Global Policy Forum

By Roy Culpeper

Next week's meetings in Prague of the International Monetary Fund and the World Bank will add another chapter to the continuing saga of debt relief for the poorest countries. Last year, the Group of Seven industrial countries agreed to the demands by church groups, non-governmental organizations and poor countries to forgive much of their debt. Debt forgiveness, it was claimed, would help the poor countries turn the corner. It would free up huge amounts of money being channelled to rich countries as debt payments, funds that could be reallocated to health, education and investment. Unfortunately, the reality is that debt relief for the poorest countries will yield a lot less than was promised. More important, poverty eradication will cost a lot more than even the most generous debt relief can offer.

It's easy to forgive debts that aren't being paid. The problem is, while "forgiveness" of unpaid and unpayable debts makes the creditor look good and appears to give the debtor a big break, nothing much changes. The creditor isn't losing anything, since he wasn't getting any payments; and the debtor isn't gaining anything, since he wasn't making any. The only difference is that both sides are recognizing that the original debt will not be repaid in full. This, in a nutshell, explains why gestures to forgive Third World debt will achieve a lot less than promised.

Consider Nicaragua, an impoverished developing country that owes US$500 million in annual debt-service payments (interest plus principal) but is only paying just under 50 per cent, say $245 million. Thanks to the current debt-relief initiative, Nicaragua's creditors have decided to forgive a large portion of the debt owing. Debt forgiveness has reduced the total amount payable every year by $330 million, from $500 million to $170 million. This looks very generous: The rich countries can claim that the amount forgiven is equivalent to a 50 per cent boost in the country's government budget, and 140 per cent of its spending on health, education and social sectors.

The actual relief, however, amounts to $75 million -- the difference between what it was paying before ($245 million) and what it is paying now ($170 million). The leeway provided by $75 million in real debt relief represents a boost of only 11 per cent of total government spending and 30 per cent of social spending. This is significant, but it's a lot less than the gross amount of debt forgiven.

In fact, Nicaragua stands to benefit much more from the debt-relief measures than the 40 or so heavily indebted poor countries -- most of them in Africa. For these countries, the "dividend" from debt relief is much smaller. Debt relief will give Uganda, for example, only 2 per cent in additional funding or an 8 per cent increase in social spending. Add to this the staggering cost of eradicating poverty in these countries. They typically face a series of formidable challenges, from natural and other disasters, to internal conflict, lack of skilled human resources, and health epidemics from malaria to AIDS.

Take the case of Nicaragua again. The government's five-year poverty-reduction strategy, aimed at reducing extreme poverty by 25 per cent by 2005, will cost $1.9-billion (U.S.), of which only half can come from internal resources. The remainder has to come from elsewhere. Actual debt relief of $75-million a year will cover less than 40 per cent of requirements. Since Nicaragua is benefiting more than most, other debtor countries will have to seek a much larger proportion of resources for poverty reduction from sources other than debt relief.

In other words, debt relief will offer a lot less, and poverty eradication is going to cost a lot more, than we had assumed. The real benefits, taking into account that much of the debt was not being paid, are much lower. That said, the debt relief is still important and welcome. But it is clear that more -- a lot more -- will be needed, in the form of foreign aid, private investment, and access to industrial countries' markets over the next 20 years.

Viewed together, developed countries' policies toward developing countries are cockeyed. Canada, for example, gives Bangladesh $97-million in foreign aid while collecting $22-million in tariff revenue on Bangladeshi imports. Duty-free access to the Canadian market (and those of other developed countries) would generate more income for millions of Bangladeshi women working under pitiful conditions in the garment industry.

Debt relief is all well and good but, on its own, little more than benign neglect. It is time to stop tinkering at the edges of the overwhelming problems facing the poorest countries and start mobilizing serious resources and consistent policies.

Roy Culpeper is president of The North-South Institute in Ottawa.

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