Reassessment Time

by Gene Callahan, who is writing a book, Economics for Real People, for the Ludwig von Mises Institute.

In a recent National Review Online Guest Comment, "Forgiveness Time," Brett Wagner and Jesse Lorenzo contend that the U.S. should forgive Third World countries $435 million in debt. While this might be a good idea, I find their analysis of the debt problem faulty and incomplete in important ways.

Wagner and Lorenzo say:

Hundreds of millions of people throughout the Third World are trapped in suffocating and dehumanizing poverty in no small part because domestic resources that could be used for health, education, sanitation, and agricultural-modernization programs are being diverted to service uncollectible international debt.

Notice that the things that they think this money could be used for are all government projects – "programs." Perhaps, after four decades of "programs" that have made things worse, these governments could try simply leaving their people alone and letting them work it out for themselves? When these programs to help the poor fail once or twice, we can believe that the "programmers" were simply mistaken – what they thought would help did not. But after repeated efforts fail, one must begin to wonder whether the programmers actually have an interest in the poor or are simply in love with designing programs.

Wagner's and Lorenzo's statement, "America has more than enough money to pay its fair share of Third World debt relief," is doubly curious. In the first place, while it is certainly true that the U.S. government has enough money to pony up $435 million, just who is arguing the issue on these grounds? Our government also has enough money to fund me on one heck of an around-the-world cruise. The real question would seem to be, "Should the government be spending its money on this?"

Secondly, how can U.S. taxpayers, who will ultimately foot this bill, be said to have a "fair share" of someone else's debts? If I can't pay my mortgage, what will Wagner and Lorenzo take on as their fair share of my debt? This usage seems to render "fair" empty of any meaning, other than enabling the user to call anyone who would dispute his number "unfair."

It's true that the poor of the Third World are chiefly innocent victims in this mess. Their leaders squandered some of the funds from previous loans on inefficient (or just plain useless) government projects. But much of the money flowing in from the developed world they simply stole. Doug Bandow of the CATO Institute writes, of one of the worst of the thieves:

If there is any nation where donors should be cautious, it is the former Zaire. The Mobuto regime collected $8.5 billion between 1970 and 1994. The only evidence that remains of that aid is the deposed dictator's luxurious villas in France and Switzerland, assorted bank accounts frozen by the Swiss government and his country's huge, uncollectable international debt.

All told, Mobuto is thought to have amassed a fortune of between $4 billion and $7 billion by looting his national treasury and the foreign aid that flowed into it.

There is a story of Mobuto being asked if it was true that he had $5 billion stashed away in Switzerland. Mobuto, apparently insulted, told the inquirer, "No, I have much more than that."

A major effect of this flow of funds to Third World governments is that it strengthens corrupt and despotic regimes. With billions of dollars to distribute, the strongmen, who are the chief obstacle to their countries' advance, are able to buy support and remain in office for far longer than they otherwise could have.

When we realize that the initial loans are as much a part of the problem as the subsequent repayments, our obligations appear somewhat differently. Let us imagine that we have been lending money to a problem drinker to buy alcohol. Certainly, we have been a part of his problem. And if he can't pay us back, we might feel a responsibility to forgive his debt. But we would surely want to add a proviso that there will be no more loans forthcoming. This is just the sort of solution to the debt problem that Ian Vásquez, CATO's director of the Project on Global Economic Liberty, recommends. In his article "Shell Games Won't Help Africa" he contends:

The best solution would be to forgive poor countries' debts and terminate official lending altogether. Doing so would end the continent's aid addiction and force governments to focus on the real causes of poverty: flawed economic policies and institutions.

Wagner and Lorenzo write:

...should America and the other "haves" turn a deaf ear to the pleas of the world's "have-nots," the 21st century will likely be increasingly plagued by famine, failed states, massive transnational flows of refugees, and growing regional instability. And that bodes well for no one.

The "help" that the "have-nots" have received from the "haves" has mainly helped to make so much of Third World the disaster area that it is. Debt relief might be a suitable act of charity, and recognition of the effect that First World aid has had on the Third World. But if not accompanied by a fundamental change in policy on future aid, it will not make a significant difference to the lives of the Third World's poor.

October 27, 2000

Gene Callahan is a regular contributor to mises.org

© 2000, Gene Callahan