Global Policy Forum

Debt Forgiveness Won't Help Poor Nations;
Opening Avenues for Them to Trade Will

This year's meeting of the group of industrialized nations ended with yet another promise to eradicate the debt of the world's poorest countries, following on last year's Heavily Indebted Poor Countries initiative. Although the HIPC aimed to forgive the debt of 41 of the poorest nations, it managed only to partially wipe out indebtedness in five. With specific details lacking in this year's resolution, the chances are that it too will go unrealized. That wouldn't be a bad thing.

The world's poorest countries don't have credit ratings that draw the attention of private lenders. Their debt therefore is owed to multilateral agencies like the World Bank and rich governments. "Loan applications" usually are reviewed not with a view to determining a prospective borrower's ability to repay, but generally in the full knowledge that money lent is money gone. (When the private fortune of Mobutu Sese Seko rose to roughly equal the national debt of his country, surely there must have been suspicions. So why didn't anyone stop lending to Zaire?) Still, with the backing of the Pope, debt forgiveness must seem an attractive virtue: Forget that past lending may have been a little dodgy. Wipe the slate clean and let the poor get on.

Only it doesn't work that way. Unlike individuals who, say, finally manage to pay off their mortgage or credit-card balance, poor countries that suddenly become debt-free don't improve their credit rating. They are only returned to the same rut they started from; no private lender will touch them still. Meanwhile, taxpayers in the richest countries will have ponied up to clear the books of their national lending agencies and groups such as the World Bank, allowing them, especially the latter, to make more loans. But handouts and government-to-government lending, time and again, have proved useless in pulling poor nations out of misery. New credit lines sometimes end up on new fighter jets. Indeed, easy debt doesn't encourage sound economic development--as Italy implicitly acknowledged when it dropped free-market reforms as conditions for its new unilateral loan-forgiveness plan. As such, aid-dependent economies are offered no incentive to face up to market strictures and rewards. And it is this insulation from real economics--the business of making things and selling them--that keeps them poor.

As East Asia has shown, private investment in export manufacturing offers the best way out of impoverishment. Despite the follies that led to the crisis in the region's economies three years ago, their commitment to manufacturing and trading has allowed most of them to regain lost wealth.

Rather than encourage a dependency that mire ordinary folks in appalling conditions, Bill Clinton, Yoshiro Mori and the other leaders of the G-7 would do better to ease conditions in their own countries that shut out products from poor nations. These take the form of labour standards inspired in New York and then unreasonably expected to be imposed on a factory in Danang; or those simply meant to protect Western products, such as textile, from cheaper alternatives. Or American organized labour's outrage over low factory wages in the Third World, ignoring the possibility that blue-collar pay in the West instead has risen too fast. (No one complains that at 81,040 baht ($2,000) a month, the attorney-general in Thailand makes less money than a New York rubbish-remover.) The truth is, compassion for the plight of the world's poor is best served by helping them work their way out of poverty, not by compounding an addiction to debt.

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