As the Senate
attempts to clear its docket of unfinished bills, the
chamber's Leadership seeks to bring S. 1320, the Multilateral Debt
Relief Act of 2005, to a vote. The bill's sponsors believe
that heavily indebted poor countries (HIPCs) bear too huge a debt
burden to spark growth and leave poverty behind while paying back
their multilateral lenders. Their bill would relieve debt and
provide more resources for future aid programs. Experience,
however, shows that debt relief and aid alone will not put
countries on the path to prosperity. The Senate should instead
focus on promoting good government, the rule of law, and economic
freedom-the real keys to growth.
Introduced in June
2005 by Senators Mike DeWine (R-OH), Rick Santorum (R-PA), Russ
Feingold (D-WI), Dick Lugar (R-IN), and Barack Obama (D-IL), S.
1320 authorizes the Secretary of Treasury "to instruct the United
States Executive Director of each international financial
institutions [IFIs]…to reach an agreement among shareholders
[of such IFIs] to permanently cancel 100 percent of the debts owed
to each such institution by any eligible country." In addition, the
bill would "compensate" the IFIs, such as the World Bank and the
International Monetary Fund, for the debt payments that they will
forgo. With this compensation, the IFIs will have the resources to
hand over more money to poor countries and to achieve the UN's
Millennium Development Goals.
sends two problematic signals. First, it implies that the United
States pardons mismanagement, dictatorship, and corruption-the
circumstances that led many countries to pile up their debt.
Second, the compensation provision indicates that the U.S. will
continue to fund poor countries' governments regardless of whether
government corruption and bad policies are to blame for their
As the bill's
proponents argue, freed from the burden of debt, the leaders of the
HIPCs would face a tremendous opportunity to set their countries on
the path of growth. But will they seize this opportunity? History
suggests that they will not.
that economic freedom, good government, and the rule of law are the
three basic elements that lead to 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, few
have economies that could take advantage of it. Most of these
countries provide little protection of property rights and little
domestic security, while permitting high levels of corruption and
state intervention in the economy. Thirteen have "mostly unfree"
economies (that is, there are significant barriers to
entrepreneurship and other economic activities), and only 5 have
"mostly free" economies. Some of these countries, such as Bolivia,
are currently in political turmoil, and others, such as Niger,
Rwanda, and Tanzania, are virtual dictatorships.
It is not their
debts, but these countries' anti-market policies that are retarding
growth. Corrupt and authoritarian leaders will use the clean debt
slate as an opportunity to run up debt again, for their own ends.
With the promise of unconditional relief, kleptocrats would have no
incentive to improve their behavior.
reducing poverty requires more potent medicine. Debt relief should
be used as an incentive for reform. The United States should be a
leader in promoting good governance by rewarding countries for
implementing sound policies. A better approach to improving the
poorest countries' growth prospects would be to advocate assistance
only to countries that have a proven record of governing justly,
investing in their people, and fostering economic freedom.
The United States
already has a program that encourages such behavior, the Millennium
Challenge Account. The Senate would do well to model any debt
relief initiatives on it.
Isabel Eiras is Senior Policy Analyst for International
Economics in the Center for International Trade and Economics at
The Heritage Foundation.