The world press is in a flap over Third World debt relief, one of the hot items on the agenda of the G7 leaders’ summit scheduled to take place in Cologne this weekend. What began as an attempt to reduce the debt of a few impoverished nations has expanded into a mega-plan now expected to be worth $100-billion, maybe more. This being a global financial theatre event, everything is taking place behind a curtain of secrecy. As the summit approaches, the unanswered questions mount: How big will the bail-out be? Who will get the money? What conditions will apply? And who will pay?

Actually, the last question is answerable. We know who will pay. Taxpayers in Canada and around the developed world will, as usual, pay the cost of cleaning up a financial mess created by the World Bank, the International Monetary Fund and the little collection of big-dollar global organizations that have created so many disasters over the past four decades.

Total Third World debt is in the hundreds of billions, piled up under the auspices of the World Bank and sister agencies when they were attempting to impose their brand of global statism on any country desperate or corrupt enough to accept the money. The majority of these loans are unlikely to be repaid, especially those to the poorest nations. This creates a problem for the people who run the World Bank, a band of bureaucrats who for years claimed that their lending practices were sound and that their loan default rates were low.

What the loans did, aside from provide tax-free employment opportunities for thousands of World Bank credit officers, was create scores of nations with large, unserviceable debt burdens.

There is a strong moral argument for forgiving much of Third World debt. As a starting point, there is the doubtful legitimacy of the World Bank and the other international government-run agencies. They used the backing and guarantees of Canada, the United States and other developed nations to lend money. These international loans were a form of foreign aid that could be slipped through the back door, usually in ways that could not be detected without effort. Canada’s mounting commitment to the World Bank and other institutions is hard to determine. And like all government borrowing, the loans are an advance tax that Canadians will have to pay later.

Much of the money also ended up in the hands of corrupt bureaucrats and dictators. Patricia Adams, executive director of Probe International in Toronto, has long argued that these “odious debts” to undeserving regimes and dictatorships should be forgiven. Whether the argument has merit in international law or not, the concept has a powerful moral underpinning. The people living under dictatorship and repression should not be forever held accountable for debts and commitments built up by their oppressors.

Simply forgiving debts, however, will not dismantle the structure that created this crisis. The debt forgiveness contemplated in Cologne amounts to a bail-out of the World Bank and the other institutions that created it in the first place.

The World Bank-IMF structure is a giant global maw of moral hazard. Moral hazard is the term economists and the insurance industry use to describe what happens when people who make decisions are relieved of the risk of their decisions. When private and commercial banks lend money to governments or companies in risky nations, there is less to worry about if the banks know that the World Bank or the IMF will come along and offer bail-out funds in the event of a financial crisis.

Forgiving Third World debt would magnify the moral hazard. The World Bank itself would be freed to continue to lend even more money to Third World nations. At worst, debt forgiveness would expand the circle of debt and the future tax liabilities.

This would be an unjust reward for the World Bank and its companion institutions. For years, these lenders prompted the world’s least-developed nations to borrow billions to build expensive projects and statist economies.

That the World Bank-IMF policies were destructive was all but admitted the other day by Alassane Ouattara, the outgoing deputy managing director of the IMF. In a speech in Berlin last week, Mr. Ouattara said one of the policy failures of the 1970s and 1980s was over-dependence on governments in African and other Third World nations. “Too much was expected of the state,” he said. “It was to be a producer and employer, as well as an educator and healer . . . This role was too widely drawn, given the limited resources and administrative capacities of African governments, and the pervasive presence of the state in all areas of economic activity stifled private initiative.” The fact we had to wait until the 1990s for the IMF and World Bank to discover this is a testament to the grip statism has had on economic theory over the past 50 years.

Whatever debt forgiveness is granted in Cologne, it will serve no purpose if it is not accompanied by a program to remove the institutions that are the real problem.