Debt Relief Bill Is Really a Bailout of Big Lenders
by Jerome F. Winzig
Those who support the $970 million funding bill to write off loans as part of the highly indebted poor countries (HIPC) initiative claim the moral high ground. President Clinton says there's a "moral imperative" for the United States to shoulder its share of $50 billion in so-called debt relief.. Many religious denominational bodies support Congressional action to forgive debt. Representative Barney Frank says rejection of the funding proposal "condemns countless hundreds of thousands of innocent children to death by starvation and disease." Representative Dick Gephart says, "This issue in my opinion is the moral imperative of our time." Representative Gregory Meeks says, "We will be judged on how we treat the least among us."
However, none of the proposed $970 million will go towards poor countries, many of which are already in virtual default on their loans and are not paying principal or interest. Instead, the money will be used to bail out misguided and incompetent lenders that made bad loans. Many of the loans that will be bought out were misguided at best. Too often, the proceeds went for military spending or grandiose development projects designed to keep dictatorial rulers in power.
The real beneficiaries of the proposed $970 million appropriation (and that's just the U.S. share) are so-called "multilateral" institutions like the International Monetary Fund, the World Bank, and the African Development Bank. They will be rewarded for their poor loan policies, so they can turn around and make more bad loans that will not benefit poor countries.
In his report, "Shell Games Won't Help Africa," Ian Vasquez, director of the Project on Global Economic Liberty at the Cato Institute, says, "Countries that receive debt relief will be eligible for further multilateral loans on the condition that they undertake certain reforms. But proponents of the HIPC initiative have failed to explain why new conditionality will be more effective than previous conditionality."
The proponents of this measure concede that many of the loans in question were a bad idea. The Jubilee 2000 Coalition web site says, "Banks lent lavishly and without much thought about how the money would be used or whether the recipients had the capacity to repay it.... In the end, little of the money borrowed benefited the poor." Representative Maxine Waters says that many of the debts grew from loans to corrupt rulers who are no longer in power.
Other critics have also raised questions. In testimony before Congress earlier this year, Charles Calomiris, a member of the bi-partisan Meltzer Commission that recommended reforming the IMF and World Bank, said that "it is worth considering the adverse impact that loans from multilateral lenders with non-economic objectives can have on emerging market countries. The debt burdens that plague the HIPCs today are primarily the result of inter-governmental or multilateral loans that were politically motivated, not private or public lending made to finance credible investments."
African countries are now $151 billion in debt, yet this massive infusion of cash has left the region in dire economic shape. Vasquez explains that "foreign agencies have subsidized regimes whose policies have destroyed their national economies--a conclusion that even the World Bank itself admitted in a recent study which found that much foreign aid has been 'an unmitigated failure'."
Given this abysmal record, why should the United States Congress bail out lenders that made loans with such terrible results? Doing so will shield these lenders from the normal consequences of misguided lending practices and encourage them to do more of the same.
The best solution--the morally right solution--is for the IMF, the World Bank, and others to acknowledge these loans as mistakes and forgive poor countries their debts. They do not need any governmental subsidies to do so. Instead, since many of the loans are in default, the lenders should forgive 100 percent of the loans and write them off. But that solution is not likely, because it would lower the lenders' credit ratings, thereby reducing their power and influence.
Fortunately, there is another solution. Simply let poor countries remain in default on these loans. If the IMF, the World Bank, the African Development Bank, and private lenders want to continue to carry these loans on their books, let them. But the United States should make it clear that it no longer favors lender efforts to collect on these debts. Bad loan decisions should have consequences. More importantly, lenders who make bad loans should be denied access to more money that they can then use to make more bad loans.
These solutions would help the world's poor countries far more than governmental subsidies to big lenders. It would be another step in the direction of establishing the notion that free market principles can benefit poor countries more than subsidies and foreign aid. Who knows, maybe truly free access to Western markets would be next.