The non-prodigal son had a legitimate gripe. At least that is what I thought as a child. And that is why I think the debt relief offered to poor African countries should be extended to Bangladesh, Sri Lanka and other nations that scrupulously meet all their international debt obligations.
For those unfamiliar with the biblical parable, the prodigal son demands his inheritance, then goes off and dissipates his wealth in riotous living. Impoverished, he slinks back to beg his father for a menial job. The father welcomes him and orders a feast of celebration.
Another son, who stayed home working while his sibling was out carousing, objects that no one ever gave a party for the loyal, responsible son. The father replies that the return of a son thought dead is an occasion for celebration that does not detract from fatherly love for the hard-working son.
I always understood the theological import of that parable but sympathized with the stay-at-home boy. I have the same reaction now to news of the Tony Blair-led initiative to discharge debt for some poor African nations.
Yes, relief from debts owed rich countries or multilateral organizations such as the World Bank is a necessary — though not sufficient — condition for growth in highly indebted African countries.
Many other countries in Asia and Latin America, however, have serviced their loans scrupulously and never threatened default of any sort. These include extremely poor nations such as Bangladesh and Sri Lanka as well as Chile, Costa Rica and Colombia.
Is it fair to write off obligations of countries that have pursued self-destructive economic policies while continuing to accept payments from more prudent borrowers? What sort of incentives does such an approach provide?
Yes, this is the same sort of perverse-incentives argument that was used at one time against Social Security, unemployment compensation, welfare and even charity to uninsured disaster victims. In all cases, critics argued that the initiative would reduce incentives for prudent behavior.
Such critics were correct that there is some disincentive effect in all these programs. And yes, proponents of the programs were correct that the social benefit of helping aged, disabled, unemployed and indigent people outweighed any harm.
The proposed debt write-off is not a bad policy. However, the very poorest countries should get relief even if they are up-to-date on their loan payments.
Middle-income countries such as Chile and Costa Rica don’t need relief. Indeed, they don’t need the World Bank, bilateral lending or anything other than continued access to private capital markets.
Sri Lanka, Bangladesh and other extremely poor countries do need debt relief, regardless of their good credit history. Limiting relief to countries that adopt sound economic policies is a good idea, despite criticism to the contrary. But a bad repayment history should not be a prerequisite for such consideration.
© 2005 Edward Lotterman
Chanarambie Consulting, Inc.