April 2002 Volume 1, Issue 1 Delivering on Debt Relief: – about $14 billion to expand HIPC eligibility and * , abolishing tied aid, creating a competitive, quasi-mar- , by Nancy Birdsall and John Williamson, with Brian Deese, co-published by – for example, by providing block grants to recipient countries to (official development assistance) by 8 percent a year over ten years paid by upper middle-income countries on loans from the World Bank paid by upper middle-income countries on loans from the World , shifting the requirement that countries prepare and commit to a poverty- GD BriefGD Over Over the last years, several major donor the United States and other countries for ten years – through a contingency facility in the IMF – against a returncountries for ten years – through a contingency to C eligibility for debt reduction to all low-income countries, including Indonesia, Nigeria, eligibility for debt reduction to all low-income debt relief in current HIPCs whose debt payments (debt service)debt relief in current HIPCs whose debt payments exceed 2 percent of still and Pakistan. to write down mostly uncollectible bilateral debt – with a paper value of about $50 billion. to write down mostly uncollectible bilateral debt – with a paper value of about $50 Expand Safeguard GNP, to ensure that budgetary burdens remain manageable. GNP, unsustainable debt levels caused by circumstances beyond their control (such as drought, floods, unsustainable debt levels caused by circumstances other natural disasters, or a collapse of export prices). and other multilateral development banks by 0.5 percent per year, raising more than $4 billion and other multilateral development banks by 0.5 percent per year, over ten years. ket with performance-based allocation of donor funds, and offering well as loans. grants as safeguard countries. reduction strategy from a precondition for canceling debt to a precondition for any major aid pro- reduction strategy from a precondition for canceling debt to a precondition for any major gram managed by the government. monitor and evaluate donor performance. deliver on debt relief: finance these proposals: reform the aid architecture:

