Rodrigo de Rato is Managing Director, International
Monetary Fund.
by Rodrigo de
Rato
Institutions and governments, like people, make
bold resolutions at the beginning of every year. But, for the millions who face
the crushing burden of poverty, mere proclamations that help is on the way are
not enough to create jobs or foster development. This year, the international
community must move decisively from pledges to action in the effort to reduce
poverty. What will this require?
In 2005, the international community
renewed its commitments to help the poorest countries meet the United Nations’
Millennium Development Goals (MDG’s), which aim to halve poverty by 2015. These
commitments include significant increases in debt relief and aid. While there
has been progress on implementing debt-relief measures, the international
community must follow through on the other part of its pledge, by delivering
increased aid and promoting its better use.
Multilateral lenders have
long understood the importance of debt relief to poverty reduction. Indeed, the
joint IMF-World Bank Heavily Indebted Poor Countries (HIPC) Initiative was
launched in 1996 to coordinate efforts by multilateral organizations and
governments to reduce poor countries’ debt burdens to sustainable levels. So
far, the results are encouraging.
Before the HIPC Initiative, eligible
countries spent, on average, slightly more on debt service than on health and
education combined. Now, debt in the 28 countries for which relief has been
approved has declined by an average of two-thirds, while their expenditures on
health, education, and other social services have risen to almost four times the
amount of debt-service payments.
In 2005, the international community
went further, agreeing on the Multilateral Debt Relief Initiative (MDRI), which
will write off 100% of many poor countries’ debts to the IMF, the World Bank,
and the African Development Bank. As a result, just this past December, the IMF
approved immediate, full relief for 19 countries – including 13 in Africa, four
in Latin America, and two in Asia – on all outstanding debt to the Fund
disbursed before January 1, 2005. Other countries are eligible, and the IMF is
helping these states make rapid progress to qualify, with total debt relief
expected to be more than $5 billion.
As with the HIPC Initiative of which
it is a part, the MDRI will do more than reduce debt: it will free up resources
that can be devoted to poverty reduction and economic development. In 2006, for
example, Zambia will see its debt fall by almost 10% of GDP, leaving more
resources available for development. Similarly, Guyana will have its debt
reduced by more than 8% of GDP. The level of debt relief will be even greater
once the World Bank and the African Development Bank finalize their own programs
in the months ahead.
Nevertheless, the debt relief now being implemented
will only provide a small part of the assistance, both financial and technical,
that low-income countries need to meet the MDG’s. If they are to be met, donors
must also deliver on their commitments for significant increases in aid.
The IMF has long called on donors to meet the internationally accepted
target for overseas development assistance of 0.7% of GDP. Some donors have now
promised to do so, though only over time; others are not ready to go that far,
but have promised more aid than they currently give. The international community
must show that it will follow through on these promises. Donors must provide the
help that developing countries urgently need.
At the same time, we must
ensure that low-income countries use debt relief and aid efficiently. One
priority is to ensure that large, new infusions of aid do not produce unintended
economic outcomes, such as rapid currency appreciation or inflation, which would
make recipient countries’ exports less competitive. Another priority is to
ensure that low-income countries that are striving to meet the MDG’s, and which
have large financing requirements, avoid a new spiral of indebtedness. The gains
from MDRI debt relief will amount to precious little if low-income countries
emerge from their debt burdens only to start the cycle anew by amassing fresh
debt.
But recipient countries must complement donor efforts, and continue
to do their part as well, by maintaining a track record of reform and sound
macroeconomic policies, and by making the best possible use of the higher levels
of assistance. Outside efforts can help reduce poverty, but it is, ultimately,
the efforts of low-income countries themselves to sustain strong economic
performance, improve governance, and develop stable and effective institutions
that will have the most important impact on reducing poverty. Low-income
countries can also improve their prospects by strengthening their fiscal
management, fostering private-sector development, and liberalizing
trade.
If we keep our promises, 2006 can be a year of hope for those who
have little else than the dream of a better life.
Copyright: Project
Syndicate, 2006.
www.project-syndicate.org