Message-ID: <s45a12d0.038@crs.loc.gov> Date: Fri, 31 Oct 1997 17:16:05 -0500 From: Jonathan Sanford <mailto:JSANFORD@CRS.LOC.GOV> Subject: Jubillee 2000/World Bank-IMF debt forgiveness plans To: mailto:DEVEL-L@AMERICAN.EDU
The Jubilee 2000 campaign is one of several proposals for the forgiveness of debt owed by low-income countries. It recommends that all foreign debt owed by countries with per capita annual income below $700 should be canceled outright by the year 2000. Countries with pc incomes between $700 and $2000 would have their debt reduced proportionally. All debt over 20% of a country's GNP or 67% of its annual export income (whichever is less) would be written off by creditors.William Peters, a co-chairman of the campaign. says the goal should be renewal and regeneration, not merely stabilization of debtor countries' debt situations. The campaign says there should be no economic condition, but rather only political conditions, for debt forgiveness. For instance, countries would be required to retrieve all flight capital they have lost because of corruption or other illegal capital flight. Likewise, countries like Nigeria would be required to institute a civilian government and stop the export of illegal drugs. Proponents say countries should be free to manage their economic policies as they wish, and this will promote better policy once governments realize that forgiveness will allow them to keep all the gain from improvements in their economy and they will not have to give creditors much of the increased income that economic policy reform would generate.
M.J. Dent, a coo-chairman of the campaign, noted in 1996 that 35 African countries owed $116 billion to bilateral official creditors, $59 billion to multilateral agencies, and $53 billion to commercial creditors. He said the creditors should all absorb the cost of debt reductions with their own resources.
Dent says the debt owed by the African countries is not worth its face value. Therefore, he says governments can forgive it without sustaining substantial losses, since the amount they are forgiving is really worth less than it appears. Jubilee 2000 literature make it clear that debt forgiveness would be just the first step. Bilateral, multilateral, and commercial creditors would be expected to make very large amounts of new loan capital available to the newly-forgiven countries for the next several decades.
The Jubilee 2000 plan employs dubious statistics in a number of instances in the development of its argument. For example, it recommends that the World Bank sell its gold to help fund the cost of debt forgiveness. In fact, the World Bank has no gold (the IMF has gold instead). The proposal to wipe out the entire financial reserves of the World Bank to cover a one-time forgiveness of debt would destabilize the institution and effect potentially serious losses--not to mention drying up the Bank as a source of new lending. Likewise, the Jubilee 2000 advocates are rather simplistic in their assumption that developing countries will promptly undertake sound economic reform once they know that they will get to keep all the economic proceeds of such reform. As though this were the only reason they are hesitant to reform.
The Jubilee 2000 plan is very casual regarding the cost of forgiveness to creditors. As noted, the multilateral banks would be largely put out of business if they had to wipe out $59 billion in debt (much of which is not yet due and is not actually costing the debtor countries anything). They certainly would not be in a position to make major new loans in coming decades. Likewise, bilateral official lenders would have to absorb the cost of debt reduction in their budgets. In the United States, for instance, new money would have to be appropriated to expunge the debts currently outstanding. Whether this could be encompassed in the current plan for reductions in the Federal deficit is a matter of doubt. Whether the United States would be willing to appropriate billions more to assist the countries where it has just wiped out debt is also dubious. Debt forgiveness costs real; it is not a mere accounting notation.
Just how commercial creditors could be required to forgive debt that poor countries owe to them is also unclear. If governments require such forgiveness, then the commercial firms will logically expect that governments will pay them for they debts they relinquish. The fifth amendment to the US constitution prohibits such takings without compensation. Other countries have similar laws. If forgiveness is voluntary, they the free rider problem is evident. The one bank that refuses to forgive will get repaid, so everyone will want to be that bank.
Even if all the debt is forgiven on Monday, we still need to ask what the poor countries will do for credit when Tuesday comes around. Commercial creditors are unlikely to sink new loans into countries where they have just lost billions--particularly if there is no likelihood that countries will take the necessary steps to make their economies more productive, efficient, and attractive to private investors. Otherwise, everyone will simply assume that a new debt forgiveness exercise will be needed in a couple years when the debtor countries find they cannot afford to service the new debt they received after the Jubilee 2000 round of forgiveness. If their economy and their international economic situation is not made sustainable by debt forgiveness, such forgiveness is a fleeting thing that will effect no real change.
The World Bank and IMF adopted a plan last October (1996) which presumes that low income countries can have up to 85% of the debt they owe to bilateral lenders forgiven if they are willing to undertake major economic reforms. Forgiveness would be effected through the Paris Club and would not place costs on the creditors immediately. An agreement with the IMF would be a prerequisite. The World Bank and IMF would also be willing to forgive or to restructure (on highly concessional terms) debts owed to them once bilateral debts have been written down and economic reforms have been adopted. I don't think the World Bank/IMF debt forgiveness plan is large enough or that enough countries are eligible. However, it does attempt to answer the real questions that must be addressed before debt forgiveness can be effective in alleviating the problems of heavily-indebted low income countries.
Jon Sanfor