DEBT AND DEVELOPMENT IN POOR COUNTRIES: RETHINKING POLICY RESPONSES (CRS Report for Congress)
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| Release Date |
March 1, 2000 |
| Report Number |
RL30449 |
| Report Type |
Report |
| Authors |
J.F. Hornbeck, Foreign Affairs, Defense, and Trade Division |
| Source Agency |
Congressional Research Service |
Summary:
The poorest countries face enormous challenges to development, with economic issues still
presenting some of the greatest obstacles. High on the current public policy agenda, including in the
U.S. Congress, is financing increased debt relief for the poorest countries. Indebtedness is not a new
issue. In the 1980s, Latin American middle income countries became severely indebted to private
banks, causing a financial crisis with prolonged economic and social consequences. Today, the
Heavily Indebted Poor Countries (HIPCs), mostly located in Sub-Saharan Africa, face worse
economic prospects and relatively large debt burdens to official creditors.
For most developing countries, debt is a marginal issue and not the primary obstacle to growth
and development. For the HIPC countries, however, debt may be a drag on economic growth and
so debt forgiveness may afford an opportunity to boost the development process. Total HIPC
country external debt amounts to $206 billion and current HIPC proposals anticipate total debt
reduction costs for all creditors in 1999 net present value terms to be $28.2 billion, not large amounts
by developed country or global standards, but as yet mostly unfunded.
A decision on financing HIPC debt relief falls to Congress. If debt reduction is desired,
experience argues that it be comprehensive and timely, but probably not unconditional, which could
be counterproductive if it is a replacement for, or diminishes incentives to effect, broader economic,
political, and social reform. For debt relief to support growth and development, it is arguably best
used if supported by a well-managed, long-term investment strategy that ensures clearly productive
public and private use of debt. This point speaks to the larger issue of addressing the need for
improved social, political, and economic institutions to encourage political participation and
entrepreneurial activity that will help create an environment conducive for attracting foreign and
domestic capital investment.
For their part, developed countries and international financial institutions might consider how
best to support developing country attempts to reform and adapt to changing international economic
trends. Solutions that prolong debt relief may delay development; this has led to recent changes to
the HIPC initiative intended to quicken and deepen debt reduction. Also, foreign aid can be helpful
at the margin and may be used to help with immediate social needs, but cannot finance all long-term
development needs. Other policy support, such as removing trade barriers to developing country
goods, would strongly complement debt relief.
Diminishing poverty in poor countries has become a major new emphasis of the HIPC debt
reduction initiative, yet debt relief is no guarantee of success. Debt does not necessarily cause
poverty, so more than debt reduction many be needed. Also, because financial resources are largely
fungible within government budgets, debt relief cannot assure that social program spending will be
given priority. In summary, given the myriad factors that must work together for development to
take place, the benefit of debt relief may be limited unless it becomes part of broader program for
social, political, and economic change.
