No. 16 — April 21, 2000


Weekly Review

--- by Marc Castellano

Just days before massive protests in Washington elevated the issue of global poverty to world prominence, Tokyo announced that it would forgive up to 100 percent of nonofficial development assistance loans to 40 nations classified as heavily indebted poor countries by the International Monetary Fund. The April 10 decision will bring Japan into line with other Group of Seven industrial nations that already have made such a commitment in an effort to advance the so-called enhanced HIPC Initiative, an international framework launched in 1996 by the IMF and the World Bank to reduce the debt burdens of the world's most destitute nations.

At last June's G-7 summit in Cologne, Germany, the leaders of Canada, France, Germany, Italy, Japan, the United Kingdom and the United States agreed to back this landmark debt-relief plan, which is designed specifically to help poor countries channel scarce funds into such basic humanitarian needs as health care and education instead of into debt payments (see JEI Report No. 24B, June 25, 1999). In particular, the seven rich economies pledged to forgive all bilateral ODA loans and up to 90 percent of bilateral non-ODA aid, which includes trade insurance and loans from such public agencies as export-import banks. Pressure from official sources as well as from international advocacy groups was critical in rallying support for the $27 billion effort, then referred to as the Cologne Debt Initiative.

Tokyo initially was reluctant to participate in the plan, in large part because of the G-7 members, it has the most at stake. Japan's bilateral claims, including both ODA and non-ODA loans, on the 40 HIPCs total $10.5 billion. Japanese aid administrators and other policy planners also oppose debt relief on philosophical grounds. To promote fiscal discipline, Tokyo's aid program traditionally has emphasized loans rather than grants. Thus, decisionmakers worried that debt relief would discourage responsible spending in recipient countries while encouraging moral hazard. Ultimately, Tokyo bowed to international pressure and, after being assured that the financial burden would be shared by other G-7 nations, signed on to the agreement.

Nevertheless, the initiative made little progress until last September, when the World Bank's Development Committee and the IMF's Interim Committee convened to work out details of the plan (see JEI Report No. 37B, October 1, 1999). Major capitals — with the notable exception of Tokyo — pledged a total of almost $2.5 billion toward writing off the debt that the HIPCs owed these two major lenders. That amount should have allowed this part of the program to begin immediately. However, several obstacles remained. Questions about attaching conditions to debt relief still were unresolved. Moreover, securing the promised funds proved to be problematic.

As the April 16-17 spring meetings of the IMF and the World Bank approached, the call for more rapid action intensified. Nongovernmental organizations were particularly vociferous. In early April, Jubilee 2000, a global coalition that advocates 100 percent debt relief for the 40 HIPCs, met in Fukuoka, where G-7 finance ministers will convene in advance of the July 21-23 summit on Okinawa, to urge Japan to take an active role in eliminating the debt of poor countries. Claiming that the HIPCs are becoming more poverty-stricken due to their massive debt-repayment obligations, the international group called for immediate implementation of loan waivers.

Whether coincidental or otherwise, Tokyo soon announced its new strategy. In addition to increasing the write-off of bilateral non-ODA loans to 100 percent from 90 percent, the government plans to boost Japan's multilateral contributions for debt relief. It will transfer $200 million, up from an initial pledge of just $10 million, to the international trust fund established for the HIPC Initiative. Moreover, support for HIPCs through various measures, including additional grants in place of loans, will continue. However, neither the Ministry of Foreign Affairs, Japan's lead foreign aid agency, nor other organizations involved in the nation's development assistance program, provided details or specific figures.

As the host of this year's summit of the leaders of the G-7 nations plus Russia, Japan understandably does not want to be portrayed as an outlier on the now high-profile issue of debt relief, particularly since the government long has characterized its big foreign aid program as the cornerstone of the nation's contribution to global security. With its latest debt-relief policy on the table, Tokyo even has asked other capitals to accelerate their efforts to move the HIPC Initiative forward. Some observers suggest, however, that Japan actually is holding up the process.

In their view, a hard-line stance by Tokyo is discouraging nations from accepting the debt relief being offered. This charge is based on statements by Japanese aid administrators that countries that exercise the option of writing off 100 percent of their existing obligations will be ineligible for future loans. Insiders counter that no country has been pressured, emphasizing Tokyo's belief that each debtor nation must determine which course to pursue based on individual considerations. But, rhetoric aside, Japan's policy appears to be fairly clear. A Foreign Ministry official put it succinctly: It "is a choice between new loans or [debt] cancellation."

Japan's long-running economic problems have strained government resources and eroded public support for what has been for years the world's largest foreign aid program. In short, the HIPC Initiative, which will cost Japan a tidy sum, is not popular. Nevertheless, Tokyo's participation, however qualified, is critical. Japan has extended more than 40 percent of all G-7 ODA loans to developing nations.

The views expressed in this report are those of the author
and do not necessarily represent those of the Japan Economic Institute

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