Debt forgiveness gathers steam

Wealthy nations will discuss absolving poor countries of loan payments at Friday's G-7 summit in Washington.

It's an idea that's been throbbing in the hearts and minds of liberal activists, antiglobalization campaigners, and rock star Bono for years: Canceling 100 percent of the massive foreign debts owed by the world's poorest countries, thus freeing them to spend millions on healthcare, education, and other poverty-busting plans, rather than just on interest payments for their massive loans.

But it's rarely had much serious political support. Until now. Suddenly both the Bush administration and British Prime Minister Tony Blair's government are behind the idea. And it's on the agenda as G-7 finance ministers meet Friday in Washington.

The Bush team's interest seems to have grown out of its campaign to cancel Iraq's $120 billion debt. If oil-rich Iraq deserves to be freed from its burden, the argument goes, so do the world's poorest nations. Also, backing a plan to help impoverished millions in a single stroke fits with President Bush's "compassionate conservative" agenda, and could impress swing voters in time for the election.

Observers don't expect a final plan to emerge immediately. But there's widespread agreement that the growing momentum means some form of unprecedented action is inevitable.

"This is the farthest we've come toward 100 percent debt cancelation," says Salih Booker, head of Africa Action, a Washington advocacy group involved in the fight against apartheid in South Africa in the 1980s.

By backing the idea, the US and British governments have changed the terms and momentum of the debate. For one thing, after long discounting it, the US now supports the doctrine of "odious debt" - that nations shouldn't have to repay debts incurred by deposed despots who didn't have popular support.

It's an argument Mr. Booker and others have used for years. "When a tyrant goes, his debt should go with him," Booker says, arguing that the notion applies as much to Mobutu Sese Seko in Zaire (now Congo) and Gen. Sani Abacha in Nigeria, as it does to Saddam Hussein and Iraq. (The Congo now has $9.3 billion in debt; Nigeria, $30 billion.)

The 30 or so poorest nations - most of them in Africa - have a total of roughly $200 billion in debt. The movement to cancel it has been gathering steam of late. This week, for instance, Britain announced a unilateral plan to cancel $180 million of poor-country debt per year. And the 1996 Heavily Indebted Poor Country (HIPC) Initiative, under which rich nations have agreed to cancel $110 billion in debt, has so far gotten rid of about $31 billion of debt in 27 countries.

Backers point to major impacts of the HIPC program in poor countries. Tanzania, for instance, used the money that otherwise would have gone to service its debt - about $80 million a year - to boost education spending and eliminate school fees. Some 1.6 million children have returned to school, according to DATA, the debt-relief group founded by U2's Bono.

But some worry that 100-percent cancelation could spark a welfare-like dependency among poor nations. "It would certainly have an enormous short- term impact," says Harry Zarenda, an economist at Witwatersrand University here. "But what's worrying is the establishment of a precedent - that countries would expect the debt to always be written off."

It would also be unfair to less-indebted nations, observers say. And it won't necessarily solve the problem. All around Africa, governments rely on foreign donors to supply big chunks - sometimes two-thirds or more - of their annual budgets. Canceling their debt wouldn't likely staunch that demand.

And then there's the sticky question of how to pay for it. That's what the ministers from the US, Britain, Canada, France, Germany, Italy, and Japan will debate starting Friday.

As British Chancellor of the Exchequer Gordon Brown sees it, it's as easy as a little accounting change by the International Monetary Fund (IMF), the Washington-based organization that's bankrolled by rich countries and facilitates poor-country loans. The IMF has one of the largest stashes of gold in the world, some 103 million ounces. It currently values this gold at the 1971 price of $40 per ounce. But today's market value is about $400 per ounce. Revaluing the gold and selling a portion of it would give the IMF an extra $42 billion to work with, according to its website.

As for the rest of the needed funds, Britain advocates that rich nations step up unilaterally - as it has - to fill the gap.

That's where it's currently at odds with the US, which prefers that the IMF use its own funds - including money coming in from loan repayments - to fund the cancelation. "The Bush administration is quite keen on multilateral solutions when it comes to spending money on poor nations," notes John Williamson, a senior fellow at the Institute for International Economics in Washington. Critics, including Europeans, worry that this will eventually impoverish the IMF and impair its future ability to help poor nations.

The Bush team is reportedly also pushing for all future IMF money to be given out in the form of grants, not loans. This would, the logic goes, mean poor countries wouldn't have to worry about loan repayment. But Europeans are resisting the idea, because over the long term it risks shrinking the IMF's ability to give out funds. If it doesn't have loan money being repaid, it won't have money to give.

Regardless of what form it takes - and who pays for it - most observers figure some form of major debt cancelation is coming. Britain is expected to champion the cause when it assumes the presidency of the G-7 in 2005. And with an Iraq-debt deal still being worked out, the US is likely to continue pushing for poor-nation debt action, too.

Given how debt is dragging down poor nations' poverty-fighting efforts, and how much political will is behind cancelation now, Mr. Williamson says: "Something extra will have to be done."

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