Rich countries get help. It's the way of the world

Diane Coyle on immoral debt policy

I may be an unusually mean-spirited person, but there always comes a point during the Christmas shopping season when I balk at shelling out more money. I spend cheerfully on my nearest and dearest, then find myself skimping on the presents bought more from a sense of obligation than affection.

And then, funnily enough, the purse strings loosen again when the New Year sales start.

It may be just me, but I take comfort from the fact that the International Monetary Fund (IMF) is just as bad. It has spearheaded a massive rescue package to save South Korea from a catastrophic financial crisis, making available emergency funds of up to $100bn over the next few months.

Philanthropic enough, you may think, except that it reveals a starkly selfish set of priorities. For it has taken the IMF, following the lead set by leaders of the Group of Seven industrial countries, most of this decade to agree grudgingly on less than $10bn-worth of debt relief for some of the poorest countries in the world, to be eked out over several years.

The only conclusion you can draw from this is that we, in the richest countries in the globalised world economy, collectively don't give a hoot for the poorest. But we will give generously to the ranks of the nearly-rich, when they get into a bit of financial bother, because of the risk that their crisis will spill over into our economies.

This is short-sighted as well as immoral. But let us start with the morality. By any calculation the debt burden on poor nations is crippling and inhuman. For example, Mozambique's debt service last year amounted to double its combined spending on health and education. It is a country where infectious disease kills a quarter of all children under five, and where two-thirds of the population is illiterate.

In Bolivia, where nine out of 10 rural people live in poverty, and only 16 per cent have access to safe water, debt repayments this year have been three times the rural relief budget.

Both countries will qualify for the debt relief package, known as the Highly Indebted Poor Countries, or HIPC, initiative. But the reduction in their interest payments to the IMF, World Bank and rich governments will be small and slow. In a decade's time they may have reached a point where their debt burden is at last shrinking because they have paid enough interest.

It was a struggle to get the meagre HIPC initiative approved by the international community - a struggle in which both Gordon Brown and Kenneth Clarke, his predecessor as chancellor of the Exchequer, have played an honourable part. Germany and Japan, and to a lesser extent Italy and the US, have held out firmly against greater generosity.

But what is astonishing is their belief that very poor countries will carry on meekly paying interest, over more than a generation, on debts often incurred by corrupt and brutal dictators. Never before in history has this kind of debt burden been repaid.

Take an example from the First World War. The great economist John Maynard Keynes calculated in 1921 that if Britain had to continue repaying its war loans from the United States, it would take 60 years of interest payments equal to what was then the annual budget for education, or to one new hospital a month. The debt from 1914-1918 would not have been cleared until 1984.

Keynes was also an ardent critic of the decision to force Germany to make punitive reparations. He asked: "Will the discontented peoples of Europe be willing for a generation to come so to order their lives that an appreciable part of their daily produce may be available to meet a foreign payment?" Obviously not. He concluded that nations could not make another people pay for debts incurred by the leaders of a previous generation.

After the Second World War, the Allies applied the lesson learnt from the disaster of demanding reparations after the Great War. In 1953 half of Germany's international debts were cancelled outright by a conference of bankers meeting in London. According to Jurgen Kaiser, of the University of Vienna's Department of Economics: "The London agreement was an important milestone on the way to West Germany's economic miracle."

The only difference in the case of today's Third World debt burden is that Western governments do not see it as a crisis. South Korea is a crisis because its financial markets have been nosediving, threatening to take Wall Street and London down with them. But clearly, death, despair and poverty in countries outside the financial loop do not constitute a crisis.

These priorities may satisfy short-term self-interest; which politicians want to ask their taxpayers for even a penny extra in tax for the world's poor and starving? But they could do huge long-term economic damage. The growth of trade and overseas investment has been an enormous boost to the rich economies, and, as the international links spread ever further, should continue to be so. Our prosperity is built not only on our own efforts but also on those of other countries, in what should be a mutually enriching process.

By making it so painfully obvious that some countries - those most like us - matter vastly more than those small and far-away nations of which we know little, the IMF and G7 risk a backlash that will halt the beneficial, interlinked growth of the world economy. The rest of the world does not like the economic recipe of our political and financial classes. And if globalisation is not seen to be for everybody, it will not benefit anybody.

Ironically, the backlash may even come from South Korea, where ungrateful workers are more likely to blame the IMF for tough measures that will put them out of their jobs than to thank it for stumping up billions of dollars in loans to stabilise the currency. There will certainly be more human disasters in the very poorest countries, not that these have so far prodded the financiers into mending their ways.

I may be a Scrooge about Christmas presents, but I can find it in my mean spirit to switch my tax contribution to the Millennium Dome or the National Lottery Fund to cancelling a chunk of Third World debt by the year 2000. It seems worth it for a more prosperous and peaceful world. The trouble is that the spirit of taxpayer generosity will have to spread far more widely to make any difference.