Stop Treating Debtors As Poor Cows

The west's big economies are in trouble. Growth is stuttering to a halt, budget deficits are rising, financial markets awash with doom and gloom. When the finance ministers and central bank governors from the G7 nations meet in Washington this week, it will hardly be an ideal moment to pass round the hat to gain the world's poorest countries another slug of debt relief.

Freeing these countries from their debtors' prison was supposed to be a done deal. Under enormous pressure from Jubilee 2000, the G7 agreed in 1999 to beef up the heavily indebted poor countries initiative (HIPC) so that more than 40 nations would have the prospect of a sustainable exit from debt. All that happened for many countries in Africa was a glimpse of freedom before the prison gates clanged shut again.

Absurdly optimistic

From the start, it was obvious that there were potential problems with the debt relief formula produced by the International Monetary Fund and the World Bank, because it depended on strong growth in exports being sustainable. Absurdly optimistic estimates were pencilled in for export growth, and these have had to be torn up as the stalling of world trade has led to a precipitous decline in the price of many commodities. Countries that thought they had been given an escape route from debt have found themselves back in trouble.

Uganda, the IMF's star pupil in Africa, has been particularly hard hit. A paper on debt prepared by the Bank and the IMF for this week's meeting shows that coffee export revenues from 1998 to 2001 were 36% lower than expected, largely owing to a 53% decline in coffee prices.

Not all HIPC countries have been hurt because some commodity prices, such as cocoa, have been rising. But the Bank and Fund know that there is a real problem and accept that some of the weakest commodity prices - coffee, cotton, copper, cashews among them - are unlikely to recover soon. Reluctant to launch a third HIPC initiative, the Washington institutions offer piecemeal "top-ups" to debt relief for those in most need.

Unsurprisingly, debt campaigners think this is an inadequate response. A joint submission to the meetings from Oxfam, Christian Aid, Cafod and the European Network on Debt and Development says: "We are concerned that levels of debt repayment after HIPC initiative debt relief are too high, undermining the necessary investment needed to accelerate poverty reduction. In the absence of radical reform, HIPC will join a long list of failed poverty reduction initiatives."

Where debt relief is freeing resources for poor countries, there are signs that it is having an impact, the aid agencies say. Mozambique has introduced a free immunisation programme for children. User fees for primary education have been abolished in Uganda, Malawi and Tanzania. Mali, Mozambique and Senegal are due to increase spending on HIV/Aids prevention. But there is a long, long way to go. In Africa, HIV/Aids will leave more than a million children without teachers. In Mozambique alone, the government estimate that 17% of children will die of Aids by the end of the decade. The World Bank estimates that combating HIV/Aids will cost low-income countries at least 1-2% of GDP. Yet 13 of the 26 countries receiving debt relief are spending more on debt than on public health.

So what needs to be done? The answer is a twin-track strategy which would tackle both sides of the problem: high levels of debt and low commodity prices. One measure that will be adopted this week is for the Bank and the Fund to use more cautious assumptions when making forecasts. This has been urged on them by Gordon Brown, who uses the same approach when it comes to calculating Britain's public finances. More realistic figures for commodity prices make it more likely that debt payments will be sustainable.

It would though make more sense to look at debt from the other end of the telescope. The western countries that run the Fund and the Bank are committed to the UN's 2015 targets, and should use debt relief as one means of achieving them. That means debts would be considered unsustainable if it could be shown that they were incompatible with cutting poverty, universal primary education and reducing infant mortality by two-thirds. This would be resisted by hardline G7 countries as a precursor to a 100% debt write-off for the HIPC countries. That is what it does mean, and eventually it will happen.

Significant gains

The other side of the coin is to do something about commodity prices. In this year's World Economic Outlook, the Fund puts forward one way in which the situation could be improved - by ending the grotesque subsidies western governments give to their farmers, which lead to over-production and drive down of prices. A report by Cafod this week will say the subsidy per cow under the European Union's common agricultural policy is $2.20 a day, higher than the income of more half the world's population. Three billion people, in other words, would be better off bovine.

According to the IMF, if agricultural support in industrial countries were eliminated tomorrow, there would be significant gains, both for industrial countries through extra spending power for consumers and for many countries - particularly commodity producers - in the rest of the world. The results indicate that agricultural liberalisation by industrial countries would increase their real income by 0.4 of a percentage point of GDP. The main agricultural exporting regions in the developing world - Latin America and sub-Saharan Africa - would gain between 0.3% and 0.6% of GDP.

The Fund's economic model shows that removal of support on rice, refined sugar and wheat results in an increase in the world price of these goods by 2-8%. These are substantial net gains to a few countries, including some poor countries that are big exporters, as well as some relatively rich ones.

Scrapping of agricultural protection by Europe, the US and Japan is only a partial solution, because part of the problem for indebted countries is that the prices of tropical commodities, not produced in the west, are also falling. Here, as Oxfam noted in its report on coffee last week, there is a need for producers to take supply out of the world market, either by destroying low-grade crops or by voluntary agreements among themselves. Only by doing so will they bring supply into line with demand, thereby pushing up prices.

All this will take time. With America's attention elsewhere, the chances of a big breakthrough this week are remote. Poor countries, meanwhile, are so desperate to boost exports that there is a temptation to produce more, condemning themselves to walking up a downward moving escalator. Change will come. The sooner it starts, the better.