Cologne initiative can do more harm than good --The Economist Stabroek News June 29, 1999 Will the Cologne Debt Initiative of the Group of Eight (G8) world leaders materialise and will it really benefit the world's poorest countries? If so, how many countries will really benefit? These questions remain as the debate rages on in the international media as to the viability of the proposed debt package. The G8 summit in Cologne, Germany, said that the International Monetary Fund (IMF) participation in the initiative, which is an improvement on the Heavily Indebted Poor Countries (HIPC) initiative, would be via the sale of 10 million ounces (311 tons) of gold. The IMF would be expected to invest the proceeds and use the earnings to help fund the package. However, The Economist magazine says that a number of US lawmakers have indicated that they wanted no part of the gold sale and the World Gold Council says this proposal should be reconsidered as it would hurt the countries it aimed to help. The council noted that if the IMF gold proceeds (estimated at US$2.3 billion) were invested in US government bonds, the interest would amount to about five per cent per year, some US$110 million. However, the council argues that the benefit had already been offset by the economic cost - a loss of more than US$150 million annually as a result of the fall in gold prices. Guyana is listed as one of the countries which sells gold on the world market in a business wire report. "Without careful reconsideration of the damage which has already been done to the fledgling gold mining industry of many of the world's poorest countries by the threat of gold sales, their glittering future may be still born," the council is quoted as saying. The council suggests that alternatives for funding this package be looked at, such as asking IMF members for direct budgetary contributions; borrowing from private markets; revaluing the gold closer to market prices; or by obtaining an SDR allocation under which developed countries agreed voluntarily to recycle their SDRs to the IMF, which could then use these funds for debt relief. The Economist also reported that there was talk of using World Bank profits to fund a part of the package, but considered that this was not likely. "The danger is that the promised relief for HIPC will either prove elusive or come at the expense of other aid and other recipients," The Economist said. The magazine noted that official aid flows had been broadly stagnant throughout the 1990's because aid had produced few successes and many mistakes. However, the British magazine believes there was some hope in the initiative, given that it came at a time when the World Bank was rethinking its approach to aid. It noted that history had shown that if relief was not carefully aimed at countries which had a genuine commitment to sound economic management, it would be wasted. Meanwhile, a writer in the London Financial Times argues that cancelling debt would not help the world's poorest, but rather debt relief as part of an aid development strategy. Noting the formidable campaign of the Jubilee 2000 movement, which pressured the world leaders to act on the debt question and which was still not satisfied with the Cologne Initiative, Martin Wolf argues against cancelling all the debt at once. He points to seven myths about debt, and emphasises that they are just myths. The first, he noted, says that debt was intrinsically wicked. However, he said for poor countries to progress, they had to borrow, but funds had to be invested for adequate returns. He contends that HIPCs were not victims of private sector exploitation but rather that private enterprises had no interest in them. The second myth is about debt being the greatest single cause of poverty and injustice. Wolf debunks this, contending that much of the debt was supplied on highly concessional terms and if countries were unable to service those debts it was because the money was wasted. "Excess debt is a symptom of that waste, not the cause of growing poverty," Wolf asserted. The question to be answered, he said, was why debt forgiveness would itself improve government. He decried the third reason that debt relief would make recipients better off, pointing out that HIPCs continued to receive more money in loans and grants from official sources than they paid out on debt service. On the argument that debt relief was just, Wolf said that 30 per cent of the world's poorest lived in India, which was ineligible for debt relief because it had managed its affairs relatively wisely. "Countries with unpayable debt burdens are, on the whole, the worst managed. Writing off all debt, regardless of performance, is unjust for this reason," said Wolf. He also argues there were no guarantees that there would be increased spending on social services with debt relief as funds were fungible. He also says that spending on social sectors did not ensure poverty reduction and that countries had to have a demonstrable record of performance for debt relief to be given. He contends that debt relief should be an element in the overall strategy for aiding development and not the tail that wags the dog. On the other hand, another report in the Financial Times noted that the new G8 debt relief package was met with scepticism from debt campaigners, the Jubilee 2000 coalition. The coalition argues that most poor countries would still pay more on debt service than health and education and urged the world leaders not to believe that their work had been done. A © page from: Guyana: Land of Six Peoples