The Real Agenda Of Debt Relief

The end of the Second World War brought with it one of the greatest successes in world economic history: the Marshall Plan to rebuild Europe. Led by Congress and fired by Harry Truman's conviction that a prosperous Europe would be a stable Europe, the plan pumped billions into the devastated Continent and produced a rapid snap-back. The lesson for the rest of the world seemed obvious: with enough money and vision, it was possible to build vibrant economies even on the ruins of a bombed-out Continent.

So it was no surprise when, in the early 1950s, that logic began to work its way into development efforts around the world. By the end of the Eisenhower Administration, government programs were lending millions to developing countries. The borrowing picked up in the 1970s, when many of these same nations--happy to pay higher interest rates in exchange for cash--turned to global banks for loans. Gleaming skyscrapers and industrial plants sprouted--all bought with money to be repaid when these nations exploded into international markets.

The only thing that detonated was a debt bomb. The Marshall model didn't work in places like Mozambique and Peru. These countries were missing the vital social infrastructure, to say nothing of the legal and business background, that sped Europe's regeneration. By the late 1990s, the debt of these countries had reached absurd proportions. Today, for instance, every man, woman and child in Guinea-Bissau owes global lenders $964--a problem for a nation where per capita income is $160 a year. At last year's G-8 economic summit in Germany, the world's richest countries adopted a plan to help bail out these nations. They will return to the issue at this week's summit in Okinawa.

The most serious impact of these bad loans isn't the cost of writing them off. Rather it's that the borrowing countries are afflicted with nearly untreatable cases of what economists call "debt overhang," a fiscal disease by which loan repayments inhibit every sort of national economic activity. That makes the markets much less attractive to export-hungry U.S. companies. Debt relief, which at first blush looks like charity, is mostly a way to stimulate growth.

Since last year's summit, there has been a slow acceleration of forgiveness. And the 2001 U.S. foreign-aid bill, which passed the House last week, would provide for an additional $238 million. President Clinton complains that even that sum isn't enough, but Congress is reluctant to up the ante because, in part, it fears that too much forgiveness will invite future profligacy. Further deals, Clinton says, are a chance for the U.S. to share its prosperity with the rest of the world--and to ensure that prosperity continues.