Shell Games Won’t Help Africa

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It's a scene that just keeps repeating itself.

The new Russian loan money approved last week by the International MonetaryFund will not leave Washington since Moscow will simply use it to pay whatit owes the IMF this year. Moscow has not fulfilled the requirements of anyof the IMF packages it has received since 1992, but the loans have continuedanyway. And they don't accomplish much: last year's Russian bailout failedto 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 decadesin countries all around the world. One result has been an unsustainableaccumulation of debt by some of the world's poorest countries. Now, the aidagencies 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 thosecountries 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 officiallending toproduce self-sustaining growth in the region. African countries are now$151 billion in debt (82 percent of it owed to official lenders), so lack ofmoney has not been Africa's problem. Rather, it's that foreign aid agencieshave subsidized regimes whose policies have destroyed their nationaleconomies-a conclusion that even the World Bank itself admitted in a recentstudy which found that much foreign aid has been "an unmitigated failure."

It is not a new insight to say that continued aid under suchcircumstancesmerely makes matters worse. The World Bank has recognized as much since atleast the early 1980s when it began "structural adjustment lending" --aidconditioned on a recipient country's fixing its macroeconomic policies. TheIMF has always conditioned its aid on policy change. But with fewexceptions, it has produced no serious reform in the region. Indeed,another recent World Bank paper found that "almost all adjustment loansdisburse fully, even if policy conditions are not met."

It is clear that economic reality has been the most effective factortoencourage reform in countries around the world, which is why the IMF andWorld Bank frequently try to discipline misbehaving governments bythreatening to suspend their aid. But the lending agencies' institutionalneed to lend undermines their credibility when they try to imposeconditions. Why should recipient countries make difficult policy changes ifaid money is going to flow anyway?

Against all the evidence, the multilaterals insist that their lending hasbeen crucial to the reforms that have occurred in Africa. OxfordUniversity's Paul Collier more accurately observes that "some governmentshave chosen to reform, others to regress, but these choices appear to havebeen largely independent of the aid relationship. The microevidence of thisresult has been accumulating for years. It has been suppressed by an unholyalliance of the donors and their critics. Obviously, the donors did notwish to admit that their conditionality was a charade."

Today, donors and critics agree that debt forgiveness is essentialforheavily indebted poor countries. They only disagree about how much debtshould be reduced and when. It is certainly difficult to justify forcingcitizens of the poorest countries to pay for the mistakes of their rulersand the government aid agencies that financed them. But the debt initiativeoffers no hope for an end to the borrowing treadmill that caused the problemto begin with. Countries that receive debt relief will be eligible forfurther multilateral loans on the condition that they undertake certainreforms. But proponents of the HIPC initiative have failed to explain whynew conditionality will be more effective than previous conditionality.

The best solution would be to forgive poor countries' debts andterminateofficial lending altogether. Doing so would end the continent's aidaddiction 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 thatpossibility. It appears that the HIPC scheme is as important to themultilaterals 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 affordto acknowledge their poor lending record and write-off these debts. Thus,the multilaterals have sought to use the debt initiative as a way to avoidjeopardizing their financial standing by funneling new money to themselvesthrough the debtor countries.

It's time to put an end to these financial shell games. Real debtforgiveness combined with an end to aid would help Africa far more than theHIPC initiative. It would also introduce a sorely needed measure ofaccountability and discipline in both the governments of rich countries andheavily indebted poor countries.

Ian Vásquez

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