Net Impact at Large: G8 debt relief examined

Since the World Bank and International Monetary Fund (IMF) agreed to lift the burden of debt for eighteen of Africa's poorest nations on September 25, the international community is left to wonder what impact-if any-the new economic policy will have on these nations in the long term. The package will reduce a projected $55 billion in debt relief for eligible countries. The G8 nations submitted their plan for approval to the World Bank after coming to the agreement at the July G8 Summit in Gleneagles, Scotland. Led by Tony Blair, the Group of Eight (the G8, composed of Canada, France, Germany, Italy, Japan, Russia, the U.K., and the U.S.A.) placed Africa at the top of its priorities this year, particularly the obstacles debt posed to the UN's Millennium Development Goals (MGDs). Of the 28 countries participating in the IMF and World Bank's Heavily Indebted Poor Countries Initiative (HIPC), 24 are African nations. The initiative targets poor countries with external debt ratios above a threshold for the value of debt to exports. Prior to entering the program, HIPC countries on average spent more on debt repayment than education, and healthcare combined. Since launching the program in 1996, spending levels on education, healthcare, and social services have since exceeded spending on debt repayment by fourfold; however, the relief has yet to spur meaningful poverty reduction.

Tethered to weight of poor governance, infectious diseases such as AIDS, civil conflict, and an endless cycle of debt refinancing, many of these countries still face an insurmountable debt burden. Their loans were often born out of the inability to finance much-needed infrastructure improvements, such as waste disposal, clean water and storm drainage systems, and the construction of highways, power plants and telecommunication networks. Countries facing natural disasters, civil conflict and poor governance faced a more acute need for borrowing. The likelihood of the mismanagement of funds in these countries further hindered them from sustaining debt payments.

In the 1990s, development activists called upon international lending institutions to cancel debt and boost funding for development initiatives. The emphasis on Africa among G8 nations and the international community over the past year has catalyzed a series of negotiations between rich nations, the World Bank, and the IMF regarding debt cancellation. Diplomats floated a number of debt relief plans, but settled on one that provided deeper relief to a small, select group of countries that were already participating in the HIPC Initiative.

The recent pact received mixed reviews from other nations and activists. The Netherlands and Belgium led a group of dissenters composed of smaller countries that were concerned that the lost funds incurred by the World Bank and IMF would not be replenished for future sustainable development initiatives. Although World Bank donors and the G8 have agreed to compensate the institution for writing off these loans, the money will go toward losses rather than fulfilling programming needs.

However, resources for further aid will not be completely tapped. Jan Svejnar, Everett E. Berg Professor of Business Administration and Economics at the RSB, believes the lending institutions will have "adequate resources remaining," but he sees the recent plan as a crossroads for the World Bank and IMF believing that the question now "is whether they will find an important new mission to pursue. If so, their resources may be worth replenishing and even enlarging."

Activists see the plan as a baby step toward the sweeping debt cancellation required for meaningful advancement in poor countries. In a recent report published by the U.K.-based nongovernmental organization Christian Aid, the new plan was deemed so limited that it left 19 out of every 20 people in the developing world, nearly 5 billion people, living in debt-ridden countries. Neil Watkins, National Coordinator of the Jubilee USA Network (successor to the Jubilee 2000 campaign backed by U2 front man Bono), expressed concern over the "possible additional hurdles and conditions" imposed on countries seeking 100 percent debt relief. The group also questioned the timing of implementation, citing that the delay in relief could prevent nations like Zambia from providing AIDS medication to its citizens.

The net effect of the plan remains unknown. At this point, 18 of the 153 developing countries will benefit from 100 percent cancellation while as many as 20 other nations may be eligible after completing the HIPC program. In an interview by Lionel Beehner of the Council on Foreign Relations, scholar Todd Moss sees a "tiny fiscal effect" on these countries, given that their debt payments are relatively small compared to the amounts of aid they receive. Svejnar predicts that "[t]he long-run effect will depend on whether the countries reform their systems of governance and public finances. If they do not improve these systems, the long-term effect of the debt cancellation will be nil."

The countries eligible for 100 percent debt cancellation are Benin, Bolivia, Burkina Faso, Ethiopia, Ghana, Guyana, Honduras, Madagascar, Mali, Mauritania, Mozambique, Nicaragua, Niger, Rwanda, Senegal, Tanzania, Uganda and Zambia. Seventy percent of the debt is owed to the World Bank, while the IMF and African Development Bank are owed the rest.