‘Debt-for-Development’ Plan Is No Gift for Third World : U.S. Banks Get Tax Break, Debtor Nations Get Left Out

A new tax break for banks, announced by the Treasury Department in November, may be well-intentioned but will draw resources from the wrong well. Under the new regulations, banks can donate debts owed by the Third World, assigning them to U.S. nonprofit organizations with overseas programs.

The U.S. group will then redeem the debt with the Third World government for a lump-sum payment in local currency. In turn, the organization is obligated to use that money to fund its programs there.

This is certainly a good deal for U.S. banks. In recent years banks have continued to make profits while paring down their Third World exposure. By donating unwanted debt they will get to take a tax deduction equal to the dollar value of the local currency received by the U.S. nonprofit group.

In addition, banks can claim a loss for the difference between the amount of the contribution and the value of the original loan.

For U.S. development organizations it could be an even better deal. Less media attention on famine-starved Africa means that contributions are not what they were a year or two ago. The $300-billion Third World debt owed to U.S. banks would seem to offer a limitless pool of resources for their work in developing nations.

Yet what about the Third World?

Granted, a foreign debt obligation converted into local money is easier to meet, but it is not cost-free. A central bank must either decide to run the presses, and thereby pay indirectly through inflation, or it must divert resources from other national priorities.

The plan also heightens the role of U.S. bankers as Third World policy-makers and development planners. The banks choose the nonprofit group; the nonprofit group chooses the local projects, and the debtor government is merely left with the option to agree or disagree.

Third World governments have their own development objectives, which may or may not coincide with the high-profile projects that make for a good public image for banks and development organizations in the United States.

Also left out of the action are non-governmental organizations of the Third World. They are even less likely to be delighted with the “debt-for-development” scheme. Throughout the developing world, indigenous non-governmental groups have emerged as a force in their own right. In fact, U.S. groups increasingly collaborate with these local partners and will most likely share the new proceeds from this plan with them. Surely the Third World organizations cannot help but notice who controls the funds from their national treasuries.

The Treasury’s debt-for-development idea was in part inspired by recent debt-for-nature swaps. In these arrangements U.S. environmental organizations purchase heavily discounted debt in exchange for a commitment by a developing country to set aside lands for parks. For $100,000, Conservation International was able to purchase $650,000 worth of Bolivian debt. The group then canceled the debt in return for the Bolivian government’s agreement to create a 4-million-acre forest preserve in its Amazon basin.

U.S. conservationists hope that the new Treasury ruling will pave the way for similar nature swaps being negotiated in Costa Rica, Ecuador and the Philippines. From a Third World country’s point of view, however, the matter is highly delicate. As one official put it, “How would you like it if the Japanese used your trade deficit to buy the Grand Canyon?”

U.S. development groups should ponder deeply how much they want to exploit Third World financial weakness, and how badly they want to strike business deals with the governments and banks that they generally blame for the debt crisis. For most of the 1960s, nonprofit groups working in the Third World have decried the suffering of the poor as a result of debt, recession and austerity. Now the same groups may be faced with a dilemma: Do they trade the moral high ground for a chance to finance overseas projects paid for by Third World governments and tax breaks for U.S. banks?

In fairness, it is hard not to applaud what looks on the surface to be an imaginative plan. Yet, stepping back, this new role for Third World debt helps those who need it the least. U.S. banks were doing remarkably well without the tax breaks. As for U.S. development organizations, they should raise funds from U.S. pocketbooks, not from debtor nations’ treasuries.