Ignore the hysteria over debt

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The Independent Culture
THERE ARE few problems whose solutions seem absolutely clear-cut, so what an enjoyable luxury it is when one comes along. Cancel the repayments of international debt owed by hurricane-blighted Honduras and Nicaragua? Surely it defies common sense for these two countries to be paying $1.3m (pounds 800,000) a day to their bankers while at the same time they are in desperate need of aid to tackle their catastrophe?

This is a bandwagon everybody can jump on. And so everybody has. France and Germany have leapt behind Britain in a call for debt relief. Gordon Brown and Clare Short yesterday announced a new fund to help Honduras and Nicaragua meet their international interest payments, putting in pounds 10m from the British taxpayer, and making up for Ms Short's politically inept insistence last week that the debt question is irrelevant at a time like this.

Yesterday, the World Bank announced it had already found an extra $100m in aid and would make sure that debt repayments did not get in the way of tackling the emergency. The need to be seen to Do Something about debt has rocketed up the international agenda.

Yet this time, as so often before, Ms Short's real mistake was to voice an uncomfortable truth that went down very badly indeed with the highly effective aid organisations lobbying for debt relief for the world's poorest countries. Emergency assistance was never going to be hamstrung by debt - but the hurricane has been hijacked by campaigners for debt relief.

The Jubilee 2000 coalition, calling for the cancellation of Third World debt for the new millennium, has helped to push a reluctant international community into setting up a much-needed programme of debt reduction for desperately poor countries. This plan to reduce the repayments to the IMF and World Bank by up to 40 countries to a level they can realistically afford finally got the go-ahead in 1996. While the UK was always in favour, other governments from the Group of Seven needed persuasion. The programme imposes tough conditions on the borrowers; but without the efforts of the campaigners there would not be any debt relief at all.

The aid groups are now using their moral authority, backed by the television pictures of awful suffering, to push for more. They have been aided by the slow and niggardly response of Western governments to the present crisis. But the argument about debt relief is genuinely an issue that is separate from the emergency needs of Central America.

There is no excuse for a wave of hysteria that exploits the death and hardship there to gloss over the fact that there are grounds for debate on debt relief.

There is, in fact, a very strong case to be made for greater generosity on the part of the leading economies and the IMF towards countries labouring under a burden of debt payments. These interest charges eat into the funds available for health and education, yet they were in many cases inherited from obnoxious regimes that squandered loans on guns and palaces. The most glaring examples must be the likes of Zaire's President Mobutu, and the Burmese military regime. The rich countries have had to be dragged kicking and screaming into the "highly indebted poor countries" (HIPC) initiative, forgiving payments on such odious debts. For little extra cost to their own budgets, they could have been far more generous about the terms of the debt relief and the speed at which it is applied. More important, they could have admitted that Western policy mistakes had played a part in creating the debt overhang.

However, meagre as it is, there is now a framework for lifting the burden on the countries most in need and least able to pay. Crucially, it insists that governments must run sensible economic policies and earmark the extra money for social spending in order to qualify. In other words, the IMF and other lenders are avoiding their past mistake of lending money with no questions asked about how it is used.

Nicaragua and Honduras are both on the list of the three dozen countries that will eventually benefit from the programme. The floods will, without any doubt, increase and speed up the amount of debt relief they will receive. There is simply no need for a new international initiative for this to happen.

Even so, you may object, how can it make sense for the two countries to continue with the repayments in the meantime, when their governments are badly in need of funds now? But this is a no-brainer only if you believe that the emergency overrides all other obligations. After all, there is nothing inherently illogical about paying money out on the one hand and receiving it with the other. We all do that when we pay our mortgage and at the same time bank our salaries. What matters is how all the flows of money net out.

As it happens - uncomfortably for the debt relief lobby - Nicaragua and Honduras have in recent years received more than they have paid out in interest. New flows have come in even as they have made repayments on old debts.

In 1996, Nicaragua received a net $669m, compared to its interest payments of $87m. Honduras paid out a net $37m but was in previous years a recipient of new international funds. Both countries are due for debt relief under the HIPC plan, Nicaragua after next year, Honduras after 2001. The delay is caused by the requirement that they build a record of effective economic policies, but their qualifying date will almost certainly be brought forward following the emergency.

Beneath the headlines and hysteria, there is a fundamental disagreement between the campaigners and the world's rich governments. The latter, although now eagerly calling on each other to do more in the wake of Hurricane Mitch, do not believe in wiping the slate clean on past debts. They argue that this would remove any incentive for borrowers to run their economies well, would raise a question mark over the repayment of future debts, and would discourage private investors from lending money to the world's poorest countries in the future.

The Jubilee 2000 campaigners want to see the old debts cancelled altogether. Certainly, it is hard not to sympathise with their outrage at the thought of governments which cannot afford simple health and schooling for their people having to repay hundreds of millions of dollars to the very richest governments in the world. The people are being made to pay with their life and health for the past follies of their leaders.

It is a genuine debate about how best to get to a future in which the quality of life of the world's poor reaches an acceptable standard, where clean water, housing, basic health care and education - the minimum necessary for human dignity - are available for all.

There are pros and cons on both sides of the argument, pitting realism against compassion. It would be a pity if the debate were to be drowned in a wave of publicity-generatinghysteria.