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Last Updated: Saturday, 11 June, 2005, 16:20 GMT 17:20 UK
The limits of the debt deal
By Steve Schifferes
BBC News economics reporter at the G8 finance ministers meeting

Dock workers in Ghana
Trade not aid may be the key to African development

The deal to relieve 100% of poor country debts is historic - but it only sets the scene for a much bigger battle at Gleneagles over trade and aid.

UK Chancellor Gordon Brown was suitably enthusiastic about the deal reached with the finance ministers of the world's richest countries.

"We are presenting the most comprehensive statement that finance ministers have ever made on the issues of debt, development, health and poverty," he said as the deal was announced.

And it is a historic breakthrough - or at least the final resolution of part of the debt issue that has proved contentious for almost a decade.

Debt relief was in fact first agreed in 1996, and it was the subject of demonstrations at the last G8 summit in the UK in Birmingham eight years ago.

The debt issue explored

The fact that is has taken so long to get agreement on the multi-lateral deal is a reflection of the deep disagreements among the major industrial countries - and the slow pace at which such relief has been administered.

Japan and Germany have always been reluctant to agree a complete write-off of debts, preferring to have greater leverage over the behaviour of the highly-indebted countries by offering to pay off their debt service instead.

More funds?

And the US has been reluctant to put up additional funds to pay for the World Bank's share of any debt relief.

George Bush, Tony Blair
Talks between Mr Bush and Mr Blair unlocked the deal
It took high-level negotiations between Tony Blair and US President George W Bush to change this position - and open the way to a deal.

It probably helped that sums involved in debt relief are relatively modest - with the US, for example, expected to put in just $175m a year over 10 years.

And it is by no means clear that either the US, or other governments, will not fund their additional contributions by reducing money that would otherwise be spent on their aid budgets.

The amount is also modest because of a fudge over how to fund the debt relief to be offered by the International Monetary Fund (IMF), which is expected to use its own internal resources.

But Gordon Brown said that more money would be made available on "a fair burden share basis" if the IMF found it didn't have enough, or if more countries qualified for debt relief.

And the amount is also modest because so few poor countries - just 18, perhaps 27 in a few years - qualify for HIPC relief.

As the development lobby argues, many of the poorest but biggest countries in the world, like Nigeria, Indonesia, and Bangladesh, have always been excluded from the debt relief initiative.

Nigeria alone is renegotiating debts worth $25bn at the moment with its creditors - half the total debt held by the 27 countries being offered help.

Aid flows

The debt deal is worth around $1.5bn - critical money to some very poor countries - but only 3% of total aid flows of $50bn per year.

The UN has suggested that the amount of aid needs to double to $100bn per year if the Millennium Development Goals to cut poverty in half by 2015 are to be met.

Agreement on that sum will be a bigger prize for poor countries - but there was little sign of agreement on Mr Brown's ambitious plan for an International Financing Facility to double aid flows by borrowing money on international bond markets.

Instead, each country seems to be going its own way, with France and Germany investigating the use of a tax on international airline travel to finance more aid, and Britain teaming up with the Gates Foundation in the US to launch a pilot project to increase spending on vaccines and medicines to $4bn per year.

And although the EU countries have pledged to double aid by 2010, the development lobby wants quicker action to put more resources into world poverty.

Romilly, Greenhill, of the charity ActionAid, said: "What is very disappointing is the lack of any substantial concrete commitments on aid.

"G8 leaders should announce an increase in aid to 0.7% of national income by 2010, and commit to stop forcing poor countries into failed policies such as privatisation.

"G8 countries must work with Africa, not against it"

It is not clear whether any further movement on this issue is possible in time for the Gleneagles Summit, with the US seemingly reluctant to increase its aid flows further - or reduce the strict conditions it has put on any disbursement of funds.

Trade not aid

An even bigger prize would be the opening up of the markets for agricultural exports for developing countries, currently the subject of tortuous negotiations in the World Trade Organization.

Africa's share of world trade and world investment has steadily declined over the last two decades, and is worth far more than aid flows.

But there is tremendous political resistance, both in the United States and the EU, to sharp cutbacks in the agricultural subsidies enjoyed by their farmers.

And there is still no agreement on how fast the poor countries would have to open up their markets even further, exposing their farmers to potentially devastating competition from subsidised Western farmers.

Steve Tibbett, of the Make Poverty History campaign, told the BBC News website: "Trade is the biggest issue, where there is the deepest unfairness- it is the root of the problem."

The G8 finance ministers communique was suitably vague on the details, although it called for a "timetable to eliminate all trade-distorting export subsidies in agriculture" and "