Debt Forgiveness or Investment

Will debt relief really solve the problem of world wide poverty? Some think that if we just forgave the debt of the world's poor nations, then they would be able to spend their limited resources on health, education and other programs that would then help lift them out of poverty. I've always found that line of reasoning a bit too simple. Yes, I think it would be a good idea to relieve some of these nations of debt, but nothing will change if these nations are run by corrupt or inept governments, which is the case in some of the world's poorer nations.

An Op-ed from Canada's Globe and Mail highlights such concerns. The writer, Chuck Gastle, notes that when nations had their debts forgiven, the result was more spending by these nations, thus putting them into more debt. He also thinks foriegn aid alone won't help either. He notes:

But is debt relief and additional spending enough to create sustained economic growth within sub-Saharan Africa? The answer, sadly, appears to be no. Economist William Easterly points out that, between 1950 and 1995, Western countries gave $1-trillion in aid. He then created two tests to measure its effectiveness, the first of which was to determine whether there was a positive statistical association between aid and investment. Only 17 of 88 countries passed this test. The second test was to see whether aid passed into investment on a one-for-one basis. Only six passed this test.

He then took a look at debt relief, noting that total debt forgiveness for 41 highly indebted poor countries from 1989 to 1997 totalled $33-billion, while their new borrowing was $41-billion. On this and other measures, he notes that debt relief often is associated with an equivalent amount of new borrowing. If debt relief occurs in the absence of government reform, these countries may end up right back where they started.

So what's the answer to help these nations develop and alleviate poverty? Gastle believes a mix of investment strategies would make a difference, such loosening trade rules on such things like agricultural items. Nations in the First World have created an uneven playing field, paying their farmers subsidies. If Third World nations, especially sub-Saharan African nations could sell their goods on the world market, then they might be able to make some money. Gastle also thinks micro-lending on the lines of the Grameen Bank will help the poor as well as using whatever "wealth" the poor have already ala Peruvian economist, Hernando DeSoto.

In short, what's going to help the poor nations of Africa, Asia and South America is not aid, or charity or even debt forgiveness, but good, ol' fashioned capitalism. Of course this means the West has to give up its subsidies to farmers so that Africa can compete on the world market. It also means finding ways to help the poor invest and make money that can lift their families out of poverty.

I know that this method bothers some folks. They only see the bad effects of capitalism and think that if the government just spends a little more, things will get better. But you need both government and the markets to solve this problem. Government can and should be there to educate the populace, alleviate health problems and establish a strong infastructure. But it can't produce the wealth needed to lift people out of poverty. For that, you need markets.

I think at some point we have to stop seeing the Third World as a charity case and get them on the road to sustainability. I think a mix of capitalism and good government services such as health and education can do that.