No. 27 — July 14, 2000


Weekly Review

--- by Marc Castellano

At a July 8 meeting in Fukuoka on Kyushu, finance ministers of the Group of Seven industrial nations acknowledged that implementation of the G-7 poor-country debt-relief initiative is being held up by a number of obstacles. Secretary of the Treasury Lawrence Summers, Finance Minister Kiichi Miyazawa and their counterparts had gathered in preparation for the July 21-23 summit of the leaders of the G-7 countries plus Russia on Okinawa, where the progress of the watershed loan-cancellation program will be discussed.

In 1996, the International Monetary Fund and the World Bank launched a major effort to reduce the burdensome loan repayment obligations of the world's most destitute nations, identifying 41 developing economies as "heavily indebted poor countries." The so-called HIPC Initiative was designed to help impoverished countries whose overwhelming liabilities were preventing them from meeting the basic educational and health-care needs of their citizens. The initiative made little impact until early 1999, when German Chancellor Gerhard Schroeder issued a statement calling on the industrialized world to forgive all existing official development assistance loans to the HIPCs by December 31, 2000.

At the June 1999 summit in Cologne, Germany, the G-7 leaders agreed in principle to cancel debts worth some $70 billion owed by the world's poorest countries (see JEI Report No. 24B, June 25, 1999). The agreement came after Japan and France, which together hold nearly 70 percent (44 percent and 25 percent, respectively) of the roughly $20 billion in outstanding G-7 bilateral ODA loans to HIPCs, were satisfied that the burden of implementing the massive loan-cancellation program would be shared by other members. The new plan, in contrast to the original HIPC Initiative, promised faster, broader and deeper debt relief for countries in dire straits. Definitive monetary pledges were secured last September. Implementation was supposed to begin shortly thereafter.

A number of interrelated factors have kept the enhanced HIPC Initiative from getting off the ground (see JEI Report No. 18A, May 5, 2000). First, the process of qualifying debtor nations has taken longer than expected. Second, the debt-relief initiative itself has sparked a heated international debate. The world's most powerful nations disagree on what conditions, if any, should be attached to debt-relief programs. Moreover, the problem of moral hazard has not been resolved, and concerns remain that corruption will defeat the purpose of the initiative. Financing also is an issue.

Although G-7 members have agreed to cancel under various terms and conditions all bilateral debts, writing off multilateral loans will require additional resources. The HIPC Trust Fund, created as a key part of the initiative to finance debt relief from such regional multilateral banks as the Inter-American Development Bank, lacks adequate funding. As of June, the trust fund had secured $2.6 billion in bilateral contributions plus pledges from about 20 countries, but some $25.6 billion more still is needed.

Another problem is that roughly one-third of the HIPCs are engaged in conflict of some sort, and donors want assurances that recipients of debt forgiveness will not divert money from loan repayments to spending on arms. Speaking after the finance ministers' meeting, Mr. Summers blamed HIPCs for not meeting program conditions. However, he also criticized Congress for its failure to release funds that Washington had promised. The House of Representatives and the Senate are discussing a contribution of around $70 million, far less than the $435 million that President Clinton had requested for FY 2001. The discord stems in part from Republicans who are trying to force changes at the IMF, an institution that recently has come under fire from a host of congressional critics for its role in economic development and other activities. Support from Washington obviously is critical for the enhanced HIPC Initiative to succeed.

Tokyo initially was less than enthusiastic about the HIPC Initiative. But earlier this year, then-Prime Minister Keizo Obuchi shifted gears at the quadrennial meeting of the United Nations Conference on Trade and Development (see JEI Report No. 7B, February 18, 2000). Describing the "pressing need" to extend debt relief to the poorest countries of the world, Mr. Obuchi called for early implementation of the initiative.

The prime minister promised in addition that Japan would work with other industrial nations to advance the program. A month later, Tokyo formally introduced a bold new strategy, ostensibly to have something to bring to the table at the April IMF and World Bank meetings in Washington and to avoid the criticism that it was not taking an active role in moving the initiative forward. A series of official statements released in March outlined Tokyo's position and confirmed its support for the debt-relief plan. Most importantly, the Ministry of Foreign Affairs echoed Mr. Obuchi's comments, highlighting the urgency of the HIPC Initiative and pressing for the active participation of other G-7 nations.

As the chair of the July summit, Tokyo has much more at stake than its roughly $10 billion share of the outstanding HIPC debt. The country's reputation as a global leader also is on the line. Can Japan, the world's largest aid donor since 1992, convince its G-7 peers to pony up? Interest groups are turning up the heat. Following the finance ministers' meeting, a group of ambassadors from 11 member countries of the Organization of African Unity handed a declaration to Foreign Minister Yohei Kono that urged Japan to tackle debt relief and other African issues at the Okinawa summit. Jubilee 2000, a nongovernmental anti-poverty coalition that has been at the forefront of the loan-cancellation campaign, recently accused the G-7 of failing to keep its promises and issued a strong call for action.

Japanese officials have been working to rally support for the debt-relief program. But the G-7 countries — Canada, France, Germany, Great Britain, Italy, Japan and the United States — still have to reconcile differing aid philosophies and convince skeptical domestic constituencies that the HIPC Initiative is worth its tremendous cost.

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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