untries have supported of a group debts a historic initiative to write down the official have untries cused on home-grown poverty alleviation and human development.cused on home-grown While the the Center for Global Development and the Institute for International Economics. From IMF Gold to a New Aid Architecture * This Brief was prepared by Nancy Birdsall and Brian Deese. It is based on a new book, 5. budgets Increase foreign aid 6. rates Increase the interest To 7. Increase donor efficiency and selectivity 8. Increase donor accountability 9. Simplify HIPC procedures Debt and Aid: A Nine-Point Program To 1. Deepen 2. 3 To 4. gold for debt reduction Mobilize more IMF Delivering on DebtDelivering Relief By Nancy Birdsall Brian and Deese Summary: co poor countries, indebted of heavily or HIPCs. had two primary Donor countries goals in supportingdebt relief:tocountries’debt reduce thatlevels to burdens allow them would sustainable growth;to achieve of assisting poor countries a new way and promote to fo current HIPC” “enhanced of debt program ambitious previous is more than any relief initiative, it short will fall of meeting these goals. dedicated to and increasing the resources countries allto include low-income program expanding the HIPC propose We debt relief. Because debt will relief still only be a first step, reforms also recommend we of the current“aid architecture” that will debt make predictably sustainable, more make efficient,aid more recipient and help aid dependence. from graduate countries www.cgdev.org Delivering on Debt Relief 2 We only whentheyarereasonablysureitwon’t bewastedorstolen. providenewaid donors toimprovetheirownperformance—to the poorthanjustgivingmoreforeignaid.Itclearswayfor waytohelp debt. Cancelinguncollectibledebtisamoreefficient thanitalreadyhasinreducingpoorcountries’ to gomuchfarther In thisbrief,wearguethatitmakessenseforthedonorcommunity grants andloanstohelppoorcountriespaybackoldloans. “defensive lending,”endlessroundsofdebtreschedulingandnew sion ofwhysomeloansfailedtohelp.)Donorswerelockedinto ties neededtofinancetheresultingdebt.(Seebox2foradiscus- failed tocatalyzetheincreasedgrowthandneweconomicactivi- countries. Two lendingatcheaprateshad decadesofofficial and cancelsomeofthedebtowedtothembyworld’s poorest Donor countrieshadanotherreasontoswallowhard,organize, totheircitizens. provide minimalsocialservices to well-intentionedgovernments ability ofeventhemostreformist, the leaders. Advocatesalsoarguedthatdebtwasundermining ple, whowerepayingobligationsmostlyassumedbycorruptpast ofindustrialcountrieswereanunjustburdenonpoorpeo- ernments Fund(IMF)andWorld Monetary International Bankandtothegov- owed bydevelopingcountriestorichinstitutionslikethe States. Jubileecampaignersarguedconvincinglythatthedebts churchgoingpeopleinEuropeandtheUnited lions ofordinary bythepopstarBono,PopeJohnPaulII, andmil- ment supported political pressurefromJubilee2000,aworldwidecitizens’move- box 1).Thisunexpecteddecisiontocanceldebtwasspurredby debts ofagroupheavilyindebtedpoorcountries,orHIPCs(see ahistoricinitiativetowritedownthe official donors havesupported During thepastseveralyears,UnitedStatesandothermajor ● ● ● What DoTheHIPCsHaveinCommon? ReductionStrategyPaper(PRSP). they havecompletedandcommittedtoacomprehensivePoverty reduction strategy.progress towardconstructinganationalpoverty Second,at“completionpoint”countriesgetdebtstockrel ice reliefatwhatiscalleda“decisionpoint,”whentheyhavedemonstrated adequateadherencetoatraditionalIMFprograman and indebtedcountries.Thereare42eligiblecountries(34inAfrica), and26havequalifiedsofar. First, countries getde The EnhancedHIPCInitiativeisatwo-stepprocessthatprovidesdebt relieffrombilateralandmultilateralcreditorstoquali 1: WHAT ISHIPC? these proposals. propose severalwaystostrengthendebtreliefandfinance ofthispackage,we relief asitscenterpiece.Inthefirsttwoparts percent forallotherdeveloping countries. paidbythem)totheHIPCs havebeenabout10percentoftheirGNPinthe1990s,compared toabout2 debt service developmentassistance:averagenettransfers(gross transfers minus HIPC countrieshavebeenmajor recipientsofofficial they weredecadesago. HIPC countriesarepoor:because theireconomieshavenotgrownmuch,peoplesaregenerally aspoortoday already higherinthe1980sthan inmostotherdevelopingcountries. andGNPwas HIPCs havebeenover-indebtedforatleasttwodecades:theratio oftheirdebtstobenchmarkslikeexports offer here a nine-point reform packagewithadditionaldebt hereanine-pointreform offer HIV/AIDS prevention. Mali, Mozambique,andSenegalplantoincreasespendingon explicit planstohiremoreteachersandprovidetextbooks. schoolenrollment,andhas universalprimary has achievedvirtually schooling, throughtheninthgrade.Withdebtsavings,Uganda threemoreyearsoffree areas. Hondurasisplanningtooffer ended feesforgradeschool,andBeninhasinrural HIV/AIDS preventionandeducationprograms.Tanzania has cation and25percenttohealthcare,includingexpansionof percent oftheestimateddebtsavingsarebeingdirectedtoedu- on healthandeducation.TheWorld thatabout40 Bankreports flexibilitytoincrease spending additional resourcesandbudgetary tiative sofar, areusingtheir thereisevidencethatgovernments In the26countriestoqualifyfordebtreductionunderHIPCini- Why DoMore? but biggerforeignaidbudgetsinrichcountries. inpoorcountries, performance require notonlybettergovernment school)will andputtingallchildreninprimary infant mortality communityin2000,suchashalving adopted bytheinternational progress towardachievingtheMillenniumDevelopmentGoals lineforgrowth.Stayingontrack(and making tries atthestarting poorcoun- But greaterdebtreductionwillonlyputwell-performing reducing growth. are