Worldwatch Institute Points to Third Way on Third World Debt, Calls Bush Proposals a Useful Starting Point

WORLDWATCH INSTITUTE POINTS TO THIRD WAY ON THIRD WORLD DEBT, 
CALLS BUSH PROPOSALS A USEFUL STARTING POINT

This weekend, July 20-22, leaders of eight of the most powerful nations on earth will gather in Genoa, Italy, for their annual summit. Both the host-the government of Italy-and Drop the Debt, the London-based successor to the non-governmental Jubilee 2000 debt campaign, have vowed to make the third world debt crisis a major issue at the summit.

In preparation for the summit, the U.S. administration today staked out new ground on third world aid and debt, as President George Bush spoke at the World Bank and Treasury Secretary Paul H. O'Neill published an opinion piece in the New York Times. Worldwatch Institute Senior Researcher David Malin Roodman, author of Still Waiting for the Jubilee: Pragmatic Solutions for the Third World Debt Crisis is available for comment on the issue.

Roodman welcomes the Bush administration proposals in principle. Key among these are that the World Bank should disburse 50 percent of its money to the very poorest nations in the form of grants rather than loans, and that lenders should restrict their aid to those countries most committed to economic and political reform.

"The third world debt crisis is all the proof we need that lending to the poorest countries since the 1960s, above all in Africa, has failed. The Bush administration proposals are welcome in that they go beyond treating the symptoms-the debt crisis-and attempt to prevent the disease. But much more must be done, both to end the current crisis and to prevent another one."

Two years ago, in Cologne, Germany, the G-7 launched what is now the main official response to the debt crisis, a debt cancellation program called the enhanced Debt Initiative for Heavily Indebted Poor Countries (HIPC initiative). Roodman argues that neither of the dominant voices on third world debt has been offering realistic solutions. He sides with activists in labeling the HIPC initiative inadequate and destined for failure. But he parts ways with many of them on how to fix it.

Any pragmatic program to end this debt crisis and prevent another, Roodman says, must accept three facts:

1. Most of the debt of the poorest nations can never be repaid. 
Consequence: Claims that creditors such as the World Bank cannot afford to cancel more debt are largely moot. Canceling unpayable debt is both inevitable and costless. But by the same token, canceling debt that would never be repaid anyway does not free up money to fight AIDS or educate children the way many activists imply it does.

2. Conditionality-putting "strings" on debt relief or new loans-rarely works. 
Consequence: Requiring country to commit to spending any savings from debt relief on fighting poverty or AIDS may sound good, but will probably not work well. Countries, such as Uganda and Ghana, that are fairly committed to using any true savings responsibly will do so-even without outside pressure. And countries that are not committed will probably not use the money so well, no matter what promises are demanded of them in return for debt cancellation.

3. "For every bad borrower, there is a bad lender."-Anwar Ibrahim, jailed former Deputy Prime Minister of Malaysia 
Consequence: Lenders and borrowers are equally responsible for the third world debt crisis, even though the HIPC initiative puts almost all the burden of reform on the borrowers. Lenders, including G-7 governments, the World Bank, and the International Monetary Fund, also deserve intense scrutiny, and must undergo thoroughgoing reform. At the World Bank and other development banks, for instance, internal pressure to lend pushes many officials to worry more about getting loans out the door than whether the money will be used well-a sure recipe for debt trouble. Without reforms on the creditor side, the third world debt crisis will persist and repeat.

Roodman's third way on third world debt proposes these steps:

1. An independent, international authority assesses how much of each country's debt is unpayable. It would cancel that debt, immediately and unconditionally. This action would be done out of realism, not generosity or charity.

2. Creditors could cancel debt deemed payable on a more selective basis, in the spirit of the Bush proposal. By canceling all debt in countries that have demonstrated their commitment to reform could free up valuable funds for aiding the poor.

3. Multilateral lenders such as the World Bank would reform their management in order to reduce the pressure to lend.

4. Rich-world governments that fund multilateral lenders would press these institutions to reform by giving more money to ones that have already begun the reform process

5. Governments and multilaterals would lend less to the poorest countries and grant more, as the Bush administration proposes.

 

RELATED INFORMATION:
Read more about David Malin Roodman's research paper, Still Waiting for the Jubilee: Pragmatic Solutions for the Third World Debt Crisis, at http://www.worldwatch.org/alerts/010426.html and http://www.worldwatch.org/forum/debt_panelist.html.


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