International tax system or debt cancellation?

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.