Will debt relief really help?

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<ul><li><p>This article was downloaded by: [Tulane University]On: 11 October 2014, At: 12:39Publisher: RoutledgeInforma Ltd Registered in England and Wales Registered Number: 1072954Registered office: Mortimer House, 37-41 Mortimer Street, London W1T 3JH, UK</p><p>The Washington QuarterlyPublication details, including instructions for authors andsubscription information:http://www.tandfonline.com/loi/rwaq20</p><p>Will debt relief really help?Denise Froning aa Policy analyst with the Center for International Tradeand Economics , The Heritage FoundationPublished online: 07 Jan 2010.</p><p>To cite this article: Denise Froning (2001) Will debt relief really help?, The WashingtonQuarterly, 24:3, 199-211</p><p>To link to this article: http://dx.doi.org/10.1162/01636600152102340</p><p>PLEASE SCROLL DOWN FOR ARTICLE</p><p>Taylor &amp; Francis makes every effort to ensure the accuracy of all the information(the Content) contained in the publications on our platform. 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Terms &amp; Conditions of access and use can be found at http://www.tandfonline.com/page/terms-and-conditions</p><p>http://www.tandfonline.com/loi/rwaq20http://dx.doi.org/10.1162/01636600152102340http://www.tandfonline.com/page/terms-and-conditionshttp://www.tandfonline.com/page/terms-and-conditions</p></li><li><p>Denise Froning</p><p>Will Debt Relief Really Help?</p><p>I,n 2000, debt relief for what the International Monetary Fund(IMF) and World Bank term Heavily Indebted Poor Countries (HIPCs) wasthe cause of the moment in development theory, attracting international at-tention and broad agreement that it was the single most important piece ofthe poor-country development puzzle. Widespread consensus emerged thatinternational lenders must forgive the HIPCs' debt burden. In the ebb andflow of development trends, debt relief thus had its moment in the sun, andrich countries rightly agreed to forgive some of the debtalthough theWorld Bank and the IMF did not.</p><p>This relief, although limited to bilateral debt, will help. But when the G-7and other advocates of development move on to the latest fad in the quest forsolutions to the problems of the world's poorest countrieswhether disease,education, or some yet unmentioned illall the attendant causes of debt re-lief will still need to be addressed.</p><p>All of these problems are long-term concerns. None of these countrieswill be wealthy tomorrow, nor will they solve all their troubles immediately.For G-7 nations, perhaps especially the United States, accustomed to focus-ing on the next quarter's profits rather than long'term returns, the tempta-tion will likely be to give up too soon. That decision would be a mistake.</p><p>The fact is that these poor countries face far too many problems in addi-tion to overwhelming debt, many of which are precisely what caused thedebt accumulation in the first place. Many factorsdisease, poverty, lack ofeducation, lack of institutions, lack of transportation infrastructure, lack offood, lack of business, lack of security, lack of foreign investment, and lack ofprospectscontinue to stifle the economic growth of these countries, and</p><p>Denise Froning is a policy analyst with the Center for International Trade and Econom-ics at The Heritage Foundation</p><p>Copyright 2001 by The Center for Strategic and International Studies and theMassachusetts Institute of TechnologyThe Washington Quarterly 24:3 pp. 199-211.</p><p>THE WASHINGTON QUARTERLY SUMMER 2001 199</p><p>Dow</p><p>nloa</p><p>ded </p><p>by [</p><p>Tul</p><p>ane </p><p>Uni</p><p>vers</p><p>ity] </p><p>at 1</p><p>2:39</p><p> 11 </p><p>Oct</p><p>ober</p><p> 201</p><p>4 </p></li><li><p>I Deni'se Froning</p><p>they will continue to do so after debt relief. Without a change in these cir-cumstances, debt relief will be only a short-term palliative, and these coun-tries will find themselves back in the same predicament that they now face.</p><p>What Is the Problem?</p><p>Bad policies and their attendant outcomes, both within and outside thesecountries, contribute to the "problem of poverty." Poor countries must im-prove domestically in a number of areas; their poverty cannot be attributed</p><p>entirely to external factors. Although thesecountries face some valid domestic woes,many of the excuses for poverty are invalid. Alack of natural resources, for instance, doesnot fully account for the poverty the HIPCsface. Africa, where most of the world's 41HIPCs are located, is awash in natural wealth,from diamonds, gold, and oil to arable agricul-tural land.1 As George Ayittey observes, thecontinent has abundant natural potential.This potential, however, remains largely unre-alized. Citing examples such as Russia, some</p><p>Debt relief, althoughimportant, was thecause of the momentin developmenttheory...