Debt Relief in Theory and Practice
A Ugandan uses the experience of his own country to illustrate why those arguing for debt relief ought to take sceptics a lot more seriously than they currently are doing. If one can read this article and still not understand the concept of "moral hazard", one never will understand it.
British Prime Minster Tony Blair and his colleagues on the Commission for Africa (CFA) are calling for total debt cancellation for Africa as part of a strategy to "help" the continent out of its poverty and misery.
Although this argument is convincing, it is deceptive. Experience shows that debt relief (or cancellation) generates unintended outcomes often at odds with the otherwise noble intentions of its architects.
The argument for debt cancellation is built on humanitarian appeals devoid of pragmatic considerations of the effect of debt forgiveness on the political behaviour of governments in Africa.
To understand the pitfalls of debt relief, we need to look at the Highly Indebted Poor Countries (HIPC) debt relief initiative sponsored by the International Monetary Fund (IMF) and the World Bank in the late 1990s.
The first country to benefit from HIPC, both original (1998) and enhanced (2000), was Uganda. The justification for HIPC was a duo-dimensional contradiction: on the one hand it was because the government had carried out "successful economic reforms" and as a result, its economy was growing consistently and impressively.
Then the flip side: the country's debt was big and increasingly becoming unsustainable. As a result, the debt was not only going to undermine future economic growth, it was also likely to put the reforms themselves in jeopardy.
When Uganda qualified for HIPC in 1998, its total debt was $3 billion. In both the original and enhanced HIPC, Uganda got debt relief to the tune of $2 billion. It is important to note that Uganda did not accumulate this huge debt burden as a result of "bad governance" under the brutal regime of Idi Amin.
On the contrary, more than 85 percent of the country's total debt by 1998 had actually been accumulated in implementation and application of structural adjustment reforms sponsored these donors under Milton Obote (between 1981-85), and now the Yoweri Museveni government (since 1987). In both periods, donors have hailed Uganda's economic reforms and economic growth rates.
Question: if these policy reforms work and Uganda's economic recovery was worth the claims donors were making, why couldn't this "African success story" pay itself out of debt? Assume Uganda were a company: how can it borrow, then report "successful restructuring" leading to "sustained expansion of the business" but be unable to pay its debts?
An excellent question, and one that agitators for debt-relief never bother to ask themselves. But now let us get to the heart of the piece:
Debt forgiveness creates a problem of moral hazard: a country borrows and invests the loan wisely and repays; another borrows and squanders the loan, is unable to pay back and is forgiven.
Such a scheme rewards incompetence and penalises good performance, and therefore creates a disincentive to better loan management. This argument is often dismissed as "neo-liberal" theorising. But as the experience of Uganda demonstrates, debt relief became an incentive for fiscal imprudence.
In Uganda's case, the law of unintended consequences applied: having gotten debt relief, the government went not only on a renewed borrowing spree, but also indulged itself into profligate public expenditure. It launched military adventures at home and abroad and rapidly expanded its patronage networks. As a result, the military budget grew from $88 million in 1998 to $200 million in 2004. Expenditure on public administration (i.e. on political patronage) grew at an annual rate of 16 percent consistently from $100 million in 1998 to $200 million in 2004.
By 2004, Uganda's debts had grown to $4.8 billion in spite of, but also because of HIPC and the IMF and World Bank "Debt Sustainability Analysis" for the country said the debt was "unsustainable".
In fact, this deterioration took place at a time when international donors had moved away from loans to grants so that Uganda was getting 60 percent of her total foreign aid as grants - the remaining 40 percent was itself on highly concessionary terms.
Amazing, isn't it? Keep in mind that Uganda is actually supposed to have been a star performer in governance terms, at least by comparison with other African countries. But at least the reckless spending bought some benefits in terms of improved living conditions for Ugandans, right?
Here is how debt relief is actually a futile exercise: donors insisted that money saved under HIPC should be put into a Poverty Action Fund to finance "poverty reducing expenditure areas" like infrastructure, health and education. However, although Uganda had managed to reduce poverty from 56 percent in 1992 to 35 percent in 2000, after debt relief, poverty increased to 38 percent in 2003.
Oops ... ahem ... guess not! And now for the section where Mr. Mweni starts to sound like a clone of yours truly:
This experience is not unique to Uganda, as many governments in Africa have behaved in similar ways. Countries should not be "forgiven" their debts. If a country cannot afford to pay its debts, let it default and pay the price i.e. be blacklisted by the international financial markets. Debt relief creates fiscal indiscipline, with a hope that a country will get away with its corrupt and profligate ways through forgiveness.
Western kindness and generosity out of humanitarian concern will not save Africa from its corrupt elites; tough and pragmatic action will. It is time donors stopped subsidising corrupt dictators in the na�ve fear that by insisting on loan repayment, they will hurt the poor.
On the contrary, debt forgiveness tends to save incompetent regimes from collapse, and therefore sustain thieving elites in power. The poor cannot be helped that way.
No doubt Mr. Mweni's just another brainwashed native like myself, unthinkingly spouting the white capitalist devil's heartless "neoliberal" rhetoric: yup, that definitely has to be it, for as every sensible person knows, incentive problems can always be wished away by sufficient largesse; just forgive those debts, pile on new aid, and this time you'll succeed in monitoring every single bit of government expenditure so well that those helpful bankers from the Cayman Islands will be reduced to misery for lack of work ...
By the way, a good example of the kind of weak-minded thinking Mweni's warning against can be found on this page, being made by a gentleman called Neville Gabriel; Mr. Gabriel takes it as evidence of the efficacy of debt relief that HIPC spending on health care and education rose substantially between 1998 and 2002, but Mr. Gabriel neither bothers to look into whether this was actually a break with the past or merely a continuation of previous spending trajectories, nor does he care to ask whether all that spending has translated into real improvements on the ground; it takes no great talent to spend large amounts of money on "education" or some other lofty goal by marking up the prices of the required inputs by astronomical sums, and rewarding the contracts for them to suitable cronies. This is no mere theoretical possibility, but a recurring problem in pretty much all of the world's poorest countries, and the thorny question of how to prevent such thievery from occurring is one few debt-relief campaigners seem much interested in seeking answers to.
Do you Yahoo!?
Yahoo! Small Business - Try our new resources site!
_______________________________________________ Ugandanet mailing list [email protected] http://kym.net/mailman/listinfo/ugandanet % UGANDANET is generously hosted by INFOCOM http://www.infocom.co.ug/
