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Is Relief the Right Response?
Subject Economic Development
Topic Developing and Transitional Economies
Key Words Debtor Nation, Foreign Debt, Economic Growth
News Story

Are debt repayments one of the major impediments to economic growth for the world's poorest countries? Many believe this to be the case and have been protesting outside the offices of the World Bank. The protesters complain that the World Bank and other financial institutions have not done enough to relieve the burden of debt for those countries. Funds earmarked for repayment, they argue, could be channeled into improving schools, health care or basic sanitation, thereby stimulating economic development. World Bank President James Wolfensohn argues that $34 billion in debt relief has already been provided to 22 countries and while debt relief is an important component, it is not the most important component of an economic development strategy.

Wolfensohn believes that "It is a question of governace, it is a question of education, it is a question of legal and judicial systems, it is a question of ethics, it is a question of how a country is run" are important issues associated with economic development. Wolfensohn's views echo that of the U.S. government, which believes corrupt and incompetent governments are primarily responsible for the poverty of Third World countries.

Some of the organizations leading the protests, for example, the Mobilization for Global Justice, believe that little will be done to serve Third World countries because the organizations that can provide relief, namely the World Bank and International Monetary Fund, serve the interests of large corporations and international investors rather than Third World countries.

The World Bank, IMF and other financial institutions have acknowledged that a problem exists, have reduced the financial burden for many countries, and are willing to consider additional reductions if there is some evidence of more effective governance. The protestors however, do not have much faith in these promises and have vowed to continue their protests.

(Updated June 1, 2001)

Questions
1.

The issue of debt relief is controversial. What arguments do proponents of debt relief offer to support their position?

2. While the World Bank and other lending institutions have provided some debt relief, they argue that additional relief would not necessarily promote economic development. What arguments are offered to support their position?
3. Some economists fear that debt relief might undermine the economic system by creating an expectation among Third World countries that they can borrow without repayment. It would then become less likely than borrowers would put their funds in investment goods. Do you agree or disagree? Explain.
4. What is the World Bank and IMF's roles in promoting economic development?
Source Steven Pearlstein and Manny Fernandez, "World Bank Defends Policies," The Washington Post, April 28, 2001.

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