Opinions Wed, 4 Apr 2001

Highly Innovative Prosperous Country (HIPC)?

.... Still Dreaming!
By Maxwell Oteng (Santa Cruz, USA)
In the rustic Kingdom of Ebiteyie-Ebi-Nso-Nnteyie-Koraa lives Opanin Ohiayedambo. By all indigenous standards and accounts, Opanin Ohiayedambo is a hardworking individual but like most of the citizens, he unfortunately finds himself on the downside of advantage. Typical of the cultural expectations of the Kingdom, Opanin Ohiayedambo has a big family comprising his beautiful wife and ten children. Ebiteyie-Ebi-Nso-Nnteyie-Koraa is an agricultural kingdom that predominantly produces atadwe.

Within a striking distance of Ebiteyie-Ebi-Nso-Nnteyie-Koraa there is the more prosperous Kingdom of Sikayede. Sikayede is a commercial and industrial center, producing a variety of durable goods including atadwensuo, a nutritional drink made from adatwe produced in Ebiteyie-Ebi-Nso-Nnteyie-Koraa. In the Kingdom of Sikayede, lives Odeneho Sikanii Aboroyede. Odeneho Sikanii Aboroyede is a money lender, who lends money essentially to the farmers in Ebiteyie-Ebi-Nso-Nnteyie-Koraa, one of them being Opanin Ohiayeadambo.

It so happens that Opanin Ohiayedambo, in attempt to provide better education for his children in order to ensure a higher standard of living for them, has, through continuous borrowing over the years, become so indebted to Odeneho Sikanii Aboroyede. This is because the proceeds that Opanin Ohiayedambo gets from selling his atadwe to Odeneho Sikanii Aboroyede and others in Sikayede are not enough to help him meet his financial obligations. Meanwhile, five of Opanin Ohiayedambo’s children, through borrowed money, have been educated and become doctors (1), engineers(1), nurses (1), lawyers (1) and teachers (1). These children, wanting better lives for themselves, have migrated to Sikayede to look for better jobs and opportunities. They remit their father regularly but the remittances go into paying his hospital bills, paying the school fees of their other siblings left behind and paying their communal “funeral fees” while they are away. In the end, nothing is left out of the remittances to the father to be used to repay part of his debts to Odeneho Sikanii Aboroyede. Ironically, Sikayede continues to prosper on the strength of Opanin Ohiayedambo’s children’s productivity and innovation – they produce the medicines, the bicycles, the textbooks, other skilled personnel – that the people of Ebiteyie-Ebi-Nso-Nnteyie-Koraa need and buy at exorbitant prices. In all this circumstance, Opanin Ohiayedambo is compelled to still rely on borrowed money form Odeneho Sikanii Aboroyede for the very survival of his family.

Meanwhile, more and more citizens of Ebiteyie are becoming so indebted to Odeneho Sikanii Aboroyede on unsustainable basis that they think some pressure must be brought to bear on Odeneho to write off their debts. However, Odeneho, realizes that these people do constitute a formidably unified force, so he must do something to deflate the gathering cloud of pressure. So he comes up with a strategy that allows his clients to forgo the monthly interest payments for a given period of time subject to certain conditions, including the adoption of reform programs designed by him (Odeneho). In Odeneho’s eye’s mind, this strategy is designed to make the debts owned him by the people of the Kingdom of Ebiteyie-Ebi-Nso-Nnteyie-Koraa sustainable (“payable”) rather than give them clean slates through total cancellation. But he is also aware that the success of his strategy depends on how unified the people of Ebiteyie are in pressing their demands for total debt cancellation. Fortunately for him, however, it happens that his clients, despite their common bond by poverty, are not unified at all. Before late, some of them have deserted the “alliance for total debt cancellation” and opted for Odeneho’s alternative Initiative, leaving hardcore supporters of total debt cancellation in the lurch, having been bugged by the old saying that there is strength in numbers. With the probability for total debt cancellation close to zero because of loss in strength in their “alliance”, Ohiayedambo has a decision to make as to whether or not to go for Odeneho’s Initiative that would at least give him little relief from not paying the monthly interest payments for some time. Opanin Ohiayedambo gives this some though and eventually decides that he’d go for the Odeneho Initiative. But lo and behold, hell breaks lose in his house because some of his children think that he is not being “man” enough to face his debt obligations squarely and in so doing puts the family’s pride and reputation in the dustbin.
The above is a simplified analogy to Ghana’s debt entanglements and the recent decision by the Kuffour Administration to join the Highly Indebted Poor Country (HIPC) initiative.

From the simplified analogy above, it may be hard to believe that some people would argue against Ghana’s joining the HIPC initiative because it cannot make the country worse off than its pre-HIPC status. However, it seems that for some people the scars left on their melange of memories by such historical sister tags as SAP, ERP I&II, PAMSCAD and the not-too-favorable menagerie of memorabilia left in their trail, continue to haunt them and offer them legitimate basis to reject additional tags in the future.

