Debt relief, poverty, Bono and Bob Geldof

Bob Geldof. U2’s Bono. Good musicians perhaps. But to see them setting the agenda for so-called poverty relief in the third world is akin to David Beckham performing heart surgery on a sick man: when you are unqualified for the task at hand, more harm than good will be done.

Spurred on by Geldof, the ever-growing bandwagon of economic-illiterate Western idealists is seeking a better deal for poor countries. They even come up with the remarkable claim that “poverty” can be ended. Great, you say. But how will they do this? Do they have a magic wand?

The new colonialists as exemplified by Make Poverty History have three key policy recommendations: Let’s look at them one by one.

Drop debt (debt relief)
Bob Geldof and friends would have you believe that third world countries are poor because they are burdened with debt. His simple solution: cancel the debt. Solves the problem right away? Er not quite. Let me explain why:

Imagine I lend money to you over a number of years – let’s assume you want the money to develop your business. Then after a period of time, you decide that you cannot or will not repay the money. Just write off the debt, right? Well okay. But consider the implications:

If the debts are written off the borrower is declared “in default”. And this is not just mere economic terminology. What it means is that the borrower will not be allowed to borrow money again. That’s logical enough of course: who would be so stupid to lend money to someone who didn’t repay it before? The crucial implication though is that the defaulting country would not be entitled to get any more low interest loans for development purposes in the future. Doesn’t sound so good now does it?

Not only that but there is the very important issue of the comparable treatment of private sector debt. Write off the government debt, and private sector debt will likely go into default as well. As such, private companies would no longer be allowed to raise funds from overseas lenders. Can you imagine the consequences of this? Besides the chaos on the stock and currency markets, private companies would face huge difficulties in running their businesses. Result? A weaker economy, less jobs, more poverty.

This explains why the Indonesian government refused a debt moratorium after the Aceh tsunami disaster. Cancellation of debt would have been a disaster for Indonesia. Rather than a cancellation of debt, some of the Indonesian government’s debts were rescheduled.

Moreover, debt is not the real problem anyway. Nations are not poor because of debts. Indonesia’s debt to GDP ratio is falling even though debts are added each year. Impossible you say. But what you have to remember is that Indonesia’s economy is expanding at a faster rate than the debt burden. In other words, debts are beneficial to the economy. Debts are merely a way of financing economic activity. Indonesia’s debt to GDP ratio after the Asian economic crisis exceeded 100 percent; now it stands at 58 percent.

What makes countries poor is their low level of economic output. Consider this: GDP per capita in the US is currently around US$37,800; in Somalia it is US$500. This means that the average US worker is 74 times more productive than a worker in Somalia. Or another way to look at it is the amount of work done in one year in Somalia would take less than one week in the US.

As such, the only way then to reduce poverty is by increasing economic output. If you make the pie larger, everyone can get larger helpings. Good examples here are Malaysia, South Korea and Portugal. And these countries only achieved success through evoking fundamental change from within, and not because of meddling by outsiders.

Calls for “trade justice”
This policy recommendation is based on the invalid premise that Western nations need to “open up” to third world countries and thus import more third world goods. The problem, however, is that the reverse is actually true!!! Take the world’s economic powerhouse, the United States, for example. Uneven trade with the US is one of the major sources of world imbalances today. The US runs a huge trade deficit, importing far more than it exports. But such a situation cannot persist forever. Most economists believe that the US dollar will eventually have to depreciate to a level at which imports into the US are made more expensive and US exports more competitive, thus reducing the US trade imbalance.

More aid
This is better. That’s why I liked Live Aid back in 1985. Simple uncomplicated charity. Just give money to alleviate suffering right? Yeah – but it only works up to a point. In many African counties, research has shown that charity has resulted in more suffering. By not addressing the real causes of poverty – war, overpopulation, corruption, etc – some of today’s poverty has simply been postponed to tomorrow. Take a country like Somalia where less than 2 percent of the land is fertile. Is it any surprise then that there is abject poverty when there is population growth of an astounding 3.38% per annum? The land simply cannot support the growing population base. And in the long run, charity simply reduces nations to beggars, making them dependent on foreign aid.

Who is responsible?
Listening to these rock stars from the UK, you’d think that the world was still under the British Empire. Third world countries, although Geldof may not like it, are sovereign nations. That means that at the end of the day they alone are responsible for the welfare of their people. I live in Jakarta where “poverty” can be seen all around you. Yet the roads are full of luxury cars, snazzy shopping malls are mushrooming up everywhere and the country has abundant natural resources and fertile lands. There is no need for the poverty, but it exists. Why blame the West? Who is really at fault here?

And what is poverty?
Why is it up to Westerners to decide what is poverty anyway? The white man always seeks to impose his values on others. Take Australia. The aborigines at one time lived in total poverty by Western standards (no access to medical care, education, housing, processed foods etc). They lived a traditional lifestyle. Many of them would die of preventable diseases, and they slept under the stars. Bathed in rivers. Wore rags for clothes. But so what. What is so bad about that? Whites thought they were so superior, and forced the aborigines to adopt their values. The result? Many male aborigines are today alcoholic bums, spiritually lost in their own land.

Africa’s nomadic tribes are not exactly doing okay on the financial front either. They have lived in “poverty” since time immemorial. But so what? Isn’t that their right? And can you imagine what Geldof and his super rich mates would make of a place like the Mentawai islands in Indonesia? My God! Just look at the conditions they live in! Would Geldof seek to “make them history” too because they live in “poverty”? Sure they don’t have much in financial terms - but they also don’t have pollution, drug abuse, terrorism, sex crimes, and Heaven knows what other perversions of the modern world.

Geldof should go back to writing pop songs. Because that’s what he does best.


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