[Senate Hearing 110-659]
[From the U.S. Government Publishing Office]
S. Hrg. 110-659
BUILDING ON INTERNATIONAL DEBT RELIEF INITIATIVES
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HEARING
BEFORE THE
COMMITTEE ON FOREIGN RELATIONS
UNITED STATES SENATE
ONE HUNDRED TENTH CONGRESS
SECOND SESSION
__________
APRIL 24, 2008
__________
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COMMITTEE ON FOREIGN RELATIONS
JOSEPH R. BIDEN, Jr., Delaware, Chairman
CHRISTOPHER J. DODD, Connecticut RICHARD G. LUGAR, Indiana
JOHN F. KERRY, Massachusetts CHUCK HAGEL, Nebraska
RUSSELL D. FEINGOLD, Wisconsin NORM COLEMAN, Minnesota
BARBARA BOXER, California BOB CORKER, Tennessee
BILL NELSON, Florida GEORGE V. VOINOVICH, Ohio
BARACK OBAMA, Illinois LISA MURKOWSKI, Alaska
ROBERT MENENDEZ, New Jersey JIM DeMINT, South Carolina
BENJAMIN L. CARDIN, Maryland JOHNNY ISAKSON, Georgia
ROBERT P. CASEY, Jr., Pennsylvania DAVID VITTER, Louisiana
JIM WEBB, Virginia JOHN BARRASSO, Wyoming
Antony J. Blinken, Staff Director
Kenneth A. Myers, Jr., Republican Staff Director
(ii)
?
C O N T E N T S
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Page
Birdsall, Dr. Nancy, president, Center for Global Development,
Washington, DC................................................. 19
Prepared statement........................................... 21
Response to question submitted for the record from Senator
Richard Lugar.............................................. 60
Casey, Hon. Robert P., Jr., U.S. Senator from Pennsylvania,
opening statement.............................................. 1
Flood, Gerald F., counselor, Office of International Justice and
Peace, U.S. Conference of Catholic Bishops, Washington, DC..... 25
Prepared statement........................................... 27
Response to question submitted for the record by Senator
Richard Lugar.............................................. 61
Henry, Dr. Peter B., Konosuke Matsushita Professor of
International Economics and Gunn Faculty Scholar, Graduate
School of Business, Stanford University, Stanford, CA.......... 34
Prepared statement........................................... 36
Responses to questions submitted for the record by Senator
Richard Lugar.............................................. 64
Lowery, Hon. Clay, Assistant Secretary for International Affairs,
Department of the Treasury, Washington, DC..................... 4
Prepared statement........................................... 6
Responses to questions submitted for the record by Senator
Richard Lugar.............................................. 64
Additional Material Submitted for the Record
Lugar, Hon. Richard G., U.S. Senator from Indiana, prepared
statement...................................................... 51
McCormick, David H., Under Secretary for International Affairs,
Department of the Treasury, letter to Representatives Barney
Frank and Spencer Bachus....................................... 58
Sitali, Muyatwa, coordinator, Debt, Aid and Trade Programme,
Jesuit Centre for Theological Reflection, Lusaka, Zambia,
prepared statement............................................. 51
(iii)
BUILDING ON INTERNATIONAL DEBT RELIEF INITIATIVES
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THURSDAY, APRIL 24, 2008
U.S. Senate,
Committee on Foreign Relations,
Washington, DC.
The committee met, pursuant to notice, at 1:59 p.m., in
room SD-419, Dirksen Senate Office Building, Hon. Robert P.
Casey, Jr., presiding.
Present: Senator Casey.
OPENING STATEMENT OF HON. ROBERT P. CASEY, JR.,
U.S. SENATOR FROM PENNSYLVANIA
Senator Casey. The hearing of the Committee on Foreign
Relations will now come to order.
We are starting as close to exactly on time as possible.
There is a vote at 2:15. So I do not know what that will do to
our proceedings here, but I wanted to get started so we could
move forward.
Today the committee meets to assess the utility provided by
international debt relief initiatives in alleviating poverty
and promoting development in the world's poorest nations. A
primary purpose of this hearing is to assess the lessons
learned from recent debt relief initiatives, including the
heavily indebted poor countries known as HIPC and multilateral
debt relief initiative known as MDRI. Both of those initiatives
have been undertaken in the past dozen years.
These two broad debt relief initiatives, when combined and
completed, are expected to reduce the debt stock of those 32
nations that are eligible under these initiatives by a total of
$96 billion. In 2007 alone, these nations included in the MDRI
initiative benefited from $1.3 billion of annual reductions in
debt service payments or approximately 1 percent of their
overall gross domestic product. The Bush administration should
be congratulated for having provided strong leadership in
initiating the MDRI effort and promoting a greater awareness of
the real benefits afforded by comprehensive debt relief.
I recognize the numbers that I just provided are abstract,
but it is essential to recognize the real savings for
impoverished nations that can now use scarce resources for the
benefit of their people. The Government of Zambia, for example,
benefited from the forgiveness of almost $24 million in
outstanding debt in 2006 under the MDRI initiative. Using
proceeds from that debt relief, the Zambian Government ended
user fees for rural health clinics, ensuring that medical care
and prescription drugs were free and available for all.
Another example. Just listen to the former President of
Tanzania who wrote in 2004, ``In 2001, Tanzania was granted
significant debt relief. We have already witnessed tremendous
successes. The primary school population has increased by 66
percent, the greater part of an extra 2 million children, and
the shortfall in the enrollment of girls has been eliminated.
We have built 45,000 classrooms, 1,925 new primary schools, and
over 7,500 homes for teachers in partnership with their
communities.'' So that is another example of the success of
these initiatives.
The purpose of this retrospective look is to establish
whether additional international debt relief today makes sense
for nations not already included in the HIPC and MDRI
initiatives.
Last week, the House of Representatives passed on a
bipartisan basis H.R. 2634, the Jubilee Act for Responsible
Lending and Expanded Debt Relief.
Last October, I introduced S. 2166, the Senate version of
this legislation, which differs in some respects from its House
counterpart but retains the overall goal of expanding debt
cancellation to an additional 24 nations. These new nations,
which range from Georgia to Moldova in the former Soviet Union
to Kenya and Lesotho in Africa, qualify on the basis of their
low per capita income levels and their subsequent eligibility
to receive special assistance from the World Bank. I am proud
to be joined by 25 other Senators who have agreed to cosponsor
the legislation, including a majority of Senators who sit on
the Foreign Relations Committee.
In recent years, the world has witnessed a coming together
of a diverse coalition of groups on behalf of the cause of
forgiving the debts of those nations at the lowest rungs of the
world's economic ladder. A grassroots religious coalition has
organized itself under the Jubilee Network to provide for
greater debt relief and has been joined by academics,
entertainers, and world leaders.
Jeffrey Sachs of Columbia University and a former adviser
to the U.N. Secretary General has declared, ``No civilized
nation should try to collect the debts of people who are dying
of hunger and disease and poverty.''
The late Pope John Paul II, whose successor, Pope Benedict,
visited the United States last week, made international debt
relief a key priority for his papacy, calling on the
international community to ``reduce substantially, if not
cancel outright, the international debt which seriously
threatens the future of many nations.'' So said the Pope.
Finally, we have seen the United Kingdom, under the
leadership of Prime Minister Gordon Brown, maintain a sustained
focus on expanding the benefits of debt relief for all worthy
recipients.
I recognize that the Jubilee Act bill before the committee
is not perfect and can be improved. One of my purposes in
calling this hearing was to solicit the views of the
administration and outside experts for just that purpose.
However, I do want to take this opportunity to briefly
address some of the critiques of expanded debt relief, and I
look forward to a fuller exchange on these issues with our
witnesses on both panels during the time for questions.
Critique No. 1. Debt relief has already been made available
to these nations with ``unsustainable debt levels'' and we
should not squander scarce resources on those nations that are
able to manage their debt flows. That is the critique.
Just a little bit of rebuttal here. A recent analysis
undertaken for the United Nations Development Programme
demonstrated that of the 24 nations that would be made newly
eligible for debt relief under the Jubilee Act, 14 of those
nations are actually poorer in terms of human poverty levels
and carry more debt as a percentage of gross national income
than nations already eligible for debt relief under the HIPC
initiative. The 24 new nations that would receive debt relief
under the Jubilee Act are designated only because they are
eligible to receive special assistance from the World Bank on
account of their deep poverty levels.
More to the point, nations judged to have ``sustainable
debt levels'' means that those nations have borrowed
responsibly and have not been in danger of defaulting on their
debt. Yet, these nations, which remain poor and economically
struggling, may also be sending valuable payments every year to
foreign creditors that can be spent more effectively at home
for the benefit of their people. It is a curious approach to
cite moral hazard in arguing that nations that have borrowed
heavily and irresponsibly should be eligible for debt relief,
but not those nations with more responsible debt burdens.
Critique No. 2. Expanded debt relief will only serve to
crowd out other valuable development assistance.
Some observers have expressed concern that the resources
required to fund expanded debt relief initiatives for as many
as 24 new nations will put at risk existing development
assistance programs. That is the attack--the critique I should
say. In other words, there is a fixed pool for development
assistance, and a new debt relief initiative will only take
funds away from other good programs.
I do not believe this is a valid concern. Indeed, we in the
Congress have been guilty at times of not fully funding the
U.S. share of debt forgiveness initiatives approved by the
United States. We must commit to ensure that debt relief
initiatives are additive to existing programs and provide a
real benefit to struggling nations and not simply substitute
for other efforts.
That said, continuing debt payments by nations that in turn
receive grants and other assistance from the international
community is also a form of ``robbing Peter to pay Paul.'' It
is strange common sense to send foreign assistance to
impoverished nations on the one hand and on the other hand see
an exodus of valuable foreign exchange reserves from those very
same nations in the form of debt payments.
Critique No. 3. Debt relief by itself is meaningless
without accompanying policy reforms.
First of all, let me make clear that I do not believe debt
relief alone is a complete panacea for the ills that beset the
world's poorest nations. Instead, only when combined with other
effective policy instruments can debt relief succeed. Greater
transparency and accountability in national budgets,
investments in the rule of law, strengthening educational
systems, and other measures are often necessary prerequisites
if debt relief initiatives are to promote real economic growth
and alleviate poverty in developing nations. Debt relief is an
important piece of the puzzle, but only one piece of the
puzzle.
That is why the Jubilee Act legislation is so promising. It
imposes rigorous requirements on recipient states before they
are granted complete relief. Those nations eligible for debt
relief under the Jubilee Act provisions must allocate all
savings from debt cancellation toward poverty-reducing
expenditures. Next, they must commit to future borrowing in a
responsible fashion. They must develop transparent and
effective budget mechanisms and refrain from excessive military
expenditures. In other words, these nations must undertake the
type of policy initiatives that will help ensure that debt
relief proceeds are used in the most effective fashion and are
not wasted or diverted to other purposes. This legislation
ensures there is no free ride--no free ride--for those
governments benefiting from a new debt relief initiative.
Today we are honored to be joined by an illustrious group
of witnesses. On our first panel, the Honorable Clay Lowery,
the Assistant Secretary for International Affairs at the
Department of the Treasury, will testify on behalf of the
executive branch. Mr. Lowery will offer the administration's
overall perspective on the utility of debt relief initiatives
and provide specific views on the provisions of the Jubilee
Act.
On our second panel, we will have a group of three
nongovernmental witnesses, all of whom have devoted much of
their careers to better understanding the role of debt relief
in promoting international development. I will make their
introductions when we are ready for their testimony in the
second panel.
For now, I think we might move to testimony unless and
until one of my colleagues shows up. I know that we may have at
least several who might want to offer opening remarks or
comments. So I think, Mr. Lowery, if we could just skip ahead a
little bit and allow you to present your testimony.
Thank you very much.
STATEMENT OF HON. CLAY LOWERY, ASSISTANT SECRETARY FOR
INTERNATIONAL AFFAIRS, DEPARTMENT OF THE TREASURY, WASHINGTON,
DC
Mr. Lowery. Thank you, Senator Casey, and thank you very
much for the opportunity to discuss the administration's views
of international debt relief and the new proposals contained in
the Jubilee bill.
I also want to personally thank you for your very
thoughtful statement. I think you are right about the critiques
and you will hear some of them in my statement. And I thought
you made some very good points as to how to take them on.
We are in full agreement that debt relief can be a valuable
tool to help the poorest, most heavily indebted countries. It
helps them reestablish a sound economic footing and can support
their efforts to lift people out of poverty. Debt relief can
remove a significant barrier to economic growth when external
debt levels become so high that they interfere with the
country's basic economic sustainability.
This administration, as you pointed out, as well as the
previous administration and the Congress, have been ardent
advocates and critical leaders in major international
initiatives to maximize the potential of debt relief as a
responsible and effective tool of development. In fact, the two
major international debt relief initiatives that you mentioned
have, over the last 10 years, provided over $100 billion in
debt relief to 33 heavily indebted countries. It is slightly
different than the number you used mainly because Liberia just
became eligible.
Given this track record, it is not surprising that we find
many of the goals that you have proposed in your act to be
laudable. The administration shares the goals of increasing
economic growth, reducing poverty, and obtaining greater
financial stability in these poor countries. However, we cannot
support this bill, and I will try to make clear by positing
three different questions.
First, is this bill sound policy? In countries where debts
are sustainable, other development tools should take precedence
over debt relief. The aim of the HIPC initiative was to remove
unsustainable debt levels for the most heavily indebted poor
countries so that these countries could stabilize their
economies and focus on growth and poverty reduction. It
included requirements for sound economic policies so that debt
relief was not simply throwing good money after bad. For
countries that are already able to successfully manage and
service their debts, sound debt management can help them to
transition gradually toward access to private capital markets.
In short, debt relief makes the most sense when debt itself is
a major barrier to development.
However, of the eight countries that some supporters of
this bill have suggested would be immediately eligible, none
face a high risk of debt distress. This means that the
immediate impact of the bill, if agreed to internationally and
if funded by the Congress, would be to forgive the debts of the
countries that are able to service their debts, countries for
which debt is a minor issue compared to the challenges they
face in tackling issues such as promoting growth.
My second question is how will expanded debt relief be
financed? Debt relief has a U.S. budgetary cost, just as new
development assistance has a U.S. budgetary cost. While it is
difficult to estimate, the potential U.S. share of the cost of
the Jubilee bill could easily be in the range of $7-$10 billion
over time. One could argue that the international financial
institutes should finance this type of debt reduction with
internal resources. However, as we learned during the financing
of the MDRI initiative, it is unlikely that we could garner the
necessary support for use of the institutions' resources,
meaning the United States would need to be prepared to make a
significant contribution.
Moreover, the United States is not meeting its commitments
on current debt relief initiatives, and is far behind on
financing the multilateral development banks, which are the
institutions that finance most of the world's development
assistance. When every other country has basically paid all of
its bills to the MDBs and the United States is the only
country--the only country--with substantial arrears, over $800
million, including almost $400 million to the IDA alone, it
leaves our credibility somewhat in question.
Third, and maybe most importantly, is the expansion of debt
relief really the right priority? Secretary Paulson and other
senior Treasury officials meet regularly with the finance
ministers, central bank governors, private sector and civil
society leaders from many of these countries. The priority they
most often highlight is the need to spur long-term growth and
reduce poverty by attracting investment, building core
infrastructure, and strengthening their financial sectors. Debt
relief is hardly ever mentioned, if at all.
Less than 2 weeks ago, Secretary Paulson had a meeting with
officials from six African countries. One minister stressed his
priority was for assistance to increase electricity generation,
while another was worried about the costs of transportation in
his country.
There has been significant success over the last few years
in many of these countries in establishing sounder economic
policies, achieving greater headline growth, and reducing
poverty. What we think that we should be trying to now shine a
light on is their attractiveness as investment destinations to
help spur greater productivity and greater economic growth.
Mr. Chairman, in our opinion, rather than embark on
expanded debt relief, the United States should focus on three
things. First, it should fulfill its commitments to current
debt relief initiatives and meet our other multilateral
commitments. Second, it should continue to provide direct
development assistance to poor countries through bilateral and
multilateral mechanisms aimed at increasing economic growth and
reducing poverty. And third, we need to find ways to work with
countries to build their capacity so they can handle more open
trade and investment.
Thanks for your consideration of these issues, and I
welcome your questions.
[The prepared statement of Mr. Lowery follows:]
Prepared Statement of Hon. Clay Lowery, Assistant Secretary for
International Affairs, Department of the Treasury, Washington, DC
Thank you for the opportunity to discuss the administration's
strong leadership on international debt relief and the new proposals
contained in the Jubilee bill
(S. 2166).
Debt relief can be a valuable tool to help the poorest, most
heavily indebted countries. It helps them reestablish a sound economic
footing and reengage with the international community, supporting their
efforts to lift people out of poverty. Debt relief can remove a
significant barrier to economic growth when external debt levels become
so high that they interfere with a country's basic economic
sustainability. This is something that plagued many poor countries
throughout the 1980s and 1990s. Recognizing the need for strong action,
this administration has been an ardent advocate of and critical leader
in international initiatives to maximize the potential of debt relief
as a responsible and effective tool of development. The two major debt
relief initiatives that this administration has supported, the Heavily
Indebted Poor Country (HIPC) Initiative and the Multilateral Debt
Relief Initiative (MDRI), are expected to provide over $110 billion in
debt relief to 33 heavily indebted poor countries. Further, we
anticipate that seven additional countries could still qualify under
these initiatives.
Many of the goals of the proposed Jubilee Act (S. 2166) are
laudable. It is clear that all of the countries which are potentially
eligible under this bill, the so called ``IDA-only countries,'' face
significant development challenges. The administration shares the goal
of increasing economic growth and obtaining greater financial stability
in these countries. However, we cannot support this bill based on the
answers to the following three key questions.
Is this bill sound policy? In countries where debts are
sustainable, other development tools should take precedence over debt
relief. We believe that debt relief is not the best development tool
for the countries targeted in this bill. The aim of the HIPC initiative
was to remove unsustainable debt levels for the most heavily indebted
poor countries, so that these countries could stabilize their economies
and focus on growth and poverty reduction. It included requirements for
sound economic policies so that debt relief was not simply ``throwing
good money after bad.'' For countries that are already able to
successfully manage and service their debts, sound debt management can
help them to transition gradually toward access to private capital
markets. Furthermore, increased private investment and targeted
development assistance are more focused ways to address the challenges
these low-income countries face.
How will expanded debt relief be financed? Debt relief has a U.S.
budgetary cost, just as new development assistance has a U.S. budgetary
cost. We continue to face challenges in financing our commitments to
existing debt relief initiatives, including in the multilateral
development banks, which is why it is so important that Congress enact
the President's full request for these programs. The Jubilee bill
represents an unfunded international mandate to fully cancel roughly 75
billion dollars' worth of debts owed by the potentially eligible
countries to official bilateral and multilateral creditors. As we
learned during the financing of MDRI, it is unlikely that we could
garner the necessary international support to finance multilateral debt
relief with the internal resources of the international financial
institutions (IFIs), meaning the U.S. would need to be prepared to make
a significant contribution.
Is expansion of debt relief the right priority? Secretary Paulson
and other senior Treasury officials meet regularly with the Finance
Ministers, central bank governors, and private sector and civil society
leaders from many of these countries. The priority they most often
highlight is the need to spur long-term growth and reduce poverty by
attracting investment, building core infrastructure, and strengthening
their financial sectors. I would welcome closer collaboration with the
Congress on ways in which the United States can support these
countries' private sector development agendas.
current debt relief efforts
This administration has led international debt relief efforts for
the world's most heavily indebted poor countries. Building on the work
of the previous administration and with strong congressional support,
we have deepened and broadened the Heavily Indebted Poor Countries
(HIPC) debt reduction initiative.
In 2005, the administration, with bipartisan congressional support,
initiated and negotiated the landmark Multilateral Debt Relief
Initiative (MDRI). MDRI provides 100 percent cancellation of eligible
debt obligations owed to the World Bank's International Development
Association (IDA), the African Development Bank's African Development
Fund, and the IMF, for poor, heavily indebted countries that complete
the HIPC initiative. We have also continued this work, designing an
initiative and leading negotiations in cooperation with Brazil to
forgive 100 percent of HIPC debts to the Inter-American Development
Bank.
As I mentioned earlier, these debt relief initiatives are expected
to provide over $110 billion in debt reduction to 33 countries that
have already qualified under the HIPC initiative. Further, we
anticipate another seven countries could qualify under these
initiatives. These two initiatives continue to provide benefits to
countries such as Afghanistan, Liberia, and Haiti. In 2007, Afghanistan
became the 31st country to qualify for debt relief under the HIPC
initiative. After years of conflict, Liberia is now rejoining the
international community. Debt relief for Liberia under HIPC and MDRI,
with eventual cancellation of over $4 billion in debts, is an important
part of this transition. However, even under these well-established
initiatives, the process is not always easy and international support
is not always firm. In the case of Liberia--a country whose debts were
clearly unsustainable and for which the U.S. provided strong leadership
and intense engagement--the international effort to clear its $1.4
billion in arrears to the international financial institutions took
over 18 months and almost failed on a number of occasions.
debt sustainability
To help ensure that gains from debt relief are not wasted, the
administration has worked through the international financial
institutions, such as the World Bank and IMF, to put in place an
internationally agreed debt sustainability framework to help guide
future lending and borrowing. We are also working through the OECD to
operationalize that framework with a set of principles and guidelines
that commit export credit agencies to follow sustainable lending
practices and consider IMF and World Bank recommendations when
extending new export credits to low-income countries. This
administration also led efforts in the multilateral development banks
to increase the level of grants for the poorest countries. In 2001, IDA
provided less than 1 percent of its financing for the poorest countries
in the form of grants. Today, as a result of U.S.-led efforts, over 40
percent of funds from IDA to these countries are in grants. For
instance, the World Bank is providing $82 million in grants to Haiti
through the first half of this year. These efforts will help ensure
that poor countries will not reaccumulate unsustainable debts in the
future.
mismatch of tools and objectives
Debt relief is a valuable tool, but it must be balanced against
other policy instruments, such as direct development assistance. It is
not always the right response to address a country's development needs.
The Jubilee bill (S. 2166) targets a group of countries that face
tremendous development challenges. However, debt relief is most
appropriate when the debt itself is a barrier to development, as is the
case with the countries eligible for the HIPC initiative. This is not
the case for the countries targeted in this bill, many of which are
experiencing robust growth and reductions in poverty levels. In fact,
many of these countries have such manageable debt positions that they
are either seeking access to private capital markets--as in the case of
Vietnam--or are repaying their debts early--as with Angola and Nigeria.
Of the eight countries that some supporters of the bill have
suggested would be immediately eligible, none faces a high risk of debt
distress. This means that the immediate impact of the bill, if agreed
to internationally and if funded by the U.S. Congress, would be to
forgive the debts of countries that are able to service their debts--
countries for which debt is a minor issue compared to the challenges
they face in tackling issues such as promoting growth. For such
countries, targeted development aid and our support for efforts to
attract investment are more immediate.
Our experience with HIPC and MDRI has shown that debt relief alone
is not enough to address these countries' long-term challenges. For
example, Rwanda benefited from $1.8 billion in debt relief under these
initiatives, but it is still considered to be at high risk of financial
distress. The reason is not that it has borrowed irresponsibly--its
debt levels are still low. The reason is that it has a small and
vulnerable export base that cannot provide a consistent source of
government revenue. The key to supporting a sustainable path for
countries such as Rwanda is assistance to directly improve their
economic growth potential, not more debt relief.
Countries must also develop and implement effective policy reforms
to ensure that savings from debt cancellation--and in fact all
development assistance--can be used effectively for poverty reduction
efforts. This is why international debt relief initiatives have been
conditioned on the adoption of sound macroeconomic policies. Debt
relief simply will not have the intended benefits if it is delivered in
an environment of macroeconomic instability. Placing blanket
restrictions on the types of economic reforms that are appropriate can
make it difficult to implement policies tailored to a given country's
situation.
potential costs of expanded debt relief
There is also the issue of cost. Debt relief must be financed, just
as development assistance must be financed, and we should not enter
into negotiations without a sense of the costs that could be incurred.
The budget impact of pursuing the program described in the bill (S.
2166) would be substantial. Expanded debt relief would be a commitment
to replace costs over 30 to 40 years, and we need to consider the
total, long-term U.S. Government exposure to such an initiative.
The Treasury Department estimates that the budget cost to forgive
the nominal debt owed to the United States alone, including loan
guarantees, by all of the IDA-only countries that do not currently
qualify under the HIPC Initiative would be approximately $1 billion.
This cost estimate assumes that all IDA countries qualify in FY 2008
and would change depending on the year each country qualified for debt
relief. These countries also owe approximately $32 billion in nominal
debt to the World Bank and IMF and roughly $15 billion to the major
regional development banks. While the bill is not explicit about
whether negotiations on expanded debt relief should include comparable
debt relief from other bilateral creditors, I note that the total
official bilateral debt owed by potentially eligible countries under
this bill is approximately $30 billion.
While the bill calls for international financial institutions to
fund debt relief from internal resources to the extent possible, the
availability of such resources is very likely to be limited. Our recent
experience with funding for debt relief under MDRI is a good example of
what we are likely to encounter. We began those negotiations in 2004
with a similar goal of seeking no additional donor resources, while
providing increased debt relief to HIPC initiative countries from
finances of the international financial institutions. However, there
was no international support for this proposal. In the end, donors were
required to compensate, dollar for dollar, for MDRI debt relief at the
World Bank and African Development Bank. The U.S. is bearing about 20
percent of the costs of MDRI at the World Bank and about 12 percent at
the African Development Bank.
