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Debt Relief: The U.S. Is Badly in Arrears
The other day, Venezuelan President Hugo Chavez declared at a meeting of OPEC leaders that if the West wanted price relief on oil, it should give more generous relief to poor, highly indebted countries. This is, of course, disingenuous. OPEC is not famous for giving aid to poor countries and has played no useful role in the discussions of debt relief. OPEC uses its power to control supply, constrain choice, and extract the highest possible prices. In this respect, OPEC behaves just like any other opportunistic monopoly, say, De Beers, or Microsoft Corp. (MSFT)
But why not get serious about debt relief for very poor countries and challenge OPEC to reciprocate? In the past year, there has actually been great progress on debt relief for the poorest countries. A major stumbling block is the Republican Congress--specifically, Texas Senator Phil Gramm, who has used his influence to limit U.S. participation. Here is the background:
At the 1999 Group of Eight economic summit in Cologne, the key national leaders agreed to an expanded program of relief for highly indebted poor countries, totaling $29 billion over five years. The creditors include the International Monetary Fund, the World Bank Group, national governments, and private lenders. This initiative reflected stepped-up prodding from nongovernment organizations, especially the Jubilee 2000 coalition of major religious groups. British Prime Minister Tony Blair and President Clinton were instrumental in getting the initiative approved.DEAL-BREAKER. But this debt relief had to be funded, with major countries contributing proportionally. (Of the multilateral creditors, only the World Bank can absorb substantial relief from its own resources.) The U.S. share was just under $1 billion. Although most European countries have approved their contributions, the U.S. has been held up by partisan politics. Last year, Congress did approve a small contribution of $110 million, but only after Treasury Secretary Lawrence H. Summers and President Clinton personally made refusal to provide some token contribution a deal-breaker in the final 1999 budget negotiations.
This July, the House approved a floor amendment by Representatives Maxine Waters (D-Calif.) and Barney Frank (D-Mass.) to contribute an additional $225 million. Some 26 Republicans broke ranks with the House leadership to support the amendment. Even this sum is far less than this year's U.S. share of $435 million. But in the Senate, funding is being held hostage by Senator Gramm, who wants shorter payback periods, more emphasis on free-market solutions, and a narrower IMF role as the price for approving debt relief.
As a result, several desperately poor countries saddled with unsustainable interest payments are not getting debt relief that was already approved by the IMF and World Bank. These include Bolivia, Honduras, and Zambia.
Interestingly enough, since the debt relief initiative was launched, the two multilateral lending agencies have become enthusiastic converts to the project. Until recently, the Bank and IMF had been known for their financial orthodoxy and reluctance to "reward" debtors. But most mainstream economists and bankers now believe that keeping poor nations in a debtors' prison only retards their capacity to grow. At the same time, this debt relief program, under the watchful eyes of the IMF and World Bank, is not available to countries engaged in civil wars, repressions, or self-defeating economic strategies.EMBARRASSED. At the recent Prague meetings of the IMF and World Bank, officials announced plans to approve relief for 10 countries in addition to the 10 that have already won approval, and to expand the total relief package to upwards of $50 billion. This would reduce the debt service burden on poor countries by between half and two-thirds. U.S. officials, who have been pressing for greater relief, were deeply embarrassed at the Prague meetings, because the U.S. hasn't been able to deliver its share.
Debt relief is analogous to a bankruptcy workout. As the laws of every capitalist country recognize, at some point it is impossible to get blood from a stone. It is better for everyone involved if assets can be put back to productive use. In the case of the world's poorest countries, we are talking not of inert physical assets but of desperately poor people, whose very survival is being jeopardized by heavy foreign debts representing decades-old decisions by corrupt or incompetent officials over whom citizens had no control.
Debt relief is no longer just a cause of religious organizations, poor nations, and street protesters. Major governments, bankers, and creditor agencies now support it. It's not likely that more generous debt relief would carry much weight with OPEC. But relief is worth giving in its own right, both for humanitarian reasons and as sound economics. Maybe the street protesters, frustrated at Prague, should pay a call on Senator Gramm.By Robert Kuttner