June 16, 2005

June 16, 2005 | WebMemo on Trade, Economic Freedom

Economic Freedom, Not Debt Relief, Is the Real Cure for Poverty

Last week, the finance ministers of the G8 countries (United States, United Kingdom, Japan, Italy, France, Germany, Canada, and Russia) announced an agreement for broad-based debt relief. This initiative has long been championed by a group of activists-rock star Bono and economist Jeffrey Sachs being the best-known of the group-who argue that heavily indebted poor countries (HIPC) bear too huge a debt burden to spark growth and leave poverty behind while paying back their multilateral lenders.


It is true that, without the burden of debt, the leaders of the HIPC will have a tremendous opportunity to set their countries on a growth path. The question is, will these leaders will seize the opportunity or just blow it again, with the help of the multilateral development organizations?


History shows that economic freedom, good government, and the rule of law are the three basic elements of economic growth and development. According to The Heritage Foundation/The Wall Street Journal 2005 Index of Economic Freedom, of the 18 countries (Benin, Bolivia, Burkina Faso, Ethiopia, Ghana, Guyana, Honduras, Madagascar, Mali, Mauritania, Mozambique, Nicaragua, Niger, Rwanda, Senegal, Tanzania, Uganda, and Zambia) that would immediately qualify for debt relief, 13 have "mostly unfree"  economies (right next to plain "unfree") and only 5 have "mostly free" economies. Most of these countries have little protection of property rights, high corruption, and little domestic security. Some of these countries, such as Bolivia, are currently a political mess, and others, such as Niger, Rwanda, and Tanzania are virtual dictatorships. What are the odds that these countries will use the economic flexibility afforded by debt relief to help the people and not to line the pockets of the ruling elite? Sustained growth will be difficult for these countries to achieve as more foreign aid follows debt relief, leaving them without any incentives for economic reform-just as before.


Debt relief is a band-aid solution to a hemorrhaging problem. Rock star Bono's recent statement equating debt relief to a "… journey of equality [that] took another step today, and broke free millions of people in some of the poorest countries from the bondage of immoral and unjust debts," despite his good intentions, gets the story wrong. Yes, much of the debt was unjust. But it is the debtor nation's responsibility to put itself in a position where the need to borrow stops. Bono could do these poor countries a service by illustrating how his own story-one of entrepreneurship, competition, and ultimately success-was possible only because he grew up in a country, Ireland, that transformed itself by opening markets, respecting the rule of law, and creating opportunities, rather than increasing its dependency on foreign aid.


Rich countries can do something to help the poor. Eliminating agricultural subsidies that support uncompetitive rich country farms and make farming in poor countries relatively uncompetitive would go a long way towards providing many of the world's poor with real economic opportunity. True, throwing money at the poor is an easier, politically inexpensive way to avoid angering domestic lobbies and voters. But if the goal is to reduce poverty, opening markets in both wealthy and poor countries is the way to go.


Ana Isabel Eiras is Senior Policy Analyst for International Economics in the Center for International Trade and Economics at The Heritage Foundation.

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