Does Debt Forgiveness Work? Ask Africa

05/13/2014 04:53 pm ET | Updated Jul 13, 2014
  • Marcelo Giugale Senior Economic Adviser at the World Bank - Fellow of the National Academy of Public Administration - Author of "Economic Development: What Everyone Needs To Know".

When countries in sub-Saharan Africa ("Africa" for short) gained independence in the 1960s, they inherited little or no public debt. And they stayed relatively debt-free until the early 1980s. Then, they went on a borrowing binge. By mid-1990s, the average African nation owed more than the value of all the goods and services it could produce in a year. The loans, which had to be paid back in foreign currency, came mostly from foreign governments and multilateral institutions, not from private bankers. The money was to build things like roads, ports, and power plants; this would speed up economic development and create the capacity to repay. It sounded sensible.

Well, that capacity to repay never really materialized. Corruption, natural disasters, wars, bad policies, and bad luck made it impossible for African governments to keep up with debt payments without cutting basic services to their people, who were already poor and getting few services in the first place. The image of rich countries forcing poor ones to cut down on schools and hospitals became a political embarrassment and calls for loan modification proliferated. Creditors came together, financial experts were hired, and African countries got softer deals -- "terms," in the jargon -- that carried the names of the cities where they were put together -- Cologne, Naples, Paris, Toronto, Venice. But that "relief" was not enough. By the early 2000s the chorus of voices asking for outright debt "forgiveness" had grown louder -- these were the times when NGOs, celebrities, and rock singers started to hold hands with development practitioners. The fact that much of the borrowing had been done behind closed doors by dictators added a moral flavor to the cause.

So, one by one, over the past 15 years, 30 African countries have seen their debts almost-entirely forgiven. Rich countries, the World Bank, the International Monetary Fund, the African Development Bank -- everyone has chipped in. They signed agreements to give up their claims together. (If you work in development, you've probably heard of "HIPC" -- the Heavily Indebted Poor Countries Initiative -- and "MDRI" -- the Multilateral Debt Relief Initiative.) History does not have many examples of better international collaboration. But, with the process now coming to an end, the final cost of debt relief has become clear: over a hundred billion dollars. So it is fair to ask: Did it work?

In a chapter written for a forthcoming book, Mark R. Thomas and I argue that it did -- better than anyone had expected and for a reason that nobody had predicted. (The book is the Oxford Handbook of Africa and Economics, edited by Justin Y. Lin and Celestin Monga.) Here is why. To qualify for a write-off, countries had to meet four conditions: produce a periodic "Poverty Reduction Strategy Paper" of their own and stick to it; manage the economy well; stay away from expensive borrowing; and put whatever they saved in debt payments into social programs. And they had to do all this transparently -- their plans, accounts, and performance were open to all those who had called for debt cancellation.

The visible result of debt forgiveness was indeed a rise in "poverty-reducing expenditures," in some cases, by a factor of three. (It is not trivial to define what those expenditures are, but think of them as basic health, primary education, and nutrition programs.) With so many eyes looking over them, governments did allocate more of their budgets to help poor people.

More subtly, the discipline brought about by the process to qualify for a debt write-off -- a discipline that was new for Africa -- came in handy when, starting in the mid-2000s, the prices of oil, gas, and minerals began to climb and the technologies to look for natural resources got better and cheaper. Suddenly, African governments had much more money to spend, and new offers to borrow -- this time from private bankers. They could have gone on a borrowing binge again. So far, they haven't. In fact, the data show that, by 2012, countries that had their debts forgiven had better economic policies than the rest of the developing world.

With no choking debt, better management, and rising commodity revenue, Africa has grown faster and for longer than it ever did before -- about 5 percent per year for the past 10 years. The proportion of Africans living in poverty has been falling for more than a decade. The region even breezed through the global recession of 2009. Sure, it still faces huge challenges, from dismal social services and a paralyzing lack of infrastructure to endemic conflicts and chronic graft. But cautious optimism is in order.

Is that it? Should the old lenders who gave up their claims call it a success and disengage? Hopefully not. As their economies grow, African governments will have easier access to the global financial market -- a dozen or so of them already sell bonds abroad. They will enter into complex contracts to fund projects and extract even more natural resources. They will be tempted to make promises and give guarantees. Their states and large cities will do some borrowing of their own. This is all normal for up-and-coming developing countries. It just needs to be handled with care, and by professionals. That is why those who once pushed for Africa's debt to be forgiven should now push for its capacity to manage future debts to be improved. Rock concerts will never be themed around helping Africa train its civil servants in borrowing strategies, debt accounting, loan auditing, cash-flow forecasting, or data reporting. There is no glamour in good debt management. Alas, that's what the continent urgently needs.