Group of Eight finance ministers agreed last weekend to write off more than $40 billion in debt owed by the world’s poorest countries. The agreement is a critical first step in efforts to help lift these nations out of grinding and enduring poverty. The deal is only a beginning, however. Success will depend on a package of initiatives that will include increased aid and a more level playing field in trade. Most important is the need to follow the words with action. The world’s richest nations should follow through on their promises.
Britain, the host of this year’s G8 meeting, has made debt relief the cornerstone of the annual leaders’ summit that will be held early next month in Scotland. Chancellor of the Exchequer Gordon Brown has made the issue a personal cause (a move that will no doubt strengthen his hand in the fight to succeed British Prime Minister Tony Blair). Months of difficult negotiations yielded a meeting in which the ministers were, according to Mr. Brown “united with a shared purpose.”
Debt relief is a priority for developed and developing nations alike, but how that is best achieved, and more importantly, how poverty can be eliminated are still disputed. The billions of dollars owed by the world’s poorest countries are a crushing burden, and lifting it is urgently needed. The agreement reached last weekend immediately erases some $40 billion owed by 18 of the Heavily Indebted Poor Countries (HIPC), the most desperate countries, to international financial institutions such as the International Monetary Fund and the World Bank. The deal will save them about $1.5 billion a year in debt repayments.
More countries could qualify for relief if they meet strict targets for good governance and fighting corruption. The larger package could up total relief to more than $55 billion. But debt relief, while necessary, is not sufficient to achieve the United Nations pledge to halve world poverty by 2015. And, it should be noted, there are 38 HIPCs; this agreement, even with the second phase, only includes 28 of them.
Another step is also critical: a level playing field in trade. All countries need markets for their goods if they are to accumulate the wealth that will lift them out of poverty, yet the primary exports of many of the poorest countries are agricultural products and this is where developed nations are most resistant to change. Eliminating these trade barriers is not just a matter for industrialized nations as so often it appears to be the case given their squabbles in trade negotiations. Rather, it is a life or death issue for developing nations.
The challenge for the G8 is two-fold. First, it must agree on cuts on agricultural trade barriers, which has been the biggest obstacle to progress in the Doha Round of world trade negotiations. There are signs that an agreement is possible, but Japan, the European Union and the United States must be ready to fight entrenched domestic political interests to see it through. As always, that is a difficult proposition.
The second challenge is replenishing the international development banks. Debt repayments provide those institutions with funds for future lending. Canceling debt without finding an alternative source of revenue risks starving the lending institutions. Some critics worry that this might be one of the reasons hat some governments backed last weekend’s deal. To counter that charge, rich countries must provide, one way or another, extra money to financial institutions adversely affected by the debt relief.
There are several proposals designed to ensure that there is no shortfall. Mr. Brown has called for an International Finance Facility (IFF) that would issue bonds using rich nations’ development budgets as collateral. This would double aid to the poorest countries to $100 billion. His suggestion was opposed by both Japan and the U.S. Instead, Britain will initiate a pilot IFF project that will provide funds for vaccination programs in Africa.
France and Germany proposed a tax on airline tickets. French President Jacques Chirac has said that a $1 levy on every ticket sold could raise $10 billion. This too has been opposed by several governments, but the G8 has agreed to study the proposal. Mr. Brown has also proposed selling or revaluing the IMF’s gold reserves and using the proceeds to finance development, although his current plan seems to rule that out.
Other nations, most notably the U.S. and Japan, prefer to rely on bilateral aid programs. The U.S. has the Millennium Development Account. It was set up in 2004 and has received $2.5 billion in funds over two years, although it has been slow to pay them out. Like Japan’s aid programs, it encourages recipient governments to develop more activist policies that promote growth. Ultimately, that is the sort of partnership that will reduce the poverty that blights the lives of billions of people.
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