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News Bulletin
"Doubts about Debt Relief for the Poorest"

by Dr. Andreas Freytag
Indiana University, US

Volume 3, Issue 3
Saturday, June 19, 1999, 4:00 p.m.

The 1999 summit has produced its first results, among them a plan for conditional debt relief for 36 of the world's poorest countries. This plan amounts to a total of US$70 billion in relief. This figure is not overwhelmingly large, given that the total outstanding debt in the developing world is estimated at US$130 billion.

Moreover, there are doubts that debt relief, although accompanied by strong conditionality, will improve the situation of the poorest countries in the developing world. From an economic point of view, structural reforms in these countries are necessary, and the moral hazards for both debtors and private creditors must be eliminated from the very beginning. Otherwise, the issue of debt relief will only return again in future years, with the same countries using the same arguments.

There can be no doubt that these countries need a fresh supply of money in order to start the process of reconstruction. G8 leaders must make it very clear that money is not available unless the debtors make deep and -- certainly painful -- structural reforms.

In addition to debt relief, U.S. President Bill Clinton has raised a topic that is particularly important for the poorest countries, namely the start of a new round of WTO talks, often referred to as the Millennium Round. The success of a new round is especially important for those countries that have accumulated a high level of debt. They need the chance to earn the dollars to be able to repay actual and future debts and to pay interest. It is important to note that these countries have no other way to make these payments without a current account surplus. Put differently: they need export opportunities.

Since the countries in question have comparative advantages, mainly in agricultural and primary products, the markets for these goods must be open. Until recently, agricultural products were not even under the aegis of the GATT. This changed during the Uruguay Round. However, agricultural markets remain far from open. Therefore, the G8 leaders should make a clear commitment to open them and, thereby, support the debt-relief initiative. Otherwise, it would remain useless.

One warning must be added. Due to the logic of the European Union's CAP, there is overproduction in the EU, which is given away with heavy subsidies on the world market. As a result, the prices for agricultural products in the world market tend to fall. After liberalization, one can expect prices to increase, which might hurt some poor countries at first but which, on the other hand, offer incentives for many people in these countries to specialize in agriculture. In the long run, there will be many who gain and a few -- if any at all -- who lose.