International tax system or debt cancellation?

By Bahtiar Arif

JAKARTA (JP): Prime Minister Mahathir Mohamad of Malaysia once again took on the rich countries when he recently proposed that Asian countries tax them rather than depending on their aid. He called for an international tax system to finance world development programs and to alleviate poverty.

At the Boao Forum for Asia in the People's Republic of China (The Jakarta Post, Feb. 28), he even called for the establishment of an independent agency under the United Nations to administer the system. Daring as it may sound, his proposal seems destined to fall flat on the feet of the rich countries.

Decades ago, the Willy Brant Commission pioneered a dialog between the North and South to deal with the problem of world poverty, but the rich countries consistently refused to give satisfying answers.

Imposing taxes on them would therefore seem unlikely, because the rich countries would simply turn down the idea. In addition, Mahathir's remark that an international tax system would benefit the rich countries is theoretically difficult to prove.

For the rich countries, the current practice of foreign aid is much more beneficial as they gain interest and other indirect benefits such as trade provisions. The poor debtors have to agree to commercial terms on debt repayments -- which in general adds profit to the lenders.

There is also the psychological "superiority" of extending foreign aid to being taxed to help the poor countries. The rich countries can be as charitable as they wish, being financed by foreign aid schemes. Further, the independent agency that Mahathir proposed is as unlikely to be established because of the rich countries' domination of the United Nations.

This is, however, a good opportunity to again raise the issue of debt cancellation as a way to alleviate world poverty. Foreign debts consisting of the principal and interest have increasingly burdened poor countries. Scholars have written how the total debts of all the world debtors will never be repaid because they are simply too enormous.

One scholar, discussing his concept of sustainable debt, which measures the ability of any given country to repay its debts based on its export earnings, concluded that some US$100 billion of the developing country's debt needed to be written off.

He justified his position on the grounds that rich creditors contributed and perpetuated the debt crisis by their reckless lending and by applying aid trade provisions and so forth. Debt cancellation is needed to sustain development programs in developing countries.

Is it reasonable that most children cannot go to school because money goes to repay debts? Of course not.

Canceling debts would mean developing countries could reallocate their budgets to finance development programs such as health care and education. Debt cancellation could therefore be seen as a grant from the rich states.

The United Nations Development Program's Human Development Report in 1996 estimated that a one-point increase in the average share of gross domestic product invested in health and education could reduce the child mortality rate by 24 percent.

Debt cancellation could therefore be a means to reduce child mortality, poverty and provide support for other human developments.

Debt cancellation is by no means a new policy. At one point in its history, the United States found itself too hard up to repaying its debts to British banks in the 19th century. Then, a number of European countries, including Britain and France, failed to repay their debts to the U.S. after World War II. Mexico had its debt canceled by the U.S. in 1942. In 1991, some $10 billion of Egypt's debts was written off by the U.S. for its cooperation in the Gulf War.

Debt cancellation should be continued not only on political grounds, but also on humanitarian grounds and for development purposes.

What about Indonesia? Three years after its independence, the Indonesian government had to take over 4,300 million gilders of Dutch debt, of which $399,000 was money borrowed to finance Dutch military operations against the Republican forces.

So Indonesia became immediately indebted despite not yet having started any development programs.

According to the Bank of Indonesia, Indonesia's foreign debt by 2000 was $132.4 billion, of which $75.3 billion, or 57 percent, is owed by the government, including state-owned companies.

With a population of 207 million, the rate of debt per capita is $364. Therefore, every Indonesian, even newborns, is burdened with a debt of Rp 3.5 million.

If the International Monetary Fund finally agrees to disburse its latest tranche of $400 million, Indonesians would be burdened by even more debt.

By using 1998 data on debt, GDP, the state budget and export earnings, the above scholar analyzed the ability of the country to repay its debts, and reported that 67 percent of the debt of $147 billion, or $116 billion, could not be paid by the Indonesian government.

That amount needs to be written off.

If we look at the 2001 budget, which totals Rp 206 trillion, we seen 10 percent is allocated to interest payments on the country's debts.

Indonesia needs a debt cancellation rather than the debt rescheduling agreed to by the Paris Club. It is also a more immediate and feasible option.

The writer is a researcher at the Jakarta-based Institute for Economic Development Studies who recently completed his master's degree in economics at the University of Manchester, the United Kingdom.