We often hear about the “need” for debt forgiveness. Our movie stars and celebrities like to clamour about it being a “moral obligation” and, of course, leaders of developing nations like the idea as well. But is debt forgiveness really going to help out the people of these developing nations? Samuel Gregg, Acton’s director of research, argues that debt forgiveness is not a moral obligation, nor is it necessarily such a great idea for the economies of some of these countries. Dr. Gregg examines the Republic of the Congo as an example of why debt forgiveness is a bad idea.

President Sassou-Nguesso is meeting with President Bush today, and will likely raise the topic of debt forgiveness. The average person in the Congo lives on about $2 a day. The nation does have a well supplied oil industry, although much of the revenue doesn’t ever make it to the marketplace.

Where does this money end up? Likely, it is diverted to extravagent spending for President Denis Sassou-Nguesso (for example, his 8-day, $295,000 trip to New York in 2005) and his entourage. Diverting monies from the oil industry hurts the economy directly by destroying the nations contractual accountability. In order for foreign investment to function well the investor needs to have some assurance that he will see profits and growth. If an economy tends to make money disappear, investment es unlikely. Dr. Gregg writes:

Allowing heavily indebted nations to walk away from their debts sends precisely the wrong economic signal to private and public international lenders of capital. Why should they lend any more funds to such countries in the future if they can never be sure their funds will be returned? Developing countries need to develop reputations as responsible borrowers who not only deploy the borrowed funds productively but who also repay their debts as contracted. How will debt forgiveness of a country like the Congo, especially given its extensive government corruption, help the Congo to achieve either goal?

The solutions to the problems of national poverty, especially in developing nations with rich natural resources and motivated, entrepreneurial, citizens lies in holding those nations’ leaders accountable rather than giving in to pleas for more money that can be further diverted into their own, personal treasuries.

For more information about debt forgiveness and solutions to poverty, look into our Impact campaign. The solution to poverty requires more than good intentions, it requires sound economics as well.

Related Items:

White House Press Office, “Remarks by President Bush and President Sassou Nguesso of the Republic of the Congo in a Photo Opportunity,” U.S. Newswire, June 5, 2006.

Associated Press, “Bush, President of Congo Discuss Darfur,” Washington Post, June 5, 2006.

Eli Lake, “Congo Battle Looms Over White House,” New York Sun, June 5, 2006.

Robert E. Wright, “Review of James Macdonald A Free Nation Deep in Debt: The Financial Roots of Democracy,” Economic History Services, May 31, 2006.

Marc Vander Maas, “Bono: Give Us a Call,” Acton Institute PowerBlog, May 19, 2006.

Jordan J. Ballor, “The Myth of Aid,” Acton Institute PowerBlog, May 15, 2006.

Samuel Gregg, Banking, Justice, and the Common Good. Grand Rapids: Acton Institute, 2005.

Jordan J. Ballor, “Movie Review: ‘The Debt of the Dictators’,” Acton Institute PowerBlog, July 21, 2005.

Osvaldo Schenone and Samuel Gregg, A Theory of Corruption. Grand Rapids: Acton Institute, 2003.