Forgive us our debts

The South African Coalition of Non-governmental Organisations (Sangoco) claims to represent the whole of the country’s civil society but continues to act as the civilian wing of a political movement. Its annual conference met under the slogan “Building People’s Power for Poverty Alleviation”, which has a somewhat familiar ring for anyone used to ploughing through policy proposals from the hard left.

Committed as ever to the cause of debt relief, the conference heard Eric Molobi of the Kagiso Trust plead with them not to include the “apartheid debt” in the general run of poor country debt. He argued that since South Africa is a middle-income country with a small foreign debt, quite unlike, say, Mozambique or Tanzania, lumping these disparate cases together reduced the credibility of the general cause of debt relief. Unfortunately for Molobi, Sangoco is pretty disciplined about taking the party line and voted his proposal down.

But does debt relief work even for the highly indebted poor countries (HIPCs)? These are some of the commoner myths surrounding debt relief that Sangoco should bear in mind.

Poor countries are the victims of private bankers and investors who exploit them by getting them into debt and then making them repay forever.
The truth is that it is impossible to get such people interested in putting money into the HIPCs, 87 per cent of whose debts are to governments and public agencies.

It is the debt that has made HIPCs poor.
Actually many of the loans were made on extraordinarily generous terms such as those offered by the World Bank’s IDA arm, with an interest rate of 0.75 per cent and ten years grace before repayment over 35-40 years. Countries receiving such loans could have put the money in a bank, earned interest and made an easy profit. So if they cannot service such debts it means only one thing: the money has been wasted. Excessive debt is above all a sign of waste and forgiving it is no guarantee that people will not waste future loans.

Debt relief will make the HIPCs better off.
In fact the HIPCs continue to receive more money in loans from public sources than they pay out on debt service. If the debt was forgiven and the loans also stopped they would be collectively worse off

Debt relief is just.
Not so. If one takes the world’s poorest quartile of people one finds that almost a third of them live in India, which has managed its affairs well enough to be ineligible for debt relief. The same is true of China. The countries with the most unpayable debts are not so much the poorest as the worst managed. Zimbabwe is a good example, though fortunately there is little chance that President Robert Mugabe’s demands that Britain should compensate him for colonialism at the same time that he is busy shopping for a new private jet and pursuing an expensive war in the Congo will win much sympathy. Forgiving the debts of such countries means rewarding bad management and discriminating against the really poor but well managed countries.

Debt relief will mean HIPC governments spend more on schools, hospitals and other social goods.
Not necessarily, even if the donor countries stipulate that their money must be spent that way. In practice it just frees the recipient government to spend its own money in other ways — quite often on arms.

Debt relief can be combined with conditions that ensure that HIPC governments behave responsibly towards their own poor.
The opposite is true. If donors dribble money in bit by bit they have the leverage to ensure compliance with loan conditions. If they simply forgive debt in one big bang they lose all leverage for imposing conditionalities.

Debt relief is bound to lead to poverty alleviation through higher social spending.
Wrong. The only thing that will lead to poverty alleviation is the honest administration of policies that produce economic growth.