Think Again: Debt Relief

Debt relief has become the feel-good economic policy of the new millennium, trumpeted by Irish rock star Bono, Pope John Paul II, and virtually everyone in between. But despite its overwhelming popularity among policymakers and the public, debt relief is a bad deal for the world’s poor. By transferring scarce resources to corrupt governments with proven track records of misusing aid, debt forgiveness might only aggravate poverty among the world’s most vulnerable populations.

BY WILLIAM EASTERLY | NOVEMBER 1, 2001

"Jubilee 2000 Sparked the Debt Relief Movement"

No. Sorry, Bono, but debt relief is not new. As long ago as 1967, the U.N. Conference on Trade and Development argued that debt service payments in many poor nations had reached "critical situations." A decade later, official bilateral creditors wrote off $6 billion in debt to 45 poor countries. In 1984, a World Bank report on Africa suggested that financial support packages for countries in the region should include "multiyear debt relief and longer grace periods." Since 1987, successive G-7 summits have offered increasingly lenient terms, such as postponement of repayment deadlines, on debts owed by poor countries. (Ironically, each new batch of terms and conditions was named after the opulent site of the G-7 meeting, such as the "Venice terms," the "Toronto terms," and the "London terms.") In the late 1980s and 1990s, the World Bank and International Monetary Fund (IMF) began offering special loan programs to African nations, essentially allowing governments to pay back high-interest loans with low-interest loans -- just as real a form of debt relief as partial forgiveness of the loans. The World Bank and IMF's more recent and well-publicized Highly Indebted Poor Countries (HIPC) debt relief program therefore represents but a deepening of earlier efforts to reduce the debt burdens of the world's poorest nations. Remarkably, the HIPC nations kept borrowing enough new funds in the 1980s and 1990s to more than offset the past debt relief: From 1989 to 1997, debt forgiveness for the 41 nations now designated as HIPCs reached $33 billion, while new borrowing for the same countries totaled $41 billion.

So by the time the Jubilee 2000 movement began spreading its debt relief gospel in the late 1990s, a wide constituency for alleviating poor nations' debt already existed. However, Jubilee 2000 and other pro-debt relief groups succeeded in raising the visibility and popularity of the issue to unprecedented heights. High-profile endorsements range from Irish rock star Bono to Pope John Paul II and the Dalai Lama to Harvard economist Jeffrey Sachs; even retiring U.S. Sen. Jesse Helms has climbed onto the debt relief band-wagon. In that respect, Jubilee 2000 (rechristened "Drop the Debt" before the organization's campaign officially ended on July 31, 2001) should be commended for putting the world's poor on the agenda -- at a time when most people in rich nations simply don't care -- even if the organization's proselytizing efforts inevitably oversimplify the problems of foreign debt.

 

William Easterly is a senior advisor in the Development Research Group at the World Bank and author of The Elusive Quest for Growth: Economists' Adventures and Misadventures in the Tropics. The views expressed are his own.