Call It Stingy, but Debt Reduction May Not Be Such a Hot Idea - TheStreet

Call It Stingy, but Debt Reduction May Not Be Such a Hot Idea

Our columnist has a few sour notes to sing about debt relief for developing countries.
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At the risk of sounding like Scrooge, I'd like to offer a few sour notes regarding the debt-reduction initiative unveiled at the meetings of the

International Monetary Fund

and the

World Bank

last week.

The IMF and the World Bank reached an agreement on financing for the

Highly Indebted Poor Countries

initiative, which will retire billions of dollars of debt for a few dozen developing countries. Everyone agrees this will provide needed relief to developing countries. For many developing countries, debt payments consume huge resources that would be better spent on health, education or infrastructure.

On Wednesday,

President Clinton

upped the ante. While HIPC only covers debt owed to the World Bank and other international agencies, Clinton announced that the U.S. would forgive $5.7 billion that developing countries owe directly to the U.S. The pressure is now on for other industrialized countries to follow suit.

I was struck by the positive response to President Clinton's announcement. As

TSC

's

Heather Bourbeau

reported last week, debt reduction is the cause

du jour

. A group called

Jubilee 2000

is seeking total debt forgiveness by 2000.

Bono

, lead singer for the rock group

U2

and an active member of Jubilee 2000, hailed the U.S. decision to forgive debt. He said of Clinton, "Here's a man who has shown real vision, real balls and an ability to cut through red tape because bureaucracy is often the enemy here."

Now for the sour notes.

First, debt forgiveness only makes sense if it is contingent on broader economic reform. That means reducing debt only in those countries that are actively pursuing sound, market-based policies that will help them create a functioning and successful economy. Otherwise, the countries will just need to borrow more money in a few years.

Second, debt forgiveness also only makes sense if the money goes to areas that are critical to the country's future, such as health, education or infrastructure.

Third, although the IMF and the World Bank are imposing the preceding two conditions for its debt forgiveness, will they be willing to suspend debt forgiveness in a country not abiding by them? It will be a lot harder to do so with Bono, the

Pope

and the rest of the Jubilee 2000 crowd urging 100% debt forgiveness.

Fourth, debt forgiveness creates a major moral-hazard problem. There will be an unintended incentive for a country to rack up more debt, with the expectation that the international community will just forgive it.

Finally, I find a certain irony in the response of

Congress

to the president's announcement. To pay for the debt forgiveness, the president has included a request for $1 billion over four years in his current budget. That's a fairly large piece of change, yet the request has sparked little reaction in Congress, which is particularly surprising considering the current, acrimonious state of the budget negotiations. (Once again, Congress has failed to pass the full budget and has had to pass a

Continuing Resolution

to fund the government past the Oct. 1 start of the fiscal year). It is possible that, as events develop, the president's request will be trashed, but it hasn't yet.

Meanwhile, two trade initiatives that would directly help developing countries are languishing in Congress -- the

Caribbean Basin Initiative

and the

African Growth and Opportunity Act

. CBI would extend the

North American Free Trade Agreement

to a number of countries in the Caribbean and Central America. Those countries have suffered since NAFTA was enacted, when many companies moved from the Caribbean or Central America to Mexico to gain access to the U.S. market. The Africa bill would basically do the same for sub-Saharan Africa by providing greater access to the U.S. market.

The two initiatives passed the

House

this summer, but have languished in the

Senate

, where similar measures failed last year. Opposition comes mostly from states with large numbers of textile workers, the sort of jobs that are most likely to move to the new free trade areas.

But if the goal is long-term, sustainable growth in a developing country, then promoting trade is critical. It encourages private investment and the development of private enterprise that is ultimately the key to creating a functioning, successful economy -- one that doesn't need to borrow a lot of money from the IMF, the World Bank or anywhere else.

David Kurapka wrote speeches for Treasury Secretary Robert Rubin from 1996 until 1999. Before that, he was U.S. Trade Representative Mickey Kantor's speechwriter from 1993 to 1996. Kurapka writes from Oakland, Calif.