The British push seems to have tipped the balance in favour of debt forgiveness for poor countries, with an agreement by the G8 to write off US $40 billion in debt. Is this really what is needed? To me it seems like “go away” money.
“Go away” in the sense that it will allow the western lenders to salve their consciences and walk away with putatively clean hands. And “go away” in the sense that it allows the third world debtors to get the lender off their back. But the opposite is what is really required if third world poverty is to be alleviated.
The Third World has problems of poverty largely because it has no relation with the First. No relation means no investment, no importation of know-how, no exportation of products and no growth. A lack of these factors leads too often to poor or corrupt government, sending governments deeper into the spiral.
A better solution to debt foregiveness would be debt conversion – a giant debt for assets swap which would see improvident lenders forced to try to recoup losses by making investments work. One of the problems of debt financing is that the financier is all too-often interested only in repayment, not the long-term viability of the activity his funding goes to support. Your loan funds can be diverted by a venal government from their alleged productive purpose into building a Taj Mahal, or arming the military against a non-existent enemy, but you don’t care too much if you still believe the money will be repaid. Not only is it a lot harder for the government to do the same with the business or piece of infrastructure that you own, but it will take the form of tax or confiscation, and you will definitely care about that.
If foreign financiers were in for the long-haul, and their returns relied much more on good governance, then there would be in-built incentives to good government which would mitigate against poverty.
Of course, this isn’t as easy as it might sound – many of the loans are owed to quasi non-governmental organisations like the World Bank, and on the basis of this part of their loan portfolio, I wouldn’t let them run the bath, let alone an asset. So there would need to be a transfer of liabilities to other parties, and probably some element of restructuring, which generally means foregiveness. But if the overall movement was in the direction of equity rather than debt, that would be a better thing than just walking away.