July this year, leaders of G8 countries promised debt forgiveness or debt write off for some of the world’s highly-indebted countries, mostly in Africa, during the G8 summit in Scotland. September this year, many world leaders gathered in New York for the UN World Summit, and one of the talking points was debt reduction for other indebted poor countries. Some proposals that received considerable support by other leaders of developing countries were “debt for equity” and “debt for Millenium Development Goals (MDG)”. The Philippine’s Speaker of the House of Representatives was among the key campaigners of such proposals.
Such new schemes are similar to debt write-off for highly-indebted poor countries. Other indebted poor countries will also not pay a big portion of their foreign debt to both multilateral/bilateral foreign aid institutions, and private bondholders. Instead, the money to be allocated for some foreign debt service (principal amortization plus interest payment) will be used for lender countries’ institutions, corporations and banks’ investment in some earning assets in poor countries ("debt for equity" scheme). Or use the money to expand the budget for social services to help meet the UN’s MDGs of cutting world poverty in 2015 by half compared to their 1990 levels.
While the goal of such new schemes -- poverty alleviation around the world – is laudable, the means are not. Debt forgiveness and reduction can inspire dictators and corrupt leaders to further rape their countries’ economy since the poorer a country is, the bigger is its chance for debt write off, or debt reduction at least. Hence, a “race to the bottom” can happen and it will condemn poor people of those countries into perpetual poverty and dependence on government for dole-outs.
Past loans for public education, public health care, infrastructure, environmental protection, and other social and economic services in poorer countries should have improved the skills, productivity and health of the people of recipient governments. In turn, these people should have become more productive and entrepreneurial, and they pay various taxes and fees to their governments, and the latter can pay back those loans contracted in the past.
Since many poor countries keep on borrowing purportedly for the same social and economic services, this means that the money from past loans were wasted and/or stolen. If this is so, then the solution to high public debt is not large-scale debt forgiveness or more foreign borrowings to be administered by the same sets of institutions and bureaucracies. Instead, poor countries should engage in large-scale privatization of state enterprises and remove some agencies and bureaucracies to save on annual expenditures. Proceeds from privatization and savings from agency consolidation should be used to retire a big portion of the public debt, and to finance continuing social and economic services to the public.
The Philippines and many other poorer economies have plenty of government corporations, banks and financial institutions, including their respective subsidiaries, that more often than not, distort the business environment since they operate as government monopolies, or siphon off public resources for their capitalization or for their bail out as they keep on losing money. Many if not all of these state enterprises can be privatized, not once but piecemeal. While it is true that privatization proceeds are one-time and non-recurring, savings from interest payment of the retired debt or from further contracting new debts, are recurring.
There are no “market failures” being addressed by these state enterprises as many private enterprises can and do provide the services which the former provide. For instance, in the Philippines, there is no justification why government is into real estate, like Clark Economic Zone, Subic Bay, and National Development Company’s subsidiaries (Batangas Land Co., First Cavite Industrial Estate, Kamayan Realty Corp., and so on). Or why government is into trucking and shipping, like NDC subsidiaries National Trucking and Forwarding Corp., Tacoma Bay Shipping Corp.
Non-payment of debts is a bad practice that encourages "moral hazards" problem of being irresponsible borrowers and being addicted to more debts. If poor country politicians, top bureaucrats and consultants can waste or steal their own people's tax money, how much more with rich Japanese or European or American taxpayers’ money. Non-payment of past loans for whatever social goals will only prolong the malady of debt addiction and the economic distortions of government enterprises that need to be disposed to help correct past mistakes and fund mismanagement.