thepreconditionsformarket-driven,sustainable,poverty- ments—in health,education,roads,andgoodgovernment—that honest andsensibleleaderswhowillmakethehugeinvest- tecture.” Ourgoalistodirectmoreaidpoorcountrieswith our nine-pointpackagewiththreeproposalsforanew“aidarchi- that ledtounmanageable,unsustainabledebt.Soweconclude incentives thatprompteddonorsandcreditorstomaketheloans politicalandbureaucratic larger project:tochangetheperverse But moredebtreductionshouldonlybethefirststepinamuch fied poor ief once bt serv- d 3 April 2002 Volume 1, Issue 1 re ipient le debt. about how ixed. There are t to build the health earnings, for the short at least term, and usually require emergency borrowing. So, Not Why All Cancel HIPC Debt? to safely escape debt If the current HIPC plan will not allow countries why not write off all the debt of the poorest countries? and poverty, agreed, cannot be One reason is that debt cancellation, once in the willing- taken back—even if there is significant deterioration ness or capacity of recipient governments to maintain good poli- would also probably cies. Complete debt relief for some countries end up diverting equally poor countries donor resources from other first place, such as that never accumulated high debt in the Uncertain the Poverty from Escape Trap HIPC Initiative provide the resources coun- Nor does the Enhanced their crippling disadvantages. Past conflicts, tries need to overcome crises, weak propertyethnic tensions, health care rights, low levels continuing inability to compete in the glob- of human capital, and a dependence on primaryal economy because of commodity exports a povertycan all combine to create trap. Success in escaping poverty mostly on develop- traps will depend ing countries doing their part with adequate governance and sound requires that donors tax and budget policies. But success also complement developing country efforts with more foreign aid than How much more is not the current estimated $56 billion per year. has estimated that, over the next decade, Bank The World clear. in development aid donors will need to provide $50 billion more Goals, assuming each year to achieve the Millennium Development developing countries embrace good policies. Some past leaders in HIPC countries contributed to civil conflict, governed Examples of donor missteps include lending to countries for strategic pur- Many HIPCs are vulnerable to adverse and largely unpredictable shocks such At one In the coming Under the IMF-World time or another, most HIPCs have been victims of droughts, most HIPCs have been time or another, disease emer- floods, commodity price collapses, infectious affectgencies, and costly civil conflicts. All these export decade, exports twice the rate will need to grow at almost to serviceof the 1990s if HIPC countries are to be able their debts. This will require the terms of trade for these countries though they deteriorated to improve by 0.5 percent a year, by 0.7 percent a year during the 1990s. Assumption 3: Bad surprises won’t matter much. Assumption 3: Bad surprises won’t Assumption 2: Borrowing will decline. Assumption 1: Exports will increase. Bank projections, new annual borrowing is projected to decline Bank projections, new annual borrowing is projected and grants are pro- from 9.5 to 5.5 percent of HIPCs’ GNP, such as Ethiopia jected to double. But a few HIPC countries, than expect- and Sierra Leone, are already borrowing at higher Bank! ed rates – including from the World orld Bank projections of debt sustainability rely on three assump- orld Bank projections of debt sustainability rely Aid has been given to some countries with failed leadership. Donor and lender behavior was not always prudent. It is too simple to say, as many critics do, that most aid has been ineffective. But the record of aid in reducing poverty is m It is too simple to say, Many of the poorest countries are stuck in poverty traps. ■ PROBLEMS 2: ACKNOWLEDGING PAST several reasons why this is so, and some of them are the fault of donor countries. ■ ■ Uncertain Trap the Debt from Escape does not provide a credible guaran- The Enhanced HIPC Initiative will escape their current debt trap, in which tee that these countries makes managing public budgets impos- the burden of existing debt private investment. Under the HIPC initia- sible and discourages debt/export Bank primarily use the World tive, the IMF and the Current IMF- ratio of a poor countrysustainability. to measure debt W tions that may not hold: But if the goal of debt reduction is sustainable growth and poverty sustainable growth and of debt reduction is But if the goal the current Enhanced poorest countries, reduction in the world’s HIPC Initiative falls short not guarantee that on two counts. It does from the dual traps of debt and poverty. HIPC countries will escape poorly or corruptly, promoted misguided policies, and neglected social sectors. poorly or corruptly, as sudden collapses of export commodity prices, climatic disasters, and civil conflicts. These vulnerabilities make it difficul and educational systems and the infrastructure that are prerequisites for economic development. of dubious value. In all of these circumstances, debt escalates but the ability to service brief makes several recommendations it does not. This to prevent these mistakes in the future, thereby avoiding the worst inefficiencies of aid and a new accumulation of unsustainab country; recipient government and pushing loans to satisfy lending targets even when and projects we programs were not credible poses despite clearly failed leadership; offering credits to promote exports technology inappropriate