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May 26, 2008

the big story about developing countries' debt

The Washington Post ran a story on Saturday about the declining significance of the International Monetary Fund. The lead was a decision by Ghana to reject loan conditions proposed by the IMF. Ghana could negotiate from strength because it has a growing economy and other options for borrowing. "That decision underscores the changing role of the IMF as developing economies have roared to life in recent years, with the fund increasingly becoming more adviser than lender."

The tone of the article was somewhat critical, focusing on challenges for the IMF as an institution. Indeed, there are plans to cut the Fund's staff by 13 percent to reflect a shrinking portfolio. But of course the story could have been told very positively; the headline could have been, "IMF Succeeds." Someone I know at the Fund told me the following story:

In the 1980s, developing nations were burdened by enormous debts, often run up by dictators. This was a huge problem, morally and practically. Admitting that the loans should never have been made in the first place was too embarrassing for the lending countries. The IMF and World Bank literally didn't have the cash to write off their loans. Forgiving debts can create a moral hazard (encouraging more borrowing). Yet the debt was a plague on the poorest people of the world.

This problem has been very substantially reduced through a combination of debt forgiveness and economic growth. Perhaps the process was far too slow or too costly for the poor countries--I don't know. What is important right now is that we have passed through the debt crisis to a large extent. The following graph, which I generated using the IMF's interactive website, shows foreign debt per GDP for Subsaharan Africa and for Ghana (the focus of the Post article). The decline since the 1990s is striking and highly positive. The debate can now be about how to develop, not how to manage debt.

May 26, 2008 9:21 AM | category: none


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