Third world debt forgiveness

We’ll be hearing a lot more about this topic in the next month or so. I’m pretty excited about it I must say. Tim Colebatch’s column captures my own feelings pretty much. There may be bugs on what’s flying around at present, but there are real achievements occuring. And if anything matters in our lives, if other people matter, this matters.

In any event, Rafe Champion did a post on it over at Catallaxy. Since it was a post on Sachs’ book and I’d been reading it – and didn’t notice anyone else in the post or the comments had, I put in a comment. Since I’d like to get the conversation away from the now fairly trite observation that we won’t do too much good if our gifts are soft headed – to very corrupt governments, or come with great faith in failed ‘industry policy’ solutions – towards some of the things discussed in Sachs’ book, I’m reposting my comments on Rafe’s post over the fold – to get our own discussion going.

They’re far from definitive comments, as you’ll see, but I’ll be interested in the discussion.

Oh and by the way, I intend to moderate the discussion strictly. That means I welcome debate from any side of the political fence but not cheap shots or sloganeering which will derail the conversation – or rather rail it – into the usual grooves. If I think a comment will do that I will simply delete it. Since I’ll probably be more offended by sloganeering with which I disagree than with sloganeering with which I agree, here is a plea for all sides to try to be as constructive as possible. If you object to this – please start your own post saying how terrible it is – somewhere else.

I’m about a third of the way through Sachs’ book. I thought it dull and worthy until I got to the last two chapters that I’ve read on ‘clinical economics’ and ‘bolivia’s hi-altitude hyperinflation’- both of which were so good I went and scanned them into my computer. Email me at nicholas AT gruen DOT com DOT au if you’d like a copy.

So far Rafe there’s none of the insights about socieities and inward lookingness that I agree are important to avoiding the disasters of the past fifty years. Then again, some of this can now be taken in one’s stride. We can move on. No-one of any seriousness now argues in favour of highly statist micro-economic solutions. I’ve not read them yet, but I’m sure Sachs’ chapters on India and Poland will gladden the heart of enemies of inward looking industrial statism (like me).

But economics is a world of positive feedback. That means lots of things, and it means both that societies can get in huge problems that are self re-inforcing. If they’re deeply ingrained politico-micro-economic problems they can be very difficult to tackle. And simply handing over more cash isn’t going to help. On the other hand it also means that aid can be of great benefit – if it can help turn vicious circles into virtuous ones.

So far Sachs’ focus is on the kinds of disastrous positive feedbacks that are involved in national debts and (in the chapter I’ve just read) hyperinflations. And on the way in which he’s come to believe in himself as ‘clinical economist’ making house calls, and thus on the importance of knowing about the countries to which one is handing out advice on and on how poorly his training has equipped him for this.

As for the idea that debt forgiveness is wrong and breeds moral hazard, of course it does. The question is as usual to weigh the two sides and decide what is, in a practical sense, best. My own view (which I won’t pretend is any more informed than others in these comments) is that where debt forgiveness is a good idea, if its practicable it might be even better to hand money to people other than those owing money. But this is often not practicable. Particularly where some rapacious and corrupt government has borrowed and squandered the money – and the lenders have often known that this is the kind of govt to whom they’re lending.

Ultimately we’ll go astray here however in getting too excited with the moral rights and wrongs – which are complex. We’ve had a pretty good system on this domestically for a century or so which has been bankruptcy and (I imagine in my shameful ignorance) that it is the approrpriate analogy for much third world government debt in the poorest countries. As for why we can’t pursue my proposal regarding private debt – don’t forgive the debt but make an equal payment to others – I’d be interested to read in further comments. I expect that an important part of the problem will be that the private debt is bank debt and that not forgiving it cripples the economy. But please commenters – enlighten me.

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Cameron Riley
2024 years ago

I see arguments in the US pop up fairly often for nations to have Chapter 11 type protections extended to them so they can restructure debts. But that assumes the money was loaned as an investment. Which I am not sure is the case, otherwise lenders would sell off bad debt to international collection agencies.

