Supporters of the
Multilateral Debt Relief Act of 2005 (S. 1320) are gearing up to
push it through the legislative process. However, S. 1320 would
effectively write a blank check to international financial
institutions (IFIs), such as the World Bank and the International
Monetary Fund, and turn a blind eye to their irresponsible lending
practices. It would also be an insulting waste of U.S. taxpayer
dollars and certainly not a wise choice at a time when America
needs to cut government expenditures.
would argue that people living in extreme poverty need help. The
question is whether forgiving the debt and continuing to lend to
poor countries will do anything at all to foster the growth and
prosperity that would lift them out of poverty.
would agree that the IFIs' lending practices need to be changed
because they have failed to alleviate poverty while saddling loan
recipients with unsustainable debts. The question is whether the
IFIs' coffers should be replenished to compensate for a history of
bad lending, with incentives to change their poor lending
practices. The entire debt relief proposal would cancel
approximately $56 billion in debt stock owed by 38 countries.
Clearly, a large portion of this was funded by hardworking American
The heavily indebted
poor countries (HIPCs) qualifying for debt relief are economically
repressed and plagued with corruption-a primary cause of their
poverty. Forgiving the debt owed by these countries indirectly
admits that the money transfers from rich countries to corrupt
governments do not alleviate poverty.
The U.S. government
should nevertheless support forgiving the debt because, in
reality, the money will never be repaid. The IFIs should write off
the debt, and their assets should diminish accordingly. For this
forgiveness to reflect the best interest of U.S. taxpayers,
however, the U.S. government must hold the IFIs accountable
for their decades of bad lending practices. To that end, the U.S.
forgiveness without compensating the IFIs for that loss
for future replenishments. For example, the IFIs could model future
aid after the Millennium Challenge Account.
This is the
responsible thing for Congress and the Administration to do, not
just for the poor, but out of respect for and duty to hardworking
What Forgiving the
Debt Will Do for Poor Countries
relieving the HIPCs' heavy debt burdens argue that these burdens
stifle growth and trap people in poverty while the countries pay
their debts. For example, S. 1320 states:
cancelling 100 percent of the debt owed by the countries that are
eligible for debt relief…would allow countries to increase
investments in economic and social infrastructure, including
improving the quality of and access to health care, education, and
poverty reduction programs, and thereby help them to move towards
sustainable economic growth and…[eradicate] extreme poverty
and hunger and promot[e] human development.
This argument has a
serious flaw. What makes this bill's sponsors believe that loan
recipients will choose this time to act responsibly by investing in
"economic and social infrastructure" instead of misusing or
stealing the funds as they have in the past? The HIPCs' roadblock
on their road to prosperity is not the debts themselves, but the
repression of their economies and the lack of the rule of law to
enforce contracts and punish corruption effectively.
No country in the
world has gone from rags to riches because of foreign aid. Every
rich country has become rich because it worked to eliminate
barriers to economic activity and has established a strong rule of
law to secure private property rights and contracts and to punish
corruption. A combination of free markets and strong rule of
law is the only framework within which the poor can turn their work
into something productive and build wealth over time. Without such
a framework, only those who monopolize government power or have
enough money to grease bloated bureaucracies can build wealth,
albeit at the expense of millions of people who struggle from day
to day just to get enough to eat.
According to the
2006 Index of Economic Freedom, of the 18 countries
that would qualify immediately for debt relief (Benin,
Bolivia, Burkina Faso, Ethiopia, Ghana, Guyana, Honduras,
Madagascar, Mali, Mauritania, Mozambique, Nicaragua, Niger, Rwanda,
Senegal, Tanzania, Uganda, and Zambia), few have the kind of
economic structure 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 are "mostly unfree"
economies (that is, they have significant barriers to
entrepreneurship and other economic activities), and only five are
"mostly free" economies. Some of these countries, such as Bolivia,
are political enigmas, and others, such as Niger, Rwanda, and
Uganda, are de facto one-party states.
Forgiving the debt
will not free any resources for the HIPCs. According to Adam
Lerrick, professor of economics at Carnegie Mellon University and
visiting scholar at the American Enterprise Institute, the
HIPCs de facto defaulted on their loans more than 20 years
This means that any resources that could be freed by forgiving
their debts were effectively freed over two decades ago, yet the
poor in the HIPCs are just as poor now as they were then. The only
reason that these loan obligations continue to appear on the World
Bank's balance sheet is because the bank issues new loans to pay
the old ones when they come due-a process known as "rollover."
