The practice of lending to developing and underdeveloped governments should end
Regional, Analysis, 5/25/2002

Developing and underdeveloped countries have a crushing need for investment capital, be it for economic or social development.

Past experience shows a very poor result in the use of these investments and aid money provided to these countries. Some countries did better than others depending on the quality of their government and its decision making process; however, even the best of these countries' performance in these regards is very far from optimum.

Good intentions are not enough. There must be sound economic foundations and practices to make sure that these intentions do not do the opposite of what is intended, and inflict harm on citizens and businesses -- where these programs are ultimately directed at.

Also, the temptations is tremendous to use the aid and economic loans by governments for political ends to increase popularity of the government, a temptation that is ever so strong -- discarding sound economic practice -- that constitutes the true and genuine concern for citizens' welfare.

These international lending institutions -- as the supposed adult in these issues -- bear the major responsibility for the past and current poor state of affairs that pervades the issue of aid and loan lending; they are the creditors and providers of aid.

These international and regional lending entities (countries, international institutions, regional banks etc.) have used lending for a variety of purposes in the past -- some well intentioned and others not well intentioned, for political and other reasons. They did not care for the welfare of the citizens of the countries that they lent money to, and were interested in political and economic influence and control. At times, there is great evidence that they even went further, intentionally providing programs knowing full well the harm these "hanging loans" will cause.

If the lending international entities, who are well endowed with economic and financial expertise are serious about proper economic development, then they bear the full responsibility for not burdening the citizens of these countries with their lending practices and criteria. These institutions should find mechanisms to lend directly to businesses in the countries involved. They should bear the risk of their lending and its associated risk evaluation on the viability of the success of the loans. Towards that end, they should develop all their efforts; be it in needs of creating intermediary private institutions, or in dealing with the private financial and business institutions of the country involved. The public should bear no direct or smartly engineered indirect cost of such ventures. If there is any lending to be done, find or invent a mechanism so that a truly private entity bears the responsibility for the loan.

If a project has sound economic foundation, then these international institutions should not have trouble assuming its risk directly. These international institutions should not lend except to private institutions, and as such, governments that want loans for its corporations should be forced to privatize these institutions, and then give the loan to this newly created private business.

Of course there are the issues where the free market will not provide for needed capital and services. That is a different issue altogether that we will address shortly. Our focus here is institutions that lend to developing and underdeveloped governments and public entities placing the legal and economic burden of these loans on the citizens.

If the money is meant to be aid, then let it be so by making it a grant. There are pressing social needs in these countries, and giving loans to these issues (education, electrification, and transportation etc..) has economic benefits, but is a very slow acting benefit that will not show returns except after an extended period of time; and this assumes a multitude of other economic decisions and actions being properly undertaken at the same time. So even in these issues, loans should not be given. If your claim is genuine care to see people educated and not being a drain on their own economy and the world's economy, then education money should be grants or build the school as a private economic entity. If you want to build a road, then give a grant. If it is needed economically, then it makes sense economically; so finance it on build-operate-transfer basis or other private system basis. Otherwise this money has better uses for it in the economy than to build this road. Let the government raise taxes if the people think they want this road; so the citizens will get involved in their economic affairs by having a direct influence on the economic decision making process that allocates funds; and for them not to think that government can simply create money. When it is their money, and the citizens will "feel" it is their money through direct taxation, then the decision making process will improve dramatically.

Enough harm to human being's welfare. Enough waste of precious capital. Enough damage to the dignity of economics.

By,
Jamil Kazoun


Editor note:We will address very shortly issues related to development in greater detail.

Previous Stories:
  Increasing Arab states inter-trade, regional economic integration an absolute imperative   (4/12/2001)
  Economic development strategies   (1/15/2000)
  The need and future of international institutions   (1/15/2000)
  A possible road map to international economic development   (1/14/2000)

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