The Economics Book

314

WE CAN KICK-START

POOR ECONOMIES BY

WRITING OFF DEBT

INTERNATIONAL DEBT RELIEF

IN CONTEXT

FOCUS

Growth and development

KEY THINKER

Jeffrey Sachs (1954 – )

BEFORE

1956 The Paris Club,

a grouping of creditor

nations, was established to

facilitate debt relief between

individual countries.

AFTER

1996 The IMF and World Bank

launch the Heavily Indebted

Poor Countries (HIPC)

initiative to give debt relief

and initiate policy reform in

poor countries.

2002 Seema Jayachandran

and Michael Kremer argue

that countries may not be

legally liable for “odious” debts

incurred by corrupt regimes.

2005 G8 countries agree

to write off $40 billion of debt

under the Multilateral Debt

Relief Initiative (MDRI) as part

of the Gleneagles summit.

I

n the last few decades of the

20th century the world’s

poorest countries piled up a

staggering amount of debt, which

grew from $25 billion in 1970 to

$523 billion in 2002.

By the 1990s it was clear

that there was a debt crisis. No

heavily indebted African nation

had ever prospered. Indeed, most

were in such dire economic straits

that they could not even service

their debts without terrible

suffering, let alone make the

investments needed to climb out

of the vicious cycle of economic

decline. Campaigns for debt

cancellation intensified.

Many campaigners took a moral

stance, criticizing the negligent or

self-interested role of the rich

countries and institutions such as

the World Bank and International

Monetary Fund (IMF), which

had made many of the loans.

Campaigners argued that since

Canceling the loans

will enable poor countries

to invest in growth.

Debt in poor countries has

grown so large that they

cannot afford to service the

debt and invest in growth.

The loans should not

have been made in

the first place.

We can kick-start poor economies

by writing off debt.

Many of the loans were

made by rich countries

to corrupt governments.