It is uncertain, at best, whether other creditor governments would
be willing to agree to additional debt relief of this magnitude,
particularly if we are unwilling to provide additional funds. If
negotiations for expanded debt relief were to follow our experience
with MDRI, the U.S. would need to be prepared to make a significant
contribution, likely at the expense of other development assistance
priorities.
continued financing needs for current initiatives
The United States is far from making good on its commitments to the
current debt reduction initiatives--which seek to help the poorest,
most heavily indebted countries. The administration has continued to
request, but has still not received, sufficient appropriations to fully
fund U.S. bilateral HIPC debt relief to the Democratic Republic of the
Congo. The U.S. also has an outstanding pledge of $75 million to the
HIPC Trust Fund, which is needed to support HIPC debt relief at the
regional development banks. U.S. support for debt relief under MDRI is
funded through our contributions to the IDA and African Development
Fund replenishments. However, we have consistently received less than
our full request for these replenishments. The result is that, in
fiscal year 2008, we anticipate the U.S. Government will have over $870
million in arrears to the multilateral development banks, including
$385 million to IDA alone. In fact, our arrears request this year is
specifically targeted at fulfilling our commitment to MDRI.
targeting the correct priorities
When we meet with developing countries, debt relief appears to be
far down the list of their priorities. Indeed many of these countries
see strengthening the environment in which the private sector can
flourish and drive economic growth as their primary development
challenge. This means improving the business climate, meeting
infrastructure needs, integrating into the global economy, and
strengthening financial sectors.
To underscore what we at Treasury hear from our counterparts in
many low-income countries, let me share with you a recent discussion
that Secretary Paulson had with the Finance Ministers from six African
countries. One minister noted that his President's top priority was
increasing electricity generation. Another spoke eloquently about the
costs that poor energy and transport infrastructure impose upon his
country's ability to grow and create jobs. And all of the ministers and
central bank governors asked Secretary Paulson to work with them to
find additional ways to attract foreign investment to their countries.
Secretary Paulson wants to find ways to shine a light on this core
challenge in these countries. We believe that these issues, rather than
debt relief, are the real priorities for spurring growth and poverty
reduction in these countries.
conclusion
Rather than embark on expanded debt relief, the United States
should focus on three things. First, it should fulfill its commitments
to current debt relief initiatives and meet our other multilateral
commitments. Second, it should continue to provide direct development
assistance to poor countries through bilateral and multilateral
mechanisms aimed at increasing economic growth and reducing poverty.
Finally, we need to find ways to work with countries to build their
capacity to handle more open trade and investment.
Thank you for your consideration of these issues. I look forward to
working with you further to support our current debt relief efforts and
to develop the best possible policies in this area. I welcome your
questions.
Senator Casey. Thank you very much. I know you will submit
your whole statement for the record. I appreciate the summary
you gave us.
At this time, my problem is we have a vote that just
started. What we will do is we will just adjourn. I will run
over and vote. It should not take more than 8 to 10 minutes at
the most I hope. So we will come back very shortly.
Thank you.
[Recess.]
Senator Casey. Well, thank you very much. We are back. I
was moving pretty quickly.
First of all, Mr. Assistant Secretary, I wanted to review
some of what you just spoke to us about. Could you just recite
again what you think the three U.S. priorities should be? There
were three. Fulfilling our commitments was the first one. If
you can just walk through those again, I wanted to ask you
about that in terms of this discussion.
Mr. Lowery. Well, they were basically, first, to fulfill
the commitments that we have already made in, frankly, the
bills that we need to pay. Second is to focus our attention on
other types of development assistance programs that we have,
both bilateral and multilateral ones, to help spur economic
growth. And third is basically work with countries to find
better ways to build capacity so that they can actually attract
more investment and open up greater trade routes.
Senator Casey. And in terms of our current commitments,
give me that number again.
Mr. Lowery. To the multilateral development banks--the
biggest one is the World Bank, but it is also the Inter-
American Development Bank, the African Development Bank--the
number is roughly--by the end of this year, it will probably be
about $870 million. And we also do have some requests in for
other debt--part of that goes toward debt relief and part of
that goes toward new assistance, new financial flows.
Senator Casey. One of the arguments that is made in support
of this legislation and, obviously, in support of the concept
of further debt relief is that the so-called HIPC qualification
criteria are unfair to a lot of countries. Would you respond to
that?
Mr. Lowery. When HIPC was begun, which was actually around
1995 or 1996, there had been a number of debt relief
initiatives over time that had been tried to try to get rid of
this problem, and they frankly had failed. HIPC was a way to
expand on that. The idea was to try to actually take the
indebtedness of countries and take it down to a level that was
considered sustainable by economists and so forth. No one is
exactly sure, but it was based on a number of criteria about
indebtedness levels. And the idea was that the debt was so high
that you could do almost anything, if you were these
countries--you could have great economic policies--you will
never get out of it because you have this huge debt overhang.
So HIPC basically reduced this down to a level which became a
much more sustainable level.
The MDRI initiative took it down even further to basically
get rid of the debt for good, so to speak, and try to get the
countries back on a path where they can get new assistance
through grants and they would not get back into this kind of
lend-and-forgive cycle. That is kind of what had happened for
the HIPCs.
The poor countries that were not HIPCs, which this bill is
trying to address, basically had not gotten into these
indebtedness problems, maybe from good policies on their part.
Maybe nobody wanted to lend to them. I am not sure. But
indebtedness is not their problem. That is not creating the
overhang for them. What is their problem is they just have
other areas that they need to address, and that is where we
think that more direct development assistance--if you want to
provide them money, give them a grant or work with them on
building a better investment capacity.
So a country like Bangladesh, which is a very poor
country--the World Bank is going to provide Bangladesh
something like $1 billion this year in new financial
assistance, some in grants, some in very low concessional debt.
But the idea is to give it financial flows so that they can
address some of the problems that they have in that country.
Senator Casey. I am going to speak kind of generally about
this and get your reaction. As you look at the legislation as
it is currently drafted, is it your position on behalf of the
administration that the administration is unalterably opposed
to it?
For the sake of argument, let us just say the
administration would support a new debt relief initiative. How
would you construct it or how would you change what we have or
what recommendations would you make? Or is it just the position
that you do not think this initiative is worthy of legislation?
Mr. Lowery. I guess with all due respect, in general we do
not think that this is the right way to go. And we have thought
about this a lot. Could we make some changes or tweaks or what
have you? We think if Congress wants to focus on some of these
countries, then let us focus on them and let us look at it
through the different types of assistance vehicles that are out
there that we could utilize. But the debt relief does not seem,
to us, to be the best way to approach it.
There are debt relief issues that we can work on and work
with the Congress together that we can get at. Part of it is
financing what we have already agreed to, as I have stated, but
part of it is also there are ways that we can help with--there
are facilities out there to help countries that have
indebtedness problems to private creditors instead of to
official creditors. There is something called the IDA buy-back
program that we could actually get involved in, and I am happy
to explain that program.
Basically I think ``unalterable'' is probably a little bit
strong, but I think that our view is that this bill is not the
way that we should be going.
Senator Casey. Now, if you look at--this is playing devil's
advocate on my side. Even if you use the World Bank's debt
sustainability framework, from what I know, 11 of the 24
potential recipients of this aid under the Jubilee Act would
have unsustainable debts even at the World Bank rather limited
terms. I do not understand why those countries should not be
eligible for some kind of debt cancellation.
Mr. Lowery. Well, I guess a couple things. One is that we
are actually kind of proud of the debt sustainability
framework. At the start of this administration, when we started
at that time candidate Bush or Governor Bush had supported
President Clinton's initiative on doing debt relief for the
poorest and most indebted countries. When he came into office,
he said we should go beyond even what the Clinton
administration did, and we did that through a couple means:
One, deepen the debt relief, which we have seen, but also
establishing a grants program. If you go back to 2001, the
World Bank provided almost none of its assistance--actually it
is less than 1 percent of all of its assistance was provided in
grants form. Today it is around 40 percent. So that was
something that really was a Bush administration lead.
The other thing we did was actually set up the debt
sustainability framework. How do you avoid this problem from
happening again? We do not want to continue to do this every 10
years. And so the debt sustainability framework is based on
basically stress-testing. How do you stress-test an economy so
you can see if it is going to get into indebtedness problems?
If you look at the countries that are in the Jubilee bill,
they basically, in some respects, have a green light, yellow
light, red light system. The red light is like you could have
some indebtedness problems. Of the countries that we have seen,
if you dismiss the small island nations, there are four
countries that are actually heavily indebted: Kyrgyz,
Tajikistan, Burma, and Zimbabwe. Our view is look, how indebted
are they really? The only one of them in ``debt distress''
through the debt sustainability is Burma. We are obviously not
going to be giving debt relief to Burma, or at least to this
government. So is this really what we want to be doing?
So our view is that given the scarce resources that are
there, basically we should be doing this through new
assistance, making sure that countries do not get into
indebtedness problems--that is for debt sustainability--and
really working on how do you diversify and work on these
economies so that they do not have these problems in the
future.
And let me just give one example. I have gone on too long,
but let me give one example.
The country of Rwanda actually has gotten debt relief,
significant debt relief. It is possible that they are going to
get back into indebtedness problems if people are not very
careful. It is not because they are taking on a lot more new
debt. It is because their economy is so undiversified that
their export base is tiny. So they do not have any revenues. So
basically they are not going to be able to pay off even the
small amount of debt that they do have. So basically debt
relief can be helpful, but it is usually helpful when countries
have real indebtedness problems.
Senator Casey. And if you look at this issue from the
perspective of the United States, one of your concerns is that
we are going to be shouldering too much of the burden.
Mr. Lowery. It is not that we will be shouldering too much
of the burden. I mean, we should shoulder a lot of the burden.
We are the wealthiest country in the world. We are the biggest
country in the world. And we do shoulder a lot of the burden in
the indebtedness issues.
What my worry is that we are not doing it. We have stepped
up and put these policies in place, but we are continuing to
run arrears and they have grown over a long period of time. So
it is not something that is recent. And if we do not address
that, we are not going to make good on our commitments in debt
relief, let alone on providing development assistance to the
poorest.
Senator Casey. From my point of view, I think that in terms
of the concern about countries falling back into a cycle of
indebtedness or kind of returning to where they were, I think
the provisions of the Jubilee Act try to address that concern
by requiring--in terms of basic requirements, we require the
country to allocate the savings from debt cancellation toward
poverty-reducing expenditures. We require that policy reforms
be developed to ensure that the savings from debt cancellation
are redirected to poverty reduction initiatives. We also
require that an annual report is produced. So I think that a
lot of the concerns about a country kind of turning back around
in the wrong direction, so to speak, as it pertains to debt,
are contemplated.
But what is your sense of that?
Mr. Lowery. No. I think that those parts of the bill we
have general support for. One of the really sound things of the
debt relief initiatives has basically been to work on making
sure that there is sound economic policy, so a macroeconomic
framework, and then that they use the resources largely for
poverty reduction programs. And if you look at 2000 to 2006, I
think, on the countries that receive debt relief, their poverty
reduction expenditures have gone from roughly 6.5 percent of
GDP to about 9.5 percent GDP, so about a 3-percent increase. At
the same time, debt service has gone from about 4.5 percent of
GDP down to a little less than 2 percent of GDP. So it is not 1
for 1, but it has actually been a little bit better than that,
which is a good thing. So I think that that part of the bill we
basically roughly agree with.
The issue, again, is can you do the same thing by just
providing it through a grant as opposed to getting into debt
reduction problems for some countries that are actually trying
to actually be good payors and be good debtors so that they can
get other types of credit. I mean, that is kind of our issue.
But I think that part of the bill is probably a very sound
part of the bill.
Senator Casey. Would it be unfair to say that your--not
you, but the administration's--perspective or approach to this
challenge would be grow your way out of the problem as opposed
to dedicating dollars to debt reduction? Is that an unfair
characterization?
Mr. Lowery. I think that is a little unfair. I think that
this administration has stood up not only for debt relief for
the countries that are poorest and most indebted, but we have
also stood up and put in place good programs to help fight
against HIV/AIDS, to help fight against malaria, to help fight
against hunger. And actually the Millennium Challenge
Corporation, which I know probably the most about, is to help
fight for economic growth and development. And those are
programs to provide grant assistance to sometimes specific
activities and sometimes to help increase economic growth. So
we are not against aid as a catalyst. We are saying that debt
relief does not necessarily have to be the only catalyst out
there. And that is one of our worries about the bill.
Senator Casey. I would not ask you to walk through all 24
of these countries in terms of our support or help for them.
And this is I guess more along the lines of amplifying the
written record, which I hope you would do on this question. But
tell me what the administration is currently doing as it
pertains to these 24 identified countries and tell me also what
the administration plans to do. In other words, if you are
saying that this particular strategy for debt relief or any
kind of support is not the way to go, what do we say to these
countries as it pertains to what this administration is doing,
or what do we say to the world in terms of why a debt relief
initiative does not make sense for these 24 countries? And some
of that I know you have to amplify the record.
Mr. Lowery. Sure. Well, in terms of the countries--by our
calculations, from 2001 to 2006, the United States has provided
this group of countries nearly $5 billion in official
development assistance. Some of that comes from the MCC. Some
of that comes from USAID. Just real quick just looking, five of
these countries are eligible for MCC and are scheduled to get
over $1 billion of new financial assistance.
So it is not that we have anything against these countries.
I mean, we want to work with these countries. The MCC is,
obviously, about working with the countries that are putting in
place the best policies and rewarding them for that. Some of
the USAID money goes toward countries because they have big
pockets of poverty, big problems of poverty, and so how do you
help work with those countries.
So we are not against working with these countries. I mean,
in fact, the United States is the biggest supporter of the
World Bank. The World Bank is providing these countries--I have
a figure here--basically about $4 billion this year to these
countries. So it is not that there are not development
assistance flows going to them, and the United States is one of
the big supporters of those flows.
Senator Casey. What were the years you cited?
Mr. Lowery. 2001 to 2006.
Senator Casey. So you are saying from 2001 to 2006, the
United States gave $5 billion to these 24 countries in total
and that 5 of the 24 are currently eligible for MCC?
Mr. Lowery. That is correct. In other words, MCC money
really has not started being disbursed. It is just starting
now. So that money would not be counted in what we were talking
about.
Senator Casey. I wanted to move to another aspect of this
using the United Kingdom as an example. I mentioned this before
about Prime Minister Gordon Brown. Prime Minister Brown and his
government have, obviously, long supported debt relief. He
stated that in 2006 that all 67 of the world's poorest nations
should secure debt relief. The U.K. has already begun to
deliver debt service relief for the U.K.'s share of the debt
payments made by nine qualifying, non-HIPC poor nations in the
World Bank.
Here is the question. How does Treasury view the U.K.
initiative to expand debt relief beyond HIPC to well-governed
countries that need it to meet the U.N. Millennium Development
goals? What is your sense of that?
Mr. Lowery. I do not know a lot about their initiative, but
I think that it is just a different way of providing financial
flows. I mean, there are two ways you could look at it. One is
you could say, OK, we are going to forgive these debts that are
coming due to us and so is that in addition or are you going to
provide them new financial assistance or what? Because it is
just basically just reversing the cash flow effect. You just do
not pay. So instead of getting a grant, you basically just do
not pay. So that is one way of looking at it, and that is, I
think, a good way of looking at it.
A bad way of looking at it is basically they provided that
debt relief and now that country pays a different creditor. I
mean, one of the reasons you try to do debt relief together is
because you are all taking the pain together. Right? You are
all the creditors, and everybody takes the pain of not being
paid back. But that is so one creditor is not in a better
position than another creditor. So that is why you do it
together. But it is obviously difficult to do that when
countries do not have indebtedness problems.
Senator Casey. To go back to the U.K. example--and I really
may not have the opportunity to fully address it today, but for
the purposes of this record, if you can go back and analyze the
U.K. strategy on this as it contrasts with the
administration's, I think that would help the record.
Mr. Lowery. OK.
Senator Casey. Just a couple more because I know we want to
keep moving. This relates to conditionality in debt relief.
The current debt relief program requires nations to meet a
strict series of economic policy requirements before receiving
debt cancellation. Now, everyone agrees that debt cancellation
should be provided in ways that ensure that funds released get
to the poorest people with full transparency and
accountability. But many of the other conditions the IMF and
the World Bank insist on attaching to debt relief are more
controversial, as you know.
A growing number of analysts, including a recent study by
the Center for Global Development, have criticized the IMF in
particular for being overly stringent in the requirements that
poor countries have low inflation; No. 2, that they pay down
domestic debt; No. 3, that they limit public spending,
including public sector salaries for doctors and teachers; and
finally, that they maintain high currency reserves.
The impact of these policies in several countries meant
that countries have been unable to spend aid or debt relief
money on poverty reduction. In nations where robust public
sector spending is needed to ramp up investments in schools,
hospitals, and clinics, these policies are obviously of great
concern.
A question about Treasury. Does Treasury have concern about
the impact of overly restrictive IMF policies on indebted
nations' ability to allocate aid and debt relief for poverty
reduction?
Mr. Lowery. I mean, this is an important question and
debate that has been going on for a while I think.
I do not know the Center for Global Development's study. So
I cannot comment on that.
I will comment on if they are saying that inflation is a
good thing, then they are wrong. Inflation is one of the worst
taxes on poor people that there is in the world. I assume they
are not saying that, but inflation is a bad problem for poor
people because they have no way to address it.
What economic conditionality gets into is a couple
different things. One is trying to establish a sound
macroeconomic framework, which is basically about putting in
place decent monetary policies and good fiscal policies. Now,
there are times where the IMF or the countries in question or
maybe even the United States sometimes go too far, and they are
being too restrictive. But most of the time, I think the idea
is establish a good macroeconomic framework. This will help
provide the basis for greater economic growth so that you have
a sound fiscal position and you are able to spend your money
where you need to spend it.
So the IMF is worried about the fiscal envelope, the
overall envelope of what you can spend your money on. And the
IMF needs to be careful. It cannot get too down in the details
and the weeds about where countries should be spending their
money. The countries need to make some of those decisions
themselves. But the IMF has to be worried about the overall
envelope because it has to be financed, and finance will come
through a variety of different means for poor countries,
usually from a development assistance perspective. So I think
that that is what the IMF tries to get at.
So it is probably important to have good economic
conditionality and sound macroeconomic frameworks. There are
criticisms and I think that the IMF and others that do this
need to pay attention to those criticisms. But that does not
mean that they are wrong to try to work with countries on those
types of frameworks.
Senator Casey. We are having a philosophical difference
here. I am trying to see it from both vantage points.
When you said before that inflation is not good for poor
people, I would agree that inflation is not good for anyone,
but I do not think debt is either. I just do not see how an
initiative that helps almost 25 countries deal with the burden
of debt--I just do not understand how the administration does
not think that is a good idea. But we have a basic difference I
guess.
Mr. Lowery. Well, let me just say that, first of all, I
will respectfully disagree with you on one thing. Debt is not
evil. We all have to find ways of financing things, whether it
is an individual getting a mortgage or you are in a poor
country and you are trying to finance an infrastructure project
or what have you. So debt can be a good thing. It is a way of
getting finance. Where debt becomes a problem is when countries
have bad debt management from a borrower's perspective or
people are overlending.
So those are things that we have been trying to address
through a variety of means. Besides getting rid of the debt,
also let us make sure that countries do put in place good
economic policies, they actually have debt management programs.
The Treasury Department works in 11 or 12 of these countries
basically on debt management capacity-building. We have worked
with the export credit agencies to try to basically put
guidelines down so that they do not continue to lend riskily,
so to speak, or frankly, ridiculously to these countries so
that they get back into these indebtedness problems.
But debt itself is not a bad thing. It is just that it has
to be handled correctly and managed correctly, and that is why
it is very important to have debt management shops in most
countries. We have one, obviously, in the United States. Most
countries have them. Unfortunately, a lot of them got into
trouble and we have tried to get rid of that problem. And I
think largely we have gotten rid of that problem.
Senator Casey. I do not think anyone would make the case
that debt is intrinsically evil, but it can lead to other
problems.
Let me ask you this. This is more of a comparative
question. You may have an example; you may not. If you can
summarize one for the record, it would help.
Do you have an example of a poor country with heavy
indebtedness, say, in the last decade or maybe more than that?
Let us say the last 25 years where kind of both strategies were
tried or something close to the strategy you are outlining the
administration favors versus the strategy contemplated by the
Jubilee Act where a debt relief strategy failed and your
approach to it was successful. Do you have any particular
examples of that?
Mr. Lowery. That is a good question, I guess. A lot of the
countries that we have focused on over time have shown success,
were very well indebted. I guess one country that has been
successful and has not gotten any debt relief is a country like
Vietnam. I am just looking at the list of countries. Vietnam
has basically gotten provided to it new assistance and some
capacity-building, but it has never received any debt relief to
my knowledge. And it has actually been largely successful at
attracting investment and actually growing its economy.
A lot of the countries, the poorest countries--many of
them--as I mentioned in my testimony, 33 countries have gotten
that debt relief. Some of them have been successful. We see
good success with countries like Mozambique, but we also see
countries like Cote d'Ivoire which have not been successful. So
debt relief, as you stated very clearly, is not a panacea.
So debt relief can be a good tool to work with with some
countries. So we are not against debt relief by any stretch of
the imagination. What we are saying is, is this the right tool
at this time for these countries? And that is where we
disagree. We just do not think that that is the case. But
overall, we think debt relief can be a very valuable tool.
Senator Casey. In your experience--you can generalize in
doing this, but it is helpful. Tell me how most of these
countries end up in the kind of debt we are seeing. I mean,
some of them have the antecedents--or the predicate for this
debt is you might have a dictator who has total control and
does not manage the economy very well, does not manage the
government very well, but has no opposition, no accountability.
But describe for me the antecedents for the kind of debt we are
talking about with regard to these 23 countries or the others
we have talked about. I mean, kind of the textbook case.
Mr. Lowery. Sure. Our view is for these 23 countries, most
of them do not indebtedness problems. They actually can pay
what they have. They are not actually in high numbers. If you
look at most of the numbers, they have 50 percent, 60 percent,
or something like that of exports, whereas in the HIPC
countries, we were talking about countries that had literally
1,000 percent of exports was their debt stock, 500 percent of
exports was their debt stock. We are talking about now
countries that have 50 to 100 percent, and the 100-percent ones
are the ones that at least somewhat have troubles.
The way that I have noticed it was that there was a lot of
lending that was done in the 1970s and the 1980s. Some of it
was petrodollar recycling and some of it was the aid agencies
had not moved to a grants basis. They were still doing things
on a loans basis. The international financial institutions were
doing things on a loan basis. So these countries kind of
stacked up a lot of debt. Then so what would happen is
basically they said, oh-oh, we cannot handle this, so let us
reschedule that debt, not reduce it, reschedule it. Well,
basically when you reschedule debt, it is like a snow plow. You
are basically just pushing out the debt, and so it grows.
And that kind of happened through the eighties and a little
bit into the nineties, and that is when everybody just said
this is crazy. We have got to get rid of this. So that is where
you saw a series of initiatives over time in the nineties to
start getting rid of the debt reduction. And it started really
reducing all the bilateral official sector credits down, a lot
of export credit agencies and things like that. And that still
was not good enough, and that is when HIPC came in and that was
to actually get at the multilateral development banks, the IMF,
et cetera. So that is kind of how it has worked over time.
But remember, there is a big difference between having huge
amounts of debt that is completely unsustainable and then
countries that basically just have a little bit of debt that
they are dealing with. And that is kind of the difference, we
think, between the debt relief initiatives we have seen over
the last 10 years and this bill.
Senator Casey. Thank you very much. We are going to move to
our second panel, but I appreciate your testimony.
Mr. Lowery. Thank you very much, Senator.
Senator Casey. Thank you.
We will go to our second panel. Our second panel of
distinguished witnesses, all of whom have spent a significant
portion of their careers working to better understand the
proper role of debt relief in helping the world's poorest
nations reach their development goals. As will become quickly
evident, our witnesses hold divergent perspectives on the value
of debt relief, and so I look forward to a robust and healthy
debate.
I am also interested in your specific views on the Jubilee
Act legislation which is before the Senate, your
recommendations on how we can improve this bill, and anything
else you think is relevant to this discussion.
I will introduce all of our witnesses at one time, and then
we will go back for testimony. First of all, Dr. Nancy Birdsall
is president of the Center for Global Development, an
organization she helped found at the beginning of this decade.
She has previously held senior positions at the Inter-American
Development Bank, the World Bank, and the Carnegie Endowment.
Dr. Birdsall is considered one of the world's leading experts
on debt relief and we are honored to have you here with us
today, Doctor. Thank you.
Next, Mr. Gerald Flood is the counselor for the Office of
International Justice and Peace for the United States
Conference of Catholic Bishops. Mr. Flood previously served
with the World Bank and has played an instrumental role in
helping move forward the goals of the Jubilee debt relief
movement, and we appreciate your presence here today, sir.
Thank you.
And finally, Dr. Peter Henry is a distinguished professor
of international economics at Stanford University's Graduate
School of Business. Dr. Henry, a former Rhodes scholar--I guess
you are always a Rhodes scholar. [Laughter.]
Has done extensive academic research on debt relief and its
connection to economic growth and development. And we look
forward to hearing your views on this topic this afternoon.
For the interest of time and for a real dialogue with our
witnesses, I would ask each of you to limit your oral statement
to 5 minutes each. The remainder of your prepared statements
will be formally entered into the record.
So we will begin with you, Dr. Birdsall. Thank you very
much.
STATEMENT OF DR. NANCY BIRDSALL, PRESIDENT, CENTER FOR GLOBAL
DEVELOPMENT, WASHINGTON, DC
Dr. Birdsall. Thank you very much, Senator Casey. It is a
privilege to have this opportunity.
I would like to make four points, and these points are set
out in the written testimony.
First, debt relief is a highly efficient form of aid and
has clearly helped foster social progress and economic growth
in low-income countries. I think we have heard a lot about the
latter point already today, that debt relief is associated with
an increase in health and education spending as a percentage of
GDP. So that increased spending cannot be associated solely
with growth, although we cannot be sure it was debt relief per
se.
But more important in my view are two points. One is that
debt relief also seems to be associated with an easing of the
macroeconomic constraints that in the past pushed countries
into difficulties in terms of their fiscal spending and so on.
And it is that macroeconomic management that is better that can
be attributed in part to the recent growth, especially in
Africa.
And even more important than that, why I think debt relief
is a good thing to do in general is that it is the most
efficient form of aid. And I would like to emphasize this
point, that for poor countries that are capable of national
planning and sound management, the direct support provided by
debt relief offers a cheaper, quicker, and more effective
alternative to traditional aid, including traditional aid from
the U.S. Government which, as is the case with many donors,
requires endless negotiations, requires implementing hundreds
of different projects and programs, and has very high
transactions costs for countries that are already managing
their economies reasonably well.
