Saturday, January 27, 2007

One Example of Why Debt Forgiveness is Not Helpful


We all want to help those less fortunate than us. One way people think to do so is by asking that the "rich" countries forgive the debt of "poor" countries.

Unfortunately, this is counter-productive. Nigeria as of late is a case in point. With oil revenues, but mostly because of improved capital markets, Nigeria (eg the government of) is able now to borrow on the international market. This is also because the Paris Club - which coordinates bilateral debt levels - reduced Nigeria debt by $18 billion last year. All this did is freed-up room for Nigeria to borrow from the private markets. In other words, the taxpayers in the rich countries, who should have been paid back the $18 billion, now will not recieve this money. Whereas, now, the big banks, which are of course owned in larger proportion by the more wealthy then the average taxpayer, are able to lend and make money at the taxpayer's expense.

Even worse, this sends a signal that governments in "poor" countries don't have to be fiscally responsible because their debt will be forgiven, and they will be able to borrow again. This new borrowing is then either from the private markets or else, again, from Paris Club members. It's foolish short-sightedness to ask for debt forgiveness.

One last point, the governments of the 'poor' countries get the revenues from these borrowings and government officials are better-off than the average citizen, but it is the average citizen who has to pay back the loans. And the government spending afforded by the loans are not as efficient as they could be because of the debt forgiveness and the 'cheap' capital made available to the inefficient borrower governments.

Therefore, with debt forgiveness, the people in poor countries have to pay back money that 1) is used to make extra-profits for international monopoly capital, 2) that is used inefficiently in their own countries, and 3) encourages their governments to act irresponsibly. Debt forgiveness? I don't think so, there are other means of philanthropy and helping those less fortunate than are we.