Combatting debt: Too little, too late?

These figures assume special significance given the recent declarations by certain developed countries to write off the debt owed to them by the Heavily Indebted Poor Countries (HIPC). British Chancellor Gordon Brown has made this his pet project since 2000. That year, he had proposed his "debt relief for peace" initiative and suggested that it should apply to 10 countries on the HIPC list involved in conflicts. This plan also offered "accelerated" debt relief if they threw down their arms before October. This plan was described by the Finance Ministers of the G-8 as a historic opportunity. It was also seen as a movement forward from the inadequate relief offered in the 1999 plan which had focused on a one-third reduction of debts for 40 countries -- far below what was needed to make a real difference. The efforts of Brown however lost their way over the next few years.

Last year, writing on this issue, under the title "Reducing the cycle of debt" (Daily Star, November 27, 2004), after the unsuccessful G-7 Ministerial meeting in Washington, I observed: "what is vital is that the world's wealthiest countries continue to work on writing off 100 percent of the debt belonging to the world's poorest countries. The patience of the poor, specially the extreme poor in many countries, is wearing thin. This has to be understood. It is no longer enough to just convene grand meetings and adopt well-meaning resolutions. If poverty is not reduced, it will continue to be the breeding ground for terrorists and instability."

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What I said then holds true today.

On June 7 this year, US President George W Bush and British Prime Minister Tony Blair indicated in Washington that they were close to completing a proposal for an elimination of 100 percent of debt for the world's poorest countries. They however had a condition attached to it for Africa's leaders, namely, there be improvement in governance and that corruption is reduced. As Blair put it, the debt plan was not "a something-for-nothing deal." Such an approach was however criticised by Archbishop Desmond Tutu who stated that the 'West mustn't operate from a position of moral superiority' and also took the opportunity to remind US and Europe of its own failures in the form of scandals related to Enron, WorldCom and Parmalat. Rock stars like Bob Geldof and Bono also expressed views that calls to end corruption were a diversionary tactic.

We are talking here of writing off about $ 40 billion of debt, or about one and half days of world defence spending. That is the bottom line.

On June 11, as a follow-up of the Washington meeting between Bush and Blair, Finance Ministers of the G-8 expressed their agreement to wipe clean the debt of 18 extremely poor nations, mostly from Africa (owed to different countries, the World Bank, the IMF and the African Development Bank). This decision to focus on poverty-stricken Africa was probably taken because of the existing plight in sub-Saharan Africa in particular. It may be mentioned here that recent figures from the World Bank indicate that this region has $230 billion in external debt (a third of which is owed to multilateral lenders) and pays $12 billion a year on servicing. This strategy is also consistent with Chancellor Brown's anxiety that without total multilateral debt relief, the poorest countries would pay up to $ 27 billion in principal and interest payments to international organisations alone between now and 2015.

Since then, we have had, as expected, differing opinions as to this exercise. There has been acclaim from several quarters, but it has not been universal.

The G-77 meeting in Doha welcomed this step as "a very good move" but also underscored that this should have been done a long time ago. It was also reaffirmed that debt relief on its own was not enough to alleviate poverty in deeply indebted countries. It was also clarified that a more lasting solution would be for countries to trade their way towards development rather than beg their way out of poverty. African ministers pointed out in this regard that if Africa gained 1 percent more of the world's share of exports, it would be worth five times the total amount of foreign aid that it receives.

The scenario is very complex and still not very clear. France, Japan and Germany have their own debt relief ideas and they feel that such a scheme of relief should be restricted to only five countries as starting points. The G-8 Finance Ministers also have to thrash out how to pay for any debt relief deal -- given the fact that their budgets are already stretched tight. Chancellor Brown had earlier proposed reevaluating IMF gold reserves to write off poor countries' debts, but this found little support from the US. Washington has also rejected Brown's other big idea -- an International Finance Facility (IFF) -- which could have raised an extra $ 50 billion in aid money up front by issuing bonds using future development budgets as collateral. Japan and Germany have also not been very keen about this idea. Nevertheless, Britain appears to be determined to launch at least a pilot IFF to fund vaccinations, even without US support. This is probably because of Blair and Brown's love for the Social Charter associated with the Labour Party.

The idea of the Bush Administration to set up the Millennium Challenge Account (MCA) was creative. However, there is a great difference between intention and implementation. The MCA was meant to have a $5 billion annual budget. Unfortunately, this has not taken place. To-date, the administration has, according to Newsweek, dispersed "a pitiful $110 million." Comparably, European generosity has been more impressive. One hopes that this time round, suitable implementation of the G-8 decision will not be caught up in red tape.

Paul Wolfowitz, the new head of the World Bank, has hailed this decision and repeatedly referred to it during his recent visit to different countries in Africa. The path forward is however not going to be easy. I believe that despite World Bank optimism, one has to be cautious. By international standards, the amount being written off is a drop in the bucket. What worries me however is that this drop or drops do not run-off into the sand as has happened in the past in Africa.

De Beers Chairman Nicky Oppenheimer has made an interesting and controversial observation. He has stated that in the decades since the colonial powers left Africa; the continent has received more than $1 trillion in aid -- a figure much higher than the $ 400 billion others estimate. He has gone on to state that such aid has in fact been less than useful and has contributed towards "a form of neo-colonialism." I do not know if his view is completely correct.

Nevertheless, it is true that Africa has, compared to Asia, received already the equivalent of five Marshall Plans in terms of aid and yet they continue to lag behind. It is most fortunate that despite repeated natural disasters, and being impoverished in natural resources, countries like Bangladesh have been able to move forward.

We have, with this latest decision of the G-8, climbed only the first rung in the ladder. Many more remain. Debt relief alone also cannot be the panacea.

I can only hope that this action by the G-8 will be complemented by other initiatives that will allow the developing nations to make the best of any debt relief programme. President Gloria Arroyo of the Philippines has correctly stated that such an initiative can succeed only if it is accompanied by fundamental reforms of the international economic order and elimination of self-interested subsidies by some of the developed countries.

I look forward to general improvement under the new head of the WTO and the World Bank. Several important issues will have to be efficiently addressed -- access by developing countries to markets (without insisting on further trade liberalisation on their part), to reasonable financing, to development assistance, to technology and to medicines. All these factors are necessary to bring developing nations out of poverty and disease.

Russian President Putin, the next head of the G-8 after Britain's Blair has already hinted that the G-8 needs to focus its attention also on the relatively poor European countries like Tajikistan, Kyrgyzstan, Georgia, and Moldova, which he has classified as also being heavily indebted. Good idea, but please do not forget the many other heavily indebted countries in Asia.

International cooperation and constructive engagement will be required. This institutional commitment might mean a slightly leaner budget for defence expenditure and fighting "terror," but then, is there any other way out? We are talking here of assistance through debt write-off and less trade barriers. These will create wealth; generate employment and indirectly markets, for the products being produced by the developed countries. It will also greatly reduce the prospect of creating terrorists who breed in the ghettos of poverty and prejudice.

Muhammad Zamir is a former Secretary and Ambassador.