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TheStreet Open House

African Debt Relief Moves to Policy Forefront

WASHINGTON -- Sure, no African nation is represented in the Group of 20, the new group unveiled this weekend , intended to assist heavily indebted poor countries. Discussion of the economic and democratic leaps sub-Saharan countries have made recently is relegated to early morning sessions at the annual meetings of the International Monetary Fund and the World Bank, when many would-be participants are still recovering from the martini-and-shrimp dinners that go for nourishment here.

But African debt relief? Now that is chic. In fact, poverty reduction through debt relief is a trumpeted bit of altruism and a bright point for the IMF and the World Bank, the multilateral lenders everyone loves to hate.

The HIPC Initiative, with $11 billion in pledges, can begin its work immediately, according to the ever-enthusiastic World Bank President James Wolfensohn. And while "immediately" often has another meaning at the Byzantine World Bank, Wolfensohn hopes that by the end of 2000, as many as 24 HIPCs will receive some amount of debt relief under the initiative.

Still, "we don't want to rush this through and not have it properly analyzed to ensure you have poverty strategies in place," Wolfensohn says. "The thing that everyone wants to ensure is that there is a connection between debt relief and poverty."

Analysis of HIPC economies underscores this connection in brutal terms. Debt burdens have left many economies in a perpetual state of underdevelopment. The United Nations Development Program, which did not participate in the IMF- and World Bank-coordinated lending programs, estimates that if interest payments on debt were diverted into health and education programs, the lives of 7 million children would be saved in one year.

Moreover, high levels of debt have rendered financial markets erratic in the poorest economies. Unworthy in the eyes of many foreign investors, heavily indebted countries are isolated from the capital inflows that could help fuel economic and social change.

"Heavily indebted sub-Saharan countries should take full and prompt advantage of the opportunity offered by debt relief under the enhanced HIPC Initiative to intensify and press ahead with reforms aimed at poverty reduction," says U.K. Chancellor of the Exchequer Gordon Brown, chairman of the IMF's interim committee.

G7 countries, which supply nearly 40% of the HIPC debt (with 50% originating from the multilateral lenders and another 10% from private bank loans), have applauded the HIPC Initiative. At the conclusion of their meeting Saturday, the G7 finance ministers announced their intention to ensure "an adequate supply of multilateral concessional resources for the poorest countries."

The rally behind debt relief has also included such odd bedfellows as Pope John Paul II, the Dalai Lama, Oxfam, economist Jeffrey Sachs, National Black Alliance and pop stars such as Madonna, U2 and Nine Inch Nails. All are participating in the Jubilee 2000 campaign, which calls for the cancellation of unpayable debts from the world's poorest countries by the end of 2000. According to the campaign's organizers, the 52 countries on their list have $354 billion debts on paper, which are worth $109 billion at markets rates and would cost $71 billion to cancel.

"It's good for these guys that they will be less saddled with debt," says Josh Feinman, chief economist at Deutsche Asset Management Americas. "It puts them on sounder financial footing. On the other hand, you have to worry about what kind of precedent it sets." Potential investors, who would likely first play these countries by investing in debt, will need assurance that debt relief will not be habit-forming.

Debt forgiveness also needs to be tied to "meaningful kinds of reforms that really improve things," Feinman says. A good example of how to do that is Uganda, which has become the poster child for the social benefits of debt reduction. Last year, the IMF and the World Bank provided some relief for Uganda's debt burden. The country, in turn, diverted the funds into primary education, so that now 90% of all school-aged children are receiving primary education against a mere 54% two years ago.

Whether or not programs such as Uganda's will be able to be replicated is unclear. Says Feinman, "It's easy to say, but harder to do." Yet it is absolutely clear that what has been done thus far has not worked in the poor countries of sub-Saharan Africa.

"The intrusive IMF-style of macroeconomic stability program has not been effective in Africa," says Sachs, director of the Center for International Development at Harvard University in Cambridge, Mass. "Without debt relief, stable and effective governance simply is not possible. And despite the pretensions to the contrary, Washington cannot run Africa."

Washington may not be able to run Africa, but the multilaterals based here, at least in word, have pledged to work with the host governments and civil society, not just the privileged donor communities.

In striking contrast to recent criticisms, the IMF and the World Bank are building and implementing this program hand in hand. Such cooperative efforts could be the foundation for new organizational structures that could better deflect criticisms against the existence of the IMF in particular. By any measure, the HIPC Initiative, in its accelerated and better-funded form, is a welcome return to the basic goals of poverty eradication.

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