Is Debt Relief Good for the Global Economy?

One of the major obstacles to managing the free trade system is the fact that the world's most impoverished countries are in a debt crisis. Low-income countries currently have a total external debt of $412 billion. Every year, developing countries pay approximately nine times more in debt repayment than they receive from developed countries in aid. The economies of these poor countries remain dominated by debt repayment, which prevents them from investing in their own development and further keeps them from participating in a free (and fair) trading system.

At the G-8 Summit in Gleneagles, Scotland , held in June 2005, finance ministers from the G-8 agreed to wipe out $40 billion of debt owed by 18 of the world's poorest countries and up to $55 billion as more countries qualify under Highly Indebted Poor Country status. In all, 18 nations–14 of them in Africa –with 296 million people will be debt free by 2009 if all G-8 members fulfill their debt relief commitments. Although these numbers are impressive, for many it does not go far from enough. At most, it cancels less than one-sixth of Africa's $295 billion debt. It also leaves out many countries in critical need, because only those that obtain Highly Indebted Poor Country (HIPC) status qualify for debt relief. Such status means that there are strings attached to debt relief. In order to qualify as a HIPC, countries are required to liberalize trade by privatizing water and education systems, which tends to mean quantifiable losses in income for some of the poorest people in those countries. In addition, many scholars question whether such conditional debt relief causes more harm than good for poor, developing countries.

In theory, canceling debt provides some respite from poverty's pressures, freeing up government money to improve public education, strengthen agricultural practices, and expand trade. However, are these benefits real, and what are the costs to poor countries? Are the conditions placed on HIPC countries fair and plausible? Do such requirements really encourage economic growth and development and participation in the free trade system in the short- and long-term? These questions are the focus for this chapter's debate.

Yes: Debt relief is both an economic necessity and an obligation of humanity.

Proponents of debt relief simply argue that the burden of debt costs lives. Some of the most heavily indebted poor countries are struggling to pay even the interest on their loans, let alone the actual capital. This massively distorts their economies and their spending priorities. African nations currently spend four times as much on debt repayments as they do on health. In addition, given the HIV/AIDS crisis there, the ramifications of this are difficult to accept. Furthermore, those who are most affected by debt repayments are not those who were necessarily responsible for creating the debt in the first place; and yet they are the ones being punished. There are numerous examples of poor countries where huge debts were amassed by the irresponsible spending of past dictators, who have now been overthrown; yet the new governments and the people of those countries have to pay the price for the dictators' actions.

From an economic perspective, poor countries need debt relief if they are to stand a chance in the global economy. As long as their economies are dominated by the need to repay debt, it is impossible for them to truly invest in infrastructure and education that will sow the seeds for development in the future. Canceling debt would give them a fresh start and the opportunity to build successful economies that would supply the needs of generations to come. In this sense, the developed world has both an economic and a moral interest in leveling the playing field for such heavily indebted countries. The global economy is only as strong as its weakest link.

No: Debt relief has long-term consequences that may do the world economy and the people participating in it more harm than good.

For many, debt relief is only the tip of the iceberg when it comes to understanding why poor countries are in their present situation. Although they may have heavy debt burdens, debt is not necessarily the cause of their problems. Many countries spend huge amounts of money on weapons in order to fight local wars, for example, instead of investing in their people. Canceling their debt does not necessarily solve their problems. Some conditional debt relief and further IMF loans are one way to make sure that when funds are freed up they are used and distributed by the government appropriately. Nevertheless, simply canceling a country's debt can be dangerous because it may enhance the power of many unstable and corrupt governments that currently govern in some parts of the world. For them, reform needs to come first.

Further, opponents of debt relief worry about the precedent that such action may set. If every new government could decide that it was not responsible for its predecessor's debts, lenders would be far less likely to provide loans on good terms in the future, which would retard economic growth in the long term. Developing countries, in particular, still need loans in order to invest in infrastructure projects. In addition, just canceling debt does not mean that countries will not apply for more loans — sparking a new cycle of dependency. Debt relief does not contain any mechanisms ensuring that this vicious lending cycle does not continue indefinitely.

This debate demonstrates how short- and long-term economic and political goals are often at odds with one another. While debt relief may have immediate and positive implications, its lasting impacts on the world's poor are much more controversial. One must consider both the economics of this argument, particularly who pays off these loans, as well as the moral argument. Use the links below (as well as those embedded in the text) to learn more about this complex issue and to develop your own opinion on the relationship between economic cooperation and debt relief.

http://www.jubileedebtcampaign.org.uk/

Home page of the Jubilee Debt Campaign

http://news.bbc.co.uk/1/hi/business/4663659.stm

"Can the G8 be considered a success?" – News analysis of the 2005 G-8 summit, with further links from BBC News.

http://news.bbc.co.uk/2/shared/spl/hi/africa/05/africa_economy/html/debt.stm

"Africa’s Economy: Debt" – BBC news Analysis of the Heavily Indebted Poor Countries initiative (HIPC) for impoverished African nations.

http://www.csmonitor.com/2005/0613/p01s02-woaf.htm

"What debt relief means for Africa " – Report from the Christian Science Monitor .

http://www.africaeconomicanalysis.org/articles/gen/AfricasDebthtm.html

"Debt Relief for Africa"

http://www.gsb.stanford.edu/news/research/econ_henry_g8debtrelief.shtml

"The G8 debt relief plan may not help Africa"—A research analysis of the 2005 G8 debt relief plan by a Stanford University economist and a researcher with the IMF

http://www.oxfam.org/en/policy/briefingnotes/bn060609_g8_oneyr

"The view from the summit – Gleneagles G8 one year later"—An Oxfam International report on the fulfillment of G8 leaders to cancel the debt owed by the poorest countries

http://news.bbc.co.uk/2/hi/business/4081220.stm

"Q&A: African debt relief "—BBC News Background Report on the 2005 G-8 Summit Plan to eliminate debt of the world’s poorest countries, most in sub-Saharan Africa.