</p><p>have argued that such resources are more a curse than a blessing, but that ar-gument does not explain the lack of development. Country after country hasbecome rich based on these very resources.</p><p>Some maintain that lack of progress among HIPCs is due in part to geo-graphical location and the affliction of disease that accompanies that loca-tion. The impact of disease, from malaria to cholera to AIDS, is indeeddebilitating; but even if disease were entirely eliminated, the lack of institu-tions (or the persistence of corrupt ones) would keep the people of thesecountries poor.</p><p>I do not belittle the effects of disease or suggest that people should aban-don attempts to mitigate the health crisis in the HIPC countries. Ratherthan quibble about which cause of poverty should be considered paramount,however, we must first acknowledge that the troubles of these countries arelegion and that each must be addressed for lasting development to takeplace. For example, a couple of years ago, before the debt-relief craze, cor-ruption was the cause du jour. The World Bank and other august institu-tions held conferences, everyone nodded their heads sagely, and learnedpeople everywhere agreed that corruption was corrosive and that somethingmust be done. Although work to address this particular problem undoubt-edly continues, the international focus on corruption has shifted to other</p><p>THE WASHINGTON QUARTERLY SUMMER 2001200</p><p>Dow</p><p>nloa</p><p>ded </p><p>by [</p><p>Tul</p><p>ane </p><p>Uni</p><p>vers</p><p>ity] </p><p>at 1</p><p>2:39</p><p> 11 </p><p>Oct</p><p>ober</p><p> 201</p><p>4 </p></li><li><p>Will Debt Relief Really Help? |</p><p>contributing factors of poverty; yet corruption's effects remain as debilitat-ing as ever.</p><p>The construction of sound institutions, as one example, ought not to beabandoned because other problems exist. In fact, admitting that the impedi-ments are many and related reduces the risk of "fad" development, in whichwhatever currently fashionable panacea that captures popular attentionreigns while other crucial issues are forgotten.</p><p>BAD LEADERS</p><p>Ayittey makes the important distinction between the African people andthe leaders of African nations. It is not the African people who squander de-velopment opportunities. Too often, it is African leaders, as Ayittey has ob-served, who seize both native wealth and foreign aid while plunging theircountries into war and plundering their money, both through the exploita-tion of resources like diamonds and by stealing massive amounts of foreignaid.2 As the Freedom House annual survey of political freedom points out,"Only 21 African countries (40 percent) areelectoral democracies."3 The African peopledo not choose these leaders, but they mustsuffer the consequences of these leaders' poordecisions.</p><p>CORRUPTION</p><p>...the attendantcauses of debt reliefstill need to beaddressed.</p><p>Despite its trendiness as an issue, corruption isa truly debilitating factor in the poorest coun-tries. Indeed, much of Africa reflects the results of corruption undermining ef-forts to foster emerging market economies. Corruption is a cancer on the mostlegitimate efforts at development in many African countries, affecting regula-tion as well as property rights and discouraging economic progress. Althoughhardly unique to Africa or to developing nations, corruption is all the moredamaging to them; it creates obstacles to development that an already estab-lished, large-scale economy might survive but that can prove fatal to fledglingefforts at market development in small economies.</p><p>Part of Africa's development problem, as economist John Mukum Mbakuwrites, is bureaucrats who are often</p><p>members of the politically dominant group and have significant influenceover the allocation of resources. Under these conditions, civil servants be-have like interest groups whose primary objective is to put pressure on thepolitical system in an effort to redistribute wealth to themselves. "In coun-tries with poorly constructed, inefficient, and non-self-enforcing constitu-</p><p>THE WASHINGTON QUARTERLY SUMMER 2001 201</p><p>Dow</p><p>nloa</p><p>ded </p><p>by [</p><p>Tul</p><p>ane </p><p>Uni</p><p>vers</p><p>ity] </p><p>at 1</p><p>2:39</p><p> 11 </p><p>Oct</p><p>ober</p><p> 201</p><p>4 </p></li><li><p>[ Denise Froning</p><p>tional rules, opportunistic behavior (including rent seeking) [is] usuallyquite pervasive.... Excessive regulation of economic activities creates manyopportunities for rent seeking, including bureaucratic corruption.4</p><p>Mukum Mbaku's solution: reform the laws to remove the state from directcontrol over the economya system which leads to profit skimming, if notoutright profit seizure.</p><p>Corruption compounds itself. Sometimes because of profit seizure, lower-level bureaucrats themselves are underpaid and regard taking bribes as nec-essary for their survival. The whole system becomes rotten in layers, withthe entire structure threatening to tumble down if one attempts to reformone part of it.