Renegades!

African Debt Relief: Moral Hazard and Internal Politics

The G8 is considering massive debt relief for African nations that are breaking under disease, interest payments, AIDS, periodic mass slaughters and other calamities that unfortunately and predictably plague the dark continent. A reasonable person might be forced to ask "Well, if debt relief was all it took to help these nations, why haven't the West dropped the debt before now?". A quick review of the state of the G8 might reveal that the inertia on this issue is not simply a case of neglecting a poor neighbour. On the contrary, aide to Africa has been one of President George W. Bush's pet projects, upping per year aide to the continent to the tune of $15B. In fact, there are two key stumbling blocks that keep the G8 and other countries from eliminating African debt: moral hazard and the internal politics of the G8 nations.

The fact is that several of the G8 nations are stumbling with their own debt, making massive relief of African debt, or "foreign" debt, a non-starter. Both France and Germany are running huge deficits, breaking the European Union's stability pact. This is a big political worry for Schroeder, as he approaches an almost certain loss in the elections later this year, and for Chirac, who has already suffered a loss on the EU constitution. For its part, the US is grappling with a rapidly expanding debt due to the double deficits, and a 5% budget deficit. Italy's Berlusconi will also have a tough time selling foreign debt relief when Italy is struggling with a debt load of over 100% of the GDP. Japan, while being extremely generous with cash for poorer nations, is in a similar bind with a debt load approaching 150% of GDP. As much as the G8 nations would like to drop the debt, their own political situations complicate this.

The next problem is known as the moral hazard of forgiving the debt of dictatorships and military juntas, whose borrowed cash ended up in the pockets of the ruled rather than the hands of the needy. To forgive the debt would be a de facto forgiveness of the actions of those horrible leaders. Uganda, for example, is now a shining beacon of light for sub-Saharan Africa. After years of slaughter, the country seems back on track for the most part. But even under the careful guidance of Museveni (does that rhyme with "Mousolini"?), over $100M/year of the budget is diverted from general revenue to kickback schemes and mismanagement. While in Canada, this might be sniffed at as the yearly shenanigans of a Liberal government, in Uganda this a proportionately huge number. And the donors that contribute one half of the budget revenues are getting nervous. Just as problematic has been the revelation that for Africa as a whole, over $148B/year goes down the drain in corruption related activity.

What's the solution to this corruption and the problem of selling debt relief on countries with their own debt problems?

Corruption, of course, is not an easily solved puzzle. But a culture and history of corruption aren't the death knell of reform. Most corruption centres around monetary payoffs, so the cynic might conclude that the only way to combat a monetary incentive of graft, is to outbid it by a monetary incentive of reform. What can achieve this? Set stringent targets for the creation of democratic and healthy nations (free press, civil rights, multiparty elections, etc) and working capital markets (foreign investment targets, strong central banks). If targets are met, then more debt relief will be given. Start off with low benchmarks and make them progressively harder to reach. A smarter approach would not be to limit these benchmarks to one issue or another, but eventually have graduated debt relief (or aid) for a variety of problem areas for Africa. In a nutshell, the idea is to make the eradication of every awful vice that plagues an African nation a potential windfall for their people.

For donor nations, the small, initial amount of debt relief will be an easy sell, while larger, more substantial debt relief will be down the road. The idea is that by the time the continent has cleaned up its act, the West's electorates will be used to the idea of graduated debt relief, while their leaders will have their own books in order.

A more constructive idea, is to get money past the NGO's, the unproductive UN, the ghastly governments and the do-gooder Christian missionaries (more intent on conversion than relief), is to drop the trade barriers to African agricultural products. Currently, the West spends over $300B subsidizing the Common Agricultural Policy of the EU and the Midwestern US farmers who recieve on average almost $160,000/year. Japan, for its part, stops imports cold with massive tariffs on outside food making its way to Japan's shores. In conjunction with graduated debt relief, the West could make tariff relief a prerequisite.

If there were a common, comprehensive initiative amongst the G8 to push for the relief of debt (over the long haul) and tariffs, Africans might see a real improvement in their standard of living. For the time being, Africans will need to wait for a healthier economic west, more willing and able to help than its present form, more intent on pleasing a home electorate.

posted by Shamrocks! @ 5:00 AM