Relief, but questions

The decision by the finance ministers of the wealthy G-8 grouping to write off $40 billion international debt owed by the poorest nations (mostly in Africa) marks the culmination of a decade-long campaign on the issue. It has been pushed successfully to signature stage by a determined Britain, after overcoming resistance from countries like Germany and France.

The actual debt written off is much less than the stated figure, since a large chunk is accounted for by future interest instalments that would have fallen due. On the other hand, the total figure could swell to $55 billion if another dozen or so countries qualify for relief by meeting some performance criteria.

Britain, which is due to take over the presidency of the European Union, will now push hard on the two other issues which the Blair government has adopted as signature themes: increasing aid by $50 billion and opening up rich markets to the poorest countries. The G-8 finance ministers have not agreed to either of these points so far; indeed, Europe recently increased import duties on bicycles from Vietnam to 30 per cent, to protect domestic producers.

Several points are worth noting. First, the write-off decision is a welcome breakthrough and probably heralds more such steps in the future since those in favour of a write-off have mentioned much larger amounts in the past.

Second, the money being written off just now is relatively small""less than 5 per cent of the total international debt owed by poor countries. So while the beneficial impact in the selected countries will be substantial, the global picture does not change very much.

Third, the write-off will be funded annually for the next 10 years or so out of the existing aid budgets of the rich countries, so this is more a re-ordering of spending priorities and not additional benefits flowing to the poor countries as a whole. And fourth, the write-off involves multilateral debt owed to the International Monetary Fund, World Bank and African Development Bank.

The IMF write-off will be funded by either re-valuing its gold reserves or by selling some gold at today's prices. To that extent, it is a relatively cost-free exercise. The World Bank may not get away so lightly.

For, what does this do to its credit rating at a time when it finds that it lends less to graduating economies like China and India, and is required to give more to precisely the very poor countries who have turned out to be equally poor in their ability to use the money well?

Some other questions too will need to be answered. How will aid-givers prevent the risk of "moral hazard"""the acceptance of more aid by those in power in the poor countries, in the expectation that the money will be written off at some stage? Bear in mind that the money that has been siphoned off out of just one country like Congo, and resting in Swiss bank accounts, is said to total $18 billion.

Then, will the money saved on future interest payments by the poorest countries be re-directed to socially desirable items like health care and education (as is now hoped) or will it be squandered in new ways?

If either question is to be answered satisfactorily, can future aid be given without the aid-givers extracting a much more direct and intrusive role in determining how the money is spent? It is also worth bearing in mind that, as India and China have shown, success comes from domestic efforts and aid plays a relatively small (though often important) part.