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?
Last year the international community renewed its commitments to help the poorest countries meet the UN's Millennium Development Goals (MDGs), 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.
Debt relief
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 percent 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 Jan. 1 last year. 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 US$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. This year, for example, Zambia will see its debt fall by almost 10 percent of GDP, leaving more resources available for development. Similarly, Guyana will have its debt reduced by more than 8 percent 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 MDGs. 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 percent 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 MDGs, 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.
Self-help
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.
Rodrigo de Rato is managing director of the IMF.
Copyright: Project Syndicate
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