for the rec that required Delivering on Debt Relief 4 performing. (Thehappyexception istheWorldperforming. Bank.Its highly tain theirdebtrepayments),regardless ofhowpoorlytheywere ued toobtainsubstantialgrantsand newloans(muchofittosus- obligationstotheIMFandWorldhigh debtservice Bankcontin- ended, donorsdidnotbecomemore selective.Poorcountrieswith moting growth.Eveninthe1990s,afterColdWar had andpro- inreducingpoverty from thepointofvieweffectiveness allocations ofaid,atleast country sures havetraditionallydistorted is mostlikelytobeusedeffectively. Strategicandcommercialpres- donors haveapoorrecordoftargetingaidoncountrieswhereit Debt reductionliberatesdonorstobemoreselective. Debt reliefuntiesaid. Habits AndInefficiencies First, DebtReliefLimitstheHarmCausedbyDonorBad thanincreasedaidflowsforthreereasons. Debt reliefismoreefficient NewAid? Relief InsteadofJust Why More Debt than tosimplyincreaseaidtransfers.Why? relief thaniscontemplatedunderthecurrentHIPCinitiative–rather But itwouldmakesensetouseaidresourcesfinancemoredebt Lanka, andVietnam. non-HIPC borrowers,suchasGuatemala,Morocco,Peru,Sri ofhigherinterestratesto the costswouldbepassedoninform Thisisbecause by theHIPCs–wouldalmostsurelyhavethiseffect. W One ideaadvocatedbysomedebtcampaigners–tohavethe countries receive100timesmoreaidpercapitathandoesIndia!) HIPCs. ThisgapinrelativeaidinflowsmeansthatsomeHIPC 0.1 percentofitsGNPinaid,comparedto10formany Bangladesh orIndia.(India,forexample,nowreceivesapaltry oping country governments. oping country todevel- relief cannotbe“tied;”itprovidesdirectbudgetsupport bursements, whichmayperpetuatethiswastefulpractice,debt implemented theirtiedaidpledge.Incontrasttonewdis- lion peryearinaidresources,evenaftertheOECDcountrieshave to tiefoodaid,weestimatethatdonorswillwastesome$7bil- for technicalassistance,andaddingtothatthecostofcontinuing value foreachaiddollarspentinatrulycompetitiveworldmarket Africa. Assumingthatpoorcountrieswouldreceivetwiceasmuch fromBrazilorSouth 10 to20timesasmuchtheircounterparts aidfundscancost ing oncontractspaidforwithU.S.orGerman consultantswork- likeMozambique,U.S.orGerman In acountry makes upasmuch25percentoftotaldevelopmentassistance. providedbyconsultants) (mostly adviceandtrainingservices exempted foodaidandtechnicalassistance.Technical assistance recently pledgedtoendthiswidespreadpractice,buttheyhave reduces itsvaluebyanestimated15to30percent.Donorshave suppliers, aidissaidtobe“tied.”Thepracticeoftying contractorsand fromdonorcountry purchase goodsorservices orld Bank draw on its reserves to write off allthedebtsowedit towriteoff orld Bankdrawonitsreserves When recipientcountriesarerequiredto Bilateral public support forhigheraidbudgets. public support selectivity wouldalsoincreaseaidefficiency, itmightpromote to countrieswithsoundpoliciesandinstitutions.Andbecause on theirdebt,donorscouldbemoreselective,channelingnewaid debt. Oncepoorcountrieshadareasonable,safeguardedceiling donors wouldnolongerfeelcompelledtocoverunsustainable debtreductionforthepoorestcountries,bilateral With sufficient incompetentorwastefulregimes. because theyoftensupported donors aswellrecipients,andmadeaidtransferslesseffective, Butitcreatedadebttrapfor tial toprivatebusinessesandfarms. fromthetradeandothercreditsthatareessen- debt wouldbecutoff behavior, itsmultilateral failingtoservice becauseanypoorcountry In apeculiarsense,thisback-doorfinancingwasenlighteneddonor allocation.) new systemofperformance-based concessional lendingbecamemoreselectiveinthe1990sundera to direct resources where it might be most effective canbelimited. to directresourceswhereitmightbemosteffective transfers ofaid(newminuspaymentsonolddebt),theirability consultants andsuppliers.Soevenwhencountrieshavepositivenet measured, andprojectsoftenprovidecontractsfordonorcountry becauseprojectoutputscanbemonitored and budget support projectstoproviding cash for debts.) Donorsprefersupporting countries spendabout20percentoftaxrevenuetorepayexisting lion ofitslimitedtaxrevenuesfordebtrepayment.(Typical HIPC by donors,sotheTanzanian hadtosetaside $230mil- government new aidmoneywaslinkedtospecificprojectsorprioritiesfavored resultinginanetinflowofaid. Butmostofthe year indebtservice, lion innewdonorfunding1999,andowed$230millionthat Of DevelopmentStrategies Ownership Second, DebtReliefAllowsForPoorCountry repayments. enue ontheirownbudgetpriorities, insteadofondebt tospend precious taxrev- Debt reductionallowsgovernments ments accountabletocitizens. andmakesgovern- Debt reliefprovidesflexiblebudgetsupport foreign aidprograms. Debt reliefreducesthehugetransactioncostsofconventional citizens. Ashiftofsomeaidresources fromnewprojectstodebt by toexercisegreatercontrolandownershipovertheiruse. countries tostreamlinethemanagementofaidresourcesandthere- comes withoutsignificanttransactioncosts.Thisallowsrecipient trast, debtreliefhasthepeculiaradvantageofbeinglikecash—it curement, disbursement,andmonitoringrulescustoms.Incon- pro- andeachhasdifferent environment, orfinancialsectorreform, evencompetingapproachestohealth, institutions havedifferent, organizations.Alloftheseaid representatives ofnongovernmental UNDP, USAID,andotherbilateralaidagencies,aswellwith iting missionsoftheWorld Bank,theIMF, theEuropeanUnion, cials inaid-dependentcountriesmustmeetdailywithlocalandvis- transaction costsforrecipientcountries.Talented offi- government This makes governments moreaccountable totheir This makesgovernments Acquiring andmanagingaidhashigh T anzania receivedabout$700mil- 5 April 2002 Volume 1, Issue 1 propose that countries be safeguarded for ten years against propose that countries be safeguarded for ten

