Professor Argues 'Debt Relief' Masks Bad Lending Decisions--by Alan B. Nichols

On July 2005, leaders of the G8 nations signed an agreement in Gleneagles, Scotland, known as the Multilateral Debt Relief Initiative. Under the plan, which took effect July 2006, the G8 agreed to cancel all of the debt belonging to 38 of the world’s poorest nations from loans given by the international financial institutions (IFIs), including the World Bank and the International Monetary Fund.The plan also called for the World Bank and the African Development Bank to be compensated for these loans, which were made to mostly sub-Saharan African countries and could never be repaid.

The aim of this full compensation­ which would be provided by donor nations­is to preserve these lending institutions’ financial capacity. Aid activists and government leaders heralded the agreement for providing much-needed “debt relief” to the poor nations of the world. Debt relief, they proclaimed, will free these heavily indebted poor countries (HIPC) to spend the money instead on economic development and programs to combat poverty, disease and illiteracy.The agreement does nothing of the sort, argues Adam Lerrick, professor of economics at Carnegie Mellon University and a visiting scholar at the conservative American Enterprise Institute, who said that “debt relief” is nothing more than a screen to shield the dismal performance of the international financing institutions, principally the World Bank, from public view.

The first HIPC agreement of 1996 was followed three years later with a second plan that provided additional relief to a larger group of eligible countries. The Multilateral Debt Relief Initiative represents an enhancement of that second initiative, with the addition of complete donor compensation to the World Bank and the African Development Bank for all losses incurred as a result of their bad loans.According to Lerrick, “Aid advocates claim debt payments are burdening poor nations, retarding economic growth, and preventing them from using their money for education and other purposes. Untrue. The debt was relieved long ago.” This relief was extended not out of charity but out of necessity, according to Lerrick, who said that for more than two decades, “the World Bank has played a shell game with worthless developing-nation loans by recirculating funding in what the U.K. Treasury describes as ‘balance-sheet fantasies.’ It had long been clear and deliberately hidden from public view that the multibillion-dollar debt of the poorest economies would never be honored. But the bank never makes a ‘bad loan’ and never has ‘a loss.’”

Lerrick’s views obviously don’t sit well with some at the banks, but his credentials are unquestioned. Lerrick was senior advisor to Chairman Allan Meltzer of the International Financial Institution Advisory Commission, a bipartisan commission created by the U.S. Congress in November 1998 to authorize $18 billion of additional funding for the International Monetary Fund (IMF) and to consider the future role of IFIs. Its objective, according to its report, was to propose “reforms and restructuring that would improve the functioning of the financial markets, the stability of the world economy, and the incomes of people in rich and poor countries.”

Lerrick spent hundreds of hours studying the bank’s arcane procedures and conducting scores of staff interviews.In what the World Bank calls a “system of defensive lending,” Lerrick charges that “dates and amounts of payments under old loans miraculously matched disbursements under ‘new’ loans to create a perpetual rollover of defaulted obligations. Although IDA [International Development Association, the arm of the World Bank that provides interest-free loans to the poorest countries] listed total development resources at $138 billion on its 2005 balance sheet, more than one-third of this apparent stockpile, or $46 billion, has long been riding the rollover merry-go-round,” according to Lerrick. Should the bank be compensated for this practice? Definitely not, argues Lerrick, who said the United States, European Union and Japanese taxpayers, by and large, are being asked to foot this bill. He noted that in September 2005, “World Bank President Paul Wolfowitz ‘insisted’ that the bank be compensated for its losses stemming from bad loans. Why?” Under the Multilateral Debt Relief Initiative, the G8 nations effectively agreed to make payments to the IFIs on behalf of the poor countries. Under the Millennium Development Goals declaration, the United Nations called for even more aid to bring HIPCs out of poverty and start them on the road to economic prosperity. As a result, the World Bank continued its lending even after the borrowers were recognized as “bankrupt” in 2000 and raised the indebtedness of the 18 qualifying HIPCs to the bank by 50 percent from 2000 to 2003, according to Lerrick.“Debt relief is simply a disguised way to get more money out of the donor nation taxpayers. New aid of $50 billion paid over the next 40 years has been disguised as debt relief,” he said.“Total debt cancellation for the poorest nations is absolutely the right policy,” he continued. “The money is long gone. The debt is uncollectable, but the real debate is not about debt relief. They’re asking for $50 billion in unauthorized aid without congressional scrutiny.”Lerrick believes that the IFIs should acknowledge their past failures, cancel the debt, write down their portfolios to reflect their true value, and come back to Congress with a request for additional aid money­ a process he says everyone else must go through. In other words, he argues that the banks should achieve the transparency in the management of their finances that they demand of the recipient countries.“None of the G8 finance ministers have any illusion about the facts…. But debt relief is easier to sell politically than new aid,” Lerrick said, pointing to the aid campaigns promoted by celebrities Bono and Bob Geldof that have enormous public appeal. “No one opposes helping the poor nations, especially in Africa, but after 50 years and a trillion dollars, there is virtually nothing to show for it.”

The World Bank has adopted an internal audit program to monitor the results of its lending, but Lerrick called this meaningless because he said the internal audits are self-serving. “The World Bank considers a project ‘completed’ when it has disbursed the money. This could be years before any results are visible. The bank has no means to measure the real impact of its aid.“If you asked a World Bank loan officer how many children have been educated or inoculated as a result of loan X, he would have no idea. If you asked him how many kilowatts of electricity were actually delivered to customers from the plant or dam that the bank funded, he could not answer,” Lerrick said.