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Bono’s Mysterious Ways

As everyone knows by now, US Treasury Secretary Paul O’Neill and U2 frontman Paul “Bono” Hewson just completed a week-long tour of Africa. While the unlikely pair seem to play off each each other well on stage, and seem to be getting along well offstage, it is not entirely clear how Mr. Bono has suddenly emerged as a power-broker. Several news sources attributed this quote to the man with the wraparound shades:

“[O’Neill] is the man in charge of America’s wallet … and it’s true, I want to open that wallet.”

None of the news sources I saw chose to elaborate on this comment’s obvious falseness. The treasury cannot release any funds until the proper appropriation and authorization bills have made their way through Congress. (I will cut Mr. Hewson some slack because he is not an American; but if certain members of the press need a refresher course in this area, I would recommend that they review their Schoolhouse Rock.) At any rate, it makes you wonder why we should take anything else the guy says seriously.

Bono’s cause is third-world debt relief. He argues that the heavy external debts of foreign governments are the principal obstacle to their emergence from poverty. We shall examine those claims briefly. How effective are official debt-relief programs in improving economic performance? Well, we can let history be the judge, since we have tried this before. In the late 1980s, the US treasury department began a debt-relief program called the Brady Plan, in which creditor banks were encouraged (through the stick / carrot of the federal tax code) to refinance debt at subsidized rates and reduce principal levels by allowing banks to replace severely discounted loans with new debt at levels closer to par value.

Was the Brady Plan a success? It depends on how you define success. If the objective was debt reduction as an end in itself, then the Brady Plan looked good — more than $60 billion in foreign debt was forgiven, by one estimate. But did the Brady Plan succeed on a larger scale, i.e. did it promote economic growth and encourage more responsible borrowing by third world governments? Sorry, Bono, but the track record there is not so good.

In his book International Debt Reexamined (unfortunately no longer in print, though I have a copy from my grad-school days), economist William R. Cline demonstrates that the economies of Brady Plan participants did not outperform those of nonparticipants with similar debt levels in the 1990s. So much for the argument that debt relief is a sine qua non of future economic growth.

Moreover, there is evidence that the Brady Plan (and other official debt relief programs) merely crowded out private debt relief efforts such as debt-for-equity and debt-for-nature swaps, which had commendably been on the rise throughout the mid to late 1980s. The announcement of the Plan itself had the effect of encouraging further profligacy — if your mortgage banker announced that it might be forgiving or substantially reducing your mortgage debt in the near future, wouldn’t you think twice before mailing in your next payment?

Bono’s line of reasoning on third-world debt would have found a favorable audience with economists a generation ago, but has long since fallen out of respectability. The new generation of development economists, spearheaded by the Peruvian economist and think-tank chairman Hernando de Soto, argues that the people of the third world already hold the solution to their poverty. This makes things difficult for would-be celebrity messiahs like Bono. Sorry, pal, but the world is ready to move on, with or without you.

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