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When I was writing about third world debt a decade ago, I watched Jubilee 2000 and other debt cancellation campaigners pound their way to victory with simplistic claims about the importance of debt cancellation, such as that principal and interest payments were diverting enough government revenue from poor countries' health budgets to kill 19,000 children per day. I wondered: are they naive or am I? On the one the hand, they appeared to misunderstand the accounting, financial, and political realities that govern (and muffle) the impacts of dropping the debt. On the other, I still favored cancellation and admired the campaigners' prowess in making it happen. One movement leader told me that if you want to make a difference, you have to choose a simple message and repeat it over and over (implicitly: fine points be damned). Maybe I was naive in my qualms about this effective tactic for a good cause.
Back in 2000, influenced by Daniel Cohen (HT John Williamson), I came to understand that most highly indebted poor countries were essentially bankrupt. They couldn't pay back. Forgiving the debts of a bankrupt does not cost much. The real tasks for the creditor are to accept that the money is gone (sometimes hard for a lumbering bureaucracy to do) and to learn from the debacle in order to avoid repeating it. The kicker: just as forgiveness costs much less than in might seem, it is worth much less than it might seem. After forgiveness, the bankrupt's pockets remain empty.
How to square this with reports that poor countries were paying billions of dollars a year in debt service to rich donors? Lenders helped borrowers maintain the appearance that they were servicing the loans by making new loans (or grants) to pay back old loans. A guy at the World Bank I had never heard of named Bill Easterly pointed me to one paper with evidence of this "defensive lending." A lady I had never heard of named Nancy Birdsall coauthored another. The more debt service a highly indebted poor country had to pay, the more fresh aid it got---almost one-for-one in some cases. I saw two key implications:
Claims that debt cancellation would free up funds for health and education spending were dubious. Mostly, cancellation would just slow the money merry-go-round. And to the extent that fresh funds were freed up (on net), pinning down how they were spent would be as hard as measuring the effect of a tax cut on education spending. In fact, a careful statistical analysis in 2005 by the Inter-American Development Bank's Nicolas Depetris Chauvin and the World Bank's Aart Kraay would find no impact of debt relief on social spending. Official World Bank tallies of debt-cancellation-induced "poverty-reducing spending" are mostly wishful thinking and public relations.
It was healthy to confront the failure of past lending by canceling the debts. In particular, the whole notion of lending to poor countries deserved critical examination. How did so many institutions effectively miscalculate the ability of poor countries to absorb loans, grow, and repay?
I was hardly alone in thinking these things. In 2001, the Bush Administration initiated perhaps the most important reform coming out of the Jubilee episode, calling for a shift at the World Bank from loans to grants for the poorest countries. The trend since among traditional donors has been that way.
The other mental frame I brought to the hearing was my recent conclusion that the enthusiasm for debt relief for Haiti, as opposed to trade or migration reforms that would create jobs for Haitians there or here, does not arise from any systematic analysis of Haiti's needs. In the short run, the amount of money at stake in a debt deal for Haiti---perhaps $25 million over the next 3 years---is trivial next to what the country needs, next to what it has already received in aid, and next to the billions coming in from trade and emigrants.
Now that you understand how I was hearing the hearing, let's go to the video. After that, a post-game analysis.
For me, the most dramatic moment came early in the testimony of the lead-off witness, Nancy Lee. She is the Deputy Assistant Secretary for the Western Hemisphere at the U.S. Treasury and (full disclosure) spent a year at CGD. That morning, I had scrambled from my home a mile away, stifled impatience through the long line at security, and reached the hearing room just as Nancy began to speak. Not bad! Nancy had merely "returned early this morning from Port-au-Prince," where she had conferred with senior government officials. Nancy described Treasury's ongoing work for and in Haiti. It sounded unsexy but heroic. I was struck by her emphasis on restarting the Haitian banking system and facilitating remittances from Haitians living abroad. Nancy was the only witness not to assert that debt relief for Haiti is "critical" or "urgent" (though she did in her written testimony).