The second point I would like to make you have already made
yourself, Senator Casey. Debt relief is not a panacea. It does
not in itself generate growth or guarantee an escape from
poverty. There is no question that the fundamental issue in
these countries has to do with their own political and economic
institutions. And debt relief, even the latest round which, of
course, extended the initial rounds of HIPC in the mid-1990s,
is still small and is no substitute for traditional aid.
I have an example in the written testimony that struck me
in the case of the 15 African HIPCs that benefited from the
MDRI. For the World Bank, that saved them, as a group, $19
million in debt service in 2004-05. That same year, they
received almost $200 million in new aid or new grants from the
World Bank and nearly $1 billion in total aid. So if we are
talking about the relative value in dollar terms of debt
relief, it has been and it will continue to be small.
Third, the Jubilee Act under consideration, despite its
merits, raises several concerns, and let me mention three very
quickly. Some of them were raised in the testimony of Secretary
Lowery.
First, some countries that might be eligible are making
good efforts through prudent borrowing and debt management to
obtain access to private capital markets at home and abroad.
This legislation, were it to become policy, might tempt them
because of political pressure at home to opt in. There are, of
course, a few countries like Bangladesh and Vietnam which would
almost certainly not opt in, but there are others, including
Mongolia, where this sort of approach does not strike me as the
ideal way to help.
A second concern is that raised particularly by Secretary
Lowery that the legislation--well, let me put it a different
way in terms of the problem of arrears. My view is that the
legislation risks further undermining already weakened U.S.
credibility with its traditional allies in the donor community.
Why is that? It assumes and calls for internal financing of new
debt relief obligations by the World Bank or through the World
Bank and the other multilateral banks that are owned in common
with our allies, other nations in Europe. And this it does at a
time when the United States, as the Secretary pointed out, has
not fulfilled its own commitments to those institutions. So you
discussed with him some of the problem of arrears. What I would
like to emphasize here is that it seems inappropriate for the
United States at this point in time to be calling on our allies
to join with us in reducing debt when we have not finished
dealing with our own commitments to the institutions through
which we are trying to do more debt relief.
My third concern has to do with the point that you raised
yourself, and I think you pointed out some of the
counterarguments. But the bottom line is that in the case of
the World Bank and the other banks, debt relief could end up
robbing Peter to pay Paul, to use the expression you did. That
is, financing debt relief for some poor countries on the backs
of other poor countries.
This is also a problem in the World Bank and the others
because it may end up financing debt relief against the wishes
of middle-income countries who are also members of those
institutions who will object because of their view, which is
reasonable, that the additional costs, if they are not covered
by contributions from the United States and the Europeans and
so on, will end up, because of the financial policies of the
banks, leading to higher interest charges on their loans from
the hard window. So this is a political problem in terms of our
maintaining relations, being a credible member of these
institutions, maintaining our good relations with countries
like China, India, Brazil, Turkey, and so on who borrow from
those banks.
So I want to make quickly a fourth point. I am afraid I may
have used my 5 minutes, but I would urge you----
Senator Casey. You are OK.
Dr. Birdsall [continuing]. And your committee to consider a
better Jubilee bill that would help poor countries minimize
debt in the medium term and help them better manage debt.
The first thing I would say in this regard is the bill
could call on the U.S. Treasury to work with the World Bank on
improving and making more transparent the debt sustainability
framework. It is correct that that framework is something for
the United States to take pride in in terms of its leadership
in moving it along, but it is still extremely opaque.
And one step that would simplify matters is to simply say
for very poor countries that clearly have not grown over
several decades in any significant way because their per capita
income is still very low, just give them grants in the future
from now on, and that will help address the problem otherwise
of a buildup in debt.
Second, the legislation could encourage the Treasury to
work with its counterparts in the World Bank and the
International Monetary Fund to develop a facility to help poor
countries cope with shocks to their economies. We see right now
the cost to oil importing and food importing countries
associated with the sudden price hikes in food in the secular
movement upward in the oil price.
These countries also tend to be extremely vulnerable to
natural disasters. A mechanism to help them cope with that kind
of volatility in the debt area would be to have a facility that
covered their debt service, their cash flow problem in the
aftermath of these disasters for at least limited periods of
time. This would make it possible for countries, which are
borrowing in a prudent way and which should be able to borrow
in order to make investments in order to grow, given that they
are well-managed economies, this would make it possible for
them at the margin to borrow a little bit more a little bit
more reasonably without the risk of falling into the debt trap
that we see happened in the past for many countries.
Third, I would suggest that the bill might be set up to
clarify that the United States could unilaterally write off the
U.S. bilateral debt of eligible IDA countries, or such a
provision should be triggered only when the United States has
fulfilled its existing international commitments.
Let me conclude by urging the committee and the Congress in
general to help translate what is this, I think, great interest
of the public, the energy and passion of the public in this
country, that supports debt relief--let that be channeled into
more ambitious legislation and not only for debt relief itself,
but for a complete overhaul of the U.S. foreign assistance and
development programs along the lines that were outlined by my
colleague, Steve Radelet, yesterday in testimony before the
House Foreign Affairs Committee.
Thank you very much, Senator Casey.
[The prepared statement of Dr. Birdsall follows:]
Prepared Statement of Dr. Nancy Birdsall, President, Center for Global
Development, Washington, DC
introduction
Senator Casey, Senator Lugar, and distinguished members of the
committee, I am delighted to have the opportunity to share with you my
perspectives on international debt relief initiatives.
As many of you know, the Center for Global Development was founded
in 2001 as an independent, nonpartisan think tank dedicated to
improving the policies of the rich countries as they relate to the
world's poor countries and poorest people. What you may not know is
that it was a film growing out of the Jubilee debt movement, which
portrayed the burden of debt in the world's poorest countries, that
inspired my cofounder and the Center's principal benefactor, Edward W.
Scott, Jr., that the rich world could do better for the poor--including
through better U.S. debt and aid policy. One result is that U.S. debt
policy has been a core issue for CGD since its inception.\1\
---------------------------------------------------------------------------
\1\ CGD's first book, ``Delivering on Debt Relief: From IMF Gold to
a New Aid Architecture'' by president Nancy Birdsall and John
Williamson, a senior fellow at the International Institute for
International Economics, helped to frame the discussions on the future
of the Heavily Indebted Poor Countries Initiative and how it is
financed (see http://www.cgdev.org/content/publications/detail/2922/).
The Center's work played a catalytic role in the historic debt relief
deal between Nigeria and the Paris Club of creditors in October 2005,
resulting in Africa's biggest ever debt reduction.
---------------------------------------------------------------------------
I would like to make four points.
First: Debt relief is a highly efficient form of aid and has clearly
helped foster social progress and economic growth in low-income
countries
The U.S. and other donor countries have supported debt relief for
low-income countries because lower debt burdens create fiscal space to
raise spending on social programs and public infrastructure, improving
lives while investing in long-term sustainable growth.
Debt relief, moreover, is a hyperefficient way to deliver aid. For
poor countries that are reasonably capable of national planning and
sound economic management, the direct support provided by debt relief
offers a cheaper, quicker, and more effective alternative to
traditional aid, which in many poor countries requires negotiating and
implementing hundreds of different projects and programs with 50-plus
donors, each with its own standards and reporting requirements. Debt
relief encourages poor country ownership of development strategies and
makes poor country governments directly accountable to citizens for
their budget priorities and program implementation, instead of to
international creditors.\2\
---------------------------------------------------------------------------
\2\ See Nancy Birdsall and Brian Deese, ``Delivering on Debt
Relief,'' Center for Global Development, April 2002, available at
http://www.cgdev.org/content/publications/detail/2862/.
---------------------------------------------------------------------------
The results of past debt relief have been encouraging. Resources
freed up from annual debt payments in the group of heavily indebted
poor countries, or HIPCs, are associated with substantial increases in
recipient governments' own spending on health, education, water, roads
and other public infrastructure.\3\ Also noteworthy though less
remarked, the increased fiscal space due to debt relief (along with
recent faster growth and recent stability in HIPC countries) has
clearly played a role in helping low-income countries sustain sound
macroeconomic programs, by permitting reductions in fiscal deficits and
accumulation in some cases of reserves.\4\ It is the resulting price
stability and investor confidence that underline recent growth of more
than 5 percent in many countries, including in sub-Saharan African
countries that have benefited from debt relief programs.
---------------------------------------------------------------------------
\3\ See ``Highly Indebted Poor Countries (HIPC) Initiative and
Multilateral Debt Relief Initiative (MDRI)--Status of Implementation,''
prepared by International Development Association and International
Monetary Fund staff, September 2007, available at http://
siteresources.world
bank.org/INTDEBTDEPT/ProgressReports/21656521/
HIPCProgressReport20070927.pdf.
\4\ Reductions in debt service from 10 to 5 percent of GDP have
been associated with increases in public investments by as much as 1
percent of GDP (see Benedict Clements, Rina Bhattacharya, and Toan
Nguyen, ``External Debt, Public Investment and Growth in Low-Income
Countries,'' IMF Working Paper 03/249, 2003).
---------------------------------------------------------------------------
Second: Debt relief itself is not a panacea
Debt relief alone does not generate growth or guarantee an escape
from poverty.\5\ Debt relief and aid can help support countries
struggling to develop their own more accountable political and economic
institutions--but it is those institutions and a country's own policies
that ultimately matter for generating sustained private sector-driven
growth and shared development.
---------------------------------------------------------------------------
\5\ See Todd Moss, ``Will Debt Relief Make a Difference? Impact and
Expectations of the Multilateral Debt Relief Initiative,'' Center for
Global Development Working Paper Number 88, May 2006, available at
http://www.cgdev.org/content/publications/detail/7912/.
---------------------------------------------------------------------------
Nor has, or should, debt relief be considered a substitute for
traditional aid programs. New aid has and will continue to be the main
vehicle for assistance. In 2004, for example, under the Multilateral
Debt Relief Initiative, 15 African HIPCs paid on average $19 million in
debt service to the World Bank. That same year, they received $197
million in new World Bank aid and nearly $1 billion in total aid.\6\
---------------------------------------------------------------------------
\6\ See Todd Moss, ``Will Debt Relief Make a Difference? Impact and
Expectations of the Multilateral Debt Relief Initiative,'' Center for
Global Development Working Paper Number 88, May 2006, available at
http://www.cgdev.org/content/publications/detail/7912/.
---------------------------------------------------------------------------
Third: The Jubilee Act under consideration, despite its merits, raises
several concerns
The latest Jubilee Act for Expanded Debt Relief and Responsible
Lending has good language and the right overall intent regarding odious
debt, vulture funds, and prudent post-debt relief lending. However, I
have several concerns about the latest legislation.
First, some countries who might be eligible are making good efforts
through prudent borrowing and debt management to obtain access to
private capital markets at home and abroad. Were this legislation to
become policy at the international level as it is now structured, it
could create political pressure within those countries to opt in
against their own long-term interests. Bangladesh and Vietnam would
almost certainly not opt in anyway, for this reason. Mongolia and other
countries in the future might. I am not confident this kind of ``help''
is ideal.
Second, the legislation risks further undermining already weakened
U.S. credibility with its traditional allies in the donor community. It
assumes and calls for internal financing of new debt relief obligations
by the multilateral banks that are owned in common with other nations
at a time when the U.S. has not fulfilled its own commitments on
existing debt relief programs and to the multilateral development banks
themselves. (As committee members will know, the FY08 budget cuts
slashed our current debt relief obligations from $200 million to $30
million to offset other accounts, and the U.S. still has close to $1
billion in outstanding arrears to the World Bank and other multilateral
development banks ($385 million to the International Development
Association of the World Bank and a total of $872 million to the
multilateral development banks).
Finally, the current language in the bill, because it relies on
internal financing by the World Bank and multilateral development banks
of any new debt writeoffs, appears and could end up robbing Peter to
pay Paul--that is financing debt relief for some poor countries on the
backs of other poor and relatively poor countries. As in the case of
the Inter-American Development Bank (IDB) financing of the Multilateral
Debt Relief Initiative (MDRI), it may ultimately be other low-income
countries that indirectly pay the cost in the form of reduced overall
availability of concessional money. In the case of the multilateral
banks in general, their internal financing without compensating
contributions from the U.S. and other donors may mean that ultimately
all developing country borrowers pay somewhat higher interest charges
on standard loans to ensure prudential standards (which are admittedly
highly conservative) are met.
Fourth: Consider a better Jubilee bill to help poor countries minimize
and better manage debt
I urge the committee to continue to improve this legislation, with
an eye to moving it forward only when the Congress has passed
appropriations to fulfill the current arrears noted above. How might
the bill be improved?
First, the bill could call on the U.S. Treasury to work with the
World Bank and the other multilateral development banks on development
and application of a simplified and more transparent approach to
judging the ability of poor countries to borrow in the future (the
``debt sustainability framework''). For example, countries with per
capita income of as little as $500 have clearly not managed sustained
past growth for one reason or another. It would make sense to provide
only grants, not loans, to these countries.\7\
---------------------------------------------------------------------------
\7\ See Nancy Birdsall, Devesh Kapur et al., ``The Hardest Job in
the World: Five Crucial Tasks for the New President of the World
Bank,'' Center for Global Development, June 2005, available at http://
www.cgdev.org/content/publications/detail/2868.
---------------------------------------------------------------------------
Second, the legislation could encourage the U.S. Treasury to work
with its counterparts in the World Bank and International Monetary Fund
to develop a facility, possibly at the IMF, that would provide
temporary financing to relieve debt service burdens in the case of
shocks to low-income countries' economies beyond their own control.\8\
Low-income countries face much higher risks of costly natural disasters
and terms of trade and other shocks (recent price hikes for oil and
food may be examples that apply to oil and food importers, though there
is a question of whether the price increases are temporary or more
permanent) than does the U.S. and other OECD countries.\9\ Such an
insurance approach would help allow low-income countries with good
growth prospects to borrow reasonable amounts on reasonable terms,
while minimizing the risk of a new round of debt relief in the future
due not to their own poor risk management but bad luck. If structured
carefully, it would also contribute to the kind of confidence in the
stability of poor countries that is vitally important to private sector
development and growth.
---------------------------------------------------------------------------
\8\ See Nancy Birdsall and Brian Deese, ``Delivering on Debt
Relief,'' Center for Global Development, April 2002, available at
http://www.cgdev.org/content/publications/detail/2862/.
\9\ See Table 1: Volatility of GDP, by region, and Table 2: Terms
of trade volatility and shock frequency, 1975-2005 for data on the
heightened vulnerability of low-income countries to trade volatility
and shock frequency (tables attached at end of document).
---------------------------------------------------------------------------
Third, the bill could allow for the U.S. to unilaterally write off
the U.S. bilateral debt of eligible IDA countries; such a provision
could be triggered once the U.S. has fulfilled its existing
international commitments.
With these modifications, a Jubilee bill would be a mechanism to
effectively channel the strong public support for debt relief into
demand for a better structured, overall approach to debt relief and
related initiatives that the U.S. and other donors could take to help
low-income countries.
conclusion
I am delighted to see the commitment of the U.S. Congress to debt
relief and the robust support from American religious leaders and other
advocates. I support debt relief from the U.S. in principle for good
performing countries as an efficient and effective mechanism for
helping countries create the fiscal space to increase spending on
social programs and other investments necessary to improve lives and
create long-term sustainable growth.
However, I hesitate to endorse this bill as currently structured,
and indeed any bill for new debt relief, until the existing arrears on
U.S. commitments to debt relief and the international institutions have
been fully funded.
Finally, I urge the committee and other Members of Congress to help
translate the public interest and support for debt relief into more
ambitious legislation--not just for debt relief itself but for a
complete overhaul of U.S. foreign assistance and development programs--
along the lines outlined by my colleague, Steve Radelet, in testimony
before the House Foreign Affairs Committee yesterday.\10\ I hope that
the next administration, together with the Congress, will find a way to
reflect Americans' growing commitment to better lives in poor countries
not only in debt relief programs, which are reaching their limits in
any case, but via a broader set of development-friendly policies
consistent with our national values and our interest in global as well
as American security and prosperity.
---------------------------------------------------------------------------
\10\ See Steve Radelet, ``Seizing the Moment for Modernizing U.S.
Foreign Assistance Reforms: Testimony for the House Committee on
Foreign Affairs,'' Center for Global Development, April 23, 2008,
available at http://www.cgdev.org/content/opinion/detail/15863/.
Senator Casey. Thank you very much.
Mr. Flood.
STATEMENT OF GERALD F. FLOOD, COUNSELOR, OFFICE OF
INTERNATIONAL JUSTICE AND PEACE, UNITED STATES CONFERENCE OF
CATHOLIC BISHOPS, WASHINGTON, DC
Mr. Flood. Thank you very much, Senator Casey, and I
appreciate the opportunity to testify here today.
Debt relief for poor countries has been a high priority for
the United States Conference of Catholic Bishops for a very
long time. It was inspired by those very words which you quoted
earlier from Pope John Paul II, and some of us have been at it
ever since.
Just to, at the beginning, say that I will be focusing on a
few issues at a level of technical detail that the bishops
would not normally get into. Therefore, I am testifying
primarily on the basis of my experience as a former World Bank
official and somebody who has worked on these issues for a
number of years at the Bishops' Conference.
I would first like to thank you for introducing this
important legislation and to Senators Biden and Lugar and other
members of the committee for the strong leadership that they
have provided over the years in support of debt relief for poor
countries.
Although I believe Mr. Lowery has left, I still would like
to have the opportunity to express our appreciation for the
very effective efforts of the Bush administration, particularly
the Treasury Department, which worked with other countries to
bring about the Multilateral Debt Relief Initiative. They
subsequently worked hard to extend it to debt owed to the
Inter-American Development Bank, and they also introduced the
possibility of many poor countries gaining access to grant
financing from the International Development Association.
You have already mentioned some of the achievements of the
debt relief program so far in terms of debt stock and debt
service relief. So I am going to go quickly to one or two
issues that I wanted to focus on.
Now, you, or at least some of the members of the committee,
might wonder why debt cancellation is necessary when so much
debt relief is already being provided under HIPC and the more
recent MDRI. The problem is that there is a substantial number
of poor countries that are not eligible for the HIPC program,
let alone the MDRI. The disparity of treatment between the HIPC
countries and the non-HIPC countries became clear a few years
ago when the World Bank and the IMF conducted an examination of
debt sustainability in the poorest countries, the so-called
IDA-only countries. The primary objective of the exercise was
to determine which countries should receive their future IDA
financing either wholly or partially in the form of grants.
The conclusion was that 42 countries were at sufficiently
high risk of debt distress to be eligible for grant financing.
The list included 29 countries plus 18 other countries. This
meant that there were 18 non-HIPC countries rated as having a
risk of debt distress equal to or greater than the HIPC
countries. Like the HIPCs, they would get grants going forward,
but unlike the HIPCs, they would get no debt relief.
Since there is a 10-year grace period on the repayment of
IDA credits, the non-HIPCs would begin receiving the financial
benefit of grants rather than loans only after 10 years. In the
meantime, they would carry the full burden of existing debts
and be unable to free up resources badly needed to move toward
achieving human development and the Millennium Development
goals.
When the results of the debt sustainability analysis became
available, some of us argued that the HIPC and MDRI programs
should be expanded to include all countries qualifying for
grant financing. S. 2166, we are happy to note, would address
this concern by making IDA-only status the standard of
eligibility for debt cancellation. This standard would make
potentially eligible all non-HIPC countries that qualify for
IDA grants. It would also make eligible six large- or medium-
sized countries that are not considered by the IMF and World
Bank to be at high risk of debt distress.
The rationale for including the grant-eligible countries is
in my view quite strong. Whether or not one agrees with the
World Bank's definition of sustainable debt, the rationale for
including the additional six countries is also strong for
several reasons.
First and most important, the IDA-only standard means that
all potential beneficiaries are among the poorest countries in
the world and need to maximize their resources for promoting
development and poverty reduction. And as Ms. Birdsall said--I
have known her so long, I have a hard time calling her Ms.
Birdsall, but I will continue to do so for the purposes of this
hearing--it is a very efficient form of foreign assistance and
something that these countries could badly use.
Second, the IDA-only standard will assure equity of
treatment among all the poorest countries. The IMF addressed
this point in an issues paper prepared a few months before the
MDRI was approved. The IMF said, ``Regarding country coverage,
all low-income countries could potentially be made eligible.
Earmarking debt relief to HIPCs only is difficult to justify
because the HIPC initiative will have already sharply reduced
previous cross-country differences in debt indicators.'' So
they were, in effect, saying that a lot of the non-HIPCs were
in similar situations to the HIPC countries, and it did not
make sense, at least from an equity standpoint, to make this
distinction.
Third, making all IDA-only countries potentially eligible
addresses concerns about redistribution of aid, that is, that
an aid donor will finance the cost of giving debt cancellation
to poor country A by reducing the amount of aid it grants to
poor country B. Making all of the poorest countries eligible
for debt cancellation obviates this problem.
Fourth, there is a point made by Ms. Birdsall and John
Williamson in their book, ``Delivering on Debt Relief,'' where
they said, ``The danger of giving complete debt relief to a
limited group of countries is that the countries that built up
the deepest debt problems in the past are likely to include the
countries that were most prone to waste external resources. We
therefore believe that there is a strong case for making
virtually all low-income countries eligible for inclusion in
the HIPC initiative.''
The last point reminds me of the statement made by Lesotho
Finance Minister, Timothy Thahane, upon learning of the MDRI
debt cancellation agreement. He told Reuters that one of the
reasons Lesotho was not classified as a HIPC country was that
it had never defaulted on its debt. ``It is important,'' he
said, ``that those who have paid their debts well, who run
their mega-finances well, should be rewarded with debt
forgiveness.''
I was going to touch on some additional issues related to
additionality and arrearages, and perhaps there will be time to
do so during discussion.
But let me just conclude by making one point. It will be
very difficult for the United States to reach any kind of final
agreement on a financing framework for new debt cancellation if
it is not meeting existing commitments. Therefore, I very much
support the inclusion in S. 2166 of the kind of sense of
Congress provision included in the companion House bill that
calls for the United States to pay off the outstanding
arrearages to IDA and the regional banks. This is something
that needs to be done quickly so that this initiative can move
forward fully.
And finally, I would like to join the chorus of those who
say that debt relief is not a panacea. It is not at all. The
problem of the poor countries is too big. It is too
complicated. It is too deep-seated for debt relief to be
considered as such. All the debts of all the poor countries
could be canceled tomorrow and it would not end poverty. There
is just a huge, big additional agenda out there that has to be
met.
[The prepared statement of Mr. Flood follows:]
Prepared Statement of Gerald F. Flood, Counselor, Office of
International Justice and Peace, United States Conference of Catholic
Bishops, Washington, DC
Mr. Chairman, members of the committee, I would like to thank the
Committee on Foreign Relations for the opportunity to testify here
today. Debt relief for poor countries has been a high priority for the
United States Catholic Bishops Conference (USCCB) for many years.
In my testimony I will be focusing on a number of issues at a level
of technical detail which the bishops would not normally address, and
on which they, therefore, would not have a position. Thus I offer my
testimony primarily as a former development agency official who has
worked on debt and related issues with both the World Bank and the
United States Catholic Bishops' Conference (USCCB) over quite a few
years.
role of usccb
But first let me briefly mention the active role which the United
States Catholic Bishops Conference has played in poor country debt
relief. The bishops have issued two major statements on the issue, the
first as far back as 1989 and an updated version in 1999. In the mid-
1990s the USCCB intensified its work on debt, inspired particularly by
the words of the late, revered Pope John Paul II in his message on the
coming Millennium. He recalled the biblical tradition of the Jubilee
Year. It was a time to restore social justice and equity between
peoples, to give a fresh start to the poor. He called on all
Christians, in the spirit of the Book of Leviticus, ``to raise their
voice on behalf of all the poor of the world, proposing the jubilee as
an appropriate time to give thought, among other things, to reducing
substantially, if not canceling outright, the international debt which
seriously threatens the future of many nations.''
The USCCB and its relief and development agency, Catholic Relief
Services (CRS), played an active role, along with many other U.S.
faith-based organizations, in the worldwide Jubilee 2000 campaign.
Senators Biden and Lugar and quite a few other Senators provided strong
bipartisan leadership and support in urging the U.S. administration to
respond to the call of many poor countries around the world for relief
from the heavy burden of international debt.
For the USCCB and CRS, support for poor country debt relief is part
of a broader agenda that arises out of a conviction that the moral
measure of our efforts is how we respond to ``the least among us'' (Mt.
25), both at home and abroad, and whether we seek justice for all.
While debt relief and investments in development more generally are,
for USCCB and CRS, primarily matters of moral responsibility, we
believe that they contribute to a safer and more peaceful world and
thus, in an important way, to the peace and security of the United
States.
the enhanced hipc initiative
The Jubilee 2000 campaign led, in the latter part of 1999, to the
adoption by the major creditor nations and international financial
institutions of a new debt relief program called the Enhanced Heavily-
Indebted Poor Countries (HIPC) Initiative. It represented a major
advance over the original HIPC program, promising much more debt
relief, more rapidly, to many more countries. Also, the Enhanced HIPC
program incorporated a new framework for the provision of debt relief
and other external assistance to HIPC countries. This new approach,
called the Poverty Reduction Strategy Process (PRSP), contained
elements that Catholic Relief Services, the bishops conference and many
other nongovernmental organizations had long advocated. The PRSP was
intended to strengthen the poverty focus of development programs and to
promote country ownership, transparency and civil society participation
in their design and implementation. A major objective of these
provisions, from our perspective, was to ensure participation of groups
who could give voice to the needs of the poor, and who could help
assure that the benefits of debt relief would reach the poor.
hipc debt relief was uneven and not deep enough to give a ``fresh
start'' to poor countries
As implementation of the enhanced HIPC program progressed, some of
us noted that while substantial debt reduction was being committed to
about two dozen very poor countries, the amount of relief was uneven
across these countries. Under the HIPC formula, the amount of the
relief is determined, in most cases, by what is needed to bring the
ratio of debt to exports down to a certain level. To us, what was most
important, however, was the relation between debt service and
government revenues. We wanted to know how much government revenue
would be freed up for expenditures in education, health, clean water,
rural roads and other investments that would create opportunities for
the millions living on less than $2 a day to break out of the cycle of
poverty and begin to achieve their human potential.
