Debt Relief No Panacea, Birdsall Tells Senate Foreign Relations Committee

CGD President Nancy Birdsall praised the intent of new legislation (S. 2166) to expand debt relief to additional poor countries, but cautioned against the bill in its current form last week at a Senate Foreign Relations Committee hearing. She urged the U.S. to first pay nearly $900 million in arrears to the multilateral development banks and consider other mechanisms to help poor countries protect themselves from external shocks, including natural disasters and sudden increases in food, oil or other commodity prices.In her testimony, Birdsall argued that debt relief is a highly efficient form of aid and has helped foster social progress and economic growth in low-income countries, but cautioned that debt relief itself is not a panacea:

Debt relief alone does not generate growth or guarantee an escape from poverty. Debt relief and aid can help support countries struggling to develop their own more accountable political and economic institutions -- but it is those institutions and a country's own policies that ultimately matter for generating sustained private sector-driven growth and shared development. Nor has or should debt relief be considered a substitute for traditional aid programs.

Birdsall raised concerns that the new legislation could put pressure on countries to opt into the program, potentially preventing them from obtaining access to private capital markets. She also said the legislation risks undermining already weakened U.S. credibility with its traditional allies in the donor community:

It assumes and calls for internal financing of new debt relief obligations by the multilateral banks that are owned in common with other nations at a time when the U.S. has not fulfilled its own commitments on existing debt relief programs and to the multilateral development banks themselves.

Birdsall said that U.S. arrears to the multilateral development banks total nearly $872 million, including $385 million to the World Bank's International Development Association, which provides grants and low-interest loans to the world’s poorest countries.She argued that because new debt write-offs rely on internal financing by the World Bank and multilateral development banks, they could end up robbing Peter to pay Paul -- that is financing debt relief for some poor countries on the backs of other poor and relatively poor countries.A similar balance of support for the intent of debt relief but strong caution against expanding the program before completing and paying for the first round of debt relief was struck by Clay Lowery, assistant secretary for international affairs with the Treasury Department, in his testimony on behalf of the administration. He argued "debt relief can be a valuable tool to help the poorest, most heavily indebted countries," but "is most appropriate when the debt itself is a barrier to development," which is not the case for the countries targeted in the latest Jubilee bill.

Rather than embark on expanded debt relief, the United States should focus on three things. First it should fulfill its commitments to current debt relief initiatives and meet our other multilateral commitments. Second, it should continue to provide direct development assistance to poor countries through bilateral and multilateral mechanisms aimed at increasing economic growth and reducing poverty. Finally, we need to find ways to work with countries to build their capacity to handle more open trade and investment.

Birdsall was joined by two other non-government witnesses at the hearing: Gerry Flood, counselor with the U.S. Conference of Catholic Bishops (see testimony) and Peter B. Henry, professor with the Stanford University Graduate School of Business (see testimony). Flood strongly endorsed the legislation, saying that the countries eligible for expanded debt relief "have high levels of poverty and thus need to maximize the amounts of resources they can marshal to promote human development." But he also acknowledged that debt relief alone was not a panacea.Henry also praised the overall goal of the bill, but said "debt relief promotes investment and growth when debt overhang inhibits a country's economic performance" but that debt overhang -- owing more money to creditors than a country is able to pay -- was not the main impediment to growth and poverty reduction in the countries named in the new Jubilee bill. He argued that weak institutions and infrastructure were principle problems in these countries and that debt relief would not achieve the growth and poverty reduction desired and that it would ultimately amount to:

…a Pyrrhic victory: a symbolic win for advocates of debt relief that clears the conscience of the rich countries but leaves the real problems of the poor countries unaddressed.

Birdsall suggested three ways to improve the current legislation. The bill could:1. Call on the U.S. Treasury to clarify the process for judging poor countries' ability to borrow, and provide grants, not loans, to countries with very low per capita incomes ($500 and less) who have not managed to sustain growth (see CGD report The Hardest Job in the World: Five Crucial Tasks for the New President of the World Bank).2. Encourage Treasury to work with the World Bank and IMF to provide temporary financing to relieve debt service burdens in the case of shocks to low-income countries' economies beyond their own control. Such a mechanism would allow low-income countries with good growth prospects to borrow on reasonable terms, while minimizing the risk of a new round of debt relief due to bad luck (see CGD policy brief Delivering on Debt Relief).3. Allow for the U.S. to unilaterally write-off the U.S. bilateral debt of eligible IDA countries; such a provision could be triggered once the U.S. has fulfilled its existing international commitments.While the House version of the bill was passed on April 16 it is now in the hands of the Senate. There are eight Republican and seventeen Democratic co-sponsors of the Senate bill, and there continues to be immense support for debt relief from church groups and other advocates around the country. Unfortunately only Sen. Casey (D-PA) attended the hearing, raising some question as to how committed the other Senators on the committee are to the legislation (see Sen. Casey's opening remarks).Birdsall closed her testimony by urging the committee to ensure that the strong constituency for debt relief be channeled into demand for an overhaul U.S. foreign aid:

I hope that the next administration, together with the Congress, will find a way to reflect Americans' growing commitment to better lives in poor countries not only in debt relief programs, which are reaching their limits in any case, but via a broader set of development-friendly policies consistent with our national values and our interest in global as well as American security and prosperity.

She encouraged the committee to read the CGD Senior Fellow Steve Radelet's April 23 testimony before the House Foreign Affairs Committee detailing how the U.S. could modernize U.S. foreign assistance. (For an account of that hearing, see Sheila Herrling’s blog posting).