Arguments Against Debt Forgiveness Example Using Subsaharan Africa Economics Essay

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Since 1980, debt relief has been a predominant debate on the international scene. Its encouragement coming from various organizations like the Paris Club, the G8 and the Jubilee 2000, has led the IMF and World Bank to move forward debt forgiveness with their HIPC Initiative. Despite being supported by various significant international groups, debt abolition for the highly indebted poor countries has its detractors.

They argue that debt forgiveness support corrupted government and their careless economical strategy. Moreover, the money saved rarely reaches the poor but only benefits the elite. Finally, as pointed out by Robertson (2006), $30 billion worth of debt owned by highly indebted poor countries has been forgiven since 1990. However, new borrowings, which are now exceeding the previous forgiven debt, followed.

This raises the question whether debt relief encourages development, like it aims for, or a vicious cycle leading to greater debt and dependency. To understand the effect of debt relief, this essay will look at the debt forgiveness' supporters' arguments, the HIPC initiative, its impact on Sub‐Saharan Africa and whether or not it encourages development.

Many social groups have put debt relief forward as a moral duty, the most significant being the Jubilee 2000 movement. In 2008, a Jubilee research, conducted by the NEF, claimed that the present debt system fails "to take into account either the human rights of the people of debtor nations or the moral obscenity of odious debt".

Countless assumptions support the follow through of 100% debt eradication for poor countries, the first one being that debt forgiveness will inevitably reduce poverty and the harms it brings like child mortality and hunger. Some say that indebted developing countries deserve reparations for the years of exploitation because of colonialism.

Moreover, as mentioned by Bond (2010), developing countries ought to have "debt repayment for Northern over-consumption of environmental space". Most highly indebted countries have already repaid the debt, some even many times because of its fluctuation due to interests over time.

The loss of confidence towards the international loan system has pushed countries, especially in Africa, to turn to China. China has increased its aid budget and is now offering interest free loans to developing countries without conditions. Through this procedure, China has augmented its access to resources and supported corrupted government.

The situation raises the question on whether multilateral organizations like the World Bank and IMF should move towards more debt forgiveness to regain the confidence of the developing world and undermine the rising threat that China is. Another resentment towards the World Bank comes from its badly design projects and loans.

In the past, too much money has been lent to corrupt governments, like in Indonesia under Suharto's power, followed by an enormous amount of leakage that poor people are still paying for today. Who should be taken to account for the developing countries' debt is still being debated.

Nevertheless, over these assumptions and disagreements lies "The Universal Declaration of Human Rights" (1948) with its first article stating that "all human beings are born free and equal in dignity and rights. They are endowed with reason and conscience and should act towards one another in a spirit of brotherhood". If we acknowledge this statement, it is the richer countries' duty to support poorer ones in the hope of creating a better world.

After looking at few arguments bringing out the idealist nature of debt forgiveness, it is essential to see what are the effects of such procedure. In 1996, the IMF and the World Bank joined their efforts to reduce the debt of the heavily indebted poor countries with the HIPC Initiative. The HIPC Initiative (IMF, 2010) has touched 36 countries with 30 of them being in Africa.

By being the poorest region in the world and by having received the most debt relief, Sub‐Saharan Africa is an appropriate area to look at as a case study to see the impact of debt relief. To be eligible to the HIPC Initiative, the IMF and the World Bank (2006) requires the country to have a Poverty Reduction Strategy, which has already been implemented since a year.

This step ensures that the countries are committed to alleviate domestic poverty before they receive debt relief. The World Bank (2006) claims the HIPC Initiative, after only 6 years, has led to a decrease, by half the previously GDP percentage allocated to debt‐service payment, falling to 2 percent.

Furthermore, in that same amount of time, poverty‐reducing expenditures have increased from 7 percent to 9 percent of GDP. This shows that debt relief does have a positive impact on poverty reduction. Nevertheless, Poverty Reduction Strategy is not the only reform advocated by the IMF and the World Bank.

As mentioned by Cline (1995 cited in Arslanalp and Henry, 2005, p.6), acquiring debt relief from these organizations requires also economic reforms like "inflation stabilization, privatization, trade liberalization, and capital account liberalization". These reforms influence directly development, which is why it is primordial to look at their impact more closely.

