Commentary

Shell Games Won’t Help Africa

It’s a scene that just keeps repeating itself.

The new Russian loan money approved last week by the International Monetary Fund will not leave Washington since Moscow will simply use it to pay what it owes the IMF this year. Moscow has not fulfilled the requirements of any of the IMF packages it has received since 1992, but the loans have continued anyway. And they don’t accomplish much: last year’s Russian bailout failed to prevent a financial crisis and left the country in even deeper debt.

Not widely appreciated is the fact that versions of this scenario, involving both the IMF and the World Bank, have been playing out for decades in countries all around the world. One result has been an unsustainable accumulation of debt by some of the world’s poorest countries. Now, the aid agencies have set up a separate lending facility, at an estimated cost of $9.6 billion, to reduce the debts of some 41 nations. Since 33 of those countries are in sub-Saharan Africa, the Heavily Indebted Poor Countries (HIPC) initiative is mainly aimed at Africa.

HIPC is an implicit recognition of the failure of past official lending to produce self-sustaining growth in the region. African countries are now $151 billion in debt (82 percent of it owed to official lenders), so lack of money has not been Africa’s problem. Rather, it’s that foreign aid agencies have subsidized regimes whose policies have destroyed their national economies-a conclusion that even the World Bank itself admitted in a recent study which found that much foreign aid has been “an unmitigated failure.”

It is not a new insight to say that continued aid under such circumstances merely makes matters worse. The World Bank has recognized as much since at least the early 1980s when it began “structural adjustment lending” —aid conditioned on a recipient country’s fixing its macroeconomic policies. The IMF has always conditioned its aid on policy change. But with few exceptions, it has produced no serious reform in the region. Indeed, another recent World Bank paper found that “almost all adjustment loans disburse fully, even if policy conditions are not met.”

It is clear that economic reality has been the most effective factor to encourage reform in countries around the world, which is why the IMF and World Bank frequently try to discipline misbehaving governments by threatening to suspend their aid. But the lending agencies’ institutional need to lend undermines their credibility when they try to impose conditions. Why should recipient countries make difficult policy changes if aid money is going to flow anyway?

Against all the evidence, the multilaterals insist that their lending has been crucial to the reforms that have occurred in Africa. Oxford University’s Paul Collier more accurately observes that “some governments have chosen to reform, others to regress, but these choices appear to have been largely independent of the aid relationship. The microevidence of this result has been accumulating for years. It has been suppressed by an unholy alliance of the donors and their critics. Obviously, the donors did not wish to admit that their conditionality was a charade.”

Today, donors and critics agree that debt forgiveness is essential for heavily indebted poor countries. They only disagree about how much debt should be reduced and when. It is certainly difficult to justify forcing citizens of the poorest countries to pay for the mistakes of their rulers and the government aid agencies that financed them. But the debt initiative offers no hope for an end to the borrowing treadmill that caused the problem to begin with. Countries that receive debt relief will be eligible for further multilateral loans on the condition that they undertake certain reforms. But proponents of the HIPC initiative have failed to explain why new conditionality will be more effective than previous conditionality.

The best solution would be to forgive poor countries’ debts and terminate official lending altogether. Doing so would end the continent’s aid addiction and force governments to focus on the real causes of poverty: flawed economic policies and institutions.

Predictably, however, the World Bank and the IMF have ruled out that possibility. It appears that the HIPC scheme is as important to the multilaterals as it is to governments of the poor countries, if not more so. Because of their AAA credit rating, the World Bank and the IMF cannot afford to acknowledge their poor lending record and write-off these debts. Thus, the multilaterals have sought to use the debt initiative as a way to avoid jeopardizing their financial standing by funneling new money to themselves through the debtor countries.

It’s time to put an end to these financial shell games. Real debt forgiveness combined with an end to aid would help Africa far more than the HIPC initiative. It would also introduce a sorely needed measure of accountability and discipline in both the governments of rich countries and heavily indebted poor countries.

Ian Vásquez is director of the Project on Global Economic Liberty at the Cato Institute.