U.S. Considers Forgiving Poor Nations' Debts

The rich nations would have to put up substantially more money -- over $1 billion a year for the next few years, and significantly greater amounts in later years -- to fund the proposed 100 percent write-off plus the conversion of loans to grants. Otherwise, the loss of debt payments from the poor countries would hurt the financial condition of the World Bank and other multilateral lenders, restricting their ability to aid other developing countries that need assistance.

The need to ensure that money will be forthcoming from the rich countries is a potentially major obstacle. The British, in particular, have insisted that a concrete plan must be established to guarantee funding.

"It's very important to acknowledge a point of principle about the need for greater multilateral debt relief," a British official said. "That shouldn't be diminished. But it has to have a credible financing plan to back it."

Although adoption of the plan could help Bush politically by possibly burnishing his image as a "compassionate conservative," a number of economists are strongly opposed to 100 percent debt write-offs, even for very poor countries. Among them is John Williamson, a scholar at the Institute for International Economics, co-author of a book proposing a substantial expansion of HIPC.

"It will go down well with all the debt campaigners, but it's not terribly good development policy," Williamson said. "Once one establishes the principle that at the end of the day a country gets a 100 percent debt write-off, that destroys any incentive" for prompt adoption of the economic reforms required to become eligible for HIPC.

"The other thing is the question of equity," Williamson said. "It's one thing to bring down the indebtedness of HIPC countries, but it seems to me to be terribly inequitable to give them a total write-off" when other poor nations, such as Indonesia, don't qualify because their debt burden isn't quite as overwhelming or their per-capita incomes aren't as low.

For the administration, the more important comparison may be Iraq. Since Bush wants Baghdad's creditors to forgive most of its debt, which the administration estimates at about $120 billion, it might help to show that poor countries are also getting a generous deal.

But White House officials stressed that they consider the Iraqi debt a separate issue. "There is no way there is going to be a grand bargain combining HIPC and Iraq debt," a senior administration official said. "That is not going to happen."