Aid, Debt Relief, and Trade: an Agenda for Fighting World Poverty Essay Example

new “basic needs” approach to development that targeted poverty reduction rather than economic growth. Another oil shock occurred during 1979 and the Federal Reserve aggressively fought inflation which increased international borrowing costs. Consequently, the developing world endured recession, inflation, devaluation, rising interest rates and real-wage reductions. Latin America was hit especially hard.

During this time period the IMF took on a new role of lending to countries on the brink of default. By the mid 1980s, some observers noted that the loan qualifying austerity policies implemented by many borrowers were prolonging and deepening the debtor nations’ problems. During the 1980s, the Baker and Brady Plans were initiated to alleviate developing countries debts. The former plan called upon financial institutions to increase lending to developing countries by up to 50% and the latter plan sought to annul debt through collaboration with private-sector lenders.

Developing countries’ debt problems became known as debt overhang whereby the “presence of existing ‘inherited’ debt” exacerbated the debtor countries’ economic hardships. While the Baker Plan was largely ineffective, the Brady Plan helped revive the Third World debt market and the composition of capital flows in the Brady countries shifted away from the public sector to the private sector in the form of foreign direct investment (FDI) and equity.

During the 1990s, foreign aid declined largely due to three events: the end of the Cold War, the fiscal problems of the Organization for Economic Co-operation and Development (OECD) countries and growth in private-capital flows to developing countries. In addition, many anti-poverty advocates quixotically believed that by forcing creditors to accept loses, debt relief would remove the uncertainty associated with debt

issues to pave the way for new capital inflows and improve the living standard in poor countries. Economic reports indicated aid did little to help promote growth in the absence of sound economic and government policies.

Amid criticisms, the World Bank launched the HIPC Initiative which called on all creditors to provide a new start to the poorest and most heavily indebted countries by cutting down their excessive debt burdens to manageable levels. Since the initiative did not provide any growth assistance, the World Bank concluded that debt reduction alone is not sufficient instrument to affect the multiple drivers of debt sustainability. Sustained improvements in export diversification, fiscal management, new financing terms, and public debt management are also needed but these measures are outside the realm of the HIPC Initiative.

In 2005 the Group of Eight (G8) leaders at the summit in Gleneagles, Scotland, called on the IMF and the World Bank to forgive 100% of their debt claims on 18 of the world’s poorest countries. The G8 also agreed to double aid to Africa by 2010 – the largest African aid deal in history. According to Kenneth Rogoff, the debt relief proposal was a farce, or “empty gesture,” in that it did not include “a better framework for future aid flow. ” Jeffrey Sachs of Columbia University concurred. The main beneficiaries were the rich countries that acquired good political press at a trivial cost.

If the G8 is “serious about helping the poor countries, they should start with finding a reliable way to support grant aid and promote accountability for donors and recipients, not debt relief. ” By the World Bank’s

own reporting standards, the Meltzer report revealed a 73% project failure rate and other empirical studies provide mixed results regarding the effects of aid on growth in poor countries. However, there have been successes such as those in Botswana in the 1960s, Bolivia in the 1980s, and Uganda in the 1990s. And let’s not forget the Marshall Plan.

As for a way forward, the search for new approaches continues. One study suggests that full trade liberalization would lift 127 million out of extreme poverty. Yet, others suggest that the main beneficiaries of freer trade would be the richer nations, not the HIPCs. With inequality reaching an all time high, the plight of the poor is impossible to ignore. According to the World Bank, more than 1 billion people lived in extreme poverty, defined as living on less than $1 a day. There were 2. 6 billion people who lived on less than $2 a day.

Personally, I suggest that a large portion of aid provided by rich countries should be pooled into a blind trust and aid allocation should be distributed based on an index of good governance. Such strategies will seek to eliminate programs that unintentionally foster “dependency encouraged corruption” and poor governance and poverty. Without question, the greatest and quickest progress in fighting poverty in history is exemplified in the liberal reforms enacted by China and India resulting in soaring growth rates and moving half a billion people above the poverty line.