Unfortunately, what we found was a wide variance in the amount of
debt service reduction being granted. For one or two countries, the
debt service obligation was being brought down to around 5 percent of
government revenues. For most of the remaining countries, however, this
ratio was substantially higher and in several cases remained above 20
percent. This was disappointing news as, for us, what was important was
to achieve the Jubilee objective of debt relief deep enough to give a
``fresh start'' to the poor. Moreover, the results seemed inconsistent
with the communique issued by the G-8 leaders at the 1999 summit in
Cologne, Germany. In announcing the new program, they succinctly
stated: ``The central objective of this initiative is to provide a
greater focus on poverty reduction by releasing resources for
investment in health, education, and social needs.''
Subsequently, with Senator Biden and other members of this
committee taking a lead role, the Congress incorporated into the Global
Health Act of 2003 major new provisions that authorized and encouraged
the administration to work to strengthen the HIPC program by tying the
amount of the debt relief to the ratio between debt service to revenues
and bringing that ratio down to a low level. Unfortunately, the
administration did not implement these provisions.
the mdri
By 2004, there was a growing consensus among the United States, the
United Kingdom and other major creditor nations that the HIPC program
was not providing debt relief deep enough to assure that HIPC countries
would not soon return to a situation of ``unsustainable external
debt.'' The U.S. Treasury referred to a never-ending ``lend and
forgive'' cycle whereby institutions such as IDA would make loans to
poor countries and then have to make new loans so that the country
would have enough funds to repay the previous loans. These concerns led
to the adoption by the international community in 2005 of a new
Multilateral Debt Relief Initiative (MDRI).
The essence of the MDRI is to provide qualifying HIPC countries
with full cancellation of debts owed to the World Bank's International
Development Association (IDA), the International Monetary Fund (IMF)
and the African Development Fund (AFDF). The cancellation occurs once a
country has reached its ``completion point'' under the HIPC program,
that is, that it has fulfilled conditions related to economic
management and progress under the country's poverty reduction strategy.
So far 23 countries have received MDRI debt cancellation, with another
17 countries potentially able to benefit from it.
A notable omission from the MDRI agreement was the substantial debt
owed by the five lowest income Latin American and Caribbean countries
to the Inter-American Development Bank (IDB). This omission was
rectified in 2007 when the IDB agreed to give MDRI treatment to its
HIPC borrowers. Since four of these countries had reached their HIPC
completion points, they received immediate debt cancellation. The fifth
country, Haiti, is expected to reach its completion point this year,
hopefully within the next few months. Together with earlier agreements
to cancel most bilateral debts, including 100 percent of debts owed to
the United States, these new agreements are providing the kind of deep
debt relief the Catholic Church has advocated for poor countries.
We were particularly pleased with the leadership of the Bush
administration in bringing about the MDRI and in encouraging the IDB to
give similar debt cancellation to the Latin American and Caribbean HIPC
countries.
what have debt relief programs accomplished?
Twenty-three countries have reached the completion point, and thus
have benefited from 100 percent cancellation of qualifying debts. These
include Benin, Bolivia, Burkina Faso, Cameroon, Ethiopia, Gambia,
Ghana, Guyana, Honduras, Madagascar, Malawi, Mali, Mauritania,
Mozambique, Nicaragua, Niger, Rwanda, Sao Tome and Principe, Senegal,
Sierra Leone, Tanzania, Uganda, and Zambia. An additional 10 HIPC
countries have reached their ``decision point,'' which has enabled them
to begin receiving debt service relief. These countries are
Afghanistan, Burundi, the Central African Republic, Chad, the
Democratic Republic of the Congo, the Republic of Congo, Guinea,
Guinea-Bissau, Haiti, and Liberia. Seven more countries remain
potentially eligible for HIPC and MDRI relief: Comoros, Cote d'Ivoire,
Eritrea, Nepal, Somalia, Sudan, and Togo.
How much debt has been cancelled to date? According to the most
recent updates from the IMF and World Bank, debt relief under the HIPC
Initiative and the MDRI has reduced the debt stock of the 23 completion
point HIPCs by a total of over $70 billion, in net present-value terms,
and when the additional 10 post-decision point countries reach their
completion point, which is expected over the next 2 years, the total
debt stock reduction should reach approximately $100 billion (NPV).
In 2007, annual debt service savings from the MDRI for the 22 post-
completion point counties were expected to be $1.3 billion, equivalent
on average to 1 percent of these countries' GDP. And we are talking
about savings on long-term debt, which means that similar amounts of
savings will be realized every year for many years into the future.
Moreover, the evidence is strong that the savings are being used to
fight poverty. Total poverty-reducing expenditures in countries that
have received debt relief have increased from $5.8 billion in 2000 to
an estimated $17 billion in 2006, or from 7-9 percent of GDP, on
average. This is actually much more than the debt relief savings, and
the question arises whether, and to what extent, this increase--beyond
what would have been possible from debt relief alone--is attributable
to the fact that all countries receiving MDRI debt cancellation are
implementing Poverty Reduction Strategies (PRSP).
As I mentioned earlier, the PRSP was established as part of the
1999 framework for the provision of HIPC debt relief. There have been
criticisms of the PRSP, including that they reflect more the priorities
of the international financial institutions rather than the countries,
i.e., that they are not sufficiently ``country owned.'' While I have
not seen an evaluation of the impact of the PRSP on expenditure
patterns, the fact remains that the World Bank data shows a very large
increase in poverty reducing expenditures in the HIPC countries. Citing
2005 World Bank research, the nongovernmental organization DATA (Debt,
AIDS, Trade, Africa) found that for every dollar freed up from debt
service, African governments have increased social spending by $2.
In 2006, The World Bank's Independent Evaluation Group did an
update of an earlier evaluation of the HIPC program. It took a closer
look at public expenditure patterns in countries benefiting from the
HIPC program. It found that the majority of funds were allocated to
expanding service delivery in the social sectors, and much less to
investments to remove bottlenecks in economic or productive sectors.
More specifically, based on data from five countries, it found that
governments were increasing their expenditures for education, both as a
share of total expenditures and as a share of GDP, but that spending
for health, agriculture, and transportation had shown little change.
Improving the quantity and quality of education is, of course,
critical for poverty reduction, and the focus on education should not
in any way be denigrated. Nevertheless, as more debt relief savings
have become available in the past few years, both by more countries
fulfilling the conditions for HIPC debt relief and by the
implementation of the MDRI program beginning in 2006, it becomes
particularly important to increase expenditures for the productive
sectors and other social sectors, such as health. It is thus
encouraging that countries are using the savings generated by the MDRI
program in 2006 for a more diversified range of poverty reduction
activities. For example, according to the World Bank as supplemented by
on-the-ground information provided by the Jubilee USA Network,
Ghana is using the $57.9 million in 2006 savings in the
energy and water sectors, for the rehabilitation of essential
major highways and feeder roads in the main agricultural areas,
as well as in education, health, and development of information
and communication technology;
Cameroon is using its savings of $29.8 million for
infrastructure, social sector and governance reforms;
Mali is using its $27 million in 2006 savings for water
supply and roads;
Uganda is using its $57.9 million on improving energy
infrastructure to ease acute electricity shortages, as well as
primary education, malaria control, health care and water
infrastructure (specifically targeting the poor and underserved
villages); and
Zambia is using its savings of $23.8 million to increase
spending on agricultural projects, such as smallholder
irrigation and livestock disease control, as well as to
eliminate fees for health care in rural areas.
But looking at the impact of debt relief programs at the ``macro''
level does not tell the whole story. There are examples of the use of
debt relief savings at the local level, which, while they may not be
reflected in national statistics, are improving the lives of thousands
of poor people. Let me give you just one example from the experience of
Catholic Relief Services.
a hipc success story
Catholic Relief Services has been active for many years in
Cameroon. Working closely with the local Catholic Church, it has
financed health, education, and community development projects in
various parts of the country. In recent years it had not partnered with
the government in any of its projects. Then came the HIPC program. When
Cameroon qualified for HIPC debt relief a few years ago, a HIPC funding
committee was set up consisting of government, civil society, church
and donor representatives, with observers from the World Bank, IMF, and
the African Development Bank. The committee's job is to assure that the
funds generated by HIPC debt relief are used to carry out the country's
poverty reduction strategy (PRSP). It approves the allocation of HIPC
funds to specific projects and monitors their implementation.
CRS and other development agencies operating in Cameroon have long
viewed community forestry as an important grassroots participatory
strategy for fighting poverty. Uncontrolled exploitation of forestry
resources by logging companies has been a longstanding problem in
Cameroon. A 1994 law allows villages in and around large forest
concessions to obtain authorization from the government for the
sustainable management of forest resources for community benefit. Yet
by 2003, very few community forestry projects had been approved. It was
at this time that CRS developed and presented to the HIPC Committee a
forestry project that would operate within a Catholic diocese that
abounds in forestry resources. The project would mobilize 25 rural
communities to manage their forests in a profitable and environmentally
sustainable manner. Moreover, a portion of tax revenues owed by logging
companies would be collected by the communities and reinvested in
community development projects.
The HIPC Committee was convinced of the technical merits of the CRS
project and, in spite of opposition from the Minister of Forestry,
approved it and arranged for project funds to be released directly from
the Ministry of Finance to the project managers. This was an important
breakthrough in the country, and CRS and a broad group of allies are
now well-placed to lead the effort to expand community forestry
projects throughout Cameroon.
the role of civil society
There are other examples of organizational arrangements designed to
assure that debt relief funds reach the poor. In Uganda, resources
freed up by debt relief are channeled through the Poverty Action Fund,
which is overseen by representatives from government, national NGOs,
churches, unions and international organizations. In Nigeria, the new
Virtual Poverty Fund plays a similar role. These models can and should
be replicated in other nations. I agree with Neil Watkins, National
Coordinator of the Jubilee USA Network, that Parliamentarians and civil
society organizations, particular those local organizations that give
voice to the needs of the poor, have an important role to play in
assuring accountability from national governments regarding the use of
funds released by debt relief, as well as government expenditures more
broadly.
While in Zambia recently, Neil saw firsthand the powerful role
played by civil society groups such as Civil Society for Poverty
Reduction, Jubilee Zambia, and others in pressuring the government to
be more transparent and accountable for use of aid, debt relief, and
new borrowing. Civil society is working in partnership with reform-
minded Parliamentarians in Zambia to put forward an agenda to make the
budgeting process more transparent and participatory and to involve
civil society in monitoring the implementation of poverty reduction
programs financed by the national budget. These efforts and others like
them should be embraced and promoted by all those who advocate debt
cancellation and responsible lending and borrowing.
s. 2166's debt cancellation would fill an important gap in the hipc and
mdri programs
I would like now to turn to the rationale for the debt cancellation
called for by the Jubilee Act for Responsible Lending and Expanded Debt
Cancellation (S. 2166). It is clear that the debt reduction that has
been granted to poor countries through successive debt relief
initiatives represents a major accomplishment within the overall effort
to address global poverty. However, we believe there is more to be
done. There are a substantial number of poor countries that have not
benefited from the HIPC program, let alone the MDRI. The disparity of
treatment between HIPC poor countries and non-HIPC poor countries
became clear in 2004 when the World Bank and IMF conducted an
examination of ``debt sustainability'' in countries that, because of
very low per capita incomes or other special circumstances, are
eligible to receive only IDA funds from the World Bank. These are the
so-called IDA-only countries. A primary objective of the exercise was
to determine which countries should receive their future IDA financing
either wholly or partially in the form of grants.
As a result of the debt sustainability analysis (DSA), it was
concluded that that 47 countries were at sufficiently high risk of debt
distress to be eligible for grant financing. The list included 29 HIPC
countries plus 18 other countries. This meant that there were 18 non-
HIPC countries rated as having a risk of debt distress equal to, or
greater than, the HIPC countries. Like the HIPC's, they would get
grants going forward, but unlike the HIPC's they would get no debt
relief. Because of the 10-year grace period on the repayment of IDA
credits, the non-HIPCs would begin receiving the financial benefit of
grants (rather than loans) only after 10 years. In the meantime they
would carry the full burden of existing debts and be unable to free up
resources badly needed to move them toward achieving the Millennium
Development Goal of reducing extreme poverty in half by 2015.
When the results of the DSA became available, some of us argued
that the HIPC and MDRI programs should be expanded to include all
countries qualifying for grant financing. Objections were raised in
some quarters that making additional countries eligible for debt
cancellation on the basis of their level of debt distress would create
moral hazard problems, i.e., encourage countries to borrow more so that
they would qualify. S. 2166 would address this concern by making ``IDA-
only'' status the standard of eligibility for debt cancellation. Almost
all IDA-only countries have per capita incomes below the historical
standard for IDA eligibility, which is currently $1,065. (IDA-only
countries above this limit are primarily small island economies.)
The IDA-only standard captures all non-HIPC countries eligible for
IDA grants. These currently include Lesotho, Djibouti, Angola, Kyrgyz
Rep., Tajikistan, Mongolia, Cambodia, Samoa, Solomon Islands, Tonga,
and Yemen. (It also includes Myanmar, which is not eligible for U.S.
assistance.) The IDA-only standard would also bring in some countries
with external debt that is considered ``sustainable'' by the World
Bank. Excluding several highly vulnerable small island economies, there
are six such countries (Bangladesh, Georgia, Kenya, Moldova, Nigeria,
and Vietnam). Of the six, all but two (Moldova and Georgia) have per
capita incomes lower than $2 a day. Of course, debt cancellation will
only occur if countries apply for it, and I believe there is a strong
likelihood that at least Vietnam will not apply. The government is in
the process of gaining access to international capital markets and is
not likely to want to send a signal that it needs debt relief.
The rationale for including the grant eligible countries is, in my
view, quite strong. Whether not one agrees with the World Bank's
definition of ``sustainable'' debt, the rationale for including the six
I just mentioned is also strong for a number of reasons:
First, and most important, the IDA-only standard means that
all potential beneficiaries of the debt cancellation provisions
of S. 2166 are countries that have high levels of poverty and
thus need to maximize the amount of resources they can marshal
to promote human development, raise the living standards of
their people and achieve the Millennium Development Goal of
cutting extreme poverty and hunger in half by 2015.
Second, the IDA-only standard will assure equity of
treatment among all the poorest countries. The International
Monetary Fund (IMF) addressed this point in an issues paper
prepared a few months before the MDRI was approved at the
Gleneagles summit in 2005. In commenting on eligibility
criteria for new debt relief, the IMF said: ``Regarding country
coverage, all low-income countries could potentially be made
eligible. (Emphasis added.) A main argument was: ``Earmarking
debt relief to HIPCS only, is difficult to justify, because the
HIPC Initiative will have already sharply reduced previous
cross-country differences in debt indicators.''
Third, making all IDA-only countries eligible addresses
concerns about redistributing aid resources away from poor
countries that are not eligible for debt relief. The concern is
that an aid donor will finance the cost of giving debt
cancellation to poor country A by reducing the amount of aid it
grants to poor country B. Making all of the poorest countries
eligible for debt cancellation obviates this problem.
Fourth, there is the point made in ``Delivering on Debt
Relief,'' by Nancy Birdsall and John Williamson (2002): ``The
danger of giving complete debt relief to a limited group of
countries is that the countries that built up the deepest debt
problems in the past are likely to include the countries that
were most prone to waste external resources. We therefore
believe that there is a strong case for making virtually all
low-income countries eligible for inclusion in the HIPC
Initiative.''
This last point reminds me of the statement made by Lesotho Finance
Minister Timothy Thahane upon learning of the MDRI debt cancellation
agreement. He told Reuters that one of the reasons Lesotho was not
classified as a HIPC country was that it had never defaulted on its
debt. ``It is important,'' he said, ``that those who have paid their
debts well, who run their mega-finances well, should be rewarded with
debt forgiveness.''
The companion bill to S. 2166 in the House is H.R. 2634. When this
bill was introduced in the House a year ago, Bishop Thomas Wenski,
chairman of the Committee on International Policy of the USCCB wrote
Representavies Waters and Bachus to express support. He said that
despite important progress in debt reduction, ``a substantial number of
needy countries are not eligible for the existing debt relief
initiatives. H.R. 2634 represents a major new step toward correcting
this deficiency and making debt cancellation a reality for virtually
all very poor countries that have participatory processes and financial
management systems sufficient to assure that debt cancellation savings
will be used to benefit the poor. We look forward to working with you
and your congressional colleagues to help complete the unfinished
business of poor country debt relief.'' As you know, H.R. 2634 passed
the House last week with strong bipartisan support, and we were very
pleased that this happened during the very days when our Holy Father,
Pope Benedict XVI, was visiting our Nation's capital.
I'd like to touch on several other issues.
additionality
One objective of USCCB advocacy for debt relief has always been to
assure that the debt relief received by a poor country frees up
additional resources for combating poverty. In other words, we did not
want donors to reduce other aid to that country in order to offset the
loss resulting from debt cancellation (nor, as discussed above, did we
want the loss offset by reduced aid to other poor countries.) We were,
therefore, pleased to note the finding on this issue by the Independent
Evaluation Group (IEG) of the World Bank in its 2006 HIPC update. It
said that, with respect to the 28 countries that had reached their
decision point, HIPC debt relief ``appears to have been significantly
additional to other net resource transfers.'' Between 1999 and 2004,
net annual transfers attributable to debt relief increased by $4
billion, while other net annual aid transfers increased by $4.5
billion.
arrearages to ida
My understanding is that the U.S. has outstanding arrearages to IDA
and regional development banks of almost $600 million. It will clearly
hamper the administration's effort to carry out the mandate of S. 2166
if these arrears are not cleared up quickly. S. 2166 calls for the cost
of the bill's proposed multilateral debt cancellation to be financed,
to the extent possible, by the multilateral institutions themselves. We
believe that substantial resource should be available for this purpose
particularly from the IMF (gold sales) and the World Bank (which has
accumulated reserves sufficient to bring its equity-to-loans ratio well
above the range its management considers necessary for long-term
capital adequacy).
Moreover, we estimate that probably 8 to 9 countries of about 24
potentially eligible countries currently meet the financial management
conditions for receiving the debt cancellation called for in the bill.
(The nine are Lesotho, Kenya, Cape Verde, Mongolia, Moldova, Georgia,
Samoa, Vanuatu, and, if it participates, Vietnam). Thus the need for
financing to cover the cost of the debt cancellation is likely to be
spread out over a number of years. Nevertheless, I expect that
significant funding will be still required over time from the U.S. and
other governments of the richer countries to finance multilateral debt
cancellation. It will be very difficult for the U.S. to negotiate an
agreed financing framework for new debt cancellation if it is not
meeting existing commitments. I, therefore, very much support the
inclusion in S. 2166 of the kind of ``sense of Congress'' provision
included in the House bill (H.R. 2634) that calls for the U.S. to pay
off the outstanding arrearages to IDA and the regional banks.
debt relief is part of a broader agenda
A final point that is important to emphasize is that while new
debt cancellation would be a major achievement, debt relief is in no
way a panacea. Even if the debt of poor countries were reduced to zero
tomorrow, it would not end poverty. The problem is much too large,
complex, and deep-seated for that. It must be addressed first and
foremost by the countries themselves, with their governments and people
working together on a variety of fronts for the common good. But their
resources are not sufficient for them to do it alone. They need aid and
just policies from the wealthier countries.
Senator Casey. Thank you very much.
Dr. Henry.
STATEMENT OF DR. PETER B. HENRY, KONOSUKE MATSUSHITA PROFESSOR
OF INTERNATIONAL ECONOMICS AND GUNN FACULTY SCHOLAR, GRADUATE
SCHOOL OF BUSINESS, STANFORD UNIVERSITY, STANFORD, CA
Dr. Henry. Good afternoon, Senator Casey. Thank you for the
opportunity to discuss the implications of my research for the
Jubilee Act.
Let me preface my remarks by saying that I am deeply
sympathetic to the sentiment of this bill and to the debt
relief movement in general. I am originally from a developing
country, not a low-income developing country. I am from
Jamaica, but even though Jamaica is a middle-income developing
country, there is no shortage of poverty in Jamaica. So the
issues that this bill raises are deeply important to me.
Let me also mention, just for the record, I am a card-
carrying Episcopalian and the Episcopal Church cares a lot
about these issues. I am not speaking for Episcopal Church here
today, but I just want to echo the fact that I am deeply
sympathetic to these issues.
But I do have some questions about whether this bill and
whether the debt relief movement in general is going about
addressing the problems of poor countries in the most efficient
way.
Since there is not enough time to talk about all aspects of
the bill, my comments will focus on the areas where I can add
the most value. Specifically, I want to address the issues of
grants versus loans and the efficacy of debt relief.
When my colleague, John Taylor, was Under Secretary for
International Affairs at the Treasury from 2001 to 2005, he
argued that instead of lending to poor countries, the
multilateral financial institutions should give grants instead.
This is a good idea and I am glad to see it emphasized in
section 1626(c)(3) of the bill under consideration.
Poor countries are poor in part because they require large
investments in public goods such as schools, roads, hospitals,
and clean water. Prudent investments of this nature can
generate a high rate of return to society in the long run by
laying the foundation for future economic growth. But they are
not likely to produce the short- to medium-run revenues needed
to service loans. Therefore, using grants instead of loans to
pay for public investments in low-income countries makes a lot
of sense.
Of course, the track record of foreign aid programs to date
does not inspire confidence that grants can be conditioned and
monitored to achieve their intended goals. This does not mean
that we should not try. Past failures and current research
provide important clues about how to design more effective and
realistic aid endeavors. The Millennium Challenge Corporation
provides an example of one such work in progress, and I would
emphasize work in progress.
The realization that poor countries need large infusions of
financial resources to upgrade their social and economic
infrastructure leads many to advocate for debt relief as a way
of doing that. Keeping in mind the caveat that aid is not a
cure-all and that we need to improve the efficiency with which
we deliver aid, I turn now to the question of whether debt
relief initiatives provide an efficient way of trying to
address the social infrastructure problems of poor countries.
The bill under consideration essentially proposes to extend
the reach of the G-8 Multilateral Debt Relief Initiative, MDRI.
MDRI is itself an extension and deepening of the Highly
Indebted Poor Countries Initiative, HIPC. Accordingly, I will
use my previous analyses of HIPC and MDRI as the basis of my
comments about the implications of debt relief for the efficacy
of S. 2166.
If you believe that increased financial flows are an
important part of the solution to the problems of poor
countries, then a fundamental problem with MDRI and debt relief
initiatives in general is that the amount of money at stake is
trivial. The roughly $2 billion of annual debt payments
forgiven under MDRI equals 0.01 percent of the gross domestic
product of the OECD countries. Replacing the funds that would
have been received by the multilateral development banks costs
1 penny for every $100--not 1 penny per dollar; 1 penny for
every $100--of OECD gross domestic product.
Put another way, the reduction in annual debt servicing
under MDRI is a mere one-seventieth--one-seventieth--of the
quantity of official development assistance agreed to by world
leaders on at least three separate occasions, dating all the
way back to 1970.
For the United States alone, honoring this pledge would
provide roughly $70 billion per year, 35 to 70 times the
quantity of debt forgiven under MDRI. Currently the actual U.S.
aid contribution is closer to 0.1 percent of GDP per year than
the 0.7 percent that the G-8 countries have pledged to provide
time and again, including agreeing to reach those levels by
2010.
One could argue that if the G-8 is unwilling to live up to
its aid goals, then debt relief provides a smaller but still
positive boost in resource flows to developing countries. For
example, if poor countries receive $3 billion per year in aid
and pay $2 billion in debt service, then they receive a net
financial inflow of $1 billion. The general public thinks that
by writing off the debt service of $2 billion, net financial
flows to poor countries would rise to $3 billion. This is not
the way debt relief works in practice. Debt relief is not free.
When one of the multilaterals, say, the International
Development Association arm of the World Bank, writes off debt,
like any other bank, its capital base shrinks. Without new
capital, it has less money to distribute. To continue with the
example, when debt service falls by $2 billion, aid drops by
roughly the same amount. There is no increase in the net flow
of resources to poor countries.
Turning from textbook examples to real life, the record
shows that increased debt relief results in less foreign aid.
The sum of new lending and grants to the heavily indebted poor
countries increased steadily from 1970 to the mid-1990s, but
starting with the onset of the HIPC initiative in 1996, aid as
a fraction of GDP decreased. Prior to 1996, aid amounted to
roughly 13.7 percent of GDP in the highly indebted poor
countries. Since 1996, that figure has dropped to somewhere
between 9.9 and 11.1 percent. Those numbers are as of 2003.
Now, section 1626(a)(5) of bill S. 2166 calls for the
Secretary of the Treasury to ensure that the provision of debt
cancellation is not simply offset by a decrease in development
assistance. I applaud this language, but if history is a
reasonable predictor of future actions, the words simply may
not translate into reality.
As we craft policies directed at low-income countries, we
must ask whether we are interested in symbolic gestures of
noblesse oblige or substantive efforts to help poor countries
help themselves. Forgiving debt does not address the
fundamental problem of inadequate economic institutions that
impedes investment and growth in the world's poorest countries.
To the extent that additional resources are part of the
solution, the assistance provided by the indirect approach of
debt relief pales in comparison to the size of unfulfilled aid
promises. One of the central development issues of our day is
whether the high-income countries of the world will stand ready
to help with real money when the low-income countries show that
they are ready to put the resources to good use. The danger is
that debt relief may amount to a Pyrrhic victory, a symbolic
win for advocates of debt relief that clears the conscience of
the rich countries but leaves the real problems of the poor
countries unaddressed.
Thank you.
[The prepared statement of Dr. Henry follows:]
Prepared Statement of Dr. Peter Blair Henry, Konosuke Matsushita
Professor of International Economics, Stanford University Graduate
School of Business, Stanford, CA
Good afternoon Chairman Biden, Ranking Member Lugar, Presiding
Member Casey, and distinguished members of the committee. My name is
Peter Blair Henry. I am the Konosuke Matsushita Professor of
International Economics at the Stanford University Graduate School of
Business, a research associate of the National Bureau of Economic
Research, and a nonresident senior fellow of the Brookings Institution.
