President Bush has recently praised the democratically elected leaders of five African countries. He also believes that debt reduction will help turn the tide of poverty on that continent. In his own words:
"We believe by removing a crippling debt burden, we'll help millions of Africans improve their lives and grow their economies."
Public opinion seems to think that debt forgiveness is a marvelous way to help the poor of developing nations. Unfortunately for its advocates there is no evidence supporting this argument. In fact debt forgiveness may well have a detrimental impact - increasing the default rate and therefore increasing the interest rate responsible borrowing nations face.
It would be nice to believe that our AID dollars are helping the world's poor. However evidence suggests the worlds poorest countries are mired in corruption with weak property rights. Giving the governments of these countries money does not help the poor and in fact may hurt them - a ruler channeling money to his Swiss bank account enjoys the benefit while the poor of his country will share in the repayment of that loan through future taxes while missing out on any potential benefit.
An interesting question might be - perhaps a country that isn't corrupt with secure property rights would benefit from AID loans. However, the research indicates that the loan doesn't make any difference because the country is growing and will continue to grow. Research has found loans making no difference in this case.
Anyone interested in reading more about the failure of the development project and the institutions who run it (the World Bank, IMF and USAID) would enjoy Easterly's The Elusive Quest for Growth a very accessible critique of 50 years of development programs from an insider.
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