I think the writing off debt is the wrong question. I think we should be asking ourselves why are we lending money in the first place? Is it for a fiscal return? To promote trade? What?

The answer to that will probably guide whether debt should be written off or not.

Jason Soon
2024 years ago

“I think the writing off debt is the wrong question. I think we should be asking ourselves why are we lending money in the first place? Is it for a fiscal return? To promote trade? What?

The answer to that will probably guide whether debt should be written off or not.”

Indeed, and the answer I would suggest is in large part enlightened national interest. Why did Australia intervene in the Solomons? Not totally out of the goodness of our hearts and understandably so, but because economically unstable neighbours make bad neighbours, breeding grounds for terrorists and insurgents, etc. Thus there is equally a pragmatic case for forgiving debt that has been accumulated if the alternative may be, as Nicholas suggests, far worse, moral hazard or no.

Philip Gomes
2024 years ago

And the lenders have often known that this is the kind of govt to whom they’re lending

And that is why debt relief is a good thing, however, the coda that corruption must be eliminated in order to receive relief is an amusing one, many of the despotic governments that have been identified by opponents of relief have been dealing with the usual instruments of world finance for decades. Suharto for example. It is we that have lent these regimes the money and encouraged further corruption by continuing to lend them even more, we now owe it to the peoples of these countries to help them put their house in order.

Placing constraints on the receipt of the cash is beyond a joke, it should be unconditional because these same instruments encouraged by geopolitical interests gave them the cash despite the decades long evidence of corruption.

And yes, I am implying that we have been corrupt in our dealings with these despots and bastards. The behaviour of the lending institutions has been immoral right from the start.

2024 years ago

Now that the stand-off between the Soviet block and the West is out of the way, it may be feasible to bring pressure to bear on hitherto irresponsible regimes to allow aid money to be put to the appropriate uses. It is likely that the only effective way to provide aid is to people, projects or villages rather than central governments. However under Cold War conditions there was no way to pressure Third World governments to put in place the right kind of policies because they could simply thumb their noses at western donors and threaten to join the Soviet block.

2024 years ago

Chapter 4, “Clinical Economics” indicates how badly Sachs was educated, taking twenty years to understand some really basic things about the productive capacity of a country. Did he never do a course on geography in high school to learn about location factors, transport, topography soil and climate? Did he never meet a geographer or an economist with an interest in location factors? And how did he spend years teaching development economics without reading Bauer? In this chapter he comes across as a self-indulgent ignoramus.
Fortunately Chapter 5 is very much better and it is possible to wear the element of self-indulgence because he provides a rivetting account of the rescue of Bolivia from runaway inflation and some other crises. He was fortunate in getting support from both parties that held power over a period of some years. It was also fortunate that the main political players were prepared to take big risks and strong stands to do the right thing on money supply, wages and taxation,
If his account is correct he also showed a lot of nerve in standing up to US and IMF officials who were not prepared to be helpful.
After the government did the right thing under very difficult circumstances (the collapse of tin exports) the biggest negative in the equation was the US stand on the coca crop and the US failure to put real money into alternative ventures to provide employment and cashflow for the rural community.

Nicholas Gruen
2024 years ago

Yes, fair enough in some ways

2024 years ago

As for Bauer’s blinkers, on my site in Revivalist4 I have linked to some critical comments by Sen.

2024 years ago

Some of the complexities of forgiving third world debt under past despots here
Where’s the money coming from?

derrida derider
derrida derider
2024 years ago

Imagine if the wicked banks had said in 1990 “We’re going to boycott Indonesia, even though that will cripple their growth and even though we think there are lots of good investments there, because we don’t like their President”. Economists would rightly have noted that such an approach was unlikely to improve the lot of the Indonesian poor (nor, BTW, that of the banks’ shareholders). The anti-globos would rightly have screamed ‘paternalism’.

My point is that the banks were not immoral – just mistaken in their estimate of risk (they should have, and usually have, paid for that mistake). If a bank believes that any money advanced is going straight into the President’s Swiss bank account it is most unlikely to lend the money because of the obvious risks. That’s why you don’t see much private lending to the most corrupt countries; only governments are mug enough to do that.