I have published a number of research articles on the topic of debt
relief. Thank you for the opportunity to discuss the implications of
this research for the Jubilee Act under consideration by this body (S.
2166).
The bill under consideration essentially proposes to extend the
reach of the G-8 Multilateral Debt Relief Initiative (MDRI). The
proximate impetus for MDRI was the Gleneagles summit in July 2005,
where the G-8 heads of state called on the International Monetary Fund
(IMF), the World Bank, and the African Development Bank to forgive the
roughly $55 billion owed to them by the world's poorest nations. MDRI
itself is an extension and deepening of the Highly Indebted Poor
Countries Initiative (HIPC), so I will use my previous analyses of HIPC
as the basis of my comments about the implications of debt relief for
the efficacy of S. 2166.
Debt relief is not free. Like any other policy intervention it
entails costs--political capital to garner support and financial
capital to pay for the writeoff. So the fundamental question is whether
the potential benefits are greater. Over a decade ago, debt relief
helped to restore investment and growth in a number of middle-income
developing countries that arguably suffered from debt overhang. But
debt relief is unlikely to help the world's poorest countries because
they suffer not from debt overhang but from an absence of the economic
institutions that provide the foundation for profitable investment and
growth.
the hipc initiative tries to raise growth and reduce poverty by
relieving debt
In 1996 the World Bank and the International Monetary Fund (IMF)
launched the Heavily Indebted Poor Countries (HIPC) initiative in order
to ``provide a framework for all creditors, including multilateral
creditors to provide debt relief to the world's poorest and most
heavily indebted countries, and thereby reduce the constraint on
economic growth and poverty reduction'' (World Bank, 2004). The
original HIPC initiative specified that in order to obtain debt relief
a country must have: (1) A GNP per capita of $695 or less and (2) a
debt burden deemed to be ``unsustainable'' even after the full use of
traditional debt-relief mechanisms under the Paris Club. Unsustainable
means a ratio of the net present value (NPV) of debt to exports in
excess of a country-specific threshold of 200 to 250 percent, or, for
very open economies, a NPV of debt exceeding 280 percent of government
revenue.\1\ In 1996, 41 countries met these criteria (see the appendix
for a list).
---------------------------------------------------------------------------
\1\ See Rieffel (2003) for a detailed discussion of Paris Club
logistics.
---------------------------------------------------------------------------
After qualifying for debt relief, the eligible countries needed to
produce a track record of reform for 3 years in order to reach a
``decision point.'' At the decision point, the creditors arranged a
debt relief package, given an adequate track record of reform. After no
more than three additional years of proven policy implementation,
countries reached their ``completion point'' and debt relief
transpired.
the enhanced hipc initiative
Under the original framework, only six countries reached their
completion points, and a consensus emerged that the process needed to
move more quickly. Consequently, the G-7 introduced the enhanced HIPC
initiative at its fall 1999 meeting in Cologne, Germany. The enhanced
initiative reduced the ratios that qualified a country's debt burden as
unsustainable to 150 percent for net-exports and 250 percent for
government revenue. The second initiative also made it easier for
countries to reach a decision point, allowed them to begin receiving
debt relief as soon as they did so, and provided greater relief. Under
the enhanced HIPC initiative, 16 additional countries began receiving
debt relief in 2000, and 4 more joined this group in January 2003.
The HIPC Initiatives Show No Signs of Increasing Growth Or Reducing
Poverty
To assess the impact of the HIPC initiatives to date, consider
first the countries that reached their decision points and began
receiving debt relief in the year 2000. Panel A of Table 1 shows that
from 1990-95 the GDP per capita of this subset of HIPCs grew at
negative 0.5 percent per year. From 1996--the year in which HIPC was
initiated--through 2000 their growth rate was 1.5 percent (the poverty
indicators show a similar pattern). At a glance, the 2-percentage-point
increase seems to suggest faster growth stemming from debt relief, but
more careful consideration produces at least three pieces of evidence
to the contrary.
First, Panel B of Table 1 shows that the growth rate of the entire
set of HIPCs from 1996 to 2000 was 2.4 percentage points higher than it
was from 1990 to 1995. This means that the change in the growth rate of
those HIPCs still waiting to receive debt relief (as of 2000) has been
almost identical to those with debt burdens already reduced. Second,
since the actual receipt of debt relief, as opposed to the qualifying
process, did not begin until 2000, it is not clear that debt relief
drove the increase in growth. Third, and related to the second point,
since growth increased before the implementation of debt relief, the
reforms required as a precondition may be the principal cause of the
increase in growth for both sets of HIPCs. These three points
notwithstanding, many argue that more generous debt relief delivered
with greater dispatch would yield better results.
the gleneagles declaration promises complete debt relief
In contrast to the piecemeal approaches of the two previous
initiatives, the Gleneagles declaration promises forgiveness of all the
debt. For the HIPCs, the critical number is not so much the stock of
debt being forgiven--$55 billion--but the reduction in debt service,
which is somewhere between $1 and $2 billion per year. To get a better
sense of the economic significance of the numbers at stake, it is
helpful to introduce the concept of the annual net resource transfer
(NRT). The NRT of a country is simply its annual net inflow of capital:
Gross capital inflows minus gross capital outflows. Because most
capital flows to the HIPCs take the form of either grants (also
referred to as aid) or new lending, we can write their NRT as follows:
Net Resource Transfer = New Lending + Grants - Debt Servicing (1).
Table 2 highlights three central facts about the impact of the
Gleneagles debt relief proposal on the net resource transfers to
heavily indebted poor nations. First, the quantity of money at stake
for the developed nations of the world is trivial. The $2 billion of
annual debt payments is equal to roughly 0.01 percent of the GDP of the
OECD countries. Replacing the funds that would have been received by
the multilateral development banks would cost about 1 cent for every
$100 of OECD GDP--not exactly a budget-busting expense.
Second, contrary to popular belief, debt service does not cause a
net drain of resources from the group of 38 heavily indebted poor
countries. Although capital outflows in the form of debt service amount
to a nontrivial fraction of the GDP of the heavily indebted poor
countries--roughly 3 percent between 2000 and 2005--their gross inflow
of capital over the same period of time was much larger--roughly 15
percent of GDP. In other words, despite their debt servicing
obligations, the heavily indebted poor countries receive more capital
than they pay out to their creditors.
Third, for the past 30 years rich country governments have made no
significant increase in the net quantity of resources that they
transfer to the heavily indebted poor countries. Given this third fact,
it follows from equation (1) that debt relief cannot have a major
impact on the overall magnitude of net resource flows. Debt relief
reduces debt servicing, but instead of the net resource transfer rising
when this occurs, grants or new loans tend to fall. In other words,
debt relief in the past has been given instead of, not in addition to,
foreign aid. The sum of new lending and grants to the heavily indebted
poor countries increased continually from 1970 to the mid-1990s. But
starting with the onset of the HIPC initiative in 1996, aid flows
(i.e., grants) as a fraction of GDP decreased. Prior to 1996, aid flows
amounted to roughly 13.7 percent of GDP in the heavily indebted poor
countries. Since 1996 that figure has dropped to between 9.9 and 11.1
percent. Together, the fall in aid flows and the postponed reduction in
debt service has been associated with a decline in the HIPCs' net
resource transfers (although they are still positive).
Since its impact on the NRT is minimal, debt relief cannot propel
the HIPCs toward sustained growth and poverty reduction unless it
produces benefits not captured by the numbers in Table 2. The
likelihood of such a possibility is the topic of the next section.
debt relief promotes investment and growth when countries have debt
overhang
Debt relief promotes investment and growth when debt overhang
inhibits a country's economic performance. ``A country has a debt
overhang problem when the expected present value of potential future
resource transfers is less than its debt'' (Krugman, 1988). In other
words, a country suffers from debt overhang if it owes more money to
its creditors than it is able to pay.
Debt overhang arises when a country accumulates too much debt, but
it can also occur when a previously manageable stock of debt becomes
intractable due to a change in a country's circumstances. When a
country not suffering from debt overhang experiences a bad shock (e.g.,
a fall in its terms of trade) or bad policy (e.g., poor economic
management), the expected present value of its future resource
transfers will fall. For a given stock of debt at the time of the
shock, if the fall in expected value is large enough, the country will
find itself in a position of debt overhang. The country will also be
unable to attract new creditors, because lending to it would, by
definition of debt overhang, result in a stream of expected repayments
whose present value is less than that of the loan.\2\
---------------------------------------------------------------------------
\2\ Existing creditors, on the other hand, have an incentive to
continue lending in an effort to preserve the value of their initial
loan (Krugman, 1988).
---------------------------------------------------------------------------
Importantly, a country suffering from debt overhang will also
invest less than it would in the absence of an overhang and
consequently may forgo efficient (i.e., positive net present value)
projects (Sachs, 1984). Underinvestment occurs because the stock of
debt acts as an implicit tax. A country's government raises the
resources it needs to service its debt by taxing firms and households.
An increase in the government's debt increases the private sector's
expected future tax burden. Because higher taxes divert the benefits of
new investment from the private sector to the existing debt holders,
they also reduce the private sector's incentive to invest. In summary,
a country suffering from debt overhang is unable to service its debt,
obtain new loans, and invest as much as it should.
Krugman (1989) and Sachs (1989) point to a way out of this
inefficient equilibrium. By extending the analogy between debt and
taxes to a Laffer-Curve analysis, they show that both borrower and
lenders can gain from debt relief. The logic runs as follows. At
reasonable levels, the market value of the debt rises one-for-one with
its face value. As the face value of the debt increases beyond a
critical threshold, however, debt overhang ensues. The market value of
the debt begins to fall--even as the face value continues to rise--and
physical investment slumps along with the country's expected future
growth rate. Consequently, if the creditors reduce the face value of
the debt, the market value of the debt will rise. Debt relief also
makes the borrower better off, because eliminating the debt overhang
reduces the implicit tax on investment and reinstates the incentive
for: (1) The country to undertake efficient investments and (2) for new
lenders to extend credit.
But debt relief will not happen without coordination, because any
individual creditor would prefer to maintain the full value of its
claims while others write off some debt (Sachs, 1989). By forcing all
creditors to accept some losses, a third-party-coordinated debt relief
program has the potential to solve this problem and pave the way for
profitable new lending, investment, and growth (Cline, 1995).
debt relief helped restore investment and growth in the brady countries
The theory of debt overhang and efficient debt relief captures the
experience of the middle-income developing countries hit by the debt
crisis in the 1980s. During the international commercial bank lending
boom from 1970 to 1981, the net resource transfer to these countries
was strictly positive. Starting in 1982, however, rising interest
rates, a global recession, and poor economic policy choices
substantially reduced the expected value of the banks' loan portfolios
in the debtor countries. As their current and future economic prospects
dimmed, debtors began defaulting, new lending to them ceased, and their
net resource transfers turned negative for an extended period of time.
In March 1989, U.S. Treasury Secretary, Nicholas Brady, initiated a
plan under which 16 of the debtors reached debt-relief agreements with
their private creditors. The commercial banks wrote off a fraction of
the debt owed to them, and the countries agreed to implement major
economic reforms.\3\ In the 12 months preceding the signing of its
debt-relief agreement, the average Brady country's stock market
appreciated by 60 percent--a $42 billion increase in shareholder
value--while there was no significant increase in the stock market
values of a control group of countries that did not sign Brady
agreements (Arslanalp and Henry, 2005a).
---------------------------------------------------------------------------
\3\ See Cline (1995) for a detailed discussion of the restructuring
terms.
---------------------------------------------------------------------------
Debtor-country stock prices rose, in part, because debt relief
restored capital inflows. After roughly 10 consecutive years of
negative net resource flows, the NRT in all 16 debtor countries turned
positive immediately after the signing of their Brady plan and remained
so for the next several years. In order to appreciate the full
significance of the change in net resource transfers, it is important
to distinguish between two effects of debt relief. The direct effect is
that debt relief reduces a country's debt servicing obligations. The
indirect effect is that debt relief cleans the books and paves the way
for new creditors to lend (Summers, 2000). The direct effect is
quantitatively less important than the indirect one. The Brady plan led
to the forgiveness of approximately $60 billion of debt, but that
number is small in comparison to the $210 billion of cumulative net
resource transfers the Brady countries received in the 5-year period
following the official settlement with their creditors.\4\
---------------------------------------------------------------------------
\4\ See Arslanalp and Henry (2005b) for the source of the $210
billion figure.
---------------------------------------------------------------------------
The resurgence of capital inflows reflects the pithy Dornbusch
maxim: ``Unresolved debt problems, not debt per se, are an obstacle to
investment. It is hard for a man to establish a relationship with a
lender if the estranged wife keeps barging in claiming alimony''
(Dornbusch, 1993, p.103). Indeed, the Brady countries' experienced an
investment boom in the aftermath of debt relief. The average annual
growth rate of their capital stocks rose by 1.9 percentage points--from
1.6 percent per year in the 5 years prior to debt relief, to 3.5 in the
subsequent five. The data on GDP per capita paint a consistent picture
of economic recovery, rising from an average of 0 to 1.6 percent per
year over the same time period.\5\
---------------------------------------------------------------------------
\5\ The increase in growth can't be accounted for solely by the
rise in the capital stock, so total factor productivity may also have
increased due to the accompanying economic reforms (Henry, 2003).
---------------------------------------------------------------------------
the hipcs exhibit no symptoms of debt overhang
Debt relief helped the Brady countries, because it removed an
obstacle standing in the way of new lending, investment, and growth.\6\
If all else were equal, one might plausibly argue that debt relief for
the HIPCs would achieve similar results. The problem is that all else
is not equal. There are at least three reasons why debt overhang does
not deter capital flows to the HIPCs (and hence their investment and
growth).
---------------------------------------------------------------------------
\6\ This is not to say that debt relief solved all of their
problems. Starting with Mexico in 1994 and most recently in Argentina
in 2001, a number of Brady countries have encountered severe economic
crises since the Brady plan.
---------------------------------------------------------------------------
First, if debt overhang hinders capital flows to the HIPCs, then
just as the Brady countries experienced negative net resource transfers
during their bout with overhang, the HIPCs should now be experiencing
negative NRTs. But this is not the case. And nor has it ever been. In
contrast to the Brady countries, NRTs to the HIPCs have always been
positive (Table 2). If debt relief works by restoring positive NRTs in
scenarios where it has turned negative, then the means by which it will
help a set of countries in the midst of an uninterrupted stream of
positive NRTs since 1970 is not clear. One counterargument to this line
of reasoning holds that even if the HIPCs do not suffer from debt
overhang, debt relief would make their already positive NRTs even
larger. After all, Equation (1) shows that holding the quantity of
grants and new loans constant, reducing debt service will surely
increase the country's net intake. The problem with this
counterargument, as we discuss in greater detail below, is that it
ignores budgetary reality: Historically, capital inflows such as grants
do not remain constant when countries receive debt relief.
Second, the concept of debt overhang is incongruous with the very
nature of lending to the HIPCs. Debt overhang and the potential for
efficient debt relief that stems from its presence are predicated on
the incentives and rationale that drive lending by profit-maximizing
entities. In contrast, official lending, the primary source of HIPC
debt, responds to a very different set of considerations. For example,
the international commercial banks lent to the Brady countries because
they expected to make a profit for their shareholders by doing so. The
HIPCs' principal creditors, multilateral lending institutions such as
the International Development Assistance arm of the World Bank, have a
broader mandate. At least part of their mission is to channel funds,
through a combination of concessional loans and grants, to development
projects that may yield large social gains in the long run, but are not
immediately profitable (Taylor, 2004).
Since debt relief is designed to enhance efficiency in the market
for private lending, it is unclear what effects it would have in a
market with a significantly different incentive structure. More
generally, a case can be made that the multilateral financial
institutions should not lend to poor countries at all but give grants
instead (Bulow, 2002; Bulow and Rogoff, 1988, 2005; Taylor, 2004). The
history of aid does not inspire confidence in the ability of such
transfer schemes to achieve their intended goal (Easterly, 2003). But
past failures and current research contain important clues for the
design of more effective (and realistic) future aid endeavors such as
the Millenium Challenge Corporation (Besley and Burgess, 2003; Birdsall
and Williamson, 2002; Brainard, Graham, Purvis, Radelet and Smith,
2003; Burnside and Dollar, 2000).
The third point relates closely to the second. The private sector
investment channel, which plays a central role in models of debt
overhang, is all but absent in the HIPCs. In models of debt overhang,
the government's debt burden deters investment because it imposes an
implicit tax on private sector investment. Therefore, in order for debt
overhang to act as a deterrent to private investment, the country must
have a private sector with viable investment projects to deter. One
indication that a country's private sector has viable projects is that
it attracts capital to fund those projects. Again, the Brady countries
and the HIPCs show stark differences on this score. As early as 1974,
capital flows to the Brady countries' private sector (private debt +
foreign direct investment + portfolio equity) comprised nearly half of
their total net resource flow, but the HIPCs' private sector never
attracted a significant amount of capital. Inflows to the private
sector in the HIPCs have accounted for as little as 4 percent of
inflows and have never exceeded 13 percent (Arslanalp and Henry,
2005b).
Furthermore, the difference between the composition of capital
flows to the Brady and the HIPCs continues to widen. At the peak of the
debt crisis (1985-89), grants plus public and publicly guaranteed debt
accounted for 73 percent of the net resource transfer to the Brady
countries, but by 1994, the private sector was the destination for the
majority of their net resource flows (Arslanalp and Henry, 2005b). No
such shift has taken place in the HIPCs. In fact, the opposite has
occurred--official flows and flows to the public sector have become
more, not less, important. The role of grants has increased to the
point where they now constitute the majority of net resource flows to
the HIPCs.
The resurgence and expansion of the private sector in the Brady
countries drove their post-debt-relief recovery in investment and
growth, with foreign capital flows playing a significant financing
role. Since the HIPCs' private sector has never attracted a comparable
quantity or composition of foreign resources, it is hard to believe
that even complete and immediate debt relief would generate capital
inflows, investment, and growth of any consequential magnitude.
the hipcs' principal problem is weak institutions
Recent advances in law and finance help to explain why private
capital does not flow to the HIPCs and would be unlikely to do so even
in the event of complete and immediate debt forgiveness. In a series of
papers, La Porta, Lopez-de-Silanes, Shleifer and Vishny (1997, 1998,
2002) demonstrate that the degree to which a country's laws protect the
rights of investors exerts a significant influence on its access to
external finance. They measure investor protection by constructing a
composite index of shareholder rights, creditor rights, efficiency of
the judicial system, rule of law, and the accounting system.
The first row of Table 3 shows that the median Brady country ranks
lower than the median G-7 country on the Laporta, et al., index of
investor protection. The Brady countries' relatively low ranking may
help explain why the quantity of capital flows they receive pales in
comparison to the magnitude we would expect on the basis of the
predictions of the neoclassical growth model (Lucas, 1990; Shleifer and
Wolfenzon, 2002; Stulz, 2005). Although the median Brady country ranks
low, the HIPCs do not even make the list. If private capital trickles
to the Brady countries because they provide weak investor protection,
then woe to the HIPCs whose capital markets and investor protection
laws lack sufficient development to even merit a ranking.
More generally, poorly developed capital markets tend to be
correlated with a weak economic infrastructure. The second row of Table
3 demonstrates this point by comparing the institutions of the HIPC and
Brady countries using the index of economic infrastructure constructed
by Hall and Jones (1999). The index ranks 130 countries and attempts to
capture the extent to which a country's economic infrastructure
provides ``an environment that supports productive activities and
encourages capital accumulation, skill acquisition, invention and
technology transfer'' (Hall and Jones, 1999). A ranking of 1 indicates
the most development-friendly infrastructure, a ranking of 130 the most
inimical. The median G-7 country ranks 14th while the median Brady
country 63rd; the median HIPC comes in a distant 102nd. The third row
of Table 3 shows that a comparison of the Bradys' and the HIPCs'
economic infrastructure using the Heritage House Index of Economic
Freedom gives similar results.
In combination with the earlier data on net resource transfers,
Table 3 demonstrates a point almost too obvious to state: Unlike the
Brady countries during the 1980s, the HIPCs' principal problem is not
debt overhang but an absence of economic infrastructure--both hard
infrastructure like roads and schools, and soft infrastructure like
markets and property rights. Without the crucial foundations for
profitable economic activity, it strains the imagination to believe
that even full and immediate debt forgiveness will precipitate the
burst of foreign capital flows, investment, and growth that it did in
the Brady countries.
Ironically, the political and financial resources devoted to
securing debt relief for the HIPCs might be more profitably employed
toward a number of countries not being considered for such programs at
all. These include a group of six highly indebted (but not as poor)
developing countries--Indonesia, Pakistan, Colombia, Jamaica, Malaysia,
and Turkey--whose economic infrastructures closely resemble those of
the Bradys (Column 4 of Table 3). Because the group of six have viable
private sectors and reasonably well functioning capital markets, it is
more plausible to expect the response of their economies to mirror the
experience of the Brady countries described earlier in the paper.
debt relief will not help build infrastructure and may have unintended
effects
The principle of policy targeting states that distortions arising
from a market failure should be tackled with policy instruments that
address the failure directly (Bhagwati, 1971; Dixit, 1994). Both debt
overhang and inadequate economic infrastructure produce inefficient
outcomes that result from market failure. However, the nature of the
market failure, and therefore the appropriate policy intervention,
differs in each case. Debt relief is an efficient policy response to
debt overhang, because it forces each lender to internalize the
negative impact of its intransigence on the borrower and other lenders.
But the HIPCs market failure stems not from lender intransigence,
but a classic public goods problem in the following vein:
Infrastructure investment in the HIPCs could raise the rate of return
to a range of private projects in these countries. For example, by
allowing them to get their goods to market, building a road where none
exists could encourage farmers to invest in technologies that increase
crop yields. But no single farmer will want to build a road, because he
will bear all of the costs while society reaps the benefits. In other
words, left to their own devices, markets will not provide sufficient
roads, or any other public good, so long as the private rate of return
to doing so is less than the social return.
Rich-country governments address this type of market failure by
collecting taxes to pay for public goods like roads, schools, and
hospitals. Since the HIPCs' tax base is not large enough for this task,
they require foreign resources to help fill their public goods deficit.
The question, then, is whether debt relief for the HIPCs will increase
their net intake of capital from abroad?
Ironically, past debt relief efforts have actually reduced net
resource transfers to the HIPCs. The net resource transfer identity,
equation (1), shows that debt relief increases a country's net resource
transfer only if the reduction in debt service does not reduce other
capital inflows. Historically, this has not been the case. Debt relief
has been given instead of, not in addition to, foreign aid. Again,
Table 2 displays the point. Aid flows to the HIPCs increased
continually from 1970 to the mid-1990s. But starting with the onset of
the HIPC initiative in 1996, aid flows as a fraction of GDP decreased
significantly. Prior to 1996, aid flows amounted to roughly 16 percent
of HIPC GDP. Since 1996 that figure has dropped to between 10 and 12
percent. Together, the fall in aid flows and the postponed reduction in
debt service has caused a decline in the HIPCs' net resource transfers
(although they are still positive).
conclusion
The main beneficiaries of the Gleneagles debt relief proposal would
appear to be the rich countries who garner good political press at a
trivial cost (Rogoff, 2005). Forgiving debt does not address the
fundamental problem of inadequate economic institutions that impedes
investment and growth in the world's poorest countries. And, to the
extent that additional resources are part of the solution, the indirect
approach of debt relief does little, if any, good. In the past debt
relief has had a minimal impact on net resource flows, and there is
nothing in the Gleneagles proposal to suggest that it will be much
different. One of the central development issues of our day is whether
the high-income countries of the world will stand ready to help with
real money when the low-income countries demonstrate that they are
ready to put the resources to good use. The danger is that the
Gleneagles declaration may amount to a Pyrrhic victory: A symbolic win
for advocates of debt relief that clears the conscience of the rich
countries but leaves the real problems of the poor countries
unaddressed.
TABLE 1.--THE HIPCS RECEIVING DEBT RELIEF ARE NOT GROWING ANY FASTER, OR
REDUCING POVERTY ANY MORE QUICKLY THAN THE HIPCS STILL WAITING TO
RECEIVE DEBT RELIEF
------------------------------------------------------------------------
1990-95 1996-00 2001-03
------------------------------------------------------------------------
Panel A: HIPCs That Began Receiving Debt
Relief in 2000:
Growth of GDP Per Capita................ -0.3 1.7 2.3
Human Development Index................. 0.40 0.41 0.43
Panel B: All HIPCs:
Growth of GDP Per Capita................ -0.5 1.9 2.0
Human Development Index................. 0.41 0.42 0.43
------------------------------------------------------------------------
Source: World Bank, World Development Indicators.
TABLE 2.--NEW LENDING, GRANTS, AND DEBT SERVICE FOR THE HEAVILY INDEBTED
POOR COUNTRIES
------------------------------------------------------------------------
Billions
of % of HIPC % of OECD
Dollars GDP GPD
------------------------------------------------------------------------
1970-79:
Net Resource Transfers.............. 4.5 7.7 0.10
New Lending......................... 2.1 3.6 0.05
Grants.............................. 2.9 5.0 0.07
Debt Service........................ 0.5 0.9 0.01
1980-89:
Net Resource Transfers.............. 13.2 12.2 0.13
New Lending......................... 6.1 5.6 0.06
Grants.............................. 9.1 8.4 0.09
Debt Service........................ 2.0 1.9 0.02
1990-95:
Net Resource Transfers.............. 18.9 15.9 0.10
New Lending......................... 6.0 5.0 0.03
Grants.............................. 16.3 13.7 0.08
Debt Service........................ 3.4 2.9 0.02
1996-99:
Net Resource Transfers.............. 13.9 10.4 0.06
New Lending......................... 4.8 3.6 0.02
Grants.............................. 13.2 9.9 0.06
Debt Service........................ 4.0 3.0 0.02
2000-03:
Net Resource Transfers.............. 17.7 12.2 0.07
New Lending......................... 4.5 3.1 0.02
Grants.............................. 16.0 11.1 0.06
Debt Service........................ 2.8 2.0 0.01
------------------------------------------------------------------------
Source: The data on net resource transfers, new lending, and debt
service are obtained from World Bank's Global Development Finance Data
Base. The data on grants come from the World Bank's World Development
Indicators Data Base.
