More and more, international lending and financial institutions have come under fire for their inadequacy in addressing the woes of ailing economies. As the International Monetary Fund has become the Big Bad Wolf in the fairy tale of globalization, a number of proposals have emerged that would relieve Heavily Indebted Poorer Countries (HIPCs) of some of their unsustainable debt. However, the fundamental flaws in the current system would serve only to equip the Big Bad Wolf with a convincing sheep costume. In the face of existing pressure upon the economic straw houses built by impoverished nations, the harsh measures imposed by lending institutions will huff, puff, and blow down the last remaining hopes for economic stability.
Forgiving the debts of economically powerless nations seems benign enough at first glance. However, many proponents argue that such debt relief should be conditioned upon environmental improvements, human rights protections, and democratization of institutions. What these advocates are overlooking is the nightmare that would result should this "carrot and stick" approach result in a backlash from developing nations. Despite its flaws, paying off debts under the current system is likely to be far more palatable to HIPCs than the West telling them how to run their countries. Mandating democratization of institutions while a nation is combating financial thunderclouds is a good way to turn a rainstorm into a monsoon; it strips away the last elements of political stability that provide some semblance of order for the state. By inducing political turmoil as illiberal institutions are replaced with democratic staples such as free elections, the goal of a peaceful transition to liberal democracy is likely to be thwarted.
The best way to democratize is not to introduce unrealistically harsh demands for liberal reform but to demonstrate that Western-style capitalism is a successful model. Of course, this demonstration means the IMF and other lending institutions will have to abandon their poorly conceived prescription for economic reforms -- increased interest rates, increased taxes, and devalued currencies -- an inflexible response that is far more likely to exacerbate economic devastation than alleviate conditions.
Similarly, the most effective means of encouraging debilitating capital flight from impoverished nations is to use environmental regulations as a bargaining chip for debt relief. For multinational corporations based in the West, nonexistent or minimal environmental regulations represent a powerful reason for investment in a developing nation. When indebted nations are forced to adopt Western environmental regulations, any corporations not already scared away by dismal economic prospects simply sell their holdings and flee the country to settle elsewhere. This seems to be little more than a formula for guaranteeing crisis in a financially destitute state.
Compounding the problem, the flight of this productive capital would be accompanied by the entrance of unproductive capital, a situation broadly labeled the "moral hazard problem." Bailouts by international lending institutions encourage corporations and other private creditors to invest when they otherwise might not. Essentially, the IMF would be providing a subsidy to risk-taking. Such investment only weakens the pillars upon which sustainable growth and development are built, thus increasing the likelihood of economic crisis in the future.
Finally, the new program established by the IMF's governing committee to forgive 28 billion dollars in debts of impoverished states could stand to put even the U.S. domestic economy in danger. The IMF recommends that the developed world lower trade barriers so that poorer nations might be able to export their way out of a crisis. Such export-led recovery would likely wreak financial instability within the United States. Given the right combination of circumstances, the American economy could overheat, thereby disabling the world's strongest economic power from responding to crisis. All the good intentions of lending institutions would not even come close to compensating for this blow. In other words, unless the objective of debt relief is to produce a host of disillusioned, unstable, illiberal nations mindful that their plight has been amplified to epic proportions by the West, the IMF debt relief initiative must be avoided.
None of this is to argue that the goals of democratization, environmental protection, and economic reform are not noble and worthy causes. But conditioning debt relief on progress in these areas only threatens to be counterproductive and ultimately self-defeating. Lending institutions certainly have the potential to play an important role in assisting nations ravaged by economic chaos, and debt forgiveness is a virtuous aim, but attaching unreasonable requirements to debt relief at best will yield polite denials from needy countries. For those unlucky nations forced by poverty to relent to Western demands, capitulation is likely to breed resentment while striking a devastating blow to the chances for capitalism to succeed in the developing world. After all, wolves are dangerous creatures, as the Little Red Riding Hoods rendered helpless by economic crises have learned all too well. And in this fairy tale, "happily ever after" is far from certain.