Wednesday, September 07, 2005

Jubilee Manifesto

Paul Mills

Whilst the Old Testament model endorses the role that lending can play in poverty relief, the sorry tale of low-income countries’ debt in the 1980s and the later hesitant attempts at debt relief indicate that we are still a long way from understanding international development finance. The confusion comes from blurring the distinction between lending for poverty relief – which should always be interest-free and capable of forgiveness if the borrowers are incapable of repaying – and commercial finance to support economic development.

The latter goal has led to the establishment of multilateral agencies (such as the IMF and the World Bank) to channel loan finance to middle- and low-income countries on quasi-commercial terms. However, these agency balance sheets need to be run on a solvent and prudent basis; their constitutions prevent ad hoc loan write-offs in response to borrower repayment difficulties. There is great scope for bilateral loans (those from one government to another) to be written-off, but here domestic politicians need to demonstrate that they are imposing conditions on borrowers (to justify debt forgiveness to taxpayers), and show that other rich lenders are not benefiting from their country’s charity in relieving debts. Hence, whether the debt is to multilateral agencies or bilaterally between countries, our current reliance on interest-based lending for development always has the potential to reinvent the international debt crisis, not matter how many current debts are relieved.

If wealthier governments wish to provide true development finance to low-income countries, they should do so through equity participation in commercial projects whereby profits and losses are shared (such as equity partnerships in power generation or toll-charging transport projects). That way, the governments would be more circumspect about the projects they choose to finance in the first place and, if a project proves to be uncommercial, the borrowing economy is not saddled with an ever-growing debt burden. Otherwise the net transfer of resources from poor to rich countries will continue.

One way for richer countries to participate more fully in development at a local level in low-income countries would be to provide equity capital for microcredit lending organisations, such as the Grameen bank in Bangladesh. Although operating on an interest-basis, it provides small loans on tight margins to poorer households to finance small start-up enterprises. Nevertheless, it has a default rate (c.5%) lower than comparable commercial banks because it lends predominantly to women and emphasises the need for repayment in order to enable the bank to lend to new borrowers. Such an approach facilitates local development without recourse to moneylenders whilst emphasising the need for neighbourly solidarity in preserving access to finance for others.

From chapter 11 of Jubilee Manifesto – a framework, agenda and strategy for Christian social reform, edited by Michael Schluter and John Ashcroft, published by IVP 2005
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