TABLE 3.--THE HIPCS HAVE MUCH WEAKER ECONOMIC INFRASTRUCTURE THAN THE
BRADY COUNTRIES
------------------------------------------------------------------------
Brady ``Group
G-7 countries HIPCs of 6''
------------------------------------------------------------------------
Laporta, et al., Score...... 7.5 4.9 N/A 4.6
Hall and Jones (1999) Rank.. 14 63 102 61
Heritage House Index of 14 59 110 58
Economic Freedom Rank......
------------------------------------------------------------------------
The first row lists the median La Porta, Lopez-de-Silanes, Shleifer and
Vishny (LLSV) score of social infrastructure for the G-7 countries,
Brady countries, HIPCs, and the group of six countries. The countries
in the group of six are Indonesia, Pakistan, Colombia, Jamaica,
Malaysia, and Turkey. The second row lists the median Hall and Jones
(1999) rank for each country group. The third row lists the median
Heritage House Index of Economic Freedom rank.
appendix a, the highly indebted poor countries eligible for debt relief
at various stages
The original 41 HIPC countries are: Angola, Benin, Bolivia, Burkina
Faso, Burundi, Cameroon, Central African Republic, Chad, Congo, Cote
d'Ivoire, Democratic Republic of the Congo, Equatorial Guinea,
Ethiopia, Ghana, Guinea, Guinea-Bissau, Guyana, Honduras, Kenya, Lao
PDR, Liberia, Madagascar, Mali, Mauritania, Mozambique, Myanmar,
Nicaragua, Niger, Nigeria, Rwanda, Sao Tome and Principe, Senegal,
Sierra Leone, Somalia, Sudan, Tanzania, Togo, Uganda, Vietnam, Yemen,
and Zambia.
After a revised debt sustainability analysis, three countries were
added (Comoros, the Gambia, and Malawi), while six countries were taken
out of the group (Angola, Equatorial Guinea, Kenya, Nigeria, Vietnam,
and Yemen). Currently, the HIPC group consists of 38 countries.
The six countries that reached their completion points under the
original HIPC Initiative are: Bolivia, Burkina Faso, Guyana, Mali,
Mozambique, and Uganda.
The sixteen additional countries that reached their decision points
under the Enhanced HIPC Initiative, and began receiving debt relief in
2000 are: Benin, Cameroon, Gambia, Guinea, Guinea-Bissau, Honduras,
Madagascar, Malawi, Mauritania, Nicaragua, Niger, Rwanda, Sao Tome and
Principe, Senegal, Tanzania, and Zambia.
The five additional countries that had reached their decision
points under the enhanced HIPC Initiative (as of June 2005) are: Chad
and Ethiopia in 2001, Ghana and Sierra Leone in 2002, and Democratic
Republic of Congo in 2003.
The eighteen countries that have reached their completion points
under the enhanced HIPC Initiative (as of June 2005) are: Benin,
Bolivia, Burkina Faso, Ethiopia, Ghana, Guyana, Honduras, Madagascar,
Mali, Mauritania, Mozambique, Nicaragua, Niger, Rwanda, Senegal,
Tanzania, Uganda, and Zambia.
The nine countries expected to reach their completion points in the
next 1 to 3 years: Cameroon, Chad, Democratic Republic of Congo, The
Gambia, Guinea, Guinea-Bissau, Malawi, Sao Tome and Principe, and
Sierra Leone.
appendix b, the brady countries
Argentina, Bolivia, Brazil, Bulgaria, Costa Rica, Dominican
Republic, Ecuador, Jordan, Mexico, Nigeria, Panama, Peru, Philippines,
Poland, Uruguay, and Venezuela.
Senator Casey. Thank you very much, Doctor.
I wanted to move to questions for our panelists. Dr.
Birdsall, I wanted to start with you. You have a book entitled
``Delivering on Debt Relief,'' and in your book, among other
things, you address the advantages of debt relief as an
alternative mechanism of delivering aid to developing countries
as well as the possibility of selling IMF gold to finance debt
cancellation.
Could you discuss your views on these issues in greater
detail? Could you provide a commentary on that aspect of your
book?
Dr. Birdsall. Certainly, Senator Casey. Let me make just
two points. One is that my remarks in the written testimony
that refer to debt relief as a hyperefficient form of aid are a
reflection of the thought that I gave to the issue in writing
that book some years ago and also to the more recent work of
myself and colleagues at the Center for Global Development on
the terrible inefficiencies in what I would call the aid
industry. And those inefficiencies are a problem in the U.S.
foreign assistance programs, but they are also a problem in the
foreign assistance programs of many other bilateral donors and
in the work of the World Bank and the multilateral development
banks.
I would not want to suggest that those aid programs do not
make sense at all, just to suggest that they impose very high
administrative burdens on the recipient countries, particularly
the poorest countries which are receiving about 10 percent,
sometimes more, of their GDP annually in aid, which means that
they are sometimes covering more than 40 percent of their
expenditures with aid inflows. And they end up spending a lot
of time talking to the 50-plus donors, the many NGOs, the U.N.
agencies, and being responsive to all these different demands
for monitoring, reporting, disbursement procedures, protocols
with respect to procurement on infrastructure deals instead of
being responsive to their citizens.
So I think any step that moves the United States in a
direction for the poorest countries of making the aid process,
including debt relief, more efficient for those countries,
particularly those that are performing well, is a good one. So
that is my first point that I am happy to have had a chance to
emphasize.
The reference to the IMF gold. Let me put it in the context
of this particular bill. I think it is important to distinguish
in a technical sense between the call in this bill for the
World Bank to finance any additional debt writeoff for all IDA
countries from its internal resources and that call on the IMF.
In the case of the IMF, it is possible for the IMF to
mobilize or sell gold in order to deal with these liabilities
of the poorest countries which may remain to the IMF without
creating the problem that it is robbing Peter to pay Paul. In
effect, the IMF can sell gold. It would not take all that much
in the case of these countries here, assuming that Vietnam and
Bangladesh and some of the other big ones did not opt in. And
the cost in a sense, I have said in other work, is that the
central bankers of the rich countries sleep slightly less well.
They have a slightly lower capital resources to cover any risks
that might occur to financial stability in the global system.
In the case of the World Bank and the other banks, as I
suggested in my initial testimony, unless new debt relief--new
relief to low-income countries for the debts owed to those
institutions is covered by new contributions from the United
States, the Europeans, the Australians, and so on--if that does
not happen, if the World Bank uses its internal resources,
those internal resources have to come either from existing IDA
money, which will reduce lending and grants to those very
countries or to other countries which may be more deserving in
terms of performance, more able to use the resources well, or
they will come from transfers from the hard window at the World
Bank.
If they come from transfers at the hard window at the World
Bank, that eventually circles around to reduce, all other
things the same, the capital available in the World Bank, which
in turn comes around to slightly higher or more than slightly
higher interest charges to those countries that are borrowing
from the hard window.
This is not really a big financial problem. You could say,
let us have the Chinese and the Turks and the Mexicans pay for
debt relief to Moldova, Lesotho, Kenya, et cetera. But it is a
credibility issue. It is a reputational issue. It illustrates
the point that the United States needs to develop any approach
like this one in concert with the other rich nations which are
the traditional donors.
And then we come back to my point in my testimony that the
United States is not now in a very good position to do that,
given that it is in arrears to these institutions, which are
like global clubs. So one member of the club is not behaving
very well, and it does not seem appropriate for that member of
the club, without paying up its dues, to be creating new
demands, much of which will be borne by other members.
It is very interesting, in particular, that of the nine
countries that would qualify under the current Jubilee bill,
given their performance--they meet the performance
requirements--four or five of them have virtually no debt to
the U.S. bilateral aid system. So we are calling on other
creditors in Europe and so on to do something that, at least on
the bilateral side, we do not need to do. I think we should do
that only when we have cleared up the existing arrears.
Sorry for the long answer.
Senator Casey. That is OK.
Let me ask a question to you and our other two witnesses.
You can all take time to answer this. You heard a good bit
today by way of oral testimony and also the written testimony
with regard to the administration. If you can assess that, in
other words, assess the administration's approach to this issue
as it contrasts with the one that is contemplated by the
Jubilee Act bill.
Dr. Birdsall. I would say that what has been accomplished
under this administration and the Clinton administration in the
nineties on debt relief has been extraordinary. So I would give
a lot of credit to the executive branch for following a lead
set in the legislative branch on these issues in a way that has
been technically sound and has been politically prudent. So I
put some weight on the fact that the Treasury officials are
concerned about the arrears in the context of this bill.
I would urge the Congress, through this bill, to use the
opportunity to ask Treasury to push harder on the insurance
type facility that I mentioned. I think the events of the last
few months illustrate the tremendous value of doing that, and I
believe that such an approach is consistent both with the
interests of the Jubilee movement and your interests and those
of other legislators that have signed onto this bill in finding
additional efficient ways to respond to poor countries' needs
in supporting their development objectives, while at the same
time not creating questions about whether there is something
wrong with debt in itself and not creating political pressure
in some countries, which honestly, frankly, I saw when I was at
the Inter-American Development Bank in the case, for example,
of Bolivia, which was an early HIPC beneficiary.
Initially it was not really clear that the Government of
Bolivia wanted to enter into the HIPC program--this is way back
in the nineties--because at that time, that government was
steaming ahead on a set of economic reforms with considerable
support from the United States and wanted to lock in access to
private capital markets. In the end, they made the tradeoff and
they went ahead with opting in for HIPC eligibility.
But the point is that we should respect countries' own
processes for trying to get into the capital market and their
own efforts at better debt management, at prudent borrowing
when they are ready to do it and not create a sort of allure of
new rounds over and over of debt relief when that may not be
the single best instrument to help them out. It may be that
they are better off to have more grants from the United States
and from the World Bank and from other donors and at the same
time be building up the reputation for good management that
allows them eventually to go to private capital markets and
allows borrowers inside those countries, small and medium
enterprises, for example, to--it creates the environment where
there is a better domestic capital market as well where some of
the capital that does exist on the part of the rich in those
countries, instead of going outside, begins to stay inside and
be intermediated through the financial system for high return
investments at home.
This is all part of a process of developing a market-based,
sustainable growth approach. So I am not sure I have answered
your question very directly except to say I think we need to
respect and take carefully into account the views that are
developed in the U.S. Treasury and in these other institutions.
They may not always be exactly right. No doubt. As I think you
mentioned, the Center for Global Development has been pushing
the IMF with success, by the way, to be less risk-averse in its
recommendations on fiscal and monetary policy in poor
countries. At the same time, we need to respect those views and
take them into account. And in this instance, I would say that
I would take pride as a U.S. taxpayer in the approach over the
last decade or more that has emerged on this debt relief issue.
Senator Casey. Mr. Flood.
Mr. Flood. Thank you, Senator.
Senator Casey. With regard to the administration's testi-
mony----
Mr. Flood. Yes. Well, I was very interested when Mr. Lowery
said that Secretary Paulson had spoken to ministers from
several African countries and none of them brought up debt
relief. I was thinking to myself, that is great, because almost
all of the countries in Africa that he might have met with--and
my guess would be all of them--have already received debt
relief. They are already beneficiaries of the HIPC debt relief
program and the MDRI. So the fact that they are not talking
about debt relief means that they are going beyond it now to
deal with some other issues and hopefully the fiscal space that
has been provided by the debt relief that they received puts
them in a better position to begin to move forward toward a
more dynamic path of growth and poverty reduction. So I thought
that was fine.
But what we have here is countries that have never been
through the process, and we are talking about completing the
process now by bringing in those few remaining countries--it is
not a huge number--who have been left out and who I think that
for all the reasons that I tried to make clear in the oral
testimony, merit being brought in so that we can say we have
completed the job.
The idea is not that countries should come back in every 2
years and get another round of debt relief. That is not it at
all. The idea is to give them a fresh start, which these
countries have never had, and quite a few of them are in
serious debt situations. There are a few that are not, but for
the reasons I mentioned, the justification for bringing them in
I think is strong as well.
Now, on the question of the arrears, I think that is a
serious question, and I certainly agree with that. I think that
the United States should deal with that. I do not think this
should be seen as a tradeoff, you know, either we do the debt
relief or we clear up our arrears. I think we have to do both,
and I think the sooner we get the arrears cleared up, the
better. Only then will we be in a position to really go out and
negotiate strongly a program like this, but let us get started
working on it. In the meantime, get those arrears cleared. I
think it is very important to do that.
I had--well, I will let it go for the time being.
Senator Casey. Thank you.
Dr. Henry.
Dr. Henry. Thank you.
So let me start by saying again that the grants versus
loans idea is one of the better ideas to come out of this
administration. Actually it was started to some extent under
the Clinton administration. So let us give credit in both
places there. And the idea was pushed very hard early on in
this administration, but it sort of fell out of view for other
reasons.
But the grants versus loans idea is really essential
because when you think about the difference between the low-
income countries of the world and the Brazils, Mexicos,
Argentinas, Turkeys, the middle-income developing countries of
the world, you really start to see very clearly why grants
versus loans make sense. In countries like Brazil, Argentina,
Mexico, where there is access to private capital markets, you
ask yourself, why do they have access to private capital
markets? Because they have a certain amount of institutional
capability that works. Markets do work. And if you think back
to a case where debt relief actually did work, it was in the
case of the Brady plan in the late 1980s and early 1990s
precisely in middle-income developing countries.
So debt relief is really designed to solve a very specific
problem. It is really designed to solve a problem that occurs
in private capital markets that Secretary Lowery actually
alluded to, which is that if you have profitable borrowers who
have just become overly indebted and actually suffer from debt
overhang, then in those instances, writing off debt can
actually lead to an efficient stall on payments to all
creditors, forcing all creditors to take some losses so that
the borrowers can actually recover. And then we end up seeing
new flows of money going to these countries, and we see an
increase in investment, increase in growth, and these countries
are able to turn themselves around.
The channel for that to happen is completely absent in the
low-income countries because they have never had much private
capital to speak of in the first place. So actually writing
down the debt is not going to spur investment or growth in
these countries. As I said in my testimony, it is an indirect
way of trying to deal with the problem. The key investments in
the poor countries of the world are really what we call high
social rate of return investments, public goods, schools,
roads, clean water, things that the private sector is not
necessarily in a position to finance, and things which are
going to be long gestation in terms of generating returns.
That is the classic argument for actually giving foreign
assistance. So if you really want to directly address the
problems of the poor countries, then give assistance directly
at that margin. That is the point that I really would like to
emphasize.
So I am not arguing that we should not help poor countries.
The question is how. And then there is also the question of
quantities. And this is where I think priorities are very
important.
As it stands, if you take the world as it is, there really
does seem to be currently kind of a fixed amount of good will
in the world, so to speak. The amount of resources that we are
willing to transfer to poor countries has been fixed over time.
If that is true, then all debt relief effectively does is
change the form in which you are actually giving assistance to
these countries. I happen to think it is not the most efficient
way of doing it.
It also becomes a distraction from the real issue, which is
why are we not willing to provide the resources that we say we
are going to do over and over. And I really do worry that all
the focus on debt relief is an enormous distraction from the
key issue.
So if I were thinking about how to rewrite this bill, if I
may be so presumptuous, I would put more emphasis on the fact
that we are continually falling short on past aid promises and
that while aid is not the answer in and of itself, there are
ways to think about making aid more efficient, and we can do
that in concert with actually ratcheting up our commitment to
past promises rather than arguing about debt relief and
accounting issues which really are beside the point because the
money at stake is really trivial.
Senator Casey. I wanted to start a little argument here, to
have a response to the points you just made, Mr. Flood or Dr.
Birdsall, if you want to respond to Dr. Henry's points.
Dr. Birdsall. I will leave the last push to you.
Mr. Flood. Go ahead.
Dr. Birdsall. Well, I would like to differ slightly. I am
not sure that it is fundamental to the challenge that you face,
Senator Casey, with this legislation. But I would like to
differ a little bit with what Peter Henry just said.
I think that there is a great passion out there amongst
Americans for what is seen justifiably as an approach to
helping the poor in the world that is fair, that has an element
of fairness about it, and that there is something patently
unfair about the fact that many countries that are very poor
have been burdened with these high debt payments. In that
sense, I would say it is worth riding the horse of debt relief,
frankly, because it is channeling a reasonable and really
admirable passion and a sense of generosity out there in a way
that I believe is very efficient, given the current structure
of the aid industry.
I agree with Dr. Henry that we could do a lot better in the
way we deliver aid, and that is another entire hearing in my
view, as some of your colleagues on your staff will know.
So I just wanted to make that point. So I do think that it
is useful to have this Jubilee Act. I think even this hearing
has brought out the potential, frankly, through your good
offices to use this in a good way to move on and get these
arrears covered, which would make, frankly, myself, and I
perceive the U.S. Treasury staff and managers, much more
enthusiastic about thinking about this approach in and of
itself.
I do think it is also important to address the volatility
problem, the vulnerability problem that I raised. I think that
is probably in a technical sense a much better way to approach
the overall difficulties of so many low-income countries than
to go down to the last intensive margin of debt relief,
particularly in countries like, frankly, Vietnam, Mongolia,
even Bangladesh, Kenya. I think a lot of these countries--it is
very good to have a system in which they are working toward
entering the market while at the same time benefiting from some
forms of assistance in the volumes that are critical so that
the public goods can be covered which are critical inputs to
the growth process.
So these are highly technical points. In the end, I do not
want this hearing, or at least my testimony, to come out
seeming not to support the concept of debt relief. It is more
about the specifics. The devil is in the details of how it is
done and, in particular, the timing of such legislation with
respect to the arrears problem.
Senator Casey. I think, Mr. Flood, you may have the last
word. I have a conflict. I have to appear with Senator Specter
at an event that pertains to our State and I cannot miss it. I
have another 25 questions, but what we might do is, after your
answer, we could propound questions to each of you for the
record and have you answer them in writing for the purposes of
this hearing. But I apologize that I have to cut this short,
but I wanted to make sure that Mr. Flood had the last word, at
least responding to that basic question pertaining to what Dr.
Henry said.
Mr. Flood. Well, I do not have a whole lot to add to what
Dr. Birdsall said about the overall value of debt relief.
I just wanted to comment on two points made by Dr.
Birdsall. One, I have always thought that the idea of some sort
of insurance program or structure going forward was a good
idea, and I certainly would support any efforts along those
lines to make that sort of thing possible.
On the financing of this particular debt relief that is
being proposed here, I would have agreed with Dr. Birdsall 10
years ago about the World Bank, but I really do not today. They
are doing very, very well. Now, I am not saying that I think
that it is realistic to expect that there will not be some
requirement of budgetary support for this program. I think
there definitely will. I do not think, even if one could argue
that it was financially quite possible for the World Bank to
finance all this out of its own resources, that its
shareholders would agree with that.
But I do think that with a bit of political will here, one
would see clearly that the World Bank is in a very, very strong
position right now. They issued a report only a few months ago
showing that they had, by their own calculations, $10 billion
in excess reserves. In other words, their equity-to-loans ratio
was high enough to give them much more than they needed for
long-term capital adequacy. They said that themselves. Of
course, then they said we still think we have to keep it all to
ourselves and not, for example, transfer funds to IDA for debt
relief. They would not agree with that.
But there is a basic assumption that they are making in
saying that they cannot transfer a large part of this, if not
all of it, to IDA, for example, for debt and perhaps other
funding for poor countries, and that is that they say that
their loans are going to grow at 3 percent a year over the next
30 years or so. It is a very, very long time. The fact of the
matter is that they have been in a long-term decline in terms
of the amount of loans outstanding. Since 1994, it has dropped
on an average of 2 percent a year, and that is even including
the bulge of lending that they did during the Asian debt
crisis.
So the idea that their outstanding levels are going to grow
at 3 percent a year is extremely optimistic. Instead of growing
at 3 percent a year they grow at, say, 1 percent a year, which
would be a big turnaround from the recent trend, there should
be a very large portion of that very large amount of excess
capital that could be available and could be transferred to IDA
and could finance a large part of the debt relief that is being
proposed here for the World Bank. And it would not mean that
there would be any rise in interest rates to any of the
borrowers because, by definition, this is excess. These are not
funds which they need to retain to preserve their financial
soundness. They are well, well beyond anything that might,
arguably, be needed in order to maintain a AAA rating, for
example.
Finally, the bill does not say that this all has to be
financed from the institutions from their own resources. It
just says to the extent possible, and recognizes that it may
not be possible to get it all out of the international
financial institutions.
Senator Casey. Thank you very much. Unfortunately, I have
to go, but we appreciate your testimony. We will get more for
the record, but thank you very much.
The hearing is adjourned.
[Whereupon, at 3:57 p.m., the hearing was adjourned.]
----------
Additional Material Submitted for the Record
Prepared Statement of Hon. Richard G. Lugar, U.S. Senator From Indiana
I join the chairman in welcoming our witnesses. In 1999, the United
States and other industrialized nations established the Highly Indebted
Poor Countries Initiative in response to crippling levels of debt
combined with anemic economic growth in dozens of developing countries.
This was followed several years later by the more comprehensive
Multilateral Debt Relief Initiative.
These initiatives allowed poor countries to receive debt relief in
exchange for adopting economic policy reforms and channeling their debt
savings to poverty reduction activities. For example, Uganda is using
its debt cancellation savings on primary education, health, and
infrastructure. Zambia is devoting its savings to improvements in
agriculture and health.
However, despite many examples of successful debt relief, the debt
problem in the developing world continues to threaten stability; impede
economic growth; and constrict investments in health care, education,
sanitation, and other elements essential to development. In response,
Congress is now considering the Jubilee Act, which would expand the
concept of debt relief to additional countries.
Much of the international debt due to be forgiven is owed to the
multilateral development banks and the International Monetary Fund.
Since 2003, the Foreign Relations Committee has reviewed U.S. policy
toward the development banks. We examined how to maximize development
bank efforts and how to continue the fight against corruption linked to
development bank financing. We found that corruption not only enriches
the undeserving and undermines the effectiveness of development
projects, it leaves the resulting debts to the impoverished. One
important way to combat the need for future debt relief is to ensure
that development loans are implemented effectively and ethically.
It is critical that Congress fund our current commitment to debt
relief and the development banks. The United States pledges for debt
relief and the development banks are not being fulfilled. The gap
between our pledges and our actual contributions jeopardizes U.S.
efforts to advance key reforms promoting anticorruption, the
measurement of results, and increased transparency of development bank
operations. Our arrears status is leading to U.S. shares at some
development banks being auctioned off to other countries, further
undermining our ability to leverage the development banks for our
foreign policy interests.
Congress must also reauthorize debt-for-nature swaps through the
Tropical Forest Conversation Act (TFCA), which is one of our most cost-
effective diplomatic and conservation tools. Through TFCA, more than 47
million acres of tropical forests in developing countries have been
conserved, helping to absorb internationally generated carbon. TFCA
uniquely leverages the contributions of private donors, who have given
more than $12 million to TFCA swaps.
As an original cosponsor of the Senate version of the Jubilee Act,
I appreciate the opportunity today to discuss the dynamics of debt
relief and receive expert commentary on the bill. The Jubilee Act
carries great promise, but we should be open to additional ideas that
may improve the effectiveness of debt relief. I look forward to the
insights of our witnesses.
______
Prepared Statement by Muyatwa Sitali, Coordinator, Debt, Aid and Trade
Programme, Jesuit Centre for Theological Reflection, Lusaka, Zambia--
``The Benefits and Challenges of Debt Cancellation in Zambia''
a. introduction and background
On behalf of the Jubilee campaign in Zambia, I would like to
express our sincere appreciation to the Jubilee USA Network and
Senators Casey, Lugar, and Dodd for their leadership and support for
the Jubilee Act for Responsible Lending and Expanded Debt Cancellation
(H.R. 2634). We are also grateful for the opportunity to submit this
written testimony on the occasion of today's hearing.
We are also grateful to the institutions and committees that have
already considered the Jubilee Act and have subsequently voted for it.
We are particularly grateful to the House of Representatives for its
strong bipartisan support for the legislation.
It is with pride and a sense of solidarity that today we witness
debt cancellation in 23 countries, including Zambia. At the same time,
many more countries which are deserving of similar benefits are still
being denied the opportunity to get space to concentrate on development
which does not only help them meet their national development targets
but also contributes to the achievement of the Millennium Development
Goals (MDGs). This is due to the eligibility limitations of the current
debt cancellation initiatives.
Brief Historical Context, Challenges and Benefits of Debt Cancellation
Both Zambia's external and internal debts were very high before the
HIPC Initiative, but it was the huge external debt and the country's
poor export performance that qualified the country for entry into the
Heavily Indebted Poor Countries (HIPC) initiative.
Before reaching the Decision Point of the enhanced HIPC Initiative
in 2000, Zambia's external debt stood at US$6.5 billion, more than
twice Zambia's GDP. In 2004, Zambia's debt stock stood at US$7.1
billion. With Decision Point qualification, debt servicing started
reducing but marginally.
With the attainment of the HIPC Completion Point (HIPC-CP) in April
2005, many people had hopes rekindled and anxieties rose. Further debt
cancellation under the Multilateral Debt Relief Initiative (MDRI)
increased expectations. This was described by the Minister of Finance
as ``optimism and a sigh of relief at having achieved one of the
landmarks in the history of Zambia'' (Budget speech, 2006).
After attaining HIPC-CP efforts were made to recruit 8,500 teachers
in 2005 and a further pledge by the government to employ 5,000 more
teachers, 1,700 more health personnel, build 31 high schools, 1,500
classrooms in 2008. The local currency, the Kwacha, appreciated by 27
percent (Development Zambia, 2006). This basically proves that debt
relief can work and that debt relief can also reach some of the poor
communities.
Parliamentarians in Zambia attest to this fact. The Chair of the
Economic Affairs and Labour Committee, Honourable Given Lubinda, in his
presentation to the Jubilee Prayer Breakfast in the U.S. House of
Representatives on October 16, 2007, alluded to the fact that ``the
US$23.8m savings from debt relief for my country is going into
agricultural projects, eliminating of school fees and user fees in
rural health care centres and to infrastructure development.''
