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AFRICA: Debt-Relief Proposals

Author: Lionel Beehner
June 8, 2005
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What are the current plans for African debt relief?

There are a number of debt-relief proposals being debated, some more ambitious than others. One of the most widely discussed is British Prime Minister Tony Blair's plan for Group of Eight (G-8) members to forgive African debt and to double their development assistance to the continent. Blair is touring the globe to recruit rich countries to endorse his program in preparation for the G-8's July 6-7 summit in Gleneagles, Scotland. Momentum for debt relief appears to be building, experts say, with a Live8 concert of marquee names and mass rallies planned to coincide with the gathering in Gleneagles.

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What exactly does Blair's plan call for?

Blair's proposal, which has been dubbed a "Marshall Plan" for Africa, calls on members of the G-8--the United States, Japan, Russia, Italy, Canada, Britain, France, and Germany--to commit 0.7 percent of their gross domestic product (GDP) to development aid by 2015, a threefold increase over the current global average of 0.28 percent. It also calls for a 100 percent cancellation of multilateral debt owed by 62 developing countries to lending institutions such as the World Bank, International Monetary Fund (IMF), and African Development Bank. The purpose of the plan is to meet the Millennium Development Goals, a series of targets set by the United Nations in 2000 to eradicate extreme poverty, reduce hunger, and reverse the spread of AIDS and other diseases by 2015. To achieve these goals, rich countries are being asked to ratchet up their aid to Africa from $25 billion to $75 billion per year by the target date. Blair and British Chancellor to the Treasury Gordon Brown have also devised a financing mechanism called the International Finance Facility (IFF) to provide immediate relief to famine-stricken Africa and raise an additional $25-$50 billion per year.

How would the IFF work?

The IFF is a scheme to "frontload" aid by issuing and selling bonds on global capital markets. Donors to the IFF would borrow against their own future pledges of development aid and guarantee repayment of IFF bonds over a period of time. The plan, says John MacArthur, manager of the UN advisory body called the Millennium Project, is "creative" because it allows countries to circumvent their current fiscal constraints and allocate more aid in the short-term. "The question is how to get that kind of money now. Governments can't typically pull $50 billion out of a hat," he says. The IFF is likely to win approval in Europe, but is not supported by the Bush administration.

What are the U.S. objections to the IFF?

"It doesn't fit our budgetary process," President George W. Bush recently told reporters. In other words, says MacArthur, "It's quite difficult to get Congress to commit future Congresses to make appropriations." Another question facing Bush is the constitutionality of the IFF, experts say. "[The United States] can borrow on behalf of the U.S. government but not some [outside] agency," says John Williamson, a development expert with the Institute for International Economics. Lastly, some experts say the IFF could result in a decline in future aid dispersals, since the bonds would have to be repaid 10 or 15 years down the road by funds taken from future aid budgets.

What has been the Bush administration's approach to aid?

A key focus of its development-aid approach is to focus assistance on countries that meet minimum standards of good governance and sound economic policy. Aid under this model will be distributed on a country-by-country basis through the Millennium Challenge Account (MCA), established in January 2004 to follow through on President Bush's March 2002 pledge in Monterrey, Mexico, to create "a new compact for global development." Eight African countries are currently eligible for the $2.5 billion thus far allocated to the account by Congress.

What do critics say about the Millennium Challenge Account?

Despite the billions of dollars allocated, "the Millennium Challenge Account hasn't disbursed a penny yet," Jeffrey D. Sachs, director of Columbia University's Earth Institute, told the New York Times June 5. Another complaint is the strict criteria placed on recipient states to be eligible for aid. Of the eligible African countries, only Madagascar has won approval for an aid package. Williamson says the holdup is because the program's administrators, mindful of past misuses of foreign aid, are "erring on the side of caution... The last thing they want is for this new experiment to be attacked by right-wingers as being wasteful," he says.

What are some other common criticisms of U.S. aid policy?

That it is too stingy, some experts say. Out of the United States' GDP, just 0.16 percent is allocated to foreign aid, among the lowest percentage of G-8 members. Administration officials argue that the United States' $3.2 billion African aid budget--triple what it was in 2000--makes it the largest donor nation to Africa. Critics, however, counter that the European Union's budget for African aid, at some $10.8 billion, dwarfs that amount. Bush's June 6 announcement to steer an additional $674 million in humanitarian assistance to Africa, mostly for famine relief in poverty-stricken countries like Ethiopia and Eritrea, is a "drop in the ocean," Jonathan Glennie, senior policy officer at the London-based relief organization Christian Aid, told the Birmingham Post.

What's the official U.S. policy on debt relief?

To forgive Africa's debt, but without compensating the World Bank and IMF for the unpaid debts owed them, experts say. The World Bank and IMF, in essence, would have to find ways to make up for the shortfall in payments themselves. Blair, on the other hand, is pushing the United States and other G-8 members to recompense these lending institutions and, in effect, pay off Africa's bills. There is also disagreement over which countries qualify for debt relief and under what conditions their debts should be cancelled.

Looking forward, the United States has suggested that future disbursements of aid, particularly to the poorest parts of Africa, come in the form of grants, not loans. "The idea [Washington has] been pushing, is for countries with per-capita annual incomes below $500 to get grants, because even if these countries do well, they're not in a position to pay [loans] back in 20 years' time," Williamson says. Europeans, however, argue that a switch to grants, which are not repaid, would mean less money available for future aid dispersals.

Which other ideas to finance debt-relief are being floated?

Originally proposed by Gordon Brown, one idea gaining momentum is to sell off some of the IMF's gold reserves, which have shot up in value in recent years, to help finance its debt forgiveness. The proposal is backed by Britain but opposed by the United States and Canada, both gold-producing countries worried about the adverse impact such a sale might have on the global bullion market. A smaller-scale solution, floated by French President Jacques Chirac at the World Economic Forum in January, is an optional airline tax on flight tickets sold in the European Union. The proposal failed to get off the ground, due to strenuous objections from tourist havens like Italy and Greece.

— by Lionel Beehner, staff writer, cfr.org

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