First of all, to stabilized inflation countries will often cut on public expenditures. This can mean less money directed towards education, healthcare and subsidies on imported goods like medicines. These areas of social welfare are vital for development and alleviating poverty. Next in order, advocating privatization for debt relief has led basic needs like water to be taken by businesses.

In Johannesburg, Bond (2010) recalls the Campaign Against Water Privatization exposing the unfair service received by poor people in black areas. This led to uprising from the people denied this essential resource. After much resentment, Tsoka ordered access to 50 liters of free water per person per day and a re-regulation of Johannesburg Water.

This is only one example of the damages that privatization can cause and its effect on poor people. Trade liberalization in Sub‐Saharan Africa has had a more complex effect that deserves an extensive look at. Sub‐Saharan Africa main exports partners are the EU and the United‐States. The Economic Partnership Agreement (EPA) was signed to encourage free trade between the SSA and the EU.

This step, which could be seen as a step towards development, has had noticeable negative consequences on the region. Gyekye Tanoh argued, in front of the Council for the Development of Social Science Research in Africa, that while Europe gets 80 percent of African's market, Africa only holds on to 2 percent of theirs (Bond and Kamidza, 2008). This is due to the extensive EU norms requiring a level of quality, which Africa has trouble meeting.

Trade liberalization confronts Sub‐Saharan Africa to unfair competition. The farmers' access to local market is jeopardized by now cheaper subsidized imports (Bond, 2010). Looking at the IMF's publication "Regional Economic Outlook: Sub‐Saharan Africa" (2007), fuel represents more than half of Sub‐Saharan Africa's exports followed by manufactured goods as the second biggest source of exports.

Manufactured goods stand for precious stones, silver, platinum, iron, aluminum and garments. SSA's exports are mainly based on natural resources and are deficient in diversity. The region's lack in technology and skills means they face difficulty in adding value to their products. A development in those two components is needed if Sub‐Saharan Africa ever wants to meet EU norms and raise their now decreasing exports of cash crops.

As mentioned by the IMF's report (2007), the AGOA law encourages the textile industry's trades between the SSA and the United‐States and therefore could help diversified SSA's exports. Nevertheless, the high transport's cost and the low production, due to the lack of mechanization, make the region uncompetitive on the international market especially against East Asia.

Trade liberalization increases Sub‐Saharan's dependence on exports making it even more vulnerable to economical shocks. Bond (2010) denotes the significant decline of trade's percentage in term of GDP when the commodity prices plunged in 2008. Finally, capital account liberalization generally encourages foreign direct investment. As much as FDI can be beneficial for one's nation, Africa's has a history of companies violating their soil and troubling their political sphere.

Shell Oil was evicted from the Niger Delta after supporting the Nigerian dictator Sani Abacha by being involve in the execution of Ken Saro‐Wiwa (Bond, 2010). Mugabe, the Zimbabwean dictator, got supported during elections by AngloPlats' investment of US$400 million in mines (Bond, 2010). Moreover, the extended extraction of finite resources in Africa has caused perpetual damages to the environment and to communities affected by these industries.

The money raised by the FDI has been known to fly back to the West without trace of investment towards developing the region. Furthermore, with the intensification of climate change, environmental norms are soon to be incorporated in trade agreements. Sub‐Saharan Africa will

certainly not be able to meet those requirements anytime soon. Looking at HIPC Initiative's conditions and whom they benefits, it is hard not to think that neocolonialism is taken place with debt relief as a mean.

Africa is stuck with only raw materials to offer, benefiting the developed countries with their access to cheap commodities. HIPC Initiative's conditions do not encourage Africa's industrialization but leaves it to an agrarian stage.

Like seen above, debt relief has more consequences than just reducing the external debt of one's country. The HIPC Initiative requires structural reformation that has had negative repercussions on development in Sub‐Saharan Africa. The "Washington Consensus" might have promoted growth of some countries, but it is not positively tailored for the SSA.