So in the minds of some, the Institutions, – IMF and World Bank – well known for their creation of faceless conditionalities and acronyms and monikers than the success of their economic prescriptions, have, in a display of hubris and chutzpah, struck again with another acronym. And if one listens to the self-styled political pundits with leftist ideological leanings, one gets the impression that the latest moniker, HIPC, is the socio-psychological straw that broke that camel’s back. To these people, HIPC is the culmination of the pulverization of the nation’s ego by the heavy artillery of a denigrating acronym. Yeah, that may be true, but what’s new?

I thought our national ego or pride, if we had any left at all, has been pulverized since the birth of our nationhood, especially in the science and art of our economic (mis)management.

Strangely, it seems that some of us do not want to be told the truth especially when the truth is chronically painful to hear.

Thus it seems that the cultural virus of the Rumplestiltskin Syndrome has found a captive space in fertile soils of our socio-cultural environment. The Rumplestiltskin Syndrome is the view that names and words have a magical quality beyond their descriptive functions.

But why should we allow cultural idiosyncrasies to ride roughshod over our scientific faculties and intellect? What is in a name? Or more aptly, what’s in an acronym, especially when that acronym painfully but correctly describes your circumstances? Why should some of us have to behave as if they hold the belief that eating timid or ugly animals will make one timid or ugly? Or do some people really hold such a belief? Or is that some of us are adherents of the ”hangover theory”? The hangover theory has a strong emotional appeal. It turns prosaic realities into a morality play of sin, punishment and redemption. But it does not actually make any sense. But when people take the hangover theory seriously, they refuse to move on. Hangover theorists tend to adopt the Naderite view that things can get better only if they first get worse.

It’s refreshing, though, that our new democratic dispensation is allowing all vectors of discourses on our new tag to run their trajectories unimpeded. However, we do not want debates and discourses to be clogged by spumes of dogmatism, because dogmatic positions, by their very rigid nature, cheapens and debilitates a healthy national discussion.

I have read some, if not all , of the arguments against Ghana’s joining the HIPC initiative, thanks to the electronic media.

Interestingly, almost all the "against" is based purely on the emotions of national pride. I am yet to find any "against" that says that because of these or those facts and figures the HIPC is bad for Ghana. I would really want someone to tell me how HIPC makes Ghana worse off than its pre-HIPC position. The idea that we do not belong HIPC is a self-inflated ego argument. HIPC or not, and despite the self-denial of some of us, outsiders know that we are economically poor and thus they regard us as such. Almost all African countries are.

Reality is different from potentiality.

This is what the IMF-Word Bank facts sheet about the HIPC says: To qualify for assistance, the country must adopt adjustment and reform programs supported by the IMF and the World Bank and pursue those programs for three years. During that time, it will continue to receive traditional concessional assistance from all the relevant donors and multilateral institutions, as well as debt relief from bilateral creditors (including the Paris Club). A country must satisfy a set of criteria to be eligible for special assistance. Specifically, it must: be eligible for concessional assistance from the IMF and World Bank; face an unsustainable debt burden, beyond available debt-relief mechanisms such as Naples terms (where low-income countries can receive a reduction of eligible external debt of 67 per cent in NPV terms); establish a track record of reform and sound policies through IMF- and World Bank-supported programs.

It takes no Einsteinian brain to know that the above conditions apply to Ghana. First of all, because Ghana is being used as a guinea pig for IMF/World Bank reform experiments, the country has been under the policy prescriptions of these two institutions for about one-and-half decades now. Thus Ghana would not have to endure additional conditionalities and reforms by joining the HIPC because these conditions and reforms are well entrenched in our economic lives. Secondly, It is clear, at least to all who care to know, that our foreign debts are not sustainable and strangulating. This is not an academic paper so I do not intend to go into the details of the debt burden on our economy. However If anyone wants to measure the burden foreign debt imposes on the Ghanaian economy, all that one has to do is to estimate/calculate the ratio (g-r)B/Y [ where B is debt, Y is output or gross domestic product (GDP), r is interest rate and g is output growth rate]. The higher this burden, the greater the likelihood that the debt is unsustainable, in the sense that the debtor country finds itself unable or unwilling to repay. In fact we essentially have been playing, what economists refer to as a PONZI GAME with regards to our external debts. Let me explain PONZI GAME: In the 1920s, Boston swindler Charles Ponzi duped investors by offering high returns that he was able to pay, for a time, using money provided by new clients. Once the flow of new money dried up, however, Ponzi could no longer meet his obligations and his fraud was exposed. Thus we have been borrowing new money to pay for old debts, and that like a Ponzi game, is not sustainable. It has been argued that by joining the HIPC initiative Ghana has officially declared bankruptcy. This is not entirely true. If Ghana has declared "bankruptcy", it is not because of HIPC.