Finance These Proposals

To Our proposals for deepening and extending debt relief carry a one-time cost of between $35 and $85 billion (the latter if Indonesia is included), plus the cost of the contingency facility, which we roughly estimate at $5 billion. This sum is not large relative to total annual aid flows, which are roughly $56 billion. And a considerable part of this “cost” arises only in an account- ing sense: It is the cost to donors of showing on their books debt that will not be paid, and does not entail any new budgetary outlays. In the United States, for example, a good deal of bilat- eral debt owed by poor countries was accounted for as a loss throughout the 1990s, so actual appropriations for debt reduc- tion in 2000 were much smaller than the face value of the reduced debt. 3. Safeguard Against External Shocks The assumptions behind the official of debt sustain- projections is that low-income ability for the HIPCs are optimistic. The fact countries are particularly natural disasters and susceptible to sharp international price changes that shrink export earnings and Current increase importsustainability. costs, threatening debt increase in debt HIPC arrangements allow in principle for some the period between relief in these circumstances, but only during decision and completion points (box 1). We debt a country’s such shocks. Under our plan, if a shock caused service/GNP to rise above 2 percent, that portion ratio of the debt service that exceeded the 2 percent threshold would be local as well as foreign This would reassure financed externally. burden would remain man- debt investors that the public sector’s remained reason- ageable, as long as overall economic policies this safeguard, we pro- administer and finance ably sound. To which in the IMF, pose that a contingency facility be established has experience operating a facility like this one. and its ability to deliver macroeconomic stability. Investors worry stability. to deliver macroeconomic and its ability imposed to sustain or write down pub- about heavy future tax burdens energy is directed into less risky projects lic debt. Entrepreneurial promising quicker returns such as retailing, small construction, and – into major new businesses. Debt reduction marketing – rather than guarantee of debt sustainability can that provides a reasonable restore investor confidence. cost between ing their debt stock to a sustainable level would largely on about $20 billion and $70 billion, depending whether Indonesia is included. recommend that debt relief be deepened to cover all debt recommend that debt relief be deepened to

