(Bloomberg Opinion) -- According to the Catholic Church, the Pope is infallible when he teaches on matters of faith or morals. When he talks about economics, however, he appears to make mistakes — just like the rest of us.
This week, Pope Francis addressed an audience at a conference in the Vatican, including the International Monetary Fund’s chief, Kristalina Georgieva, and several finance ministers. He called on the rich world to help developing countries achieve debt sustainability through measures such as debt restructuring. “You have to remember your responsibility to aid the poorest countries,” he said.
Francis is not the first Pope to advocate this approach for the world’s most deprived nations. Just before the celebrations of the year 2000, John Paul II backed a similar campaign, and was joined by musicians such as Bono and Bob Geldof. That Francis now feels the need to renew that appeal shows the previous Vatican-inspired effort on debt relief didn’t produce a long-term fix. To properly assist the world’s poorest countries, one has to help them improve the quality of their institutions; that’s more important than cancelling their debt.
In the past 25 years, the rich world has put together two hefty packages to help poor countries cut their debt. In 1996, the World Bank and the IMF spearheaded the “Heavily Indebted Poor Countries” (HIPC) initiative to eliminate the unsustainable debt accumulated in the 1970s and 1980s. In the mid-2000s, a number of multilateral institutions, including the IMF and the World Bank, supplemented this program with the “Multilateral Debt Relief Initiative.” This plan was more ambitious, in that it offered full relief of eligible debt for those countries that had completed the HIPC program. Taken together, the two schemes have provided about $99 billion in relief to 36 heavily indebted countries, according to World Bank estimates.
The case for such programs makes sense in a way. If poor countries have to spend most of their money to pay down their borrowings, they have no room for productive investment. In turn, this generates lackluster economic growth, making it even harder to pay back debt. Debt forgiveness should, in principle, allow poor countries to use their money more usefully. They should be able to borrow again on the international capital markets, and spend this money to build roads and bridges or to provide education.
In practice, things haven’t quite gone this way. Nicolas Depetris Chauvin, a professor at the Haute Ecole de Gestion in Geneva, and Aart Kraay, now acting chief economist at the World Bank, have looked at the impact of the combined debt-relief effort from 1989 through 2003. They find that these measures haven’t raised growth, investment rates, or the quality of policies and institutions among recipient countries. “The evidence reported here does suggest that some skepticism is in order regarding the likely benefits of further large-scale debt relief,” they conclude.
Why has debt forgiveness failed to help the world’s poorest nations? One reason is that the overhang of borrowings may have not been such a big part of the problem after all. Serkan Arslanalp, an IMF economist, and Peter Blair Henry, at New York University’s Stern School of Business, found that the countries that benefited from programs such as the HIPC had already been receiving inflows of financial capital larger than their debt payments. “Since the world’s poorest countries do not suffer from debt overhang, debt relief is unlikely to stimulate investment and growth,” the two economist wrote. They agreed that the main obstacle to their development was the inadequacy of basic institutions.
It could be argued, as the Vatican does, that it is simply immoral to collect money from countries where much of the population lives in extreme poverty. But even if you agree, any debt relief effort has to be matched by reforms that ensure countries don’t fall into the same trap again. The HIPC program demanded some institutional changes but, self-evidently, these were insufficient. In the absence of progress in areas such as property rights and the rule of law, a new round of debt forgiveness may prove — once again— useless for long-term development. And since each dollar of this type of aid isn’t spent on other less indebted nations, there are ethical doubts too.
Pope Francis is right to remind the world’s finance ministers of the plight of poor countries. But there needs to be more than a new round of blanket debt relief.
To contact the editor responsible for this story: James Boxell at jboxell@bloomberg.net
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Ferdinando Giugliano writes columns on European economics for Bloomberg Opinion. He is also an economics columnist for La Repubblica and was a member of the editorial board of the Financial Times.
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