Nancy debuted, in outline, a concrete proposal for Haiti debt relief. Donor governments including the United States would inject new money into, most notably, the Inter-American Development Bank (IDB). The IDB would cancel its Haiti debts. The new funds would be earmarked for IDB grants to Haiti. In addition, IDB loans that have been committed to Haiti but not disbursed would be converted to grants.
Next up was Timothy Adams, an Under Secretary for International Affairs at Treasury in the Bush Administration. He enthusiastically supported debt relief for Haiti. By and large, I enthusiastically supported his other comments. He emphasized the need to end the "cruel hoax" of repeated debt creation and cancellation.
In the Q&A, Adams nailed an underlying problem: lending institutions exist to lend.
Then spoke Melinda St. Louis of Jubilee USA. She called debt relief a critical first step for Haiti. I heard two reasons: Haiti has a terrible, two-century history with debt. And Haiti can't pay the current debt anyway. The first---bad things happened in the past---argues for helping Haiti in all the ways we can, not just relief of debts incurred since 2005 (all that are left). But the second is a pragmatic argument for at least suspending the small amounts of debt service Haiti is currently paying western donors.
I really liked what she said about the absurdities of the current system.
Last came Tom Hart of the One Campaign, which won the Commitment to Development Award in 2008. He applauded debt cancellation programs over the last decade for "freeing up $117 billion so far of debt that couldn’t be repaid and in fact freeing up around $2 billion annually that these countries were paying back." In other words, they couldn't pay the debt, and they were paying it---see discussion of the merry-go-round above. Hart also contradicted Chauvin and Kraay by asserting that debt relief has greatly increased social spending in receiving countries.
Tom appeared to nod rhetorically in my direction. "Debt relief relieves very little immediately." It should be part of a long-term strategy to help Haiti recover.
Yet he closed by asserting that the case for debt relief is "compelling and very, very urgent."
The messages of the debt campaigners have clearly reached the top Republican on the House Financial Services Committee, Spencer Bachus. He expressed a fervent belief in debt relief's power to reach the poor.
Almost everyone said that outright debt cancellation is critical and urgent, but no one made a good argument for why. One proponent seemed to make a good argument for why it isn't.
The most important (and universal) message was that international agencies are still lending too much to the poorest countries. In this way, the system is broken. The bill voted out of the subcommittee right after the hearing acknowledged this critique in urging that new assistance to Haiti be given, not lent. That is a helpful tap of the chisel, but inadequate to reshape the system. On that day at least, there was disconnect between what the experts said and what the legislators did.
Almost everyone said that debt relief should be a part of a bigger, longer-term plan---which was itself hardly discussed. I hope that Congress and interested groups such as One will more systematically review a) what Haiti needs (in part by involving Haitian voices), and b) the U.S. government's full array of options for helping. The closest the hearing came to a broader view was a sentence from Representative Al Green on trade policy---ironic since he is not even a member of this Subcommittee on International Monetary Policy and Trade, only of the parent Committee on Financial Services. Seemingly, determining whether debt relief should be a top priority involves examining competing priorities for Congress's scarce time and political capital.
The testimony made it easy for members of Congress to overestimate debt relief. To that extent, it let Congress off the hook for modest trade and migration reforms next to which the value of debt relief would be a rounding error.
Truthiness was aired and justiness was done.
I suppose that is par for the legislative course: an approximately appropriate response to a partially accurate depiction of reality. Heck, maybe it was a birdie. A bit of good was done.
Still, I am bothered. I understand that you sometimes have to discard scruples to fight the good fight. And I am not interested in preaching from a post one step removed from the hurly burly of policymaking. But the Center for Global Development was founded on the notion that good policy requires good analysis. I have devoted my professional life to that idea. I think it is fair to ask whether Haitians were as well served by the proceedings, including the vote, as they could have been. They were not, not nearly. In hearings to come, I hope experts will help Congress understand that.
CGD blog posts reflect the views of the authors, drawing on prior research and experience in their areas of expertise. CGD is a nonpartisan, independent organization and does not take institutional positions.