Being underdeveloped and highly indebted, the participation of Sub‐Saharan Africa in the liberalized international market has increased its vulnerability and dependence to the developed world. The IMF and the World Bank's request for Poverty Reduction Strategy is a positive step. If their true aim is to alleviate poverty and encourage development, the multilateral organizations should impose conditions adapted for the challenges that each country faces.

Corruption is an issue in Africa, but it can be monitored by the World Bank and the IMF, which has imposed sanctions in the past when faced with the problem. Ensuring the money saved by debt relief reaches the poor instead of sticking to the elite is imperative. Violence is another trouble affecting Africa being touched by frequent civil wars. Debt relief should be acquired not when inflation is stabilized but when the political environment is.

Moreover, Africa's development is highly undermined by its lack of skills. Education is primordial to ensure a competent future generation. The HIPC Initiative could also offer technical assistance and share technology already available in the West. This will encourage Africa to move towards self‐sufficiency. Additionally, it will decrease Africa's dependency on aid and the chances of it falling back into the vicious cycle of debt.

Building infrastructures to facilitate access for the people and for commerce is also essential. Africa is lacking in facilities, like ports and roads, to permit cheaper transport and to ease trades. Another issue that raises debt relief is the stop of aid's inflow. Robertson (2006) reminds us the UK's declaration, in 2004, claiming they would pay back 10 percent of the debt payment owed by the heavily indebted poor countries in Africa.

To do so, the UK cut the allocation of aid for Africa. Even though the burden of debt has to be addressed, aid is still important to increase development. Aid can come in the form of projects and through the allocation of skilled human resources. It touches various areas like housing, healthcare, agriculture, education and infrastructures. All of these domains need monetary input, which is usually provided by aid.

Stopping aid because of debt relief will hurt the possibilities of Africa's growth. Overall development will not only be beneficial on the social sphere but also economically. As Easterly and Levine (1997) mention " low education levels, political instability, inadequate financial systems, high government deficits and weak institutions have been identified as reasons for economic decline".

The HIPC Initiative's conditions focus mainly on structural adjustment of economic policies, which are insufficient to promote economical development. Besides, Sub‐Saharan Africa's economy is based on finite natural resources. This is unsustainable economically and environmentally on a large scale of time. HIPC Initiative should encourage industrialization so Africa can have a chance to diversify its exports' goods and therefore ensure its growth in the future.

To back up this movement towards development, it is imperative that the receiving countries put in place adequate domestic policies and strong institutions. The World Bank and the IMF have more than enough people that can provide advices on this matter. Cooperation between the countries in need and the organizations could have beneficial effects by providing a mix of expertise and direct involvement of Africans in their own development.

Looking at the success the EU is, regionalism could be positive for Sub‐Saharan Africa. It could increase trades within the region and economically strengthen it. Regionalism would encourage SSA's independence towards the West and reduce its vulnerability to exterior shocks. To do so, the IMF (2007) recommends a reduction of customs dues and easing crossing borders' process between Africans' countries.

On the other hand, what the IMF does not mention is Sub‐Saharan Africa elementary need to emphasize on rule of law and allow easier access to personal credit to permit this move towards regionalism. Again, the IMF fails to see the diverse features that would encourage later growth.

After reviewing the HIPC Initiative and the impact of its conditions on Sub‐Saharan Africa, we can imply that debt relief does not jeopardized development but the required economical adjustments pushed by the IMF and the World Bank do. Debt relief is essential as monetary funds are necessary for governments to invest positively in their own country. The HIPC Initiative needs adjustment if its aim is truly to encourage development and self‐sufficiency.

The requirement of a domestic Poverty Reduction Strategy to gain debt relief has been proved as successful. On the other hand, demanding modifications of economic policies has not brought the results expected. Economic development is important, but only concentrating on it will not bring growth to Sub‐Saharan Africa.

Overall human development, in terms of literacy, life expectancy, education, poverty alleviation, infrastructures and the level of access, needs to be taken for account by the IMF and the World Bank. Moreover, decent institutions and respectable governance are essential to ensure a good repartition of debt relief's gains. If the IMF and World Bank do not embrace a broader view on development and changes his ways, the cycle of debt and dependency will perpetuate itself, debt relief or not.