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Debt relief enters US election
fray
By Todd Tucker
(Posted
with permission from Foreign Policy in Focus)
People looking to get excited about US democracy
in an election year needn't look further than the
current proposals on poor-country debt relief being put
forward by the presidential campaigns. This has clearly
graduated from an issue that concerned only a few
committed activists to one that engages the political
mainstream.
The Bush administration's initial
proposal was to offer 100% debt cancellation for about
30 nations considered "Highly Indebted Poor Countries"
(HIPC). Most of this would be funded through the
existing gold and cash reserves of the World Bank and
the International Monetary Fund (IMF). Not to be
outdone, Democratic candidate John Kerry recently called
attention to his own campaign's proposal, which calls
for the same goal on debt but includes more countries.
The Kerry initiative also notes that debt cancellation
"should not come at the expense of future foreign aid
flows to poor countries" and suggests such measures can
be made through "modifying the [existing] Enhanced
Highly Indebted Poor Countries Initiative".
Support from other Group of Seven (G7) countries
is needed for either proposal to become policy. Recent
press reports suggest that there may be some support in
Europe. UK Chancellor of the Exchequer, Gordon Brown,
has backed the goal of poor-country debt cancellation
and suggested that British taxpayers would foot 10% of
the bill. Whatever the outcome, the topic of debt
cancellation will continue to loom large in the coming
months.
The case for debt
cancellation
Religious leaders, rock stars, and
even some economists have long called for deeper debt
relief for the poorest countries. Many of these are in
sub-Saharan Africa, which has experienced a dramatic
decline in living standards since 1980. While the
region's economies grew 36% in per capita terms in
1960-80, they actually shrank 15% in the subsequent 20
years. In the poorest countries, progress in life
expectancy, reduction in infant and child mortality, and
increase in the rate of growth of school enrollment was
also slower for the second period.
The AIDS
pandemic has clearly exacerbated these problems. Nearly
2.2 million sub-Saharans died from AIDS-related
infections in 2003, or nearly 75% of the world total for
that year. Addressing the pandemic has been impeded as
countries have been forced to send scarce resources to
rich countries in the form of debt and other payments
despite their desperate social conditions.
Contrary to the standard prediction of economic
theory, that capital will flow from capital-abundant
countries in the North to capital-scarce countries in
the South where it will get a higher return, developing
countries are actually net capital exporters to rich
countries in today's global economy. In 2000, the river
of capital was flowing upstream - from South to North -
to the tune of more than US$43.5 billion, or 0.8% of the
gross domestic product (GDP) of developing countries.
When you consider interest and dividend payments as
well, the developing world as a whole would have a
surplus equal to 2.9% of its GDP in the absence of such
flows. Sub-Saharan Africa would have a whopping surplus
equal to 4.4% of its GDP, if not for these payments.
Payments to the World Bank and the IMF
exacerbate some of the problems. Economist Jeff Sachs
recently said, "If the World Bank thinks it's actually
doing any good, collecting money from Malawi so that it
can re-lend money to Malawi, then it has misunderstood
the point." While many rich countries have already
canceled the bilateral debts owed to them by poor
countries, these two multilateral agencies have been
slower to get on board. Their current HIPC initiative
has only reduced debt levels by about a third and merely
seeks to reduce the countries' debts to "manageable
levels", tied to their export levels. To make matters
worse, the harmful policy conditions that poor countries
had to comply with to receive loans from these
institutions are now being used as a condition for debt
reduction as well.
Looking forward
As
G7 finance ministers discuss the various proposals, they
will consider how much debt cancellation the World Bank
and the IMF can afford and how this will be financed.
Some European governments and organizations remain
concerned that debt cancellation will hinder the ability
of the international financial institutions (IFIs) to
operate. But the New Economics Foundation and other
researchers indicate that cancellation of debt for HIPC
countries is not only affordable but well within the
reach of the institutions' own gold and money reserves
held in abeyance for just such a conjuncture. Affordable
debt cancellation can be achieved without
developed-country taxpayers having to foot the bill for
the IFIs' past mistakes and without hindering the flow
of future resources to poor countries.
Existing
relief measures demonstrate that poor countries direct
more money to health and education when their debt
levels are reduced. If both US presidential candidates
can agree to finish what was started on debt
cancellation, so should the rest of the G7. Anything
less would be in bad faith - and bad economics.
Foreign Policy In Focus analyst Todd
Tucker works with the Center for
Economic and Policy Research in Washington, DC,
and writes frequently on trade, development and economic
implications of foreign-policy issues. This article is
posted with permission from Foreign
Policy in Focus.
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