Givers and Takers

MOST TAXPAYERS in the rich industrialized countries believe, as the Pearson Commission inquiry into foreign aid believed, that “it is only right for those who have to share with those who have not.” Much of the Western World’s sharing, though, has been in the form of loans, not gifts. The Third World has borrowed about one-third of the $400 billion in foreign aid that it has received from the rich countries’ national aid agencies.

Though national foreign aid loans were cheap — provided at well below commercial rates — they have nevertheless proven to be unrepayable. Over the years these loans have accumulated, fallen into arrears, and been rescheduled so often that by 1989 the Third World owed the rich countries $180 billion, or 14 per cent of their $1.3 trillion debt, for national foreign aid — as much as they owed the World Bank.

Not only have Third World countries needed to borrow much of their aid money, they have also been forced to spend it on the donor’s products, even when the price and the product were not right. According to the Pearson Commission and to a Canadian Treasury Board study, the goods and services bought with foreign aid funds have been inflated by 20 to 25 per cent as a result. That extra 25 per cent could well have made profitable investments unprofitable, and payable debts unpayable. The only beneficiaries of rules tying aid are the few favored companies that supply this captive market, and the political parties able to boast of the jobs created.

In the same way the British government used aid to secure the Sicartsa contract, the Canadian government has cofinanced at least two massive projects a year over the last decade through the Canadian International Development Agency and Canada’s Export Development Corporation. One of these projects is the Chamera dam in India, which $650 million in loans locked up for Canadian firms. In a speech to the Canadian Exporters Association, Peter Haines, a former CIDA vice-president, explained: “The best way to be competitive is, of course, to avoid the competition altogether and that is essentially what … we did on the Chamera Hydro Project in India.” Haines noted that “there are immense front-end costs in taking a project off the market,” but made clear that these were well worth bearing to win the contracts for Canadians.

Throwing these foreign aid projects at Third World countries has exacerbated their debt. With their repayment difficulties extreme, national aid agencies agreed in 1988 to provide debt relief, especially for the low-income countries of Africa.

The Paris Club, where sovereign debts are more likely to be rescheduled than forgiven, began considering ways to reduce interest rates, to cancel some of the debt related to foreign aid, and to reschedule, or stretch out, debt repayment.

Within two years, the Paris Club members had canceled over $5 billion in foreign aid debts. Canada forgave $400 million in debts to Francophone and Anglophone Africa and the Caribbean; Denmark promised to write off repayments of earlier development loans to all least-developed countries and other low-income countries with serious balance of payments problems; France wrote off $2.7 billion in debt owed by 35 poor African countries; Germany provided some $1.5 billion in debt relief to six African countries; Italy converted the outstanding debts of a number of African countries to long-term low-interest loans; Japan forgave $1 billion worth of interest and principal on past foreign aid debts for some 20 countries; the U.S. announced $1.3 billion in write-offs for low-income African countries with World Bank or IMF-assisted economic restructuring programs; and the Netherlands canceled all foreign aid debt due from the least developed countries.

Paris Club members, several years earlier realizing that the debt crisis was as much their doing as their debtors’, had already begun to lend less and give more: foreign aid delivered through loans was halved to 20 per cent, with some countries — Australia, Canada, Ireland, New Zealand and Switzerland among them — providing all their aid in the form of grants.

To help cash-starved Third World countries, national aid agencies also started making World Bank-type “round-trip” loans, but these failed to lift Third World nations out of their debt quagmire. So some aid donors — the Netherlands and Switzerland among them — went further, providing foreign aid to pay off commercial bank debts.

In spite of, and possibly because of, these recent debt relief measures — the endless restructuring, stretching out, and granting of grace periods — Third World countries have

remained deep in debt. For Africa’s nations and others, says Jeffrey Sachs, Harvard economist and advisor to the Bolivian and Polish governments, the Paris Club’s willingness to reschedule ad infinitum, and even to provide new loans, casts a cold financial shower over whole economies. “It stops investment…. It creates expectations of instability. It absorbs enormous waste of time in negotiations. There’s always the possibility that creditors might get tough.”

Expectations of debt relief have one other inevitable effect — a willingness to spend recklessly, as illustrated by the remarks of Gabon’s President Omar Bongo, upon learning in 1987 that Canada had forgiven all of Gabon’s foreign debts: “I even regretted not having had more debts with Canada,” Mr. Bongo said, adding that “One country has to go first, perhaps the others will follow.”

NATIONAL FOREIGN AID officials cannot claim that the debt crisis took them by surprise. The Pearson Commission had warned about more than export credits; it warned about the national aid agencies’ role in expanding the Third World’s debt. During the 1960s, the proportion of foreign aid which was lent instead of given had tripled, and the grace period for repayment was quickly running out.

Pearson concluded that several factors were conspiring to create catastrophe: the debt guaranteed by Third World governments was increasing by an alarming 14 per cent per year, capital was becoming more expensive with interest rates having risen from 4.25 per cent in the late 1940s to 7 per cent in 1969, and the Third World would soon be paying more to service old debts than its export earnings and new loans would be bringing in. Pearson asked the rich countries to curb their export credits, to give more aid in the form of grants, to untie aid, and to extend the payback period for foreign aid debts.

Pearson predicted a debt crisis caused primarily by governments: Third World governments were borrowing more from First World governments than they could pay back. What Pearson could not have foreseen was the chaos of the coming decade, in which the commercial banks would take over as the Third World’s main lenders.

Sources and Further Commentary

Once again, the report of the Pearson Commission provides extremely valuable insight into the role of foreign aid in the Third World’s debt crisis. See Partners in Development: Report of the Commission on International Development, Lester B. Pearson, Chairman, Praeger Publishers, New York, 1969.

The various figures for the sums owed to bilateral aid agencies and how much they have forgiven can be found in The World Debt Tables 1990-91 published by the World Bank, and in Development Co-operation: Efforts and Policies of the Members of the Development Assistance Committee of the OECD, Paris 1990. The total owed to national aid agencies were also compiled with the help of data provided by the World Bank’s Debt and International Finance Division.

The Treasury Board report that estimated tied aid prices were inflated is called The Economic Effects of an Untying of Canadian Bilateral Aid by the Effectiveness Evaluation Division, Planning Branch, Treasury Board Secretariat, Canadian Government, July 1976.

A copy of Mr. Haines’s comments can be found in Annual Consultations of the Canadian Export Association and the Canadian International Development Agency, June 10-11, 1986.

For more detail on the Paris Club see The Paris Club: An Inside View by David Sevigny, published by The North-South Institute, 1990; Jeffrey Sachs’s comment can be found in “Look Whose Turn It Is To Bite The Bullet” by Lenny Glynn in Global Finance, New York, March 1990. President Bongo’s regrets were quoted in “Ottawa pledges $17 million more to French Africa” by Graham Fraser in The Globe and Mail, Toronto, September 4, 1987.