June 12, 2000 | Commentary on Foreign Aid and Development

Escaping the Vicious Circle of Foreign Debt

WASHINGTON-Of all the charges being leveled at the World Bank and International Monetary Fund, perhaps the most curious is the notion that these organizations believe too strongly in the gospel of global capitalism. In reality, they don't believe strongly enough.

But luckily for the world's poorest countries, that may be about to change. The World Bank has proposed dropping all tariffs and quotas on exports from some of the world's most poverty-stricken nations in Africa, Asia and Latin America.

Given the fact these countries remain mired in massive amounts of foreign debt, and that their only hope of repaying this debt lies in gaining greater access to world markets, the proposal makes good economic sense. It is precisely the argument made by the Clinton administration: Free trade creates wealth and lifts poor countries out of poverty.

Which makes the administration's opposition to the World Bank's proposal all the more puzzling. The White House argues that only the World Trade Organization has the jurisdiction to approve such a policy and that WTO rules forbid giving any country or groups of countries preferential treatment.

But the administration has yet to pursue the proposal in a way that would satisfy such objections. This is unfortunate, because it would correct America's schizophrenic foreign policy, which traps poor nations in a vicious cycle of lend-forgive, lend-forgive.

The United States gives aid to the developing countries in the hope that it will promote economic development and allow the countries to repay their debts. Then Washington effectively shuts the same countries out of American markets through quotas and tariffs.

Once U.S. officials realize the loans won't be repaid, they forgive the debt. Then they give more aid, and the cycle starts anew.

Developed nations such as the United States must shoulder some of the blame for perpetuating this cycle. Foreign assistance adds to the economic burden many developing countries face by increasing their overall debt.

According to the World Bank, country-to-country assistance to the 40 Heavily Indebted Poor Countries accounted for an average of 42 percent of their total debt in 1997.

Yet the United States persists in imposing tariffs and quotas that cripple their efforts to create market-led growth. The burden of the U.S. quota system on textiles and apparels, for example, falls disproportionately on poor countries.

More than 35 countries with a per-capita gross domestic product of less than $10,000 faced some form of U.S. quota last year on their apparel and textile products. Yet of the countries with per-capita gross domestic products of over $25,000, only two faced such quotas.

Why the discrepancy? Because poor countries tend to export many goods that are subject to high tariffs. These nations rely on textiles and apparels, which are labor-intensive and do not require sophisticated machinery or large amounts of capital to turn a profit.

High trade barriers also present a challenge for food-producing countries. For example, the people of Zimbabwe, with a per capita GDP of $610 in 1997, depend on agricultural exports, which amount to 40 percent of their country's total exports.

The notion that food imported from Zimbabwe might pose a threat to U.S. producers is laughable. Food from Zimbabwe-corn, wheat, peanuts- accounts for a mere 0.07 percent of total U.S. food imports.

Yet Zimbabwean food products face an average U.S. tariff rate of 9.88 percent, almost five times the U.S. average on all products from all countries.

Lower tariffs are certainly preferable to President Robert Mugabe's latest solution to Zimbabwe's economic woes, which is seizure of white- owned farms without compensation.

The best way to help poor countries is by promoting international free trade. Yet the lend-forgive merry-go-round continues. President Clinton recently announced the United States would give Bangladesh $97 million in food aid, $30 million for a clean energy program and $8.6 million to eliminate child labor. Meanwhile, the country faces an average U.S. tariff rate of 13.6 percent.

There is no sound economic or moral argument for maintaining high tariffs against a nation as desperately poor as Bangladesh, whose per- capita GDP in 1997 was only $262.

This is not to argue against debt forgiveness. The congressionally appointed committee on IMF-World Bank reform, on which I recently served, recommended precisely that, saying international financial institutions should write off multilateral debt entirely.

But the United States should go further, reversing its contradictory policy of high tariffs, foreign aid and debt relief. Only then can poor nations foster the economic growth they require and break the debt cycle.

Edwin Feulner is president of The Heritage Foundation (www.heritage.org), a Washington-based public policy research institute.

About the Author

Edwin J. Feulner, Ph.D. Founder, Chairman of the Asian Studies Center, and Chung Ju-yung Fellow
Founder's Office

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