Rich Nations Warm to Idea of Debt Relief

Rich Nations Warm to Idea of Debt Relief

 

By John Burgess, Washington Post Staff Writer

Saturday , April 8, 2000 ; A08

 

Debt relief. The words make every banker quiver, because they strike at the sacred rule of money-lending everywhere: What

goes out must come back. If you let one person--or one country--renege on repayment, what's to stop the others from doing

the same?

 

Such was the reaction in the mid-1990s when ideas began to float in international development circles that the horrifying

realities of life in places like Mauritania and Mali trumped those concerns. The world's richest nations should forgive a portion

of the debts owed by the poorest countries, proponents said, and let them divert to schools, clinics and basic sanitation the

money that had been flowing to foreign banks.

 

Five years later, the seemingly impossible idea is widely perceived as common sense and decency. The big industrialized

nations have launched a program to forgive up to $28 billion in debt, with politicians on the right and left supporting it. So are

banks, churches, aid agencies and the international activist movement Jubilee 2000, many thousands of whose members plan to

rally peacefully in Washington tomorrow to press for the program's expansion.

 

Debt relief is, in part, a rare act of old-fashioned charity in an era when the world mantra is to sink or swim in open markets

and trade. It's also partly a recognition of the cold fact that most of the debt owed by nations like Mali, Bolivia, Ivory Coast

and Mozambique is simply unrecoverable.

 

In some eyes it serves an important political purpose as well, as proof that the new world order has heart. "There's a real

question out there," said David Rothkopf, chairman of Intellibridge Corp., a consultancy on economic affairs. "Is globalization

fair? Is it really globalization or are we really creating two worlds," one for the rich and one for the poor?

 

From the field have come promising early results, development officials say. Uganda has doubled enrollment in its primary

schools since 1997, an achievement that government officials attribute largely to debt relief. The program has cut the country's

annual service payments to $50 million a year from $150 million, allowing it to raise education spending to $174 million.

 

So far, nine countries have qualified for about $15 billion in relief through the new program. One of the most recent is arid,

debt-laden Mauritania in North Africa. A deal worked out with the World Bank and the International Monetary Fund earlier

this year would save it $36 million a year, or nearly half of what it has been paying the two institutions.

 

The issue dates to the 1970s, when governments and "multilateral" institutions such as the World Bank and the African

Development Bank pumped billions of dollars into poor countries in Africa and Latin America. The plan was to underwrite

modernization projects in countries that commercial banks wouldn't touch. But the money often helped pay for villas and

limousines of corrupt leaders, or was swallowed up by civil war, natural disasters or simple waste.

 

Many of the dictators who signed the documents, such as Mobutu Sese Seko of Zaire, now Congo, have died, and many of

the grand projects are scrapped and forgotten. What remains are entries on the computerized accounting books of the lenders

thousands of miles away--and demands for repayment.

 

As East Asia grew in prosperity through trade and private enterprise, even with the financial panics from 1997 to 1998, Africa

and much of Latin America were held back, with many countries actually getting consistently poorer. One important drag, by

everyone's account, was the huge proportions of their export earnings and national budgets going to debt repayment. For

example, Zambia spent four times as much on debt service from 1993 to 1996 as on education, according to Oxfam, the

humanitarian advocacy group.

 

That created a trap for many countries. "I could see no purpose [of a system in which] every new loan you got was used to pay

your old loans," World Bank President James Wolfensohn said.

 

U.S. officials floated the idea of forgiving some debt in 1994, and have continued to press for it ever since, in Washington and

abroad. Treasury Secretary Lawrence H. Summers is the administration's voice on the issue, calling relief a "global moral

imperative."

 

Adding pressure was the Jubilee 2000 movement, which began in Britain and eventually spread to more than 60 countries. It

calls for a modern-day application of a biblical call for a periodic clean sweep and fresh start. Pope John Paul II signed on, as

did celebrities such as rock star Bono and former prize fighter Muhammad Ali and countless Protestant churches and

development and social service agencies.

