via europa


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Debt Relief?
Calls for flat debt relief, hence, must differentiate as to which debts should be written off. Public creditors must not fear to a similar extent as private ones a deterioration of the optics of their balance sheet, but no finance minister is keen on loosing cash flow on which he had based his planning. In 1996 the International Monetary Fund (IMF) and the World Bank have launched the HIPC-initiative, a programme intended to relieve a group of 27 highly indebted poor countries (mainly in Africa) from most of their debt burden. Without going into details I claim that this concept has not produced much sustainable effect in practice. The benefiting countries are supposed to develop Poverty Reduction Strategy Papers (PRSP) (based on the participation of the civil society) – sort of debt-poverty-swap where a commitment to actions apt to potentially reduce poverty leads to debt relief. The issue at stake, though, is not to produce a plan but to actually implement efficient policies. However, economic development has not accelerated, public debts have not declined, and poverty has not been reduced. Worldwide, more than one billion people dispose of less than one dollar per day; only in Asia there is some improvement in this aspect. Some critics say that debt relief is negatively affecting the credit rating of a country and the inflow of private investments. Admitted. But in many cases this is not really relevant because that rating anyway is below creditworthiness. A better solution might be increasing export earnings but this is more easily said than done. After having been freed from it’s debts by the HIPC initiative, Uganda (as an example) has accumulated a fresh debt burden of twice it’s export earnings, and this is not a singular phenomenon. Why is a high level of debt normal for a developing country?

Structural Causes
Economists tend to identify a double structural problem. The DCs have to pay their imports by exporting, but the terms of trade develop unfavorably: they ‘deteriorate’ since the DCs’ exports consist predominantly of (few) raw materials and agricultural products (which yield comparatively low world market prices), and imports are composed of more sophisticated consumer and industrial goods (which are comparatively expensive), in addition to often urgently needed basic nutrition. This tends to produce a gap in the balance of payments, to be financed by capital imports, and this means debts. This structural explanation is added to by the fact that the industrial countries are interested in low and declining prices for raw materials and agricultural goods they do not produce themselves. So why then do the DCs not export more processed goods for which they can ask higher prices? This is the other structural problem. As a matter of fact, the typical DC does not have the industrial infrastructure to do so. Why? Lack of skilled workers, lack of know-how, and lack of finance is the usual answer.