Zambia's historical challenges stemming from a huge external debt
problem did not only deny the citizens of Zambia benefits from their
resources but also substantially constrained governments' abilities to
plan effectively and implement national plans. For example, in 1986,
Zambia spent 86 percent of its export earnings on debt service and was
left with only 14 percent percent to distribute to other sectors. This
trend continued even with the onset of HIPC when in 1999 Zambia paid
over three times of its combined budget for health, education, and
social security in debt service.
With both HIPC and the subsequent Multilateral Debt Relief
Initiative, Zambia's debt repayment has now come to an average of
US$60-80 million per year as opposed to over US$300 before the
attainment of HIPC completion point as well as entry into the MDRI
initiative. These benefits are only party to a list of which the
following is by no means exhaustive:
a. Irrevocable debt relief which totaled US$3.8bn under HIPC
and over US$2bn under the MDRI.
b. Significant annual debt savings. The country will be
saving annually about US$180 million or K500 billion in debt
service.\1\ At the time of reaching the completion point of the
HIPC initiative, annual debt service was projected to fall
below US$150mn per year at least up to 2020. Last year, 2007,
foreign debt service was K244 billion (approximately US$65
million) against the pre-HIPC and pre-MDRI figure of US$373.2
million in 2004.\2\ The amount of US$65 million (K244 billion)
was about 2 percent of the budget while the pre-MDRI figure of
K373.2 billion was 3.7 percent of the budget in 2006. These
savings arising from debt relief under both the HIPC Initiative
and MDRI are expected to assist the country in its development
efforts so as to reduce the current levels of poverty by 50
percent by 2015.
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\1\ Zambia's National Budget: 2006.
\2\ Zambia's National Budget speech, 2007.
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c. Substantial reduction in the overall stock of external
debt. Preliminary information indicates that the country's
external debt stock stood at US$635 million as at end of
December 2006, a reduction of 86.7 percent from the end of 2005
stock of US$4.5 billion.\3\
---------------------------------------------------------------------------
\3\ Zambia's National Budget speech, 2007.
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d. Increased policy space. Upon the attainment of HIPC
completion point, primary rural education and health care were
made free, enabling thousands of rural children and citizens to
access free basic education and primary health care. It is
worth stressing that of Zambia's 11.9 million, 65 percent are
in rural areas. Preliminary reports from Zambia's Central
Statistical Office indicate that between 2004 and 2006 rural
poverty increased by 2 percent to 80 percent while urban
poverty reduced from 53 percent to 34 percent.
e. Increased focus on poverty through increased expenditures
on social sectors like education and health. The two post HIPC/
MDRI budgets for Zambia have showed some modest increases in
social sector spending. For example, in 2005, social sector
spending totaled 30 percent of the budget; this increased to 36
percent in the 2007 budget and subsequently over 37 percent in
2008. With increased focus on poverty, the remaining ingredient
to halving poverty by the year 2015 is increased commitment and
consolidated action from donors to meet their aid pledges to
poverty reduction.
b. remaining challenges in debt management
The gains highlighted above are not without challenges. The
challenges are both domestic and external and their resolution will not
only depend on national reforms but also on the international
communities' response to the post HIPC/MDRI challenges.
Macroeconomic Policies and Harmful Conditionalities
Zambia's macroeconomic indicators reveal that there has been steady
growth recorded at an average of over 4 percent in the last 5 years, as
opposed to GDP growth of 2.2 percent in the 4 years before the
government embarked on a return to national planning induced by the
Poverty Reduction Strategy Programme under HIPC. Inflation has also
been below 10 percent in the last 2 years. While this favourable
macroeconomic outlook is necessary for the improvement of economic and
human development; in itself, it does not guarantee human development
and poverty reduction.
In Zambia, the results of a stable macroeconomic outlook have not
translated into direct benefits for communities. It is clear that
striking the delicate balance and tradeoffs between macroeconomic
stability and economic growth are ignored, while certain social
priorities are subordinated. This is as a direct consequence of the
policy prescriptions of International Finance Institutions whose
impetus has always been built around macroeconomic reform rather than
ensuring that social-economic progress is assured.
The meddling of IFIs into Zambia's governance structure originates
from the 1970s when Zambia's economy was faced with both internal and
external shocks relating to the fall of world copper prices and the
simultaneous increase of oil prices. This gave rise to the IFIs advice
commonly known as Structural Adjustment Programmes in the 1980s. SAPs
aimed at reducing the role of the state in the economy by stabilizing
and liberalising the economy including external trade and privatizing
state-owned enterprises (World Bank 2002a, 3).
While SAP measures achieved macroeconomic stability, the GDP growth
in the reform decade 1990-2000 was negligible, averaging 0.6 percent,
while between 1991 and 1995 the economy contracted by 1.6 percent and
external aid dependence increased. In 2002, 43 percent of the
Government of the Republic of Zambia's (GRZ) annual budget was financed
from external resources that included loans (Saasa 2006). Consequently,
Zambia's external indebtedness rose from US$3.2 billion in 1980 to
US$5.6 billion at the beginning of 1987. By 2000, it had skyrocketed to
approximately US$7 billion. As the levels of Zambia's public debt rose,
concurrently did the level of leverage of its creditors, especially the
IFIs in determining Zambia's economic and social policies (White, 1999
in Chisala 2006).
The result of these policies are undoubtedly visible even in
Zambia's current high levels of unemployment which the Central
Statistical Office of Zambia indicate that employment between 2004 and
2006 continued to take a downward trend. The CSO 2006 preliminary
report of living conditions states that ``more people were employed in
2004 than in 2006, 54 percent and 43 percent respectively, while more
people were classified as unpaid family workers in 2006 (12 percent)
compared to 2004 (5 percent).''
Honourable Given Lubinda, the Zambian MP, in his speech to the
Jubilee Prayer Breakfast, laments the current situation which is
historically linked to the role IFIs play in low-income countries: ``As
though they were a panacea to the unsustainable debt that my country
and other poor countries had accumulated creditor nations and the
Breton Woods institutions imposed various conditions such as
privatisation, wage freezes, downsizing of the civil service,
introduction of user fees for primary health care and basic education,
cancellation of government subsidies to water and sanitation and so on.
As we have now come to acknowledge the results of these formulations
have been reduced productivity, increased joblessness, deepened poverty
and even heavier debt. Under these circumstances, the attainment of the
most important United Nations Millennium Development Goals (MDGs) by
countries such as my own will be a far cry.''
The international community has come to realise the dangers of the
inappropriate conditionalities based on flawed assumptions. Even the
World Bank staff has admitted this fact. The admission by Edward
Jaycox, the then-World Bank vice president in charge of the African
region, is particularly insightful as it underscored not only the
strategic role multilateral bodies such as the IMF played in Zambia's
structural reforms but, more significantly, confirmed how the IMF's
Zambian Programme was poorly handled: Writes Jaycox: ``Zambia's was a
terribly underfunded Programme. We overestimated copper revenue,
overestimated aid flows, and did everything we could to paint a picture
of an internally consistent financing plan based on the resources that
we and others could bring to bear. If the case had been looked at more
closely or more sceptically, the plan's lack of realism would have
become apparent. A great number of shocks took place as the adjustment
process went along: Copper prices went down or stayed at the same level
when they were expected to go up; aid that was expected did not arrive;
deals with the Paris Club that were normative were made less liberal
when the aid was increased . . . In sum, the Zambian Programme was
administered in a very chaotic way, and the chaos resulted in part from
the inadequacy of financing and unrealistic financing projections.''
\4\
---------------------------------------------------------------------------
\4\ Jaycox, E., 1991, ``Comments on Africa,'' in Thomas V. et al.
(eds), ``Restructuring Economies in Distress: Policy Reform and the
World Bank,'' Oxford University Press, Oxford.
---------------------------------------------------------------------------
The consequences of the bad conditionalities Zambia needed to
satisfy in order to attain completion point are still being reversed. A
study on the Use of Conditionality by International Finance
Institutions to encourage privatisation and liberalisation indicates
the frustrations. ``It is noteworthy that, in spite of the
acknowledgements regarding the acceptability of IMF's Poverty Reduction
and Growth Facility conditionalities, some level of frustration has
been recorded at lower levels within the Government system itself. A
senior economist at the Ministry of Finance and National Planning
shortly before the country was put on a Staff Monitored Programme
following its failure to meet PRGF fiscal targets in 2003, the response
(below) is illustrative'':
Zambia is a case of a so-near-yet-so-far situation. We have
complied with all the benchmarks and targets save for one on
fiscal management and this has thrown the entire economic
programme with creditors off course. The implications of this
situation are obvious. Firstly, as a country we have forgone
US$3.8 billion, which should have been knocked off our total
debt stock had we reached the Completion Point this year. This
essentially means that we still remain heavily indebted to the
creditors. Secondly and more importantly, the amount of money
required to successfully implement the PRSP has been
drastically reduced meaning that some poverty reducing
programmes have simply been shelved aside. For instance, this
year's national budget allocation to the PRSP was K420 billion
out of which Government has only managed to mobilize K110
billion. The balance in the national budget was to come from
donors who have since imposed an aid freeze. Put differently,
the PRSP is slowly being rendered irrelevant as it cannot be
implemented and thus national development plans are at best
inconsequential if they cannot be implemented or realized. \5\
---------------------------------------------------------------------------
\5\ Interview with Dr. Situmbeko Musokotwane, Deputy Secretary to
the Cabinet, 20 October 2006.
The Minister of Finance, in June 2005 during a meeting with civil
society groups and after the country attained the HIPIC Completion
Point, is acknowledged that ``creditors have substantial amount of
control in the affairs of the nation when it comes to setting
conditions on loans,'' but was quick to add that ``. . . this can be
avoided if Zambia reduced on borrowing.'' \6\
---------------------------------------------------------------------------
\6\ Jubilee-Zambia, National Conference Report on the theme
``Beyond the HIPC Completion Point-Which Way Forward for Jubilee-
Zambia,'' Conference held on 9 June 2005.
---------------------------------------------------------------------------
In the past 8 years a number of internal processes have taken place
within the creditor community to respond to criticism on openness,
accountability, and the power asymmetry. The responses of the IMF and
World Bank are summarised in the figure below.
IMF and World Bank response to Conditionalities
IMF:
Adopting the ``new aid architecture'': PRSP-
alignment and donor coordination;
Reaffirming of IMF's role to address balance of
payment problems;
2002 Guidelines on Conditionality.
World Bank:
Adopting the ``new aid architecture'': PRSP-
alignment and donor coordination;
Devising a selectivity approach to aid allocation;
2005 Conditionality Review.
A study commissioned by the Norwegian Government in 2006 assessing
``The World Bank's and the IMF's use of Conditionality to Encourage
Privatization and Liberalization: Current Issues and Practices'' in
Bangladesh, Mozambique, Uganda, and Zambia also concludes that while
the IFIs have embarked on some important reform, their stewardship role
is still highly prevalent. These conclusions are summed in the figure
below:
Do the IFIs adhere to their own guidelines?
There is a stronger sense of national ``ownership''
of the programs, but this is reduced by:
Weaknesses in participatory processes;
Extensive dependence on IFIs and foreign consultants
in elaboration of policies, and lack of local input;
Lack of ``policy space'' and analysis of policy
alternatives; and
Lack of unified view within the government,
frequently used by IFIs to promote their own cause.
The IFIs are more flexible in their enforcement of
conditionalities. Sometimes bilateral donors and civil society
have demanded less flexibility.
Donor coordination is strengthened, but this may
reduce policy space and weaken borrowing member countries'
bargaining power.
Local IFI representatives show little in-depth
knowledge of the World Bank's GPPs.
The same study also poses critical questions as to whether the IFIs
(World Bank and IMF) still use Conditionalities to promote
privatisation and liberalisation? The conclusion is that ``though less
common, these conditionalities are still prevalent.''
Do the IFIs still use condionalities to promote
privatization and liberalization?
Privatization and liberalization are still
included as conditionalities in World Bank and IMF loans, but
are less common than before.
The policy advice given by the IMF and the World
Bank on privatization and liberalization has changed; a clear
trend towards greater pragmatism and focus on complementary
policies, but changes not uniform across cases and sectors.
The IFIs exert considerable influence through
providing policy advice, and have not generally elaborated
alternative policies to those involving privatization and
liberalization.
Of critical concern for countries like Zambia, is the role the IMF
and the Bank have continued to play in stewarding the process of
development. In illustrating this point, in his 2006 study on the Use
of Conditionality by International Finance Institutions to encourage
privatisation and liberalisation, Professor Saasa quotes a former
Ministry senior official who at the time of the interview was Managing
Director of Zambia National Commercial Bank, ``There were times when we
officials will . . . sit in the Minister's conference room [awaiting
the Minister to join us] . . . Then he will come in the room
accompanied by IMF officials and inform us the . . . already agreed
position before we the officials] are given the opportunity to table
the pertinent issues.'' \7\
---------------------------------------------------------------------------
\7\ Personal interview with Mr. Likolo Ndalamei, Managing Director
of ZNCB, Lusaka, 31 October 2006.
---------------------------------------------------------------------------
In light of the above, the overbearing weight of the IMF and the
World Bank in influencing the outcome of the PRGF negotiations as well
as other development processes has been stressed by nearly all civil
society organizations and this is said to have been caused by the
restrictive dialogue approach to economic policymaking, generally.
Weak International Response to the Problem of Vulture Funds
Zambia's post HIPC/MDRI debt situation is also challenged by the
rise of ``vulture funds.'' \8\ Donegal International Limited, an
incorporated company of Debt Advisory International LLC (DAI) of
Washington area of the U.S. was the Vulture Fund that sued Zambia. It
was registered in the British Virgin Island (BVI) on 18 December 1997.
Donegal is owned and run by Mr. Michael Sheehan, a citizen of the
United States. Donegal's major asset was its claim of over US$55
million against Zambia from a loan it bought from Romania at a cost of
only US$3.3mn.
---------------------------------------------------------------------------
\8\ A ``Vulture Fund'' is a financial organization that specializes
in buying securities which can be in the form of company shares,
industries, and debts in distressed economic environments. These
securities could be high yield bonds/shares in or near default and
debts where debtors are struggling to pay. The goal of the vulture fund
is to make profit by buying cheap debts of struggling companies and
recently, heavily indebted third world countries facing debt repayment
difficulties. These organizations work like circling vultures that
patiently wait to pick up the remains of a rapidly weakening debtor and
later claim huge interest repayments through litigation. According to
Jubilee-U.K., currently, there were at least 40 lawsuits by ``Vulture
Funds'' against poor countries by May 2007.
---------------------------------------------------------------------------
Though this was not the first case of a commercial creditor seeking
super profits from a country striving to provide basic social services
and put its citizens back onto the path of development, the
international community was not impressed with the development. While
CSOs did what they could to stop this injustice, the authorities with
the ability to change the situation responded in ways that leave much
to desire. The World Bank put in place a Debt Reduction Facility which
assists poor countries to buy back such debts but not actually dealing
with the real cause of the problem, which is the lack of regulation to
control the activities of ``vulture'' creditors such as Donegal.
Jubilee-Zambia and partners opposed the directive which called on
Zambia to pay Donegal US$15mn and also opposed the view point that
Donegal should even make such a claim in the first place.
In a publication entitled ``Vulture Funds and Debt Relief. The
Immoral Tactics of Vulture Funds: The Case of Zambia''; Jubilee-Zambia
and its partners state that:
Why is Jubilee-Zambia and Its Partners Opposed to This Claim?
We feel it is immoral for Donegal to ask for a
profit of several millions dollars (US$55 million) over and
above the price (US$3.3 million) it paid for the debt from
Romania.
We feel debt repayments to Donegal International
will upset Zambia's fiscal stability and ability to deliver
public services. Our position is that Zambia cannot afford to
lose millions of dollars as the country needs to address
pressing poverty and development problems, which require
immediate financial resources.
We also feel and agree with Judge Smith of the
London court that Mr. Sheehan and his agents did not act very
honestly in the acquisition of this debt. As Jubilee movements,
we are convinced that the purchase of the debt undermines and
erodes the full intended benefits from debt relief arrangements
initiated through the Highly Indebted Poor Country Initiative
(HIPC) and the Multilateral Debt Relief Initiative (MDRI).
Additionally, this case has not only revealed the lack of an
international mechanism to safeguard vulnerable countries against
claims by rich companies but has also brought to the fore, weaknesses
in international agreements. While debtors were bound to abide by every
conditionality of the HIPC process, creditors were not bound by law not
to cancel their debts.
Additionally, the HIPC process and the MDRI were only limited to
bilateral and some multilateral creditors. The creditor community also
includes commercial creditors such as Commercial Banks and Private
investors including Donegal International whose main interest is profit
at all costs, however, the debt cancellation initiative was left to the
mercy of creditors to join such important pro-poor mechanisms. It is
essential that a mechanism be developed to make debt relief all
encompassing and mandatory.
The weaknesses of the HIPC process as a whole are evident by the
lack of a binding agreement on the part of creditors to deliver their
part of debt relief. According to the Ministry of Finance and National
Planning (MoFNP), some creditors have not yet delivered their part of
debt relief.
The amount of US$635 million reported in last year's budget (2006)
was adjusted upward during the year. This adjustment was to reflect
undelivered HIPC Initiative debt relief from some of the bilateral
creditors with whom we have not yet reached agreement. Budget speech,
2008.
It is clear that bilateral creditors were not bound to deliver
their part of the deal even when they required Zambia and other HIPC
countries to adhere stringently to their austere conditions and those
of the multilateral institutions.
Accountability Issues: What Government, Parliamentarians, and CSOs are
doing
It is worth mentioning that there are commendable efforts to fight
corruption and increase financial accountability. Since the
inauguration of the current government in 2001, the President has
embarked on the crusade against corruption to the extent that his
predecessor has been relieved of his immunity to pave way for a free
and fair trial in several cases of alleged corruption.
The Auditor General has also been meticulous in bringing out cases
of misuse or misapplication of resources. For example, the lack of
expenditure returns which was reported to be approximately US$1mn
(K3,567,598,553) in 2005 was no longer the case in 2006. The 2006
report of the Auditor General only indicates that less than US$500,000
irregularly transferred. While these are regrettable occurrences and
should not be inevitable, their magnitude is evidently reducing.
To assist in this area, the Jesuit Centre for Theological
Reflection has developed a simple tool that can be utilised by local
communities in assessing the efficacy of debt resources. This tool,
called the Debt Resources Monitoring Manual, which the Jubilee-Zambia
campaign members are using in five districts of four provinces will
help clarify the following:
a. To what extent are both new and old loans benefiting the
communities in Zambia;
b. Have the local communities been involved in the
identification, design, and implementation of projects/
programmes benefiting from loans or debt relief in their
communities;
c. Are the programmes/projects under loans demand driven or
supply driven; are they part of Zambia's development agenda;
d. What is the rationale, conditions, and requirements for
the loans.
With this tool, we are confident that we will not only bring about
early warning but we will also augment other processes and tools which
seek to raise transparency and accountability in Zambia.
Zambia has also embarked on a number of standard international
accountability systems and tools including operationalising the Public
Expenditure Management and Financial Accountability (PEMFA), which
includes the Integrated Financial Management Information System
(IFMIS). During the fifth national development plan period, 2006-2010,
the government will implement routine tracking studies and periodic and
detailed Public Expenditure Reviews (PER). The FNDP states ``Public
Expenditure Tracking Surveys will be developed and implemented.''
While recognising that the work of the Auditor General is
extensive, the release of the report 1 year after the period in review
does not rid it of worries around the possibility of recovering what
has been lost and of course like in many places prosecution on
defaulters has either tarried or nonexistence. Therefore the need for
early warning cannot be ignored. Therefore the work of the JCTR-hosted
Jubilee-Zambia campaign on monitoring of debt resources is extremely
essential.
CSOs in Zambia have also been actively engaged with
Parliamentarians to ensure that the oversight role of Parliament in the
loan contraction process in the future is made constitutional through
the proposals for a Debt Management bill. Members of Parliament,
particularly those in Reforms and Modernisation Committee, the
Estimates of Budget Committee, and the Committee on Economic Affairs
have been making significant efforts to introduce the following pieces
of legislation:
a. The Budget Act to provide for a transparent and
participatory budget preparation process, the development of
medium- and long-term development plans indicating
corresponding sources of income and submission to relevant
committee of Parliament of anticipated revenues and
expenditures for the year prior to submission of the final
estimates to Parliament.
b. The Government Borrowing Act to provide for a transparent
loan contraction process and to provide Parliament to authorise
any borrowing after considering the source of the loan, the
extent of the total indebtedness by way of principal and
interest, provisions made for repayment of the loan and its
intended utilisation.
c. Access to Information Act whose aim is to give every
citizen the right to information held by the state and to
compel the state to publicise any important information
affecting the welfare of the nation.
d. The Code of Conduct of Public Officers legislation to
address conflicts of interest for public officers and for
declaration of incomes, assets, and liabilities by specified
public officers.
e. The Budget Monitoring Framework to provide for the setting
up of a unit involving Civil Society Organisations and other
interest groups to monitor the implementation of poverty
reduction programmes financed by the national budget.
c. the need for legislation
Debt cancellation should be expanded to all countries that it need
to meet the Millennium Development Goals. In doing so, it is necessary
to ensure that:
a. Mechanisms to provide debt relief are expanded in order to
provide space for all low-income countries to reorient their
priorities toward national sustainable development rather than
external debt service.
b. The International community's responses to the problem of
low-income countries' debt are secured from incessant
litigations and claims made by creditor institutions/companies
which have chosen to free-ride by claiming their part of debt
repayments while others have provided debt cancellation.
c. Gains made by debt cancellation are not eroded due to poor
or weak institutions, and there must be accountability, greater
transparency and effectiveness.
d. Interference of external institutions is circumscribed
only to necessary areas such as those listed above.
To do the above, legislative actions are necessary. It is therefore
essential that such proposals as the Jubilee Act which encompass all
these are put in place.
In Zambia, the Jesuit Centre for Theological Reflection has already
come up with similar proposals which are meant to increase
parliamentary oversight in the contraction and management of loans.
This proposal will also be discussed between the JCTR and the
parliamentary committee for Economic and Labour Affairs on April 28,
2008. The Zambian community is also becoming aware of the proposed
legislation through the activities of the JCTR-hosted campaign,
Jubilee-Zambia. Government intentions in the 2008 budget are ``to
consolidate the legal framework governing the contraction and
management of debt.''
With the Jubilee Act and the Debt Management bill in place in the
United States and in Zambia respectively, it is clear that
coresponsibility envisaged in the Monterrey consensus is possible and
this can herald many such processes. The Monterrey consensus in 2002
declared, ``Debtors and creditors must share the responsibility for
preventing and resolving unsustainable debt situations.'' Here lies the
challenge: Generating the political will to ensure both expanded debt
cancellation and responsible lending and borrowing practices in the
future.
______
Letter From David H. McCormick, Under Secretary for International
Affairs, Department of the Treasury, to Representatives Barney Frank
and Spencer Bachus
Washington, DC, April 2, 2008.
Hon. Barney Frank,
Chairman, Committee on Financial Services,
U.S. House of Representative, Washington, DC.
Dear Mr. Chairman: I am writing regarding H.R. 2634 ``Jubilee Act
for Responsible Lending and Expanded Debt Cancellation of 2007,''
scheduled to be marked up by the House Committee on Financial Services.
This Administration has provided strong international leadership on
debt relief for the world's most heavily indebted poor countries.
Building on the work of the previous Administration and with strong
congressional support, we have deepened and broadened the Enhanced
Heavily Indebted Poor Countries (HIPC) debt reduction initiative. This
Administration then initiated, largely designed, and negotiated the
Multilateral Debt Relief Initiative (MDRI) and the recent agreement in
the Inter-American Development Bank for 100 percent debt relief for
heavily-indebted poor countries. These initiatives combined are
providing over $100 billion in debt reduction to 32 countries, and
there are another 8 countries that could eventually become eligible. In
addition, to avoid repeating the ``lend and forgive'' cycle, this
Administration led the efforts in the multilateral development banks to
switch to grants for the poorest countries. For instance, in 2001, IDA
provided less than one percent of its resources in grants to the
poorest countries (IDA-only)--today it is over 40 percent. The
Administration has also worked to put in place an internationally
agreed debt sustainability framework to help guide future lending.
The goals of the proposed Jubilee Act are laudable, but we think
the consequences of such a bill are problematic and the Administration
does not support it. While there are a number of problems with the
bill, let me note four.
The countries to be covered by the Jubilee Act are managing their
debt, and some of the countries that would be covered by this bill are
now actively working towards expanded access to international capital
markets. Providing debt relief to countries that can service their debt
sends the wrong message, and undermines efforts to assist countries in
developing sound debt management practices that will allow them to
transition gradually toward access to private capital markets.
Any debt relief should be conditioned on the adoption of policies
that promote sound economic practices, or it could easily be seen as
throwing ``good money after bad,'' though in this case the money has
not gone ``bad.'' Policy conditionality is important and often
necessary to ensure that debt relief is used in a manner that will
promote economic growth and provide real benefits to the poor.
The budget impact of such a program would be significant, and would
require trade-offs that could affect key foreign policy priorities. The
Treasury Department estimates that the budget cost to forgive the $2.5
billion in nominal debt (including loan guarantees) owed to the United
States by non-HIPCs would be approximately $1 billion. (This cost
estimate assumes that all IDA countries qualified in FY 2008 and would
change depending on the year each country qualified for debt relief.)
These countries also owe the World Bank and IMF over $32 billion in
nominal debt, in addition to other bilateral and multilateral debts.
While the bill calls for international financial institutions (IFIs) to
fund debt relief from internal resources, the availability of such
resources is very likely to be limited, as recently demonstrated by the
donor funding for the Multilateral Debt Relief Initiative (MDRI), as
well as by the financial engineering that was required to make Liberia
debt relief work. Therefore, the U.S. would need to be prepared to make
a significant contribution, at the expense of other development
assistance.
