Case Study on Banking on Forgiveness

When James Wolfensohn became head of the World Bank, he bluntly admitted the bank had screwed up in Africa. Decades of loans had erected a vast modern infrastructure (dams, roads, and power plants) for Africa's poor, but the gap between rich and poor did not narrow. In fact, the policies of the bank and global financial regulators had created a new crisis in sub-Saharan Africa: These nations were now mired in debt they could not possibly repay. Africa's total debt at the time almost equaled the annual gross na- tional product of the entire continent. For instance, in Mozambique, where 25 percent of all children die from infectious disease before the age of five, the government was spending twice as much paying off debt as it was spending on health care and education.

  • The World Bank and the IMF had once argued that the leniency of debt forgiveness would make it more difficult for themselves to borrow cheaply on the world's capital markets. If you were a World Bank donor, would you sup- port the HIPC Debt Initiative or argue against it? Explain.
  • While working together on the HIPC Debt Initiative, things came to a standstill when the IMF gave a more optimistic forecast for Uganda's coffee exports than did the World Bank and so argued against the need for debt relief. Which organization do you think should play a greater role in aiding economic development? Explain.

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