NPR : The Marketplace Report: Forgiving Third World Debt

The nearly annual debate as to whether developed nations should forgive the debt owed them by less developed nations has been in the news again this week. MarketPlace is one of my favorite (non music) radio shows and All Things considered each had reports on it.
NPR : The Marketplace Report: Forgiving Third World Debt

All Things Considered also discussed it:
http://www.npr.org/templates/story/story.php?storyId=4057267

While NPR seems to be more convinced than other sources that the debt will be forgiven, all agree that there are roadblocks and problems.

So let's step back and examine them: The basic idea is that many poor nations have borrowed so much debt, that debt service (repayment of principle and interest) is preventing the nations from growing economically.

On one hand, forgiving debt will free money that could then be used to help the poor, build new infrastructure or make other improvements. But would it? Empirically it is hard to dismiss the possibility that, at least in some nations, the money be used to further leaders' lavish lifestyles.

Moreover, is it fair to forgive the debt of only a select few nations? And what about the precedent that the debt forgiveness would create: go ahead and waste the money, we won't make you repay it.

Indeed, it could be argued that one of the things that led to the US being an economic power was the hard stance that Alexander Hamilton took too force the repayment of Colonial Debt.

But of course you probably know this and are bored with it as the debate has been waged for years. But before you dismiss it as the same old same old, there is a difference this year.

What makes it different this year is that rather than being waged by Bono and crew, the call for debt forgiveness is being led by US government. Why? A large reason is that the US is pushing for forgiveness of much of Iraqi debt to help the nation recover from the war and current terrorism.

Of course, it is not so easy as if you forgive one nation, do you forgive all nations? Where do you draw the line?

As an aside, some of the discussion is just silly. For instance, when a backer of forgiveness says that the nations have paid back more than they borrowed already due to interest payments. Any student in an introductory finance course should be able to rip that argument to shreds with only a modicum of knowledge of the time value of money.