Wolf: What is to be done?

Debt Crisis


Debtors' jubilee

By Steve H. Hanke

LOST IN THE FANFARE of June's G-7 summit was the Cologne Debt Initiative, designed to provide more debt forgiveness to heavily indebted poor countries. It was hailed by the leaders of the seven most powerful industrial countries as a great move forward.

But Jubilee 2000, a London-based organization supported by the usual luminous do-gooders - politicians, churchmen, academics, writers, sports figures and entertainers - wants much more. It wants governments and multinational organizations to write off all loans they have made to the poorest countries.

This would amount to $172 billion, or 83% of the poor countries' total external debt. Predictably, the Western press has started a run of sympathetic "We are the World"coverage.

Before this debt forgiveness movement gains momentum, let's take a look at Jubilee 2000's propaganda. Here's the pitch: 700 million people in the world's most destitute countries are held in bondage by rich countries. Not to forgive the debt of the poorest nations would be refusing crumbs to a beggar.

The rhetoric pulls at the heart strings. But a dose of reality challenges that rhetoric easily. The International Monetary Fund classifies 40 countries as heavily indebted and poor. But Freedom House, a New York organization that rates countries on political and civil liberties, rates only 7 of those - Benin, Mali, São Tomé and Principe, Bolivia, Guyana, Honduras and Nicaragua - as "free."

Rwanda, Somalia, Laos and Vietnam are anything but free.

Economic freedom is a scarce commodity, too. The Vancouver, B.C.-based Fraser Institute ranks 119 countries on that criterion, and most of the poor debtors fall into the bottom third. Corruption, as well, according to Transparency International in Berlin, is endemic in the Third World. Of the 12 debtor countries ranked, Zambia is the least corrupt, with a lowly score of 3.5 out of a possible "corruption-free" score of 10. The truth is that most poor, indebted countries are not angelic beggars. They are undemocratic, anticapitalistic and corrupt.

What about Jubilee 2000's economic arguments? They are half-baked. The group's first principle is that debt is inherently harmful. Please. There is nothing wrong with debt as long as you can use it to fund projects that pay off. There is nothing wrong with repaying lenders, either. It makes other lenders willing to put more capital to work where it is most needed.

Jubilee 2000 claims that too much debt has made the Third World poor. What nonsense. Putting aside the vast amounts of outright foreign aid poured into poor countries, the fact is that many loans to these countries are "soft," with long grace periods and low interest rates. We should all have such harm done to us.

Poor countries are not bankrupt - contrary to another Jubilee 2000 claim, again laid to foreign loans - but are solvent, as even a cursory review of their balance sheets shows. They could retire their debts simply by privatizing some of their assets.

But guess what? Despotic regimes generally don't like to sell off their utilities, mines and trading companies. And most poor countries are already liquid, receiving more money in loans and grants from official sources each year than they pay out in debt service.

To be sure, there is real human suffering and great waste of potential in poor countries, and I don't want to say that we should take a hard line with ordinary, poor citizens just to spite their rulers. So how about forgiving debt even though we know that countries could pay it? The Jubilee 2000 crowd would have us believe that the savings in debt service would be plowed into schools and hospitals.

What they forget to mention is that the debt relief would simply accrue to Third World governments, which could use these funds as they wish. At present, the politicos in poor countries tend to favor military spending, Swiss bank accounts and villas on the Riviera over schools and hospitals.

Debt cancelation would, literally, mean more of the same.

Jubilee 2000's agenda is moronic, as well-intentioned as some members may be. Debt cancelation constitutes a transfer of wealth from taxpayers in Western countries to rich politicos and their cronies in poor countries. By further empowering those bad seeds, debt cancelation will help poor countries remain unfree and corrupt.

Steve H. Hanke is a professor of Applied Economics at The Johns Hopkins University in Baltimore.

More about Hanke and his writings with Lars Jonung

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