Pre-HIPC Ghana was also a "bankrupt" nation in all respects – in its inability to pay its debts, in ideas to run its economy, etc. I think it is lost on many that HIPC is not a unilateral declaration of debt default by Ghana, but rather an arrangement by interested parties including the IMF/World Bank, the bilateral and multilateral creditors and the country. Thus we have to analysis the potential effect of HIPC on our future ability to participate in world capital markets in terms of unilateral repudiation vis-?-vis negotiated debt relief.

“Sovereign risk”, a situation in which a government defaults on loan contracts with foreigners or prevents domestic residents from fully meeting obligations to foreign creditors, is gauged by the “sustainability” of indebted countries’ current account deficits.

Current account is the difference between a country’s exports of goods and services and imports of goods and services. Thus a current account deficits means that the country imports more goods and services than it exports. In the international capital markets, creditors and policy-makers watch the current accounts of countries at the thought of detecting situations in which countries might become bankrupt, that is, unable to pay off foreign obligations at their face value.

In this connection, Pre-HIPC Ghana was invariably a bankrupt country by virtue of its persistent large current account deficits. Thus the argument that joining HIPC means the declaration of bankruptcy by the country holds no water.

Equally important, assessing the possibility of national bankruptcy is a very subjective matter. In reality, it is hard to forecast future national outputs, and perhaps more importantly, there may be limits to the share of GDP that a country is willing to devote to repaying foreign creditors. For this reason, while policymakers often view persistently large current account deficits as a portent of future borrowing problems, creditors tend to have a differentiated view of each country’s situation. In most cases, the key variable is the trade balance. Trade balance is the net amount of output the economy transfers to foreigners each period. There are historical examples of this: Australia and Canada have persistently had a strong tendency to run large deficits in the postwar period. Between 1950 and 1994, Australia’s current account was in deficit in all but four years, while Canada’s was in deficit in all but five. Does it follow that Australia and Canada were about to go broke? On the contrary, they have been able to finance their external borrowing with remarkably little difficulty. Canada’s credit has remained good: even though the country has run current account deficits, its trade balance has registered substantial surpluses over 1976–93. The reasons for Australia’s continuing creditworthiness were less obvious, because the country has had persistent trade deficits since 1976. Perhaps Australia’s creditors, reassured by recent economic reforms, expected trade surpluses to emerge in the relatively not-too-distant future.

History also suggests that lenders face a great deal of uncertainty about borrower characteristics and preferences. In this light, changes in a borrowing country’s POLITICAL and LEGAL regimes or economic prospects have a significant impact on its access to world capital markets past transgressions notwithstanding. In fact available econometric studies intimate that lenders typically assess a country’s risk potential and creditworthiness on the basis of past debt-servicing behavior as well as on NEWER INFORMATION. For example, radical economic liberalization and macroeconomic stabilization in Argentina, Chile and Mexico returned these countries to world capital markets in the 1990s after their debt crisis of the 1980s.
In our case, our creditors, through the negotiated arrangements, view our “defaults” as “excusable” and given that our Pre-HIPC and post-HIPC statuses do not differ much, there is no reason for joining the HIPC initiative to affect our creditworthiness in any significant way.

Actually, the credibility of Ghana as well as our creditors/sponsors especially the International Monetary Fund and the World bank is at stake. These institutions cannot afford to make Ghana fail because they have vested interest in our success as a model for other countries.
Facing these strangulating foreign debts and given the effects their servicing has on our social and economic endeavors, we badly needed some relief. The first best option would have been total debt cancellation, but that is not tenable as the IMF, the World Bank and the donor countries have said repeatedly in clear and subtle ways. (I wonder if those who are against HIPC are also consistently against total debt cancellation because the latter also constitutes an indelible stain on our national pride). So in the absence of the first best option, do we stand against the second best option because of its imperfection? Hell no!
It is true that the HIPC initiative is designed by the donors to ward off pressures for total debt cancellation. It would have been great if all the indebted countries have stood together, and under the aeges of organizations such as Jubilee 2000 and OXFAM, applied intense pressure on the donors for total debt cancellation. Unfortunately, as African countries have demonstrated more often than not, African unity remains superficial and a mirage. Therefore, once some countries opted for the HIPC, it left Ghana with no option to sit on the fence any longer. It seems to me that it would have been unwise for Ghana not to join the Initiative and be waiting for total debt cancellation in the face of a broken unified position of the debtor countries.
Obviously, the HIPC Initiative was not designed to thaw the frozen smiles of its recipients. The Initiative is not the Elixir of Life we are looking for. But one-hundredth of a loaf is indeed better than none any time.
In fact foreign debt will be part of our national economic life for some time so we better get used to it. The challenge facing our country is how to increase our national output through increased productivity. It is a challenge of increasing the value of our exports to put us in good stead to pay off our debts, and thus restore our sense of national pride.
Maybe one day Ghana will become a Highly Innovative Prosperous Country – the kind of country we all dream about. Until then, let us have the courage and the humility to accept that we are a Highly Indebted Poor Country.
Read Other feature articles by Maxwell Oteng


Columnist: Maxwell Oteng
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