Opinion

Debt forgiveness grand experiment

The New York Times reported today that the G8 finance ministers have come to an implementation agreement on eliminating up to $55B in multi-lateral debt owed by 18 poor countries. Essentially the G8 have contractually committed to cover the World Bank’s dollar-for-dollar cost of this in ADDITION to their regular contributions. In reality this is worth closer to $18B in near-term dollars … significant nonetheless. This also sets a model where additional countries (up to 35 in total) can qualify to participate for even more debt cancellation.

This debt cancellation has been connected with requirements that “sound” economic policies and meet reasonable standards for good governance [details still tbd.] This is the [amazingly relatively new] concept that aid [in this case, debt cancellation] is contingent upon governments investing funds in ways that help alleviate poverty. Obviously, the devil is in the details on whether these requirements are “reasonable” [historically, some requirements have not been] and, more importantly, helpful in ensuring accountability for spending.

This is an amazing breakthrough and, frankly, a grand experiment in a new approach to aid proposed by a number of economists and anti-poverty activists including Jeffrey Sachs. Why a grand experiment? Because it hasn’t been proven that these kind of monies will be directed to help the poor. There is so much pressure (and historical precedent) for poor incumbent governments to take windfall monies and invest them ineffectively. It is understandable (although not excusable) that governments are tempted to spend money on short-term, non-sustainable activities (e.g. welfare, high-profile pet projects) which are politically popular but which are not building up the long-term infrastructure (human and physical.) And then there’s the unfortunately not-too-uncommon cronyism which favors the wealthy over long-term public interest.

In the spirit of Bono, though, I won’t succumb to being a skeptic. This is a needed experiment which we should all watch closely to ensure it is successful.

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