Plans by the World Bank and the IMF to relieve Third World debt would have dire consequences for the very countries they are trying to help. Noble Ends, Flawed Means: The Case Against Forgiving Third World Debt says forgiving Heavily Indebted Poor Countries (HIPCs) their debts is morally and economically misguided. In addition, agencies which support debt-forgiveness, such as Jubilee 2000, are ignoring the serious economic ramifications of such a plan.
Allowing HIPCs to walk away from their debts sends precisely the wrong signal to the community of international leaders. Poor countries need to develop reputations as responsible borrowers who not only deploy the borrowed funds productively but who also pay their debts as contracted. How will debt cancellation help poor countries achieve either of these goals?
The IMF and the World Bank are obligated to evaluate and implement responsible measures to resolve a situation that they had a large role in creating. Because aid flows have been declining, debt-forgiveness would mean shifting aid expenditures from well managed to poorly managed countries. This would send the message that failure is to be rewarded and success is to be penalised.
Governments least concerned with the welfare of their citizens, and correspondingly the most corrupt, would be forgiven the misery that they are creating at the expense of more responsible countries. Forgiving debt increases borrowing costs by increasing country risk [as] it anticipates writing debt off again in the future. It would raise the costs of borrowing for other developing countries.
The only way to reduce poverty in developing countries is through encouraging rapid growth. Yet these countries would be losers if debt-forgiveness proceeded in the way envisaged by the HIPC Initiative and Jubliee 2000.
Professor Ian Harper is an economist who teaches at the Melbourne Business School within The University of Melbourne and was a member of the Wallis Inquiry. Dr Samuel Gregg is Resident Scholar at The Centre for Independent Studies in Sydney. Both are practising Christians. Professor Helen Hughes is Emeritus Professor at the Australian National University and Senior Fellow at The Centre for Independent Studies.