The move to write off debt that very poor countries owe to other governments and to institutions such as the World Bank is a good one. It will help the nations affected, but is far from a cure-all for their overall economic woes. These are beyond the control of anyone outside the poor societies themselves.
The problems poor countries face servicing international debts have been evident for 20 years. When high budget deficits and a tight monetary policy drove nominal U.S. interest rates to unprecedented highs in the early 1980s, highly indebted countries such as Mexico, Brazil, Argentina and Nigeria all faced default.
Concern among the governments of wealthy nations focused on how defaults on international debt owed to commercial banks might harm the world economy. Considerably less attention was given to how high debt levels affected the citizens in the indebted developing countries, at least at first.
The problem of commercial debts owed by the large, more developed nations such as Brazil and Mexico was ameliorated — though not solved – over time with several devices. These included complex reschedulings, write-offs and swaps of bank loans for bonds.
As threats to financial markets posed by the unsustainable commercial debts of poor countries faded, another problem surfaced. Nonprofit organizations and churches focused increased attention on the noncommercial debts that the very poorest countries, largely in Africa, owed to the governments of the wealthy nations or to international lenders such as the World Bank and the International Monetary Fund.
These concerns coalesced into the Jubliee 2000 movement that advocated forgiving substantial amounts of such debt. Religious organizations led the campaign, which included well-publicized pleas by rock star Bono and Pope John Paul II.
Official responses were slow in coming, but eventually the World Bank and IMF responded with the Highly Indebted Poor Country program to reduce the debts of very poor countries that agreed to undertake economic reforms. Introduced with much fanfare in 1996, the program accomplished much less than debt-relief advocates had demanded. We passed into a new millennium without any real “year of jubilee.”
The current initiative, advocated in somewhat different versions by the United Kingdom and the United States, is thus a welcome return to dealing with a problem. Reducing or eliminating debts of some very poor countries simply recognizes the reality that these debts are not likely to be paid in any case. It also gives their governments some budget relief that might be used to foster greater growth or help the poor.
Debt relief is no guarantee that these countries will thrive, however. Their inability to service debt contracted in the past is a symptom — not a cause — of their limited capacity for good self-government. Effective institutions and rational policies are needed. Debt relief alone will accomplish little.
© 2004 Edward Lotterman
Chanarambie Consulting, Inc.