ON DEBT FORGIVENESS

Young Back Choi^1_
Professor of Economics and Finance
St. John’s University

Many advocate that the debt owed by poor countries should be forgiven. It is always tempting to do or say what we think is good for others. Before we surrender ourselves to the sentiment, we should size up the situation. For unless our moral sentiment is informed by facts and relevant principles, our good intentions may be for naught, or worse, may even bring much harm.

Debt is not a problem for every indebted nation, or even for every heavily indebted nation. The most heavily indebted nations include Brazil, Korea, Mexico, and Argentina. But these countries do not have the problem of repaying or servicing their debt. Only a subset of indebted nations, so-called the 40 "Highly Indebted Poor Countries" (HIPC) such as Burkina Faso, and Mali, are having difficulty repaying/servicing their debt. The total amount they owe is about $170 billion (in 1996 dollars)--much of that is sovereign debt owed to foreign governments and international organizations (WB and IMF). Since the countries have no ability to service their debt, most bilateral loans--about half the total--are largely written off and/or forgiven. Debts owed to international organizations are partly written off or continually rolled over.

Why are we experiencing a fresh enthusiasm for debt forgiveness? HIPCs' inability to service their debt is nothing new. Their debt repudiation will not cause international financial crises because the debts are largely written off already, or only they remain on the books for cosmetic purposes, as widely recognized. The only possible rationale for fiscally writing off HIPCs' debt is to enable them to borrow more by wiping the slate clean. This will enable HIPCs to start a new life and embark on a course of economic development, as it were.

The proposed debt forgiveness is not likely to bring those desired results. To see why, we will need to understand the origin of the current debt crisis in the first place. Often misfortune--e.g., oil crisis, change in interest rates, falling price of primary exports, etc.--is blamed for the problem. Since there are other LDCs faced with the same conditions but which somehow manage to service their debts, we should look for real causes elsewhere. The real culprit of the HIPC debt crisis is mismanagement, e.g., showcase projects, financing current consumption, and corruption.
Debt forgiveness as a temporary relief for the qualified HIPCs--without a meaningful policy reform-- would mean nothing would change. Furthermore, the relief will be mostly for the rulers and offer very little relief to the poor. For example, the debt relief in the 90s had no effect, e.g., Paris Club debt relief operations for $25 billion during 1990-1996. If anything, the debt problem has become worse.

In addition to rulers of HIPC, the proposed debt forgiveness will benefit certain lenders. Governments can write off bilateral loans to HIPCs. But others--i.e., commercial lenders and international organizations-- will demand that they should be given a credit, in one form or another, as a condition for forgiving debts known to be uncollectable. That is, these lenders will insist on avoiding paying for their mistakes at the expense of taxpayers. How satisfying it is to be generous with other people's money! Is this the meaning of charity?

There is no easy solution. We know that simple debt forgiveness will not truly benefit the people in HlPCs. It will merely benefit their rulers and international lenders, at the expense of innocent taxpayers in the West. And the problem will recur, calling for another round of debt forgiveness. What is to be done? From the point of view of fairness, we should let all those who are responsible for the problem pay and let interested parties search for a solution--including changing government, rulers, policies, etc. Taxpayers who are asked to foot the bill should insist that any debt forgiveness should be only in exchange for a thorough ongoing reform in government and for renouncing future demand for financial assistance. This way, people in HIPCs may see the necessity of changing their own government if they are to improve their living standard. Mere expression of good wishes will not do much good.

You shall hallow the fiftieth year, and proclaim liberty throughout the land
to all its inhabitants; it shall be a jubilee for you,
when each of you shall return to his property and each of you shall
return to his family.
-Lev. 25:10

^{1 _}Young Back Choi is a Professor of Economics and Finance at the Peter J. Tobin College of Business, St. John’s University. He holds a Masters Degree and a Ph.D. in Economics from the University of Michigan. He is a co-editor of Perspectives on Korean Unification and Economic Integration, as well as a chapter author in this book on “Costs and Benefits of Unification" (2001), Borderlands of Economics (1997), Financial and Economic Integrations in Asia , and Economic and Political Reforms in Asia. He is the author of Paradigms and Conventions:Uncertainty, Decision Making, and Entrepreneurship (1993). He has lectured and presented papers at conferences throughout the world. His present research interest is Chinese economic thought and understanding income and wealth distribution.

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