Finally, the Responsible Lending Framework described by the bill
could hinder access by poor countries to private capital. The bill
calls for the creation of a binding international legal framework for
lending by all multilateral, bilateral, and private creditors. While we
recognize the goals underlying such a framework--to encourage
sustainable lending and borrowing levels--the prospects for such an
agreement are doubtful. Given the wide range of international
creditors, creation would be very difficult and enforcement would be
nearly impossible. Finally, the threat of sanctions from such a
framework will likely discourage legitimate creditors from lending to
poor countries, further reducing these countries' access to financial
markets.
My staff is ready to go into much more detail on these issues with
your staff, but I believe that one other obvious problem should be
highlighted. The United States is far from making good on its current
commitments to the current debt reduction initiatives--that help the
poorest, most heavily indebted countries. We find ignoring this reality
to be a serious flaw in this bill.
The Office of Management and Budget advises that from the
standpoint of the Administration's program, there is no objection to
the submission of this letter.
Thank you for your consideration of these issues. I look forward to
a continued dialogue and to working with Congress to develop the best
possible policies in this area.
Sincerely,
David H. McCormick,
Under Secretary for International Affairs.
______
Department of the Treasury,
Washington, DC, April 2, 2008.
Hon. Spencer Bachus,
Ranking Member, Committee on Financial Services,
U.S. House of Representatives, Washington, DC.
Dear Mr. Bachus: I am writing regarding H.R. 2634 ``Jubilee Act for
Responsible Lending and Expanded Debt Cancellation of 2007,'' scheduled
to be marked up by the House Committee on Financial Services.
This Administration has provided strong international leadership on
debt relief for the world's most heavily-indebted poor countries.
Building on the work of the previous Administration and with strong
congressional support, we have deepened and broadened the Enhanced
Heavily Indebted Poor Countries (HIPC) debt reduction initiative. This
Administration then initiated, largely designed, and negotiated the
Multilateral Debt Relief Initiative (MDRI) and the recent agreement in
the Inter-American Development Bank for 100 percent debt relief for
heavily-indebted poor countries. These initiatives combined are
providing over $100 billion in debt reduction to 32 countries, and
there are another 8 countries that could eventually become eligible. In
addition, to avoid repeating the ``lend and forgive'' cycle, this
Administration led the efforts in the multilateral development banks to
switch to grants for the poorest countries. For instance, in 2001, IDA
provided less than one percent of its resources in grants to the
poorest countries (IDA-only)--today it is over 40 percent. The
Administration has also worked to put in place an internationally
agreed debt sustainability framework to help guide future lending.
The goals of the proposed Jubilee Act are laudable, but we think
the consequences of such a bill are problematic and the Administration
does not support it. While there are a number of problems with the
bill, let me note four.
The countries to be covered by the Jubilee Act are managing their
debt, and some of the countries that would be covered by this bill are
now actively working towards expanded access to international capital
markets. Providing debt relief to countries that can service their debt
sends the wrong message, and undermines efforts to assist countries in
developing sound debt management practices that will allow them to
transition gradually toward access to private capital markets.
Any debt relief should be conditioned on the adoption of policies
that promote sound economic practices, or it could easily be seen as
throwing ``good money after bad,'' though in this case the money has
not gone ``bad.'' Policy conditionality is important and often
necessary to ensure that debt relief is used in a manner that will
promote economic growth and provide real benefits to the poor.
The budget impact of such a program would be significant, and would
require trade-offs that could affect key foreign policy priorities. The
Treasury Department estimates that the budget cost to forgive the $2.5
billion in nominal debt (including loan guarantees) owed to the United
States by non-HIPCs would be approximately $1 billion. (This cost
estimate assumes that all IDA countries qualified in FY 2008 and would
change depending on the year each country qualified for debt relief.)
These countries also owe the World Bank and IMF over $32 billion in
nominal debt, in addition to other bilateral and multilateral debts.
While the bill calls for international financial institutions (IFIs) to
fund debt relief from internal resources, the availability of such
resources is very likely to be limited, as recently demonstrated by the
donor funding for the Multilateral Debt Relief Initiative (MDRI), as
well as by the financial engineering that was required to make Liberia
debt relief work. Therefore, the U.S. would need to be prepared to make
a significant contribution, at the expense of other development
assistance.
Finally, the Responsible Lending Framework described by the bill
could hinder access by poor countries to private capital. The bill
calls for the creation of a binding international legal framework for
lending by all multilateral, bilateral, and private creditors. While we
recognize the goals underlying such a framework--to encourage
sustainable lending and borrowing levels--the prospects for such an
agreement are doubtful. Given the wide range of international
creditors, creation would be very difficult and enforcement would be
nearly impossible. Finally, the threat of sanctions from such a
framework will likely discourage legitimate creditors from lending to
poor countries, further reducing these countries' access to financial
markets.
My staff is ready to go into much more detail on these issues with
your staff, but I believe that one other obvious problem should be
highlighted. The United States is far from making good on its current
commitments to the current debt reduction initiatives--that help the
poorest, most heavily indebted countries. We find ignoring this reality
to be a serious flaw in this bill.
The Office of Management and Budget advises that from the
standpoint of the Administration's program, there is no objection to
the submission of this letter.
Thank you for your consideration of these issues. I look forward to
a continued dialogue and to working with Congress to develop the best
possible policies in this area.
Sincerely,
David H. McCormick,
Under Secretary for International Affairs.
______
Response of Dr. Nancy Birdsall to Question Submitted by Senator Lugar
Question. Your testimony provides clear suggestions to improve the
Jubilee Debt Relief Act which is before this committee. Are there
additional accountability, anticorruption and democracy conditions that
should be considered as well?
Answer. The standards used for HIPC completion (including an IMF
program or equivalent) should apply equally to any new debt reduction
for all IDA-eligible countries. It would be reasonable for the bill to
call for Treasury, or another agency such at the GAO or World Bank, to
assess the application of those standards in the past, and propose any
improvements in their application given experience in the last decade,
particularly with respect to corruption, financial management, budget
transparency and so on. (A standard on democracy would best be framed
in terms of transparency, rule of law, public access to information.)
Such an assessment could compare the existing HIPC program standards to
the Millennium Challenge Corporation standards for eligibility, for
example.
The addition of an insurance-style facility which I recommended in
my testimony has the following advantage: In contrast to a one-time,
upfront debt writeoff, it creates a healthy incentive for countries to
maintain eligibility for benefits from it into the future, while
allowing for reasonable new borrowing, including from the IMF and the
multilateral banks.
______
Response of Gerald Flood to Question Submitted by Senator Lugar
Question. Could you please provide additional examples of the
tangible benefits to poor countries of debt relief? Would we have seen
the same improvements in those poor countries if debt relief had not
occurred?
Answer. The following are additional examples of how debt relief is
benefiting poor countries:
country examples
Tanzania
When Tanzania reached its completion point under the Heavily
Indebted Poor Countries Initiative (HIPC) in 2001, it received debt
stock relief totaling $3 billion. Former President Benjamin Mkapa
explained what this meant to his country in a letter to the Jubilee
Debt Campaign in 2004: ``When I became President of Tanzania in 1995,
our country was witnessing a serious deterioration of basic services,
and a high and unsustainable debt burden. One of my first priorities
was to reverse these trends by increasing government revenue and
seeking debt relief . . .'' He said that when HIPC debt relief was
received in 2001,
[It]enabl[ed] us to increase resources for poverty reduction
by 130 per cent. We have already witnessed tremendous
successes. The primary school population has increased by 66
per cent--the greater part of an extra 2 million children--and
the shortfall in the enrolment of girls has been eliminated. We
have built 45,000 classrooms, 1,925 new primary schools and
over 7,500 homes for teachers in partnership with their
communities; between 2000 and 2004, we recruited 37,261 new
teachers, and retrained another 14,852. The pass rate in the
Leaving Examination doubled in 2 years.
Much has been attained in other sectors as well. For
instance, hospitals are being rehabilitated and refitted with
diagnostic equipment; the previous shortage of basic drugs is
now history; and the rate of immunization has reached 83
percent. We are now introducing the hepatitis vaccine and this
will save 20,000-25,000 lives annually.
(Tanzania received an additional $3.7 billion in debt cancellation in
2006 under the Multilateral Debt Relief Initiative--MDRI.)
Niger
Niger, located in the Sahel region of sub-Saharan Africa, is one of
the poorest countries in the world. It began receiving HIPC debt relief
in 2001, reached its completion point in 2004 and received MDRI debt
cancellation in 2006. The following is an excerpt from ``Debt Relief
Yields Results in Niger'' by Emilio Sacerdoti and Philippe Callier, IMF
African Department, January 25, 2008:
In the landlocked Western African country of Niger, lower
debt service, together with continued significant budgetary aid
and higher domestic revenue mobilization, is having an impact
on spending in education, health, and the rural sector, where
budgetary allocations increased by 4 percent of GDP between
2002 and 2007.
The debt stock was reduced through the [HIPC and MDRI] from
76 percent of GDP at end-2002 to 14 percent at end-2006, or by
the equivalent of $1.3 billion. . . . Debt cancellation yielded
a drop in debt service of about 2 percent of GDP between 2003
and 2006. . . .
The higher spending associated with debt relief has resulted
in progress in improving key social indicators, which are among
the weakest in Africa. The country is finally moving up in the
rankings of the U.N. Human Development Index.
The infant mortality rate dropped from 156 deaths per
1,000 births in 1997 to 81 per 1,000 in 2006. Under-5 mortality
is still among the highest in Africa.
The primary school completion rate improved from 16
percent in 1997 to 28 percent in 2005. Overall primary school
enrollment is among Africa's lowest.
Access to potable water increased from 40 percent in
1996 to 69 percent in 2005.
Thus, while Niger still has a long way to go to emerge from extreme
poverty, debt relief is helping to launch the country and its people
toward a brighter future.
Zambia
The case of Zambia illustrates the importance of debt relief to a
country facing severe fiscal constraints. Zambia had a difficult road
to the completion point. When I looked into the problem in 2004, I
found that the completion point was apparently being held up in large
part because pressures to increase salaries led to an overshooting of
the wage bill target agreed with the IMF. I noted that the World Bank
had recently examined the wage bill problem as part of a comprehensive
review of public expenditure management. It found that:
[L]ow remuneration in the public sector is a major factor
contributing to the problem of poor productivity, motivation,
and recruitment and retention. At a time when government is
seeking efficiency improvements, in part by reducing the size
of the civil service, there exist significant staff shortages
in a wide range of professional and technical jobs owing to
poor pay compared to that available in the private sector and
within regional labor markets. . . .
The problem of low pay . . . notwithstanding, the wage bill
in Zambia has remained large relative to overall government
expenditures, thereby crowding-out operational expenditures.
The challenge for Zambia is therefore how to design and
implement a pay reform strategy that is consistent with the
macroeconomic goal of containing the size of the wage bill (as
a proportion of GDP).
The World Bank report outlined a broad strategy for addressing the
issue, but the challenge was an enormous one--how to make wages
sufficiently remunerative to attract as well as retain qualified staff
while at the same time minimizing the cost. It was difficult to see how
it could be dealt with effectively except, at best, over the medium
term. In the meantime, Zambia continued to be plagued by a severe
fiscal constraint, attributable in large measure to its heavy debt
service obligations. According to the IMF and World Bank, Zambia's debt
service in 2004 was expected to reach an extremely high 31 percent of
government revenues. It was a kind of catch-22 situation. Zambia badly
needed the fiscal space that debt relief would provide, but because
fiscal pressures were so great, it had difficulty meeting the IMF
fiscal target that would have made it eligible to receive debt relief.
Eventually, in April 2005, Zambia satisfied the conditions for
reaching the HIPC completion point, and a year later it became eligible
for MDRI debt cancellation. Debt cancellation under the two programs
totaled more than $6.5 billion. Fiscal relief was at hand at last, and
the World Bank reports that a significant number of new teachers and
health workers were hired in 2005 and 2006.
Moreover, in April 2006, just after qualifying for MDRI
cancellation, the Zambian Government abolished ``user fees'' in all
rural health clinics in Zambia. This meant that while costs previously
may have deterred the poorest from coming into health clinics, care was
now free. This was particularly important for a country facing one of
the world's most severe HIV/AIDS pandemics. Early last year, Neil
Watkins, National Coordinator of Jubilee USA Network, led a delegation
of a dozen Jubilee USA supporters to Zambia. In Neil's own words:
On our first day in Zambia, we drove south of the capital,
Lusaka, to a town called Siavonga, to witness the impact of
debt relief. After a long, bumpy ride through the Zambian
countryside, we arrived at the Siavonga Rural Health Clinic. As
we toured the clinic, Grace Chibanda, a pharmacist, showed us
the pharmacy, which was full of antiretroviral drugs for HIV/
AIDS. ``Debt relief is a good thing,'' Grace told us. ``It is
getting medicines for people who didn't have it before.''
Nurses and doctors we talked with confirmed that they had seen
an increase in patients since April. It was inspiring to see
the impact of debt relief firsthand and to know that debt
relief is improving the lives of many Zambians in need.
transparency and participation
A facet of the HIPC program that often does not get much attention
is that it became a vehicle for establishing transparent and
participatory processes for allocating and monitoring the use of debt
relief savings, and in some cases for allocating and monitoring
poverty-oriented budgetary resources more broadly. Debt campaigners,
locally and internationally, had always stressed the importance of such
processes in assuring that the funds would, in fact, benefit the poor.
In my written testimony I mentioned the case of Cameroon, where a
broad-based HIPC funding committee overcame political opposition to
allocate debt-relief savings to a path-breaking program for uniting
sustainable forestry with rural community development throughout the
country. Another example is:
Malawi
Several years ago local civil society organizations came together
to form a federation called the Malawi Economic Justice Network (MEJN).
Once HIPC funds were granted, they worked closely with the
Parliamentary Budget and Finance Committee to identify 12 key
categories of priority poverty expenditures in the budget. They
persuaded the Malawi Ministry of Finance to produce periodic
expenditure figures for each of these categories and worked with the
Parliamentary Budget and Finance Committee to monitor the allocation of
funds to the relevant line ministries.
The MEJN formed subgroups to monitor the delivery of services in
different parts of the country. They selected dozens of local districts
and provided training to local leaders in the use of questionnaires to
discover, for example, whether clinics had medicines, schools had
books, and teachers were trained. The information was compiled and
analyzed by experts, and the findings were publicized. The survey
results were shared first with communities, then with the government,
donors, and other stakeholders. As of 2004 (when I examined this case)
the monitoring exercise was having an impact. For example, the national
budget was revised, e.g., to shift allocations from nonpriority items
(foreign travel, expenditures of the office of President, etc.) to
priority poverty programs. The Ministry of Education was using the
findings in its own planning, and Parliament was using them to question
the line ministries.
The broader point in the Malawi and Cameroon examples is that the
procedures instituted with the HIPC debt relief program appear to be
making a contribution to the strengthening of democratic processes in a
number of countries where historically weak governance has often led to
serious neglect of the needs of the large majority of very poor and
vulnerable citizens.
the economic impact
Another noteworthy effect of HIPC and MDRI debt relief that is
often overlooked is its impact on the overall economy of the
beneficiary countries. As Dr. Nancy Birdsall, President of the Center
for Global Development, observed during her testimony before the
committee, ``[T]he increased fiscal space due to debt relief (along
with faster growth and recent stability in HIPC countries) has clearly
played a role in helping low-income countries sustain sound economic
programs, by permitting reductions in fiscal deficits and accumulation
in some cases of reserves.'' In a 2003 IMF Working Paper entitled
``External Debt, Public Investment and Growth in Low-Income
Countries,'' the authors conclude that the substantial reduction in the
stock of external debt projected for highly indebted poor countries
(HIPCs) would directly increase per capita income growth by about 1
percentage point per annum. While 1 percent may not seem high, its
significance increases when one takes into account that most of the
HIPC countries are in sub-Saharan Africa, and according to the World
Bank, GDP growth per capita in these countries during 1995-2005 was
1.88 percent. (It should also be noted that the Working Paper did not
take into account--because it did not exist--the major additional debt
stock reduction provided by the MDRI.)
Another interesting and potentially highly significant development
is reported in a recent edition of the IMF Survey Magazine. According
to an article entitled ``Africa's Improved Debt Outlook Sparks Investor
Interest,''
Strengthened macroeconomic fundamentals and lower debt levels
following debt relief from the IMF and other international
institutions have increased the attractiveness of low-income
African countries to a broader universe of investors. A larger
group of bilateral lenders is now active in Africa, with
creditors outside the traditional OECD-based donor community
initiating or expanding their operations in the continent.
Private investors have also stepped up their lending
markedly. In the past year, two sub-Saharan African (SSA)
countries have issued international bonds and in at least
eight, a significant share of domestic securities are held by
foreign investors.
Reflecting these trends, more than a dozen SSA economies are
now the subject of an international credit rating. Although
immature, some African stock markets are also starting to take
off.
This new investor interest is a promising development, but it also
presents major challenges. It places a special premium on both strong
debt management by African governments and responsible lending by the
new creditors (a topic addressed in
S. 2166). Otherwise, the benefits of the HIPC and MDRI programs may
prove ephemeral as countries fall back into unsustainable debt. It is
in the interest of all parties to make sure that this does not happen,
and that the new investor interest will translate into opportunities
for a substantial number of African countries to move beyond exclusive
reliance on traditional aid donors to a new level where they can tap
diverse sources and types of financing on a sustainable basis for
critical investment needs.
______
Responses of Dr. Peter Henry to Questions Submitted for the Record by
Senator Richard Lugar
Question. You noted many concerns with debt relief. If debt relief
has not been as effective as expected, can anything be done to
structure debt relief so that it truly helps to reduce poverty?
Answer. If the goal is to reduce poverty, then debt relief is not
an efficient tool to achieve that end. As I outline in my testimony,
holding debt service constant and increasing the flow of foreign
assistance to anything approximating the quantities that we have
promised to deliver time and again would provide a much more effective
way of reducing poverty. See my answer to your next question for ways
to improve the allocation of foreign assistance.
Question. From your perspective, what are the most effective
economic policy and foreign assistance tools to help countries fight
poverty? If we had one additional dollar foreign assistance available,
how would you specifically recommend it be spent?
Answer. Much has been made of the fact that foreign assistance has
not helped promote economic growth and development in poor countries.
This should come as no surprise, because much of our foreign assistance
was given with no such intent. Aid that we grant for political reasons,
or tied-aid that requires the recipient to buy goods from U.S.
corporations, irrespective of the appropriateness of those goods for
the recipient country, cannot be expected to promote development.
The aid that we grant through multilateral organizations such as
the International Development Association arm of the World Bank has a
better record than our direct foreign assistance, but the results have
still been disappointing.
This does not mean that all is lost. A large body of research that
uses randomized trials (a technique similar to the way medical
researchers test the effectiveness of new drugs) to evaluate the
effectiveness of antipoverty programs, points to a potentially
promising path for the use of foreign assistance. Surveying the results
of this research, Professor Abihijt Banerjee of MIT identifies several
areas where foreign assistance can be put to use efficiently:
Education, Provision of Vitamin Supplements, HIV Prevention, Spraying
for Malaria, Fertilizer, and Vaccination.
In his survey, Professor Banerjee identifies specific micro level
programs that were successful in each of these areas in various
countries. He also estimates the cost of scaling up such interventions
from the micro level to include all low-income developing countries.
Based on my read of the evidence, if we had one additional aid
dollar to spend, I would recommend that we give it as a cash transfer
to a mother in a poor country in return for vaccinating her children
and sending them to school.
______
Responses of Assistant Secretary Clay Lowery to Questions Submitted for
the Record by Senator Richard Lugar
Question. How has debt relief been important from a U.S. foreign
policy perspective?
Answer. Economic development and poverty reduction are important
foreign policy priorities not only for the direct benefits they
provide, but also to reduce the desperation and radicalism that poverty
can breed. As President George W. Bush stated on March 22, 2002, ``We
fight against poverty because hope is an answer to terror. We fight
against poverty because opportunity is a fundamental right to human
dignity. We fight against poverty because faith requires it and
conscience demands it. We fight against poverty with a growing
conviction that major progress is within our reach.'' Further, as the
2006 National Security Strategy of the United States notes, ``America's
national interests and moral values drive us in the same direction: To
assist the world's poor citizens and least developed nations and help
integrate them into the global economy.''
When external debt levels become so high that they interfere with a
country's basic economic sustainability, as was the case with the
countries eligible for the HIPC initiative, they can become a major
obstacle to achieving these goals, and therefore need to be reduced.
Debt relief can be a valuable tool to help the poorest, most heavily
indebted countries reestablish a sound economic footing and reengage
with the international community, thereby supporting their efforts to
lift people out of poverty. For countries with unsustainable debts, the
prospect of debt relief, particularly when provided in a coordinated
fashion by all external creditors on comparable terms such as under the
HIPC initiative, can also create an important incentive for governments
to consult with their citizens and make the reforms necessary to
sustain growth. However, while debt relief is a valuable tool in these
cases, it must also be balanced against other policy instruments, such
as direct development assistance. In countries where debts are
sustainable, other development tools can offer a more immediate,
targeted method to encourage economic growth, support poverty
reduction, and achieve U.S. goals.
Question. Have the current debt relief programs, HIPC and MDRI,
hurt the ability of the development banks to finance projects in the
poorest countries?
Answer. Although the financing for debt relief initiatives has been
slightly different at each development bank, implementation of HIPC and
MDRI debt relief at the development banks has generally been financed
through a combination of increased bilateral donor contributions and
limited use of the institutions' net income and internal resources. One
example of these donor contributions is that donors have agreed to
offset, dollar for dollar, the cost of MDRI debt relief at the World
Bank and the African Development Bank.
As a result of these financing arrangements, including increased
donor contributions, debt relief under HIPC and MDRI has not caused a
decrease in the overall financing levels provided by the development
banks for projects in the poorest countries. In the long term, the
ability of the development banks to provide debt relief without
reducing their overall level of financing for the poorest countries
will largely depend on donor countries successfully meeting their
funding commitments to these institutions. In FY 2008, we anticipate
the U.S. Government will have over $870 million in arrears to the
multilateral development banks, including $385 million to the World
Bank's IDA alone. Our budget request this year for payment of arrears
to the multilateral development banks is specifically targeted at
fulfilling our commitment to MDRI and our annual commitment to IDA.
Question. Did HIPC and MDRI include adequate accountability and
anticorruption mechanisms? If Congress moves forward with Jubilee debt
relief, what accountability and anticorruption requirements should be
included in the legislation?
Answer. In our view, HIPC and MDRI include adequate accountability
and anticorruption mechanisms. In order to qualify for debt relief
under these programs, the country must develop a strategy for poverty
reduction and a prudent economic plan. The international financial
institutions and donors work with the country to lay out a course for
improved performance and accountability at the beginning of the
program.
When the country qualifies for HIPC, it begins to receive interim
debt relief. However, in order to receive full HIPC debt cancellation,
the country must demonstrate satisfactory performance over time in
carrying out its poverty reduction strategy and economic reform
program, including satisfying a number of country-specific requirements
for improvements in areas such as fiscal management, anticorruption
measures, and improved social programs. Since debt relief under MDRI is
nearly always conditioned on successful completion of the HIPC process,
the accountability and anticorruption mechanisms included in HIPC also
apply to MDRI.
The Senate Jubilee bill (S. 2166) includes provisions that require
eligible countries to develop and implement effective policy reforms to
ensure that savings from debt cancellation are redirected to poverty
reduction efforts, and requires that the beneficiary government produce
an annual report detailing how debt relief savings were used. The
inclusion of these requirements is a positive element of the bill.
However, the accountability and anticorruption requirements in the
Jubilee bill (S. 2166) are not as extensive as the requirements
included in the HIPC legislation. For reference, the relevant standards
for the HIPC Initiative are found in Public Law 106-113, Appendix E,
Title V (1999).
Question. The International Monetary Fund has recently suggested
selling a significant portion of its own gold reserves to fund
operating expenses. Could some of this gold be used to fund additional
debt relief as well?
Answer. The sale of IMF gold requires an 85-percent majority vote
in the IMF Board. The IMF Board supported a sale of gold, as
recommended by the Crockett Committee, strictly limited to the 12.9
million ounces to fund an endowment for operating expenses.
We believe there would be little support in the IMF Board for gold
sales to finance the additional debt relief called for in the Jubilee
bill, since there appears to be very limited support in the IMF Board
as well as among G-7 governments for the proposals contained in the
bill. In addition, compared to other institutions, debt to the IMF
represents only a small portion of the total debt of the Jubilee
countries. Even if there were backing in the IMF Board to sell IMF gold
to finance forgiveness of the IMF's loans to these countries, the
Fund's membership would not support IMF gold sales to finance debt
reduction at other institutions. Finally, while the IMF Board agreed to
a limited gold sale, selling IMF gold to fund debt relief at other
institutions would require a very large gold sale that could disrupt
gold markets and harm the poorest gold producing countries. Therefore,
we see very little chance that such a sale could gain the support it
would need in the IMF Board.
Question. You mentioned Bangladesh during the question and answer
portion of the hearing. Is it true that the Government of Bangladesh is
sending debt repayments to the United States Government that are close
to the amount that the U.S. provides Bangladesh in foreign assistance?
Could you please provide the committee with the amount that Bangladesh
is now repaying the U.S. (including Public Law 480 debt repayments) and
the amount that the U.S. is giving Bangladesh?
Answer. In 2006 (the most recent year for which complete data is
currently available), the United States disbursed $77.67 million in
gross official development assistance for Bangladesh. During that same
period, Bangladesh paid $51.5 million to the United States Government
in debt repayments. Currently, all of Bangladesh's outstanding official
bilateral debts to the United States are low-interest rate,
concessional Public Law 480 debts owed to the U.S. Department of
Agriculture.
Question. On the second panel, Dr. Henry noted that the G-8 has
repeatedly committed to providing 0.7 percent of GDP in foreign
assistance. Is this correct? If so, was the U.S. party to such a
commitment?
Answer. The G-8 has not committed to providing 0.7 percent of GDP
in foreign assistance, and the U.S. is not party to such a commitment
in the G-8 or elsewhere.
While many countries use this target, the 0.7-percent target bears
no relationship to the ability of partners to use aid effectively. The
United States strongly endorses continued efforts to increase aid
effectiveness, and is a signatory to the 2005 Paris Declaration on Aid
Effectiveness.