Is Africa debt write-off really a 'historic breakthrough'?

Aid and debt campaign groups joined Chancellor Gordon Brown this week in hailing a "historic breakthrough" on debt relief by G8 finance ministers in London, said Gary Giles in the FT. The agreement covers $40bn owed by 18 poor but well-governed countries to the World Bank, the IMF and the African Development Bank with nine more countries likely to meet the criteria within the next 18 months.

But is this write-off of the poorest countries' multilateral debts really the major breakthrough that Gordon Brown claims? asked The Times. Campaigners argue that the West was morally obliged to cancel the debt since they should never have lent the money in the first place knowing full well it would be swallowed up by the continent's kleptocrat rulers. Yet this kind of "moral hazard" argument in favour of debt cancellation dismays many Africans, who fear long-run damage if "their villains are seen to get off the hook" once again.

Instead, rather than talk about how the rich world can help the poor with debt and cash aid, the focus needs to be on helping the poor to create wealth for themselves. It will be "Africans with initiative who lift their countries out of the mire of poverty". Unfortunately, African entrepreneurs are held back not just by corruption and bad infrastructure, but by lack of access to affordable capital. "In Africa, debt should be seen not as an evil, but as a lubricant to growth." In this regard, the West's charity-centred Africa debate would do well to study Japan's ideas. It is the only G8 country to put entrepreneurship firmly at the centre of its vision for Africa's future. Its Enhanced Private Sector Assistance Scheme would "channel capital to African businesses and provide risk insurance to foreigners seeking to invest there".

Subscribe to MoneyWeek

Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE

Get 6 issues free

Sign up to Money Morning

Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter

Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter

Sign up

The debt-relief package is a necessary first step, said the Japan Times. But debt relief alone is not sufficient to achieve the UN's pledge to halve world poverty by 2015. The next step is just as critical: a level playing field in world trade. There is also Gordon Brown's plan for an International Finance Facility (IFF), which would double aid to the poorest countries to $100bn by issuing bonds using rich countries' development budgets as collateral. It's an interesting idea, but since its opposed by the US and Japan, it's unlikely to be a runner. Those two nations prefer to rely on bilateral aid programmes (such as America's $2.5bn Millennium Development Account), which encourage recipient governments to "develop more activist policies that encourage growth. Ultimately, that is the sort of partnership that will reduce the poverty that blights the lives of billions."