other words, the benefits of the initiative may not be sustainable.


Consensus among delegates to the World Economic Forum (WEF) Southern Africa summit in Durban last week was that the solution to the high cost of debt servicing went beyond debt relief. SA doesn't want or need debt relief, which puts Finance Minister Trevor Manuel in a strong position to argue the HIPC case. Manuel says issues beside debt relief must be addressed - "global stability; market access for HIPC countries; FDI (foreign direct investment) flows, domestic capital formation and official development assistance".

The number of countries qualifying for debt relief leapt from 10 last October to 22 a few months later. The countries - 18 in Africa - are scheduled to receive US$34bn in foreign debt relief. The International Monetary Fund (IMF) says, together with other forms of debt relief, the sum will cut foreign debt of these countries from $53bn to $20bn at net present value. It will reduce by one third the amount they pay in interest each year - the equivalent of 1,9 percentage points of GDP. Perhaps more importantly, says the IMF, debt service as a percentage of government revenue will fall from 27% to a projected 12% in 2001-2003 and to below 10% by 2005.

But views expressed in Durban were echoed at a conference that finance ministers of HIPC countries attended in London last week. Ugandan Finance Minister Gerald Ssendaula said the recent drop in the coffee price, one of Uganda's main exports, meant export revenue was falling. So the relationship between debt-service costs and export revenue would once again be out of line. The countries pouring resources into the IMF-World Bank HIPC initiative may be missing the critical point on which its success or failure depends: a coherent approach to development assistance. Unless they allow HIPCs to integrate with the global economy, the debt problem will arise again and again.

This was a point that Manuel and Trade & Industry Minister Alec Erwin underlined at the WEF meeting. HIPC country currencies are not used on world markets. To pay for imports or repay debt, the countries have to earn hard currency and the only way to do that is through strong export growth. But, according to the World Bank, tariffs and quotas in the rich world cost the 49 less developed countries - 34 of them in sub-Saharan Africa - $2,5bn a year in lost exports. Non-tariff barriers, such as health and safety regulations, cost more again. Though average tariffs in the US, Canada, the EU and Japan range from only 4,3% in Japan to 8,3% in Canada, their tariffs and trade barriers on products that developing countries export are much higher. These include agricultural products and processed food.

In addition, agricultural subsidies go to uneconomic producers so they can compete on a non-level q playing field against imported goods. If the constraints on HIPC country exports were to be removed, they would become much more attractive to foreign direct investors. And domestic investors would be in a better position to raise funds for infrastructure spending. GDP growth would be that much stronger and the need for developed countries to give handouts would be that much less. Ironically, developing countries that are discriminated against have the comparative advantage in producing most of the targeted exports. So consumers in the EU, Japan and the US would also benefit if the barriers were abolished; as would the taxpayers who would no longer have to fund unviable industries.

Another point of contention is the conditions attached to relief under the HIPC framework. One is that the resources, freed by debt cancellation, should go towards health and education. The reasoning is sound: economic growth needs healthy educated people. But the conditions don't allow for practical decisions on the ground. Manuel says democratically elected governments should be left to set their own priorities because they are closest to the problems. When infrastructure is lacking, it may be impossible to deliver health and education services. "You can't have a corner shop until there are two roads," he says.

Poverty, debt and development failure, compounded by the HIV/Aids pandemic that affects many HIPC countries, have combined to create a time bomb. The countries that are casualties must commit themselves to finding a way out of the poverty trap. However, if the advanced countries don't look beyond their own interests, they will find themselves in target range when the time bomb goes off.


More Information on Financing for Development
More Information on Debt Relief

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FAIR USE NOTICE: This page contains copyrighted material the use of which has not been specifically authorized by the copyright owner. Global Policy Forum distributes this material without profit to those who have expressed a prior interest in receiving the included information for research and educational purposes. We believe this constitutes a fair use of any such copyrighted material as provided for in 17 U.S.C § 107. If you wish to use copyrighted material from this site for purposes of your own that go beyond fair use, you must obtain permission from the copyright owner.