EVER SINCE 1996, when the World Bank and the International Monetary Fund first promised debt relief for poor countries, this cause has been a reliable rallying point for development advocates. A broad coalition of religious groups, anti-poverty organizations and the rock star Bono pushed for a second round of debt relief three years later, and a similar coalition is stirring again. Britain recently promised $180 million per year to finance further debt reduction, and it says it will challenge other countries to follow at this weekend's World Bank and International Monetary Fund meetings. The Bush administration, for its part, has begun canvassing support for outright cancellation of the poorest countries' debts.
The administration's position, which has not yet taken the form of a firm proposal, is superficially appealing. The idea is that, if a country is due to pay $10 million in debt service to the World Bank, this obligation would be canceled and the bank's new transfers to the country would be reduced by that amount. At the same time, the new aid would take the form of grants instead of loans, so no new debt mountain is created. This would break the pattern of lending followed by half-hearted debt relief followed by more lending and more debt relief. If everybody has come to expect that World Bank credits will be forgiven in the end, it makes sense to call these credits what they really are: grants.
The administration's idea avoids a pitfall of some debt-relief proposals, which is that they consume scarce aid money that would otherwise have gone to development projects elsewhere, thus helping indebted countries at the expense of other equally poor nations that have managed their finances prudently. This transfer from prudent countries to imprudent ones is inefficient as well as unfair, because prudent countries are more likely to use aid productively. By taking the resources to finance debt relief from the World Bank's allocations to those same countries, the administration avoids this undesirable transfer.
But the Bush plan has two weaknesses. It does not increase overall development assistance; it is a mistake to argue, as some campaigners do, that there will be any immediate effect on the amount of money available for schoolrooms or AIDS clinics. The administration should therefore not expect much credit for helping the cause of development unless it couples its debt ideas with a renewed effort to persuade Congress to fund foreign-aid programs more generously.
Second, the Bush administration may end up weakening the World Bank. Writing off debt and converting loans to grants means that the bank will forgo repayments from borrowers and therefore have less money to distribute. This would be a pity, because the bank's development efforts are less politicized and more technically sophisticated than those of government aid agencies. The attraction of the British proposal is that, by providing fresh donor money, it relieves poor countries' debt burden without diminishing the World Bank.
The Treasury argues that, if the bank agrees to debt relief, it will be easier to persuade Congress to generously contribute to the World Bank's soft-loan kitty. But this sort of claim has a poor history. Two years ago the administration said it would boost the bank's resources if the lender met certain performance targets; the bank did meet them, but this year's U.S. contribution to the bank's soft-loan fund looks set to come in $200 million below the amount promised. The danger in the administration's debt-relief idea is that it will drain more resources from an important multilateral institution, damaging America's reputation as a global leader.