The new International Monetary Fund (IMF) Witteveen Facility for "debt relief" - a $10 billion fund for paying the oil-import costs of poor nations - is applauded by bankers and politicians worldwide. But such adulation is unwarranted and misleading. Though well-intended in concept, the new facility - like the IMF gold auctions, the newly expanded World Bank lending authority, the "doubling" of foreign aid, etc. - is one more special-funding device to perpetuate artificial levels of development and economic well-being in poor nations. It exemplifies the bankrupt mythology of Third World development policy and obscures the pernicious nature of "debt relief" itself.
What is now forgotten in the alarm over rising debt and possible loan defaults is what the original loans were supposed to achieve. Debts were contracted primarily to purchase the resources for development. Yet with many poor nations subsequently unable to generate productivity sufficient to repay debts, two basic questions arise: Is development being achieved with the resources the original loans provided? Will any additional loans to buy more development resources perform any better?
Since the aggregate demand for "debt relief" has been steadily increasing, it is clear that development is not being achieved in many poor nations. This indicates that the original loans are not performing as expected. This fact is not surprising since many of the original loans should never have been made. Public lenders responding to political, commercial and humanitarian consideration have desregarded borrowers' modest capacities, their weak commitment to development, and their lagging motivation for fulfilling loan objectives and responsibilities. Private bankers, anxious to share the lucrative Third World market and confident of being shielded from borrower defaults by just such devices as the Witteveen Facility, have engaged in incautious lending.
The inability to repay these debts announces that many poor nations are already living far beyond indigenous capacities and are being maintained at an artificial development level by external aid flows. The poor performance of the original loan automatically answers the second question relative to "debt relief" - whether any additional loan resources will perform any better. There is actually no basis for "debt relief" in most cases. New resources would not simply tide over most nations until normal productivity is restored. Their indigenous capacities and productivity are inadequate to sustain a new loan.
Rather than seeking new loans as artificial development supports, the poor nations should draw the proper conclusion from their modest performance and eschew the drift to dependency status. They should restore a proper balance between living standards and productive capacities. Lenders, rather than encouraging the nation to assume more debts than it can reasonably repay, should likewise address the limits of their own role and allow the nation to develop only commensurate with its indigenous abilities. When running downhill too fast, one restores balance by slowing down, not running faster.
Since many nations are thus not particularly credit worthy, how do we account for escalating Third World debt and mounting demands for "debt relief"?
The answer lies in political concerns intruding into the development arena. Third World development has come to be viewed primarily through political lenses and in terms of external resource amounts. Artificial development levels have been underwritten in many poor nations for so long that many institutions, governments and people now have a vested interest in maintaining those levels in order to protect their investments, export markets and, not least, reputations.
A banker expresses the basic attitude government "debt relief" when he says: "To cut back on development loans would take away the means of earning the funds to repay existing debt." The Pearson Commission set the tone on the public side when it said: "Debt relief should be recognized as a legitimate form of aid." As a consequence, when loan defaults are imminent, the requests for "debt relief" are not examined in their appropriate development context relative to indigenous abilities, but politically - how to preserve the special interests. Therefore, instead of confronting the sensitive social and structural causes of underdevelopment and low productivity, those with vested interests are more interested in finding less painful and less controversial solutions such as the new IMF facility.
The strategy exemplified by the Witteveen Facility is neither valid development policy nor sound international finance. Designed to buy time, it hopes to forestall the inevitable collapse of the debt pyramid. Since nations, like individuals, cannot keep borrowing a spending at a far higher rate than their earnings allow, the strategy is unrealistic. Even New York City did not seek remedy for its near-default by expanding its debt obligations. Recognizing the limits to borrowing, it reduced the development pace, sacrificied services and restored a semblance of balance between productive capacities and living standards.
The deeper significance of "debt relief" is that it has been easier for lenders to continue providing loans on a questionable basis than to confront the true causes of Third World underdevelopment. Such ill-advised practices can only temporarily obscure the fact that "debt relief" is a system of international welfare that spreads the cancer of artificial development supports, perpetuates gross misconceptions about how Third World development is achieved and moves us all toward an international financial disaster of far greater proportions than the default of a few loans.
For these reasons we should not applaud the Witteveen Facility.