Sunday, February 06, 2005

To write off or not to write off 

"The world's seven wealthiest nations said Saturday they were willing to take on up to 100 percent of the debt owed by some of the poorest countries. But they failed to agree on a British plan to boost international aid by $50 billion a year.

"But G-7 finance ministers said they would consider debt relief on a country-by-country basis and underlined that governments must show themselves accountable for they would use money freed up by the relief for poverty reduction."
Bono should be happy; should everyone else? I'm of two minds on the question of debt forgiveness for the developing world. To my mind, the most persuasive argument in favor is that the most (thought definitely not all) of the debt has been accumulated by autocrats and dictators who borrowed in the name of "their" countries but pocketed or wasted most of the money themselves - hence, it might not be fair to saddle the successor governments, often new democracies struggling with political and economic reform, with the burden of debt repayment. The strongest argument against the debt forgiveness (link in PDF) is that it sends the wrong message to the developing world: you can borrow as much as you want and not worry about the consequences because eventually we'll take pity and write it off. In particular, it would penalize and disadvantage those most disciplined and best organized among the developing countries who actually have been pretty successful in meeting their repayment commitments.

But perhaps the most important consideration is, is the developing world ready for the debt forgiveness? On that account, Niall Ferguson is as skeptical as I am:
"Between 1950 and 1995, Western countries gave away around $1 trillion (in 1985 prices) in aid to poorer countries. But these efforts yielded pitiful results, as New York University economist Bill Easterly has shown, because the recipient countries lacked the political, legal and financial institutions necessary for the money to be used productively. Indeed, much of the money that has poured into poor countries since the 1950s has simply leaked back out - often to bank accounts in Switzerland...

"I recently visited Tanzania, where I got to know the son of an opposition politician. For most of his life, his father had been in jail. 'You see,' he explained to me, 'what African politicians find hard to understand about democracy is why, once they have got power, they should have to hand it over to someone else just because of an election.'

"For power means, above all, money. It means being the guy to whom [the West] hands the bulging envelope. So Africa's problem is not a problem that aid can solve. On the contrary: aid may simply make the problem worse. Africa's real problem is a problem of governance."
(hat tip: Real Clear Politics) The bottom line is: whether you give money to the developing world directly (foreign aid) or indirectly (debt forgiveness), what are the guarantees that the funds will not be misappropriated and mismanaged as badly as they were over the last few decades?

The critics are right: poverty throughout the developing world is merely a symptom. If we truly want to help people throughout the Third World (does anyone still use this term?) we should tackle the causes of poverty: unrepresentative, unresponsive, corrupt and nepotistic political culture, and economic systems that are holdovers from the golden age of socialist delusion.

The best aid we can give to the developing world is to continue freeing up international trade so that their products and produce can compete fairly on the world market. We should also continue to push for political and economic reform. To that end, any direct aid or debt write-offs should be conditional on democratic reform, improvements in governance and public administration, fighting corruption, and continuing free market reforms.

Charity is a virtue. Giving - with no strings attached - might make you feel better about yourself, and might even bring you eternal rewards, but in the end it's a selfish charity that gets you into heaven, while continuing to leave its purported beneficiaries stranded in hell of their rulers' making.

Update: Trust Mark Steyn to put it in stark terms:
"Washington has no interest in joining Gordon Brown's newly announced Cash-for-Guilt programme, under which the Chancellor (or, to be more precise, you) has agreed to improve the Afro-kleptocracy's cash flow by transferring 10 per cent of its debt burden to the United Kingdom – a perfect example of the malign combination of empty European gesture-politics and Third World larceny that's been the default mode of progressive transnationalism for far too long. By contrast, consider the splendid John Howard. In announcing Australian's $1 billion tsunami aid package, he was careful to emphasise that he wouldn't be wiring it via the estate of Benon Sevan's late auntie."
(hat tip: Dan Foty)


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