</p><p>BAD INSTITUTIONS</p><p>Ayittey delineates four institutional pillars5 that are essential for lasting devel-opment in Africa: an independent judiciary, an independent central bank,free media, and neutral armed forces. In HIPCs and other poor countries,these pillars are often missing, which is why foreign assistanceeven by thoseagencies whose sole purpose is giving aidhas proved ineffective overall.World Bank analysis of past loans and credits concludes that assistance "has apositive impact on growth [only] in countries with good fiscal, monetary, andtrade policies."6 In countries with poor policies, aid has had a negative im-pact. Robert Barro's analysis reveals that countries with "good fiscal, mon-etary, and trade policies" are more likely to experience positive economicgrowth whether they receive assistance or not.7 Meanwhile, regardless of howmuch assistance they have received, countries with poor economic policieshave not experienced sustained economic growth.8 Clearly, sound economicpolicies, not foreign assistance, are the key to development.</p><p>How Rich Nations Exacerbate the Problem</p><p>For poor countries to succeed in the international economy, they must haveaccess to the markets of developed countries. Yet the United States leviesthe most onerous of its tariffsas high as 45 percentagainst some of theseimpoverished nations.</p><p>The U.S. weighted-average tariff rate of only 2 percent on worldwide im-ports is low by global standards,9 but rather than apply this rate evenlyamong nations, the United States applies tariffs according to the type ofproduct imported. The goods that face the highest U.S. tariffs are preciselythose that the poorest countries produce: agricultural goods, textiles, andapparel. Combined with the impact of quotas, the U.S. tariff structure pre-</p><p>THE WASHINGTON QUARTERLY SUMMER 2001202</p><p>Dow</p><p>nloa</p><p>ded </p><p>by [</p><p>Tul</p><p>ane </p><p>Uni</p><p>vers</p><p>ity] </p><p>at 1</p><p>2:39</p><p> 11 </p><p>Oct</p><p>ober</p><p> 201</p><p>4 </p></li><li><p>Will Debt Relief Really Help? |</p><p>jound economic</p><p>policies, not foreign</p><p>assistance, are the</p><p>key to development.</p><p>sents a significant obstacle to any country struggling to create even an ini-tial presence in the world economy.</p><p>U.S. weighted-average tariff rates vary widely when plotted along lines ofthe exporting countries' economic wealth. Countries whose inhabitants earnan annual per capita gross domestic product (GDP) of more than $25,000face an average U.S. tariff rate of 2 percent. Twenty-five countries with an-nual per capita GDPs of less than $1,000approximately the amount that aminimum-wage worker in the United States earns in one monthface tariffrates greater than the U.S. average.</p><p>This disparity in U.S. tariff rates exists be-cause poor countries tend to export many ofthe commodities that are subject to high tar-iffs in the United States and other wealthymarkets. Low-income nations develop indus-tries in which they have a comparative advan-tage and which provide goods and servicesthat meet the basic needs of their people. Theagricultural, textile, and apparel industries arelabor-intensive and do not require sophisticated machinery or large amountsof capital to make a profit. The resource they do require, and the resourcesometimes the only resourcethat developing countries have, is people.</p><p>The United States imposes absurdly high duties on the very goods forwhich poor countries most need a market, effectively pricing HIPCs out ofthe market. For example, Gambia, which has a GDP per capita of about$325 per year, faces duty rates on exports to the United States ranging from8.8 percent on woven cotton fabrics to 11.8 percent on textile outerwear to15.4 percent on women's clothing; the tariff on women's clothing is almosteight times the U.S. average tariff rate of 2 percent. The notion thatwomen's skirts from Gambia are going to flood the U.S. market, overwhelmAmerican textile factories, and send Ann Taylor out of business is clearlypreposterous. In fact, if Gambia exported its entire economy to the UnitedStates, it would amount to less than 0.005 of 1 percent of total U.S. GDP.</p><p>Other examples of U.S. protectionism against HIPCs are just as absurdand needlessly damaging. Burkina Faso, a landlocked nation subject todroughts and desertification (both of which make agriculture a difficult en-deavor, to say the least), has an annual GDP per capita of about $215. Itsmain exports are cotton and gold, and the United States is not one of itsprincipal markets. Nonetheless, Burkina Faso faces a 33.3 percent tariff onwhatever outerwear it might attempt to send to the United States. IfBurkina Fasowhich faces high costs in exporting everything because of itspoverty and landlocked nature-somehow manages to get a coat to theUnited States, that coat is instantly taxed at a third again its cost.</p><p>THE WASHINGTON QUA...</p></li></ul>