D+C Development and Cooperation (No. 3, May/June 1999, p. 3)

What Chance for Debt Relief in Cologne?

Dieter Brauer

Will the summit of the 7 most important industrial nations (G7) in Cologne lead to a comprehensive debt relief initiative for developing countries? The preconditions for success have never been better. Since last year, thousands of non-governmental organisations around the world have been competing with the Christian churches in campaigning for debt forgiveness in the symbolic jubilee year 2000. Countless local initiatives are pointing to the links between high public indebtedness of many developing countries and the increase in poverty and social disintegration in those societies. If their debts were cancelled, so the campaigners argue, the affected countries could make a fresh start into the new millenium ­ free from a burden which is now threatening to drag them down indefinitely and stifle all development.

Political leaders within the G7 countries are responding to the call and have proposed new measures to deal with the debt problem. German Chancellor Gerhard Schröder, the chairman of this year's G7 summit in Cologne, announced in parliament that his government would launch a "Cologne Initiative" for debt relief (see also p.28). Germany offers to cancel 1.5 billion DM in debts from development cooperation plus one billion in trade credits of "Highly Indebted Poor Countries" (HIPC) who owe Germany a total of 15.5 billion DM. American President Bill Clinton has pledged to ask other leaders of the G7 nations in Cologne to make "significant improvements" to the HIPC-initiative. Debt reduction should be deeper and faster, and complete forgiveness of all bilateral loans to reforming countries should be possible instead of the rescheduling that has been common on the past, Clinton says. French Finance Minister Dominique Strauss-Kahn also came forward with a proposal for the Cologne summit. He said debt service by developing countries should be suspended for 30 years to allow developing countries to build up their economies without the suffocating debt burden. Strauss-Kahn¹s British counterpart, Gordon Brown, went as far as proposing a 50 billion dollar debt relief scheme for HIPC countries and a lowering of qualifications for poor countries to benefit from debt forgiveness.

With so much professed enthusiasm from prominent G7 leaders for debt relief, the road for action seems to be free at the Cologne summit. A closer look at the debate, however, could dampen any high-flung expectations for a radical turnabout by G7 creditor nations. The total foreign debt of all developing countries now exceeds 2,200 billion dollars. Of this total, only 200 billion dollars are owed by the HIPC countries who are the subject of the debt relief initiatives now under discussion. Most of the 41 HIPC countries are in Africa, and most of them have extremely weak economies: on average, their debts equal 465 per cent of export earnings. Debt servicing, if punctually done, devours such a large share of foreign exchange earnings that not enough money is left for necessary investments in health, education, infrastructure and industrial development. A speedy cancellation of these debts would give developing countries breathing space to tackle the most urgent measures to combat poverty. But before the debts are actually waived under the HIPC scheme, debtor governments first have to prove that they worthy to be chosen. Conditions are that their debt burden exceeds 200 to 250 per cent of export earnings; that their debt service ratio is higher 20 to 25 per cent of exports; and that they are reforming their political and economic systems to become more democratic, more market-friendly, and more oriented towards the world market. As a result of these conditions, only seven HIPC countries have so far benefited from debt relief ­ the total debt reduction under the scheme stands at about 6 billion dollars. Moreover, the HIPC initiative prescribes a lengthy six-year process during which the debtor countries have to prove that they are really implementing the required reforms and that they are successful with this.

It would be naive to expect that conditions for debt relief will be substantially relaxed at the Cologne summit. As German development minister Heidemarie Wieczorek-Zeul said in Bonn recently, it would be unfair to the German taxpayer if no conditions were attached to debt cancellation. Debt relief should, therefore, be linked to existence of the rule of law and sustainable policies designed to abolish poverty and inequality in the country concerned. Hans Tietmeyer, President of the German Federal Bank, questions the ethical foundation of debt forgiveness unless it can be guaranteed that it really benefits the poor in the debtor countries. A general debt reduction could very well be used for personal enrichment of ruling elites, for the financing of economic prestige projects of for higher military expenditures, Tietmeyer warns. A debt cancellation might also be interpreted as a justification for capital flight and encourage it even further. Tietmeyer also raises the "moral hazard problem" ­ the fear that debt servicing discipline by non-HIPC countries would become laxer with the accompanying dangers for the international financial system. Moreover, those countries which have managed their economies efficiently are indirectly punished by the proposed debt forgiveness because they would not be able to benefit from it while those which mismanaged their economies were bound to gain.

All these are considerations which will play an important role in designing any new debt relief initiative. The question should also be allowed what happened to the huge fortunes which some of the leaders have amassed who ruled in countries now asking for debt relief. Marcos of the Philippines, Suharto of Indonesia, Mobutu of former Zaire or Abacha of Nigeria are the most notorious, but they stand for the many others who channelled their countries¹ funds into their own pockets. The governments now in power in these countries must do everything to recover the ill-gotten gains of those leaders before asking the international creditors to cancel their debts. This also applies to the "apartheid debts" of South Africa which a new NGO/Church campaign wants to see cancelled.

The summit in Cologne will show that there are no easy solutions to the debt problem. The positive news is that world leaders are now dealing with it ­ a big success for the Jubilee 2000 campaign.