According to Lerrick, real International Development
Association resources amounted to a "de facto $84
billion" in 2005, as opposed to the $130 billion on the World Bank
To foster economic
growth and eliminate poverty, the HIPCs need more open
markets, more transparency, and a strong rule of law so that the
people living in these countries can have greater opportunity to
make a living and more resources to invest in their future and that
of their children. More spending on social programs by their
governments or the IFIs will continue to do nothing for the
poor in these countries except to burden them with more
with unfree economies generate poverty en masse, they
are also the largest recipients of aid money to fight (in
theory) the poverty that their policies generate. Therefore, far
from having worked to eliminate poverty, the IFIs, with the
blessing of donor countries, have fed the corruption that
keeps markets closed, rule of law a joke, and the poor as poor as
they could ever be. They have done so by repeatedly lending to poor
countries regardless of the corruption and economic repression
that the leaders of these countries impose on their citizens. As a
result, all of the countries that qualify for debt relief
today are basically just as poor as they were many decades ago when
the lending started.
Since the debt has
not been paid for decades, forgiving it simply means making
the IFIs' balance sheets reflect reality. However, this action
would also send the perverse message to the world's poorest (and
most corrupt) countries that the U.S. government is willing to
overlook funds mismanagement, dictatorship, and corruption-the very
circumstances that led many countries to pile up
unsustainable debts. To avoid sending such a message, the U.S.
government must hold the IFIs accountable for their bad lending
policies and must not compensate them for the money that they lost
on bad loans.
The debt relief is
structured so that the richest countries (the G7) would assume the
payments for qualifying debtors. Each year for the next 40 years,
the G7 would pay the IFIs the exact amounts that the poor debtors
are obligated to pay. If the debt stock is worth $56 billion (as S.
1320 indicates), the G7 would pay an average of $1.4 billion per
year-a large share of which would be paid by the U.S. government.
The IFIs claim that
they need this "offsetting compensation" to avoid compromising
future lending, but this claim should be viewed with
considerable skepticism. The loss of these funds, for example,
would represent less than 16 percent of the World Bank's total
commitments ($8.7 billion) for fiscal year 2005.
It is disrespectful
to U.S. taxpayers that some Members of Congress are pushing for a
bill that, on top of overlooking corruption, provides unlimited
funds to compensate the IFIs for the U.S. share of the estimated
$56 billion that they have lost in bad loans. This is disturbingly
similar to the U.S. government's bailout of the savings and
loan institutions in the late 1980s.
S. 1320 states that
"there is authorized to be appropriated to the President such
sums as may be necessary for the United States contribution to
the implementation of the agreement [to forgive the debt]." In
this bill, "such sums" is equivalent to signing a blank U.S.
Treasury check to the IFIs and deciding only after the fact how
much money the United States will contribute to this charade in the
name of helping the poor. "Such sums" is an irresponsible
diversion of the earnings of American families, who forgo some of
their own personal goals when they pay their taxes. In its current
form, this bill sets the stage for the IFIs to continue their
current lending practices, which would lead only to more bad debt
and another bailout. Replenishing their coffers would reward the
IFIs' poor lending practices and insult the efforts of U.S.
Thing to Do-for the Poor and for U.S. Taxpayers
If the U.S. forgives
the debt because it will obviously never be paid, then debt
relief should come with strings attached, and the U.S. government
should be a leader in attaching those strings. To that
clarify exactly how much forgiving the debt will cost the U.S.
The only sum specified in S. 1320 is the approximate amount of the
debt stock owed by the 180 countries that would immediately qualify
for debt relief ($40 billion) plus those who could eventually
qualify (an additional $16 billion). Based on that information, S.
1320 should establish the exact amount that will be forgiven on
behalf of the United States.
Congress should not
compensate the IFIs for the share of debt that the U.S. forgives.
The IFIs lent irresponsibly, and they should find it costly to
continue to do that in the future.
The Administration should work with the U.S.
representative to the Board of the World Bank and the IMF to
encourage reform of the IFIs' lending practices. For the poorest
countries with no access to capital markets, the reform should
change the type of aid from loans to grants so that they do not
pile up debt. For these countries, most of which qualify now for
debt relief, it makes little sense for the World Bank to provide
loans that are unlikely to be repaid when the aid is intended to
alleviate the immediate consequences of poverty, such as immunizing
children, rather than to spur growth. Such activities should be
funded not by loans, but by performance-based grants that would pay
for actual accomplishments, such as the number of people vaccinated
or miles of roads paved. Payments for these services should be
made directly to the service providers, as the International
Financial Institutions Advisory Committee proposed in 2000.
Future replenishments should be conditioned on the IFIs'
reforming their aid practices from a system of loans to one of
grants for poor countries.
Behind its good
intention, the Multilateral Debt Relief Act in its current form
represents a blank check to irresponsible lending institutions, a
blind eye to corrupt governments, and a waste of taxpayers'
dollars. To help the HIPCs, the debt should be forgiven, but future
aid should be based on performance-based standards that the
countries must meet in order to qualify for aid and avoid further
waste. In addition, the IFIs should absorb the losses resulting
from their bad lending decisions, and future replenishments should
be conditioned on reform of the IFIs' aid practices that uses the
U.S. government's Millennium Challenge Account as a model. This is
the responsible thing to do, both for the poor and for the
hardworking U.S. taxpayer.
Eiras is Senior Policy Analyst for International
Economics in the Center for International Trade and Economics at
The Heritage Foundation.