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Debate: Debt relief from the US following natural disasters

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Should countries provide debt relief to other countries suffering from a natural disaster?

Background and context

Debt relief is often discussed as a possible solution to world poverty. Given the continuing dire poverty of over 40% of the world’s population, the international community, and more specifically the G8 group consisting of the most powerful nations in the world, made poverty relief one of the main goals during the UN’s millennium meeting in 2000. In looking for solutions for world poverty, debt relief is often seen as an important element and has thus sparked the creation of initiatives such as the Heavily Indebted Poor Countries Initiative (HIPC). This addresses some of the world’s poorest nations that face an unsustainable debt burden and seeks to provide debt relief or complete debt cancellation in exchange for economic and political reforms. 28 of the world’s poorest countries already benefit from this initiative. In 2005, at the urging of British Prime Minister Tony Blair, the G8 summit revisited the issue of debt relief as a way to rid the world from poverty. An agreement was reached to provide more aid as well as debt relief to poverty-stricken countries. The agreement erased the debt of 18 of the world’s poorest nations (mainly in Sub-Saharan Africa). 70% of this debt was owed to the World Bank and the remaining debt was owed to the IMF and the African Development Bank. It is as yet unclear how the World Bank will afford to take this loss and who will cover future costs. Debt relief for countries affected by natural disasters - such as the Asian tsunami, the Kashmir Earthquake and the Mozambique floods – is also being discussed as part of this larger debt relief initiative. The United Nations has been very supportive of debt relief.

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Argument #1

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Yes

Debt relief is much needed for the world’s poorest nations and the only way to ensure that they get back on the road to economic development. Without debt relief, the cycle of poverty, disease and corruption would continue and possibly spread to other parts of the world. Debt relief is particularly needed in countries affected by natural disasters, where much of the aid is focused on solving immediate concerns as opposed to getting the economy back on track. Not only do they desperately need more money to cope with the disaster, but the economic impact of the tragedy reduces their ability to service their loans anyway. What is the point of the developed world promising hundreds of millions of dollars in post-Tsunami aid, if they then take away much more money each year in debt charges?

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No

There is no doubt that poverty is a serious issue in the world today and that a solution is needed. Debt relief, however, has so far proven to be fairly inefficient in terms of getting countries back on the road to development. In fact, most countries whose debt has been forgiven have not managed to escape the cycle of poverty. Debt relief alone will not be a solution in desperate situations where corruption, totalitarian governments and criminal gangs rule. It is better when natural disasters occur to provide short-term humanitarian assistance in the form of emergency supplies, specialist teams and money for rebuilding. Unlike debt relief, such aid can be focused on areas in real need and monitored to ensure it reaches those suffering in the disaster zone.

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Argument #2

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Yes

Normally debt-relief schemes are accused of creating a moral hazard - encouraging governments of poor countries to spend their revenues unwisely in the expectation that creditor nations will wipe out their debts if they get into trouble. Debt relief for countries affected by natural disasters is different, as by their very nature such events are unpredictable and cannot be planned for. Instead the possibility of such assistance in the event of an earthquake, tidal wave, or other disaster makes it more possible for developing states to plan ahead and invest wisely for the future.

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No

We need to keep in mind the fact that the need for debt relief is looked upon as a threat of bankruptcy. This means countries that are desperate enough to seek debt relief after a disaster may in future be seen as bad credit risks, and become unable to receive the loans they need in order to rebuild for the long-term after a natural disaster. It is also unclear what qualifies as a “natural disaster”. Earthquakes, hurricanes and tidal waves may be sudden and unpredictable, but as much or even more damage can be done by disease outbreaks such as AIDS, SARS or Avian ‘Flu, or by famine caused by crop failure. And why do disasters have to be “natural” to justify debt relief? What about countries affected by man-made disasters such as war? Tanzania and Chad have both suffered hugely from coping with massive refugee inflows following violence in neighbouring states (Rwanda and Sudan respectively).

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Argument #3

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Yes

Debt burdens are common in the developing world, but natural disasters such as earthquakes, tsunamis or hurricanes are rare and unpredictable. Existing debt-reduction programmes take a long-term approach, but years of good policy and improving governance can be totally wrecked by one event. People who have the misfortune to live in badly-run or totalitarian states still deserve our help when disaster strikes. Debt-relief is one way for the international community to make sure they are not oppressed from without (by debt charges) as well as from within.

