Debt relief hopes bring out the critics
By Jorn Madslien
BBC News business reporter

Total debts amassed by the world's poorest countries shot up from $25bn in 1970 to $523bn in 2002, resulting in endless misery and widespread poverty as many of these economies spiralled out of control.

In 1970, Africa's proportion of the total stood at less than $11bn, not even half the total owed by poor nations. By 2002, that had risen to well above half, or $295bn.

But despite the cash injections provided by the loans, no indebted African country has sincerely prospered. Consequently they are not in positions where they can service their debts without enduring considerable pain.

And yet - despite having paid back $550bn in principal and interest over the last three decades, on $540bn of loans - they still go on paying, sacrificing both the health and the education of their people, as well as any prospect of economic recovery and growth.

The desperate plight of Africa has convinced ever more mainstream politicians across the Western world that the only way forward is to write off the debts of the world's poorest countries, with the UK chancellor Gordon Brown pushing for a 100% debt forgiveness deal at the G8 summit of the world's richest nations in July.

Stimulating debt forgiveness

The idea of debt relief as a tool to secure peace and prosperity is not new.

A debtor nation does not love its creditor
John Maynard Keynes
After World War I, the British economists John Maynard Keynes observed that "the war has ended with everyone owing everyone else immense sums of money".

"The existence of the great war debts is a menace to financial stability everywhere," Mr Keynes argued, pointing out the obvious; that "a debtor nation does not love its creditor".

"It is fruitless to expect feelings of goodwill... if their future development is stifled for many years to come by the annual tribute which they must pay us", he wrote in The Economic Consequences of the Peace in 1919.

"If, on the other hand, these great debts are forgiven, a stimulus will be given to the solidarity and true friendliness of the nations," Mr Keynes reasoned.

Grants not loans

Mr Keynes' advice was not heeded, of course.

Instead, "allied war debts and post-World War I reparation claims entangled creditor and debtor nations in a prolonged political and financial crisis that contributed to the Great Depression and indirectly to the rise of fascism", observes economist Jeffrey Sachs, special adviser to United Nations Secretary General Kofi Annan, in his book The End of Poverty.

But following World War II, it seemed the global community had learnt from its mistakes.

Under the Marshall Plan, it was decided that grants rather than loans should be issued to help rebuild Europe, to ensure embryonic and fragile democracies were not torn apart by squabbles over debt burdens.

"We would do well to emulate that wisdom today," argues Mr Sachs.

Only this time - with a child dying every three seconds from hunger or preventable diseases - there is even more at stake.

Moral hazard

Those campaigning for debt relief insists it works wonders. For example, in Tanzania, debt relief enabled the government to abolish primary school fees, leading to a 66% increase in school attendance, according to the Jubilee debt campaign.

And yet, not everyone is in favour of debt relief.

Critics say writing off debts encourages moral hazard at the international level - that is, "debt relief encourages borrowers to take on an excessive amount of new loans expecting that they too will be forgiven", argues World Bank advisor William Easterly.

"Commercial banks obviously don't want to get caught with forgiven loans, and even the most charitable official lenders don't want to sign their own death warrants by getting stuck with forgiven debt," he adds.

"Both commercial and official lenders may want to redirect their resources to safer countries where debt relief is not on the table."

As a consequence, poor countries whose debts are written off become financial pariahs without any hope of raising finance to invest in better futures.

Mr Easterly believes "debt relief is a bad deal for the world's poor" since it rewards those who have behaved recklessly or cynically and encourages them to go out there and do it all again.

"Debt relief goes into the same government account that rains money on good and bad uses alike," he says. So rather than being a spur to spend more on education, "debt relief enables governments to spend more on weapons, for example".

"Full and unconditional debt forgiveness... would simply transfer more resources from poor countries that have used aid effectively to those that have wasted it in the past," he argues, pointing out that debt levels have continued to soar during the last decades even though a string of debt relief programs have been introduced after 1967, when the United Nations argued that the debt servicing burden had reached "critical situations".

In the late 1970s, bilateral creditors wrote off $6bn, and since 1987 "successive G7 summits have offered increasingly lenient terms... on debts owed by poor countries", Mr Easterly says.

Part of the problem

By the late 1980s, the debt crisis was spiralling out of control, after soaring oil prices during the late 1970s sparked a global recession that killed off much of the demand for imports of commodities from the developing world.

So while the oil exporting countries were raking it in, producers of other commodities saw their income from exports plummet.

Meanwhile, both banks and governments in cash rich countries took the opportunity to lend to the increasingly poor countries, many of them governed by dictators.

As the debt burden grew, new loans were taken out to service old ones - a practice taken as proof of the old adage; that for every bad borrower there is a bad lender.

Bad lenders come in many forms, and the worst is the sort that makes debtor nations behave in ways that harm their own economies, according to anti-poverty campaigner George Monbiot.

Both loans and debt relief tends to come with conditions attached. To qualify, poor countries are often forced to open up their markets and embrace neoliberal policies that help maintain and extend the power and influence of the West over African and other poor nations.

The problem, argues Mr Monbiot, is the way the G8 leaders try to make out that they are desperately searching for a solution to Africa's problems, while in reality they are part of the problem.
Story from BBC NEWS:
http://news.bbc.co.uk/go/pr/fr/-/2/hi/business/4619189.stm

Published: 2005/06/29 06:23:48 GMT

© BBC MMV