Global Policy Forum

By Richard Segal

While the anti-globalization movement has succeeded in pushing debt relief up the agenda, a closer look at the problem reveals it is neither global nor the main thing holding back poor countries. But debt relief will help free up resources needed to address the larger problems that these countries face. Until recently, the annual meetings of multilateral organizations were dry events for policy wonks, economy ministers from developing countries, journalists and institutional investors. But the Seattle WTO summit changed all that, perhaps forever. Almost every international conference that features senior IMF or World Bank officials, whether an EBRD conference in London or this week's IMF and World Bank joint meetings in Prague, is now bound to mobilize the energies of activists against the forces of globalization.

Although the attentions of non-governmental organizations are directed in many areas, one central point of unease is the indebtedness of the lower income countries. It is with this in mind that the international community, characterized especially by the vocal leaders of the World Bank and G7, have sought to accelerate the process of debt relief.

Creditors resisted this for a number of years, in part because they disagreed about the optimal approach. Most agreed that it was desirable for the debtors to have in place a strategy for putting relief to good use, but this required complicated position papers and comprehensive institutional reform programs. Many countries clearly lacked the resources to accomplish these tasks. In addition, until recently debtor nations were required to achieve a three-year track record in economic policy management before becoming eligible. However, the creditors have agreed to substantially more flexibility within the past week, in part because they finally recognized the importance that their constituencies are now attaching to this issue.

Nonetheless, there are a number of ironies in the fight against the undesirable aspects of globalization, to use a catch-phrase commonly used by proponents of debt relief. The first is that this is hardly a global problem. Of the twenty-one countries that the IMF hopes to bring to the so-called decision point by the end of this year, all but two (Nicaragua and Guyana) are in Africa. Second, if the concern of many is that Africa is being left behind by the process of increasing economic integration, then debt write-offs, important as they are, go only a short way in addressing the continent's problems.

There are six factors commonly cited that hold the continent back, and foreign debt arguably falls far down the list. In fact, preferential access to world markets would do a great deal more to help these countries catch up. The fact that market access is restricted for a number of goods is an added disadvantage. Meanwhile, cyclical developments in commodities markets have added further pain. According to recent IMF estimates, 14 African countries have seen their terms of trade deteriorate by 15% or more this year, reflecting falling prices for products such as coffee, cotton, copper, cocoa and gold, coupled with rising prices for oil.

Many of the economic problems have domestic roots, where issues such as policy coherence, corporate and public governance and internal political conflict remain to be addressed. Many critics of the World Bank cite foreign indebtedness as a major strain on budgetary resources in poorer countries, resources that could be utilized for health and education spending. However, it is an often-forgotten fact that debt forgiveness is largely an accounting exercize, in which wealthier creditors cancel liabilities that have little likelihood of being repaid. Limited resources for health and education, while a huge problem, are largely independent of the level of foreign debt. Moreover, the World Bank would clearly be happy to plow its own resources into these areas if it felt that it had an efficient strategy for alleviating the problems.

Many leaders in the developing countries publicly criticize the process of globalization and its related burdens, but behind the scenes they embrace the benefits brought by trade and policy orthodoxy. In a recent speech, Stanley Fischer, the IMF's first deputy managing director, noted several leaders in the developing or newly industrialized world who have recently criticized the policies of the leading industrialized nations, including President Museveni of Uganda and Prime Minister Mahathir of Malaysia. But Uganda has aggressively liberalized its economic policies, integrated itself into the world economy and become Africa's best performing economy as a result, with growth averaging 7% over 1995-2000, with 5% inflation. And Malaysia has arguably benefited more than any other country from the process of globalization: consider that its export-to-GDP ratio stands at greater than 100%.

So debt relief is not an antidote for all of the poorer countries' economic ailments. But it is fortunate that it has been moved to the top of the agenda. It was about time that OECD countries, the IMF and the World Bank wrote off debt, formally, which had been informally forgiven some time ago. The financial position of these three groups is so strong that it would be grudging if they failed to act with generosity at this point in time. By dealing with this contentious issue, countries can more forcefully address the issues that are really important.

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