Debt Relief: A Fresh Start
By Lawrence H. Summers
Writing down debts that will never be repaid reflects economic logic. It is also a moral imperative for the world's richest economy. But it is equally a national strategic imperative that as we respond to problems around the world we respond with equal vigor in Africa, where more people have died in conflicts in this decade than in all other regions combined. When we help these countries build the basis for growth and stability, we help prevent future crises--and so provide important forward defense of American interests.
Building a safer world for Americans out of the ashes of the Cold War has reduced our annual defense budget by $107 billion in real terms in the past 10 years. The president's request for the reformed Heavily Indebted Poor Countries (HIPC) initiative would reinvest less than $1 billion, over four years, in supporting global stability through debt reduction. It would serve the United States' core interests in six critical respects.
First, it would provide the right kind of finance for these economies. Private banks write down claims that can no longer be repaid, because keeping sterile loans on the books serves nobody's interests. The alternative is to lend the borrower more money simply in order to service previous loans. A cynical cycle of this kind of defensive lending discourages private investment, rewards free-riding creditors and does little to promote economic development.
Second, it establishes a principle of national responsibility for economic performance. If we have learned anything from the history of economic development it is that national governments shape national outcomes. Saddled by a mountain of unpayable debt, governments have a ready excuse for poor performance. Clearing away that debt in return for strong policy makes it easier for people to hold their leaders accountable for economic outcomes--and greatly strengthens the incentive to implement long-overdue reforms. We saw in Poland and Egypt that debt relief, which won strong bipartisan support here in the United States, could provide vital early momentum to reformers and help countries put decades of economic failure behind them. With the enhanced HIPC we have a chance of seeing this happen in Africa.
Third, this initiative will support more people-centered policies in places where children are today more likely to die before reaching the age of five than to learn to read, and corruption and poor governance are major blocks to economic growth. With the new framework in place, countries would not receive further debt relief without demonstrating their commitment to strong policies aimed at rapid growth and poverty reduction, and accountable and transparent government. Nor would they receive relief without credible ways of demonstrating that savings produced by reduced debt servicing obligations will result in higher levels of spending on reducing infant mortality and other core social goals.
Fourth, and supporting this objective, it establishes a new framework for providing international assistance to these countries--one that moves beyond a closed, IMF-centered process that has too often focused on narrow macroeconomic objectives at the expense of broader human development. In its place would be a new, more open and inclusive process that would involve multiple international organizations and give national policymakers and civil society groups a more central role.
Fifth, it maximizes our financial effectiveness in promoting the right kind of change in these economies. Because of the leverage implicit in our own contribution, and the contributions from other countries that our support would set in train, every dollar we appropriate for this effort could leverage as much as $90 in debt relief for these economies.
Finally, supporting the president's request would show that the United States can meet its international commitments. This initiative reflects an understanding that was reached among all of the G7 leaders at the Cologne summit, after the United States had expended considerable effort enlisting the support of several initially reluctant countries--and after there had been strong bipartisan support in Congress for much more generous proposals for relieving the debts that the poorest countries owe the United States.
The future of this global effort is in our hands. The rest of the world will not move forward without us. If we fail to play our part, we will stall a major international initiative--and raise yet another question mark about the genuineness of the United States' commitment to a more prosperous and stable world.
In the end, the only ones who can offer the poorest countries a better future are their own governments and citizens. But we can serve America's deepest interests, and those of the global economy as whole, by helping these countries make a fresh start.
The writer is secretary of the Treasury.
© Copyright 1999 The Washington Post Company