debt relief bad for debtors

Doug Henwood dhenwood at
Wed Aug 9 09:41:03 PDT 2000

[from the World Bank's daily clipping service]

THE HARSH CONSEQUENCES OF DEBT FORGIVENESS. Anne Krueger, professor in humanities and sciences, and director of the Center on Economic Development and Policy Reform, Stanford university, and T.N. Srinivasan, professor of economics at Yale university, write in an op-ed in the FT (p.11) that heavily indebted countries spend more on debt servicing than they do on their social sectors, such as education and health. Therefore, the argument goes the debt of the highly indebted countries should be forgiven.

It is difficult to understand why sympathizers with the poor in developing countries focus on this issue. Most countries that are heavily indebted are ones that have over- and mis-spent on defense, perks for high officials, and subsidies predominantly benefiting upper income groups. At the same time, corruption or illegal transfers to the powerful combined with failure to collect taxes has led to large fiscal deficits.

Typically, expenditures on education and health for the poor have been low. Past assistance has therefore largely been allocated to items that have not had high development pay-offs. Moreover, most of the heavily indebted poor countries (HIPC) have not, in fact, been servicing their debts voluntarily: these debts have either been rolled over or are in arrears. So debt forgiveness would not release resources when debt-servicing obligations would not have been paid.

Even when resources are released, unless there is radical change from past behavior on the part of the debtors, their priorities for the use of released resources are not likely to be on education, health, or other expenditures that will enable the poor to improve their lot. Indeed, it would make far more sense to allocate resources directly to areas such as education and health through non-governmental organizations with a proven track record, rather than forgiving debt.

A worthwhile rallying cry for those sympathetic with the poor worldwide should be for more assistance. That assistance, especially in HIPC, should take the form of aid tied to increases in educational expenditures. To seek debt forgiveness is to assume that governments in these countries have entirely reformed; and even then, it is no better than allocation of additional resources to education.

Meanwhile, a Far Eastern Economic Review editorial on debt relief says it wouldn't be a bad thing for the details of the HIPC initiative to go unrealized in the wake of the recent G8 meeting. Rather than encourage a dependency that mires ordinary folks in appalling conditions, US President Bill Clinton, Japanese Prime Minister Yoshiro Mori and other G7 leaders would do better to ease conditions in their own countries that shut out products from poor nations. Compassion for the poor, says the editorial, is best served by helping them work their way out of poverty, not by compounding an addiction to debt.

Further, a Wall Street Journal Europe (p.6) editorial on former IMF chief Michel Camdessus' appointment to work on debt relief for the Vatican says debt relief has its pitfalls, the most obvious being the moral hazard it creates. Debt relief, like so many things, can either be a blessing or a curse. At the very least, the matter should not be treated as a moral crusade, but merely as a partial, possible solution to the problems of some indebted countries, requiring a lot more study before being put into practice. All of them would benefit far more from political and economic reform than from relief from debts they aren't prepared to pay. The real issue, says the WSJE, is how best to promote those reforms.

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