A cautious offer, cautiously received

Jan 12th 2005
From The Economist Global Agenda

The Paris Club of creditor nations has offered to freeze debt repayments immediately for those countries hit by the Indian Ocean tsunami. Perhaps surprisingly, not all the affected countries are keen on the idea

BETWEEN them, the 19 member states of the Paris Club, an informal coterie of major lenders, pledged $3.64 billion in aid to the countries afflicted by the Indian Ocean tsunami. But these 19 countries, meeting in the French capital on Wednesday January 12th, had also been due to receive about $5 billion in debt repayments this year from these same disaster-hit nations. Indonesia, the country that suffered the most casualties in the disaster, also carries the bulk of the region’s debt. It owes $48 billion to the Paris Club and was due to repay around $3 billion in principal in 2005. But at its meeting, the Club decided to offer all tsunami-hit countries a freeze on debt repayments, starting immediately, until the World Bank and International Monetary Fund have completed an assessment of their needs. In the face of such suffering, the rich world has agreed to be generous, not usurious.

But not all of Indonesia’s fellow sufferers are crying out for their burden to be lifted. Thailand, for one, is cautious about creditors’ magnanimity. To delay its repayments may send the wrong signal to the capital markets, it fears, suggesting that Thailand is a mendicant country unable to carry its debts. This might deter new creditors and investors. Thailand may thus decide to show that it can pay its debts in full and on time, even though it is not now obliged to do so.

Some of the lenders have also had reservations about offering debt relief, although it is impolitic to air them too loudly. Such relief frees up resources, which a government can then devote to aid and reconstruction—or divert to anything else. Heavily indebted governments tend to be bad governments, sceptics argue. If they cannot borrow money prudently, why should we trust them to spend it well? Any money given to such countries should come with strings attached.

Since 1996, for example, the Bank and the Fund have offered to reduce the debts of 38 poor countries, most of them African, under the Highly Indebted Poor Countries initiative (HIPC). To qualify, countries must establish a track record of sound policies and a viable strategy for fighting poverty. The original conditions were so stiff that few countries were able to meet them. They have since been softened, but almost a decade on, 11 of the 38 HIPC candidates are yet to enjoy any debt relief, because government in these countries is bad (Myanmar) or largely absent (the Democratic Republic of Congo).

Indonesia is not in that category. But it is the fifth most corrupt of all the countries tracked by Transparency International, a graft-monitoring organisation. The Australian government, for one, is anxious to stay in control of the large sums it has offered the country. If the Australian public sees money being “siphoned off for corrupt purposes,” warns Alexander Downer, Australia’s foreign minister, “it would turn [them] violently against aid of any kind.”

But Australia will have to tread lightly. Some in the Indonesian military, which controls the badly damaged province of Aceh, still resent Australia’s 1999 military intervention to keep the peace in East Timor, before the province won its independence from Indonesia in 2002. Indeed, Indonesia has announced that all foreign military personnel helping with the relief effort must leave Aceh by the end of March.

Indonesia has also had some bruising past experiences with conditions imposed on it from the outside. The IMF’s unsuccessful rescue package in the wake of the 1997-98 Asian financial crisis came with no fewer than 140 strings attached. Miranda Goeltom, a senior official at Indonesia’s central bank, has argued that any debt relief offered in the wake of the tsunami should be unconditional.

Show me the money

Of course, donors and creditors do not always live up to their responsibilities either. At a conference last week, the United Nations reminded governments of past promises left unfulfilled. About $1 billion was pledged to Iran after an earthquake destroyed the city of Bam in 2003. But only $17.5m of that promise trickled through to the Iranian government (though that was partly because some aid agencies got tired of dealing with Iran’s maddening bureaucracy and pulled out).

This time, the UN insists that donor governments show them the money. Last week, it asked for $977m immediately, to meet basic needs such as food, shelter and health care over the next six months. It already has $717m of that sum.

But the UN itself is not above criticism. Allegations of fraud and self-dealing surround the Iraqi oil-for-food programme carried out under its name in the 1990s. The UN is anxious to demonstrate that its handling of the tsunami relief funds will be done transparently. It is working on a revamped online financial-tracking service, to record and monitor the flow of funds; and it is also introducing rules to safeguard whistle-blowers.

Even when money remains in the proper hands, it is not always well spent. After Hurricane Mitch killed 5,757 people in Honduras in 1998, the aid agencies set about stitching back together the dismembered economy. But they could not provide the spark to bring it back to life. Bridges were repaired, but cross-river traffic and trade was slow to recover. Houses were constructed, but according to the standards of an outside aid agency, not the needs of the people who had to live in them. Some, for example, were built at such a distant remove from the centres of commerce that villagers exhausted their daily earnings travelling to and from their place of work.

If experiences in Iran and Honduras were repeated in Asia, a weary cynicism would soon replace the competitive generosity of the past few weeks. But if the aid industry, and the UN in particular, succeeds in rehabilitating the victims of the tsunami, it will go a long way to rehabilitating itself as well.

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