Debt Forgiveness for Developing Countries

Debt forgiveness is a programme to cancel or reduce the amount of debt a person, or usually country, has.

Debt Forgiveness is an emotive issue because many feel it is wrong that low income developing countries suffer from high debt burdens, when they really need the money to invest. Many developing countries spend a high % of GDP on servicing the debt burdens.

For example, it has been estimated that for some sub Saharan African Countries the interest on their debt burden is  over 200% of their total export value.

Therefore, in the West there has been much pressure for Government to write off third World Debt.

In 2005 Live 8, raised the issue again, with Governments taking some steps to cancel Third World Debt. However, critics argue this debt was cancelled by merely using existing Aid money. Therefore, in practice little was done to improve the Third World Development

Problems of Cancelling Third World Debt

An economist would argue that cancelling bad debts can cause the problem of moral hazard. This is the argument that cancelling debts encourages people to create bad loans.

To Combat this problem the World Bank tried to tie Debt cancellation to structural changes in the Economy. (i.e. to get debt cancelled countries had to prove that they no longer had the same circumstances which created the debt in the first place.

However, even this World Bank approach has been highly controversial. It is argued that the free market reforms they advocate are not necessarily good for developing countries. By 2003 only 8 out of 38 HIPC (Highly Indebted Poor Country) and been able to meet the criteria.