Deliver on DebtDeliver Relief

payments that exceed 2 percent of a borrowing countr’s GNP. payments that exceed 2 percent of a borrowing countr’s (Most HIPCs collect about 20 percent of their GNP in tax rev- enue, and a reasonable share of revenue to spend on debt serv- ice is 10 percent; 10 percent of 20 percent implies spending 2 percent of GNP on debt service.) A 2 percent debt service/GNP target would be sustainable for most countries, because it would not require unusual sacrifices by citizens. 2. Expand HIPC Eligibility Some very poor countries with substantial official debt burdens are not formally eligible for the HIPC initiative—for the odd rea- son that they have (or had) good enough credit to gain some access to private capital markets. In some cases (Indonesia, for example), governments could borrow privately because they con- The official debt of ducted their financial affairs prudently. Indonesia, Nigeria, Pakistan, and another 16 poor countries is undermining their ability to get back on a growth track. If and when they meet the basic conditions of an IMF program, reduc- The HIPC debt/export has little to measure of debt sustainability and donors do with the needs of poor people. If debtor countries basic social invest- want to prevent the diversion of resources from of debt sus- ments to debt payments, the appropriate measure tainability should be the ratio of debt service to GNP. We To 1. Deepen Debt Relief A Nine-Point Debt Plan for and Aid approach to devel- The HIPC program has institutionalized a new aid not only or pri- opment assistance, linking debt relief and new but also to the marily to traditional macroeconomic conditions, That poverty. development of coherent strategies for reducing debtor coun- has made debt reduction – as debt campaigners, first step in the tries, and donors all have pointed out – a critical societies. The nine rebuilding of more equitable and democratic momentum, helping measures proposed below will build on this debt and ensure that debtor countries escape from unsustainable startpoverty down the road toward meaningful alleviation and human development. Third, Debt Relief Can Foster Private Investment Third, Debt Relief Can and can rekindle private investment. A Debt reduction is irreversible and perpetual dependence on the benefi- large amount of debt, finances uncertaintycence of donors, creates about a government’s relief would give a boost to countries struggling to strengthen struggling to strengthen give a boost to countries relief would governance.honest and democratic Delivering on Debt Relief 6 * Notethat$8billion hasalreadybeenpledgedinadditional bilateralcancellationfortheHIPCs. Contingency Extending Deepening Cost OUR PROPOSALS Bank’s ourproposals. HIPCtrustfundtosupport ThesefundscouldbechanneledthroughtheWorldearnings. dle incomeborrowersmightgenerate$400millionayearin increase intheinterestratemultilaterallenderschargeupper-mid- community.increased influenceintheinternational A0.5percent some ofthesecountrieswouldbecomedonors,acquiring countries tograduatefromtheranksofborrowers.Overtime, T upper middle-incomeborrowers,suchasBrazil,Mexico,and increasing theinterestratesthatmultilateralbankscharge low-income countriesmustbeavoided,thereisstillacasefor shiftintheburdenofHIPCrelieftoother Although aninadvertent Middle IncomeCountries 6. IncreaseMultilateralBankInterestRatestoUpper- haveproposed. many Europeangovernments amount ismuchsmallerthantheincreaseindevelopmentaid 10 yearswouldeasilygeneratemorethan$60billion.This assistanceof8percentayearover quent realincreaseinofficial ratio. Asubse- HIPCs underour2percentdebtservice/GNP about $8billion,whichcouldgoalongwaytowardbringingall forHIPCcountries.Itisestimatedthiswillcost plete debtwrite-off bilateral donors.Somedonorshavealreadypledgedacom- debt reliefmustcomefromincreasedflowsofassistance But thelargestcontributiontoadeepeningandbroadeningof 5. IncreaseOfficialDevelopmentAssistance estimate at$5billion. could financetheproposedcontingencyfacility, whosecostwe debt relief.Bymobilizingadditionalfundsinthismanner, theIMF representingIndonesia)fordeeperandbroader (the difference tion wouldenabletheIMFtomobilizebetween$29billion Fund’s shareofthefirstphaseHIPCrelief.Asimilartransac- holdings ($4billion),theinterestfromwhichhelpedfinance goldtransactiontomobilize14percentofits off-market tral banksofthelargestmembers.TheIMFhasalreadyusedan are safe.InthecaseofIMF, onlyreassurethecen- reserves reassuredepositorsthattheirfunds commercial banks,reserves Mobilizing goldwouldreducetheIMF’s Inthecaseof reserves. gold. ofitsmassivestockundervalued lizing aportion bymobi- to financeitsownroleinanexpandeddebtreliefeffort Unlike themultilateraldevelopmentbanks,IMFisinaposition 4. MobilizeIMFGold We urkey. Higherrateswouldencourageuppermiddle-income

