Global Arab Network | Rebuilding Haiti’s economy starts with cancelling its debt

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Rebuilding Haiti’s economy starts with cancelling its debt

Global Arab Network - - Gamal Ragay

Friday, 29 January 2010 01:09

Rebuilding the Haitian economy will require massive international investment, along with local ownership of the policy and reform agendas to ensure the revival of State capacities.

Given the scale of destruction, and Haiti’s precarious financial position even before the earthquake, international support for reconstruction must begin with a moratorium on debt servicing, followed quickly by its cancellation, UNCTAD argues in this policy brief. Without such action – and without development assistance in the form of grants, and not loans – a new debt crisis is all but assured.

The massive response of the international community to the earthquake that hit Haiti on 12 January 2010 has understandably been directed towards saving lives and providing immediate relief to the victims. However, even at this stage it is necessary to think about the finances and the reconstruction work required to rebuild the Haitian economy, put its people back to work and provide a more hopeful future.

Given the scale of the damage – social, infrastructural, and economic – recovery in Haiti will take time. The Government must be given the policy space necessary to undertake the reforms and adjustments needed to create a viable economy. It will also need massive investments, which will depend on multilateral funding along the lines of a Marshall Plan, as has been suggested by the IMF’s Managing Director, Dominique Strauss-Kahn.

The Marshall Plan is all too readily evoked in the wake of large-scale disasters. But the parallel is particularly apposite for Haiti, given the scale of the devastation, its links to political instability, and the need for a prolonged engagement by the international community with the process of post-disaster reconstruction. Moreover, given that international involvement prior to the disaster had failed to establish a viable development path for one of the world’s poorest countries, talk of a Marshall Plan raises the hope that, this time around, there will be a different and more productive approach, by donors and the national authorities. UNCTAD believes this task should begin by immediate and total cancellation of Haiti’s existing external debt obligations.

Haiti’s vicious debt cycle Haiti has had a long and difficult history of external indebtedness. Although a significant portion of its debt was acquired under periods of dictatorship, recurrent natural disasters in recent years have compounded the problem.

UNCTAD’s study of the impact on debt sustainability of 21 large natural disasters that struck low-income countries between 1980 and 2008 shows that natural disasters add on average 24 percentage points to the debt-to-GDP ratio in the three years that followed the events (see figure).1 Shocks on such a scale can lead to a vicious cycle of economic distress, more external borrowing, burdensome debt servicing, and insufficient investment to mitigate future shocks.

It is worth recalling that George Marshall was concerned with just such a vicious cycle gripping post-war Europe when he was designing his reconstruction measures. In 1947, he recognized that “Europe’s requirements for the next three or four years of foreign food and other essential products – principally from America – are so much greater than her present ability to pay that she must have substantial additional help or face economic, social, and political deterioration of a very grave character. The remedy lies in breaking the vicious circle and restoring the confidence of the European people in the economic future of their own countries and of Europe as a whole.”

The challenge facing Haiti, in light of its existing development deficits, is of a similar order of magnitude to that facing Europe in 1947, and the case Marshall made for international support resonates again in the current Haitian disaster.

Despite having recently benefited from debt relief under the Highly Indebted Poor Country (HIPC) and Multilateral Debt Relief (MDRI) Initiatives, Haiti was already classified as being at high risk of debt distress prior to the earthquake, in large part because of the numerous and successive external shocks that have recently hit the country.

Considering the large direct cost of the earthquake (conservative estimates put this at 15% of GDP), in the absence of further international action a new debt crisis is all but assured.

Global Arab Network

Extracted from "UNCTAD release"

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Last Updated on Thursday, 28 January 2010 21:15

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