DEBT RELIEF - How poor is poor enough?

During Argentina's presidential campaign last fall, the trailing candidate, Eduardo Duhalde, floated an audacious trial balloon: He brazenly proposed that his country renegotiate its massive external debt, and even went so far as to request an audience with Pope John Paul II to discuss debt forgiveness for Argentina as part of the Jubilee 2000 movement.

The fallout was immediate and unmerciful. Latin American financial markets took a nosedive at the prospect of a debt moratorium, while local pundits seized upon the issue to argue that Duhalde would mismanage Argentina's newly privatized market economy. Despite copious retractions and clarifications, Duhalde fell further in the polls and eventually lost in a landslide. Rather than seek divinely inspired debt forgiveness, Argentina clearly opted to keep faith with its creditors.

Though his proposal was likely no more than a desperate blunder during a faltering campaign, Duhalde unwittingly hit upon a critical set of questions in the debt-relief debate. Which countries are-or should be- eligible for relief? How poor and indebted must a nation be to qualify? And perhaps most important, who sets the standard?

In 1996, the World Bank and the International Monetary Fund (IMF) created the Highly Indebted Poor Countries (HIPC) initiative, the largest official debt-relief effort to date. The program's goal is not to eliminate poor countries' debts altogether, but simply to reduce the payment burden to "sustainable" levels, such that governments can continue servicing their debts, yet still finance antipoverty programs and social services.

Three main criteria for eligibility were established. First, the country in question must qualify for special World Bank loans targeted for extremely poor nations, usually with per-capita incomes of about $800 or less a year. Second, the nation must face an "unsustainable" debt (its total debt must exceed 200 to 250 percent of the country's annual export earnings, or its yearly debt payments must exceed 20 to 25 percent of export earnings). And finally, the government must show a three-to-six- year track record of implementing orthodox, IMF-approved macroeconomic reforms.

Although more than three dozen nations are technically considered HIPCs, through January 2000 only seven countries-Bolivia, Burkina Faso, Cote d'Ivoire, Guyana, Mali, Mozambique, and Uganda-had fulfilled these requirements and agreed to debt-reduction packages, qualifying for up to a combined $6.8 billion in relief over time. Five additional countries- Ethiopia, Guinea-Bissau, Nicaragua, Mauritania, and Tanzania-have completed their preliminary reviews and may eventually qualify for relief.

The HIPC program has received mixed reviews from nongovernmental organizations. Opponents claim that governments must wait too long to obtain debt relief, and that this relief is not deep enough for countries to make meaningful inroads against poverty. Others chastise the multilateral agencies for requiring strict fiscal discipline as a precondition for debt relief, thus indirectly restricting government spending on social services.

Last June, the finance ministers from the G-7 countries (an association of the world's most advanced economies) supported calls for "deeper, broader, and faster debt relief through major changes to the HIPC framework." Their proposals included reducing the level of what is considered a "sustainable" debt load, thus offering more relief for qualifying countries, and revising the standard economic policies required for nations to obtain debt relief, with a greater focus on long-term measures that will reduce poverty and protect the environment. At their annual meetings in Washington, D.C., last September, the World Bank and IMF themselves introduced modifications to the HIPC initiative, both reducing the debt sustainability threshold and making debt forgiveness conditional on antipoverty programs in debtor countries.

These changes are important steps in the right direction, and will no doubt begin to improve the debt-relief program. Yet one question remains largely unasked: Rather than simply deepen the level of relief and modify the policy framework for existing HIPC nations, why not also broaden the program to encompass additional highly indebted countries?

Consider Peru. It owes some $30 billion to its foreign creditors, only slightly less than the combined debts of the seven qualified HIPCs. Peru's annual payments are equivalent to more than one-third of its export earnings-far surpassing the required threshold for debt forgiveness. And Peru has implemented painful market-oriented reforms to its economy for nearly a decade now-a vastly superior track record compared to those of most highly indebted poor countries. Peru would seem a prime candidate for debt relief. But there is a problem: Peru is too rich to qualify. In the World Bank's "Global Development Finance Report for 1998," Peru is classified as a severely indebted "middle- income" country, based on its annual per-capita income of about $2,100.

Unfortunately, per capita income is hardly a sophisticated yardstick with which to assess a country's poverty. In Peru, the richest 20 percent of households accumulate more than half the country's annual income, whereas the poorest 20 percent earn a scant 4.4 percent. In this context, per-capita (or average) income is virtually meaningless. The "average" Peruvian-a statistical myth-might earn more than $2,000 per year, but in reality 60 percent of Peru's rural households struggle under the poverty line. How poor is poor enough?

Peru is one of many developing countries where small elites control vast proportions of the wealth-producing assets. Indeed, Latin America as a whole shows the most skewed income patterns in the world, even worse than sub-Saharan Africa's. Five percent of the region's population amass one-quarter of the annual income. And Brazil-another severely indebted nation that is "too wealthy" for debt relief-has the most unequal income distribution in Latin America. The top 10 percent of Brazilian households account for nearly half the national income, while the bottom tenth of households earn a meager 0.8 percent. Close to a third of Brazilians live in poverty.

A typical argument against expanding eligibility to countries like Peru and Brazil is that they can still issue bonds in global financial markets and can therefore refinance their debt through traditional methods. But arguing that a highly indebted and poverty-stricken country should not receive relief simply because it can still take on even greater debt is a bit like refusing to help a drowning man because he has not yet hit the bottom of the ocean.

Ultimately, debt relief may be more a matter of politics than economics. Clearly, the funds for more comprehensive debt forgiveness are available. One need only recall the recent multibillion-dollar bailouts in Mexico and Asia to know that rich nations can quickly mobilize massive financing when their own short-term financial interests appear threatened. Despite much lofty rhetoric, significant debt-relief financing remains elusive. The G-7 was vague as to how its proposed enhancements to the HIPC program would be funded. In its original form, the HIPC debt-relief program cost approximately $12 billion (in present value), whereas the enhanced version could increase this amount to $27 billion. And the Clinton administration recently earmarked roughly $1 billion in bilateral relief for the world's poorest countries. But how meaningful are these sums when the countries of sub-Saharan Africa alone owe $176 billion to external creditors, or when Latin American and Caribbean nations owe more than $550 billion? Expanding relief eligibility would only aggravate funding shortfalls, and would require more than token gestures on the part of advanced economies.

One is tempted to conclude that a flawed debt-relief program is better than none at all. But this is not the case. In a joint statement, UNICEF and the relief agency Oxfam cautioned that the HIPC program's financing uncertainty "raises the prospect of a diversion of development assistance into HIPC debt reduction. Such an approach would be inequitable because it would deprive non-HIPC countries of desperately needed assistance...." It would be tragic if implementation of the HIPC initiative-even an upgraded version-somehow left the international community with the sense of a job well done, the feeling that it had discharged a once-in-a-millennium obligation to the world's poor. There is so much more to be done. And in this age of astounding prosperity, there is no excuse not to do it.

Carlos Lozada is an associate editor of Foreign Policy magazine in Washington, D.C.