propose financingadditionaldebtreliefinthreeways. $)($5) $20 $10 ($5) $70 (w/outIndonesia) $10 (w/Indonesia) 8 n$5b 8 n$35bn $85bn $35bn $85 bn (in billionsofUSdollars) Multi. Charges Donor ODA* IMF Gold Financing not suitedforloansincountrieswhereinstitutionsareweak,disease explicit therecognitionthatsomedevelopmentprioritiesaresimply this proposalbyalltheshareholdersofWorld Bankwouldmake about halfofitsdisbursementsfromloanstogrants.Endorsement 17 July2001,PresidentBushsuggestedthatIDAshouldconvert Development Association(IDA).InaspeechattheWorld Bankon loans throughtheWorld Bank’s theInternational soft-lendingarm, grantsaswell istooffer A finalwaytoincreasedonorefficiency governments. with recipientcountry the developmentprogramsthemselvessquarelywhereitbelongs, bility forselectivitywithdonors,andaccountabilitythesuccessof among donorsandaidrecipients.Itwouldplaceaccounta- hopeless goalofdonorcoordinationtowardhealthycompetition The quasi-marketcommonpoolapproachimpliesaswitchfromthe development assistanceforeachpoorcountry. Thiswouldcreatea“commonpool”of would notbepermitted. forspecificprojectsorprograms financing decision,butearmarking duringthedialogueleadingupto be madeknowntothecountry monitorprogressandexpenditures.Donors’viewswould effectively strategy andofthecountry’s abilitytoimplementthestrategyand donor woulddependonitsassessmentbothofarecipientcountry’s in adialoguewithdonors.Theleveloffinancingprovidedbyeach and projects–incloseconsultationwiththeirowncitizens,butalso countries woulddesigntheirowndevelopmentstrategies,programs, countries, inamounts,andforperiodsoftheirchoosing.Borrowing countries wouldreleasetheircontributionsasunrestrictedcashto homegrowndevelopmentstrategies,anddonor loans tosupport recipient countrieswouldrequestblockgrantsorhighlysubsidized establishment ofaquasi-market-basedapproach.Insuchsystem, the non-competitive, project-basedaidsystem,donorsshouldsupport require ustorethinkthewayaidisdelivered.Inplaceofcurrent The problemsofpoordonorcoordinationandlackselectivity shifting fromfoodaidtoequivalenttransfersincash. mitment --whichonlyappliestogoods–technicalassistance,and ish tiedaid.Thatimpliesexpandingthescopeofcurrentcom- andselectivityistoabol- The firststepinincreasingdonorefficiency 7. IncreaseDonorEfficiencyandSelectivity ofthedevelopmentaidbusiness. er reform Securing thebenefitsofgreateraidreductionwillrequirebroad- A NewAidArchitecture 4$4 $24 $7 $4 $67 (w/outIndonesia) about $14 (w/Indonesia) 7 7 April 2002 Volume 1, Issue 1 h.D. quity Birdsall

hitecture, n Matters: l Studies. anagement Delivering on Debt Relief: From IMF Gold to a hoops before full debt stock relief is granted (see box 1). We 1). We is granted (see box full debt stock relief hoops before the process. recommend streamlining procedure, debt stock reduction comes not Under the current HIPC at completion point, when a countryat decision point, but only has again to If donors were unlikely ever PRSP. developed a full-blown to persuade these countries to go have the leverage needed it would make sense to delay debt stock through the PRSP process, of maintaining that leverage. But in fact reduction, in the interest leverage at all because the HIPCs are all there is no need for such and will remain so even after the deeper heavily aid-dependent in this brief. If the donors were to debt reduction recommended debt relief had been provided, they announce that after HIPC for new aid com- would continue to require a PRSP as a condition ensure that the PRSP mitments, they would have ample means to process continued to be taken seriously. Furthermore, the pressure to bring HIPCs to completion point is reportedly PRSPs, undermin- already leading to a rush to complete ing the very of participation values ownership the PRSP process and the requirement that certain “stan- is meant to encourage. Finally, is provided ignores dards” be met in a PRSP before debt stock relief uncollectible the fact that the debt to be cancelled is fundamentally – and thus seems to liberate donors and official creditors from rec- ognizing and reforming the procedures or incentives that led to the problem in the first place. project of reduc- Debt relief is only a small step in the much larger But by substantially – and efficiently – ing worldwide poverty. and by bring- increasing the resources available for development, together in a new rela- richest and poorest countries ing the world’s debt relief can jump-start reform of tionship of mutual accountability, the entire aid architecture. , by Nancy Birdsall and John Williamson, with Brian Deese, co-published by the Center for Global Development and , by Nancy Birdsall and John Williamson, with Brian Deese, co-published by the Center for Global is President of the Center for Global Development. Prior to launching CGD, Ms. Birdsall served for three years as Senior is a Research Assistant with the Center for Global Development. Before joining CGD, he was a Junior Fellow at the Carnegieis a Research Assistant with the Center for Global Development. Before joining CGD, he was have emphasized that donors and officialhave emphasized that creditors must take

