Help or Hurt? African Debt Edition

I’m going to start a new recurring series that I’m calling “Help or Hurt” on various popular causes or initiatives frequently advocated by the Church, celebrities, the cognoscenti, etc. Today, we discuss HIPC or “Highly Indebted Poor Countries.”

Bono famously has called for massive debt relief for HIPC’s, and there is some logic to it. If these poor countries are under crushing debt, the it seems that removing some or all of that debt would be a vital step in their recovery. There are two issues here, though, that need to be thought out before diving in.

1. How did they get into debt in the first place? One of problems we’ve already seen with past debt forgiveness (both of countries and people) is that the most common outcome is the simple recurrence of debt. The underlying problem remained so as soon as the massive debt (which was prohibiting any new debt) was removed, debt simply increased again. If the problem is cleptocratic governments, then all we’ve done is line the pockets of the crony thugs who keep these people in power, and done little more than hand billions of dollars to bad governments to waste.

2. The thing these countries need the most is functioning debt markets. Felix Salmon has posted an open letter from Michael Shaheen, recently taken down by Johann Hari in the Independent as a heartless capitalist in search of even more money. Felix had written before about it as well.

So, what is happening here? Shaheen and others like him buy the debt of third world countries, usually very cheaply, and then take them to court to get the full amount back. Since they bought the debt so cheaply, they usually make money, even if they don’t get 100% of the face value. This does, on the face of it, seem to be rich capitalists exploiting poor countries.

But this is how debt markets are supposed to work. If it is deemed politically impossible to actually get your money back when you lend to a country (or a person) then nobody will lend to you. All these “vulture” funds are doing is spending the time and effort to force a country who borrowed to make good on a financial contract. Until these countries know that they will, in fact, have to pay back debt at some point, they will continue to run up large debts and then wait for them to get forgiven. Several Latin American countries have made this a core part of their fiscal policy and until they change it, their people are the ones who pay because it is dysfunctional. They simply spend and spend and spend until they are broke, claim they can’t pay and default. It is the classic tough love argument.

Now, I’m not taking one generalization (we should always forgive the debt of HIPC) and turning it into another (we should never do that). I’m just saying it’s more complicated. Perhaps a small amount of debt relief tied to required governmental reforms may be in order. But broad scale unconditional debt relief for governments does not seem to have brought the results we hoped.

If we really want to help our African neighbors, what we need is unconditional free trade, importing from them anything they want to sell us. But that’s a story for another day.