Debt Cancellation and Poor Countries

(From a friend who works with an international NGO):

It’s good to be concerned with accountability issues, however the issue is very complex, and would take a book to address, but here is a shorter answer: Debt relief being provided is already conditional on countries developing and implementing national owned poverty reduction strategies – and the accountability is being made stronger (though we must await news of how, from the G8 World Bank and others). To date proceeds of earlier debt relief have been used (eg in Tanzania and Uganda) to introduce universal primary education and fund better health care. Most debtor governments have poverty monitoring units, plus in some countries civil society groups including churches are active in monitoring how funds are being spent. There is still scope to much improve accountability, but much progress has been made ( BTW remember we in Australia are well short of good accountability for our vastly larger (per head) public spending; and in some respects – we are going backwards, arguably losing much of the independence of the Senate from July 1 – watch how that pans out for one critically important national accountability mechanism here). The sums announced recently sound impressively large, but be aware they will be provided to 18 countries over decades. They are not nearly as impressive as they sound. To put the G8 debt relief in perspective:

By my back of the envelope calculations, relief will in theory average about A$6 per person per year. Australia – if it contributes its full share to multilateral debt cancellation for 18 countries, as the Treasurer pledged – will give less than 10 cents per citizen (in the 18 nations) per year towards this relief – this, for millions of people with the highest poverty rates in the world. As a comparison, a recent OECD report showed that government “farm aid” globally (but only to those in rich countries) is far in excess of $5000 per farmer per year – even though Australia gives less per farmer, wastage alone here will be many times 10 cents each year. (BTW, in dollar terms, “farm aid” globally each year is roughly 5 times total annual aid for poverty reduction, and over 150 times the debt relief the G8 will offer to the 18, each year) Around 150 million of the world’s most impoverished children, many without any reasonable prospect of a decent education or basic healthcare will be the largest group of beneficiaries (though let’s not get carried away with the amount being released for them – much less than $6 on average – see below on why.) Note too that the debt to be cancelled was the result both of rich creditor as well as poor debtor (including many long-gone dictators) decisions and actions, as well as factors well outside the control of both, and was not in any sense the responsibility of these children (it was incurred before most of them were born, and certainly before they were able to vote – if that is meaningful or possible in their countries)? Above, I wrote, “in theory” and indicated not all funding will reach poor people.The reasons some of the proceeds of debt relief will not reach those who need it are many, of which corruption and other leakages and inefficiencies are but three. There is good reason, based on the experience of “debt relief” iover the last 5 years, to believe that some of the 18 countries will after “relief” pay more in debt service annually than they paid before debt relief – and so will not have the full amount of “relief” available.

Much of the modest proceeds of relief will be wiped out by higher oil prices (e.g. early last month I was in Uganda where petrol prices are much higher than Australia, but average income is just over 1% of that here – and global oil prices have skyrocketed since.) and the declining prices for those few commodities they rely on for export income (over those coming decades) will almost certainly offset the gains from debt relief – in some cases, quite rapidly. However, the alternatives – doing nothing, or wishing things like accountability were better without having specific workable ways to address them – are likely to leave ordinary people worse off. On the positive side, in terms of future debt crises, I see evidence (in line with my comments above about accountability improving) that the quality of lending to poor countries has improved – the volume of lending has contracted and lending is being done with more care (though could still be improved). If a poor country takes a backward step, governance wise, donors are quicker to show they do not accept this, and have sanctions they can and do tend to use. I find it interesting that the “experts” who publicly criticise both Jubilee and Make Poverty History talk much about the need for better accountability but show so little evidence they know anything about what is happening to improve it, let alone how to do so. I could go on, but I hope this gives a sketch of the overall picture.

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July 2005

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