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No

While it is true that debt payments place a serious burden on governments, one also needs to consider what kind of governments are talking about. Because current debt-relief programmes such as the HIPC scheme are already rewarding countries for good governance, some of the poorest states will in future have little debt to forgive in the event of a natural disaster. Only those which refuse to meet international norms for governance and human rights are keeping their debts and so will be in line for debt-forgiveness after a future mass tragedy. Sadly, in many cases these have governments that are involved in civil wars, killing their own populations as well as others; they are governments that waste most of the aid that comes into their countries; governments that use development funds to feed their own foreign bank accounts; and governments that engage in serious human rights violations. Forgiving the debts of such states will do nothing for those struck by disaster and will make a mockery of the existing debt relief schemes.

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Argument #4

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Yes

This scheme is designed to help developing countries recover after terrible tragedies, not to channel money to rich nations even if disaster strikes them too. The key difference is the ability of the country to cope with the situation. The US (or Japan) may have huge debts and potentially huge reconstruction costs after a disaster, but compared to the size of its overall economy or government budget these are much more affordable. And developed nations have access to insurance to spread the burden of loss after a disaster - something which is either absent or totally unaffordable in developing countries.

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No

Where would you draw the line? The proposition seems to assume that only developing countries suffer from natural disasters, and so require debt relief. In fact, natural disasters can strike a wide range of countries and it is not clear if your scheme would not also apply to middle-income or even rich states. In recent years the United States has been struck by several devastating hurricanes, and many people believe an enormous Californian earthquake is overdue. Given the huge foreign debts of the US government, why shouldn’t it apply for debt relief too in such situations? And what about Japan, for example after the Kobe earthquake? After all, given the much greater physical infrastructure of such countries compared to developing ones, the cost of damage done by a similar natural disaster will be very much higher.

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Argument #5

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Yes

As IMF debt relief has been perceived to be fairly controversial, particularly given the economic and political reforms required in return, the United Nations would be the preferred institution to manage debt relief. The UN has expertise in coping with disaster areas and in reconstruction, as well as in humanitarian relief - all lacking in the IMF and World Bank with their focus on long-term financial and economic development. This means the UN is best placed to determine whether relief is appropriate in a particular situation. The UN is also a fairer overseer of post-disaster debt relief, as it is not itself a creditor and so can be more objective in its decision-making.

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No

The UN is not a loan giver and thus should not have much of a say in debt relief. Loan givers such as the IMF and the World Bank have long-term economic and political interests that could easily be wrecked by UN decisions. For example, the World Bank needs to produce a return on its loans in order to generate income which can then be lent cheaply to poor countries in desperate need of investment capital. If the UN scrapped some of the World Bank’s loans, other developing countries would suffer from the loss of cheap credit for development. Even if it were to oversee these interests, a complete UN reform would be needed, transforming it into a bank-like institution – something that might not be desirable. The UN does not have a good track record in managing money and does not have the necessary international legitimacy needed to support such a plan. While the IMF and the World Bank may not be popular institutions, they certainly are well trusted in terms of their ability to pay up or forgive loans.

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Argument #6

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Yes

Sovereign and commercial creditors can afford to cancel this debt. The sums involved may be huge to poor countries, crippling their ability to rebuild after a disaster, but they are relatively small to the western governments, banks and multilateral institutions that hold the loans. Furthermore, lending institutions typically spread their risk, so writing off debt to a particular government struggling to cope with a tragedy will not hit the lenders very hard. Recent progress on debt-relief for the poorest countries has shown that lenders do have the flexibility to cope with writing off some debts without getting into trouble themselves.

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No

While powerful countries that support the IMF and the World Bank are certainly much wealthier than the world’s poorest countries, the amount of debt that we are talking about is still extremely large. Even though lenders try to spread their risk, natural disasters often affect more than one country (e.g. Caribbean hurricanes, the Asian tsunami) and so debt-relief could be demanded for a number of states simultaneously, making it unaffordable. Regional lenders (e.g. the African Development Bank) rightly specialise in a particular part of the world where they can bring expertise to bear; they could be wiped out if many of their loans were cancelled after a regional disaster. In addition, existing debt-relief schemes have been negotiated over very long period. This means countries, banks and multilateral institutions have had years to prepare their balance sheets for the losses write-offs involve. Sudden debt-relief following a natural disaster would be much more destabilising.

See also

External links and resources

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