Brian Deese For research and other background on aid effectiveness and debt issues, go to www.cgdev.org This Brief was prepared by Nancy Birdsall and Brian Deese. It is based on a new book, For ordering information, please visit www.cgdev.org. Nancy Birdsall 9. Simplify HIPC Procedures 9. Simplify HIPC Procedures through multiple The current HIPC initiative makes countries jump the Institute for International Economics. 8. Increase Donor Accountability 8. Increase Donor We burdens are high, geography is challenging, and civil conflicts and and civil conflicts high, geography is challenging, burdens are other shocks frequently undermine progress. Helping committed coun- for sustained economic growth will require tries lay the groundwork for a decade and more. large resource transfers Associate and Director of the Economic Reform Project at the Carnegie Endowment for International Ms. Peace. From 1993 to 1998, and m of the Inter-American Development Bank, before which she spent 14 years in research, policy, was Executive Vice-President recently as Director of the Policy Research Department. Bank, most positions at the World Populatio and monographs, including, most recently, or editor of more than a dozen books co-author, Ms. Birdsall is the author, Contentious: Economic Policies for Social E Washington Demographic Change, Economic Growth and Poverty in the Developing World, University and an M.A. in international relations from the Johns Hopkins School of Advanced Internationa in economics from Yale New Aid Architecture Ms. Birdsall holds a P in Latin America, and New Markets, New Opportunities? Economic and Social Mobility in a Changing World. Endowment for International Peace. Deese contributed significantly to Delivering on Debt Relief: From IMF Gold to a New Aid Arc the book on which this brief is based. Deese holds a B.A. from Middlebury College. some responsibility for the build-up of unsustainable debt in the some responsibility for taking countries. With the HIPC initiative they are poorest world’s needed to But new procedures are some financial responsibility. encourage donor accountability. additions to the OECD Development First, we recommend modest (DAC) reporting and accounting, most Assistance Committee’s importantly as ODA uncollectible ending the practice of recording interest arrears and cancellation of export credits. This would allow development activists to better monitor official creditor lending and that donor gov- overall donor commitments. Second, we suggest Bank and the ernments, the leading shareholders in the World to encourage regional development banks, instruct those institutions governmentsand be prepared to finance any initiative of borrowing and evaluate to seek independent credit counseling or to monitor donor performance within their countries. Third, the DAC, in con- cert its mandate the devel- with developing countries, might add to conduct and mecha- opment of principles on appropriate donor up to those princi- nisms for monitoring how well donors measure just as aid recipients can now be held accountable for ples. Finally, their performance under the Poverty Reduction Strategy Paper (PRSP) that supportsprocess, a parallel mechanism could be established recipient country monitoring of donor performance. 1776 Mass Ave., NW Suite 301 Washington, D.C. 20036 www.cgdev.org CGD Brief Delivering on Debt Relief

Nancy Birdsall and Brian Deese

April 2002 Volume 1, Issue 1

and strategic benefits of promoting improved living standards and governance in developing countries. countries. developing in governance and standards living improved promoting of benefits strategic and

public understanding public in industrial countries of the economic, political, economic, the of countries industrial in institutions to improve improve to institutions

and participatory development in low-income and transitional economies. The Center works with other with works Center The economies. transitional and low-income in development participatory and

policy alternatives policy that will promote equitable growth equitable promote will that society groups, the Center seeks to identify identify to seeks Center the groups, society

globalization and of the policies of governments and multilateral institutions. In collaboration with civil with collaboration In institutions. multilateral and governments of policies the of and globalization

esearch r assesses the impact on poor people of people poor on impact the assesses prospects in poor countries. The Center’s Center’s The countries. poor in prospects

Center’s work is the policies of the United States and other industrial countries that affect development affect that countries industrial other and States United the of policies the is work Center’s

engagement on development issues with the policy community and the public. A principal focus of the of focus principal A public. the and community policy the with issues development on engagement

dedicated to reducing global poverty and inequality through policy oriented research and active and research oriented policy through inequality and poverty global reducing to dedicated

Global Development Global ter Cen is an independent, non-partisan, non-profit think tank think non-profit non-partisan, independent, an is The for