 

Lenders were skeptical early on. When borrowing countries can't pay, banks often agree to new terms and maturities. But

banks will move heaven and earth not to void an obligation altogether, because a loan functions as an asset on a bank's balance

sheet. If it is erased, the bank has less to its name and may have to replace it.

 

Many economists who have nothing personally to lose from debt relief often don't like it, either. They fear it might undermine

the world economic system by creating an expectation among countries that they can borrow and beg off from repayment.

That, in turn, will make them less likely to put the money to productive uses that would generate development and repayment

funds, the logic goes.

 

Despite the impediments, rich nations gradually warmed to the idea. They reached a deal in 1996 for a program, then upped it

at a summit in Cologne last year in the face of the Jubilee campaign and the world financial panic that began in 1997. Now all

they have to do is raise the money.

 

The Clinton administration is discovering how difficult that can be. It has requested $210 million in a supplemental budget to

underwrite the U.S. share of the program. The House has removed it; the Senate has yet to act, amid suggestions that the

money may have to wait until the next budget cycle.

 

One point on which governments and the Jubilee movement diverge is the conditions for the relief. Countries can't merely walk

away from debt. To qualify for the new program, they must convince the banks, in exhaustive detail, that the money freed up

from loan payments will be spent on crucial needs such as primary education and rural health.

 

To many in the movement, this perpetuates undemocratic power for the lenders, with rich bankers flying into Third World

capitals to dictate policy. The critics want the money spent in ways mapped out more at the local level, drawing on the views of

community leaders, labor unions and other members of "civil society."

 

Dan Driscoll-Shaw, national coordinator for Jubilee 2000/USA, cites Bolivia as doing it right. Roman Catholic bishops there

have led a series of regional consultations with people of the local community. Later this month, they plan to bring

representatives from the regional meetings to the capital, La Paz, to meet with leaders of government and political parties.

 

"We know the competency of the people if given the opportunity to design and implement programs that will really help the

poorest," Driscoll-Shaw said.

 

Another big difference is over how deep the program should go. The people who will turn out on the Mall tomorrow generally

want total forgiveness of the poorest countries' debt, which would roughly double the program's size. Many also want breaks of

some kind for borrowers such as the Philippines, which by the numbers are much better off than places like Mauritania but still

have huge numbers of people living in abject poverty.

 

Banks and many politicians say that total forgiveness would be too expensive and would set the wrong example. Then again,

that's what they said about the whole idea five years ago.

 

AT A GLANCE

 

What is the World Bank?

 

Created in 1944, the World Bank Group is the world's largest source of development assistance, providing nearly $30 billion in

loans annually to many of its 181 member countries. The bank is made up of five institutions:

 

* International Bank for Reconstruction and Development (IBRD)

 

* International Development Association (IDA)

 

* International Finance Corporation (IFC)

 

* Multilateral Investment Guarantee Agency (MIGA)

 

* International Centre for Settlement of Investment Disputes (ICSID)

 

In addition to financing projects such as roads, power plants and schools, the bank makes loans to restructure a country's

economic system by funding structural adjustment programs (SAPs).

 

What is the IMF?

 

Created in 1944, the International Monetary Fund provides member countries with funds to help them overcome short-term,

balance-of-payments difficulties. It also provides advice and oversees financial coordination. Each of its 182 member countries

contributes to the pool of funds; only members can qualify for loans.

 

What is debt relief?

 

Many Third World countries have borrowed so much money that the repayments consume much of their budgets, leaving little

funding for anything else. As worldwide pressure has grown to improve the lot of the people in the world's most impoverished

nations, the major industrialized nations have launched a program to forgive up to $29 billion owed by debtor nations, with the

goal of freeing funds for such essentials as education, basic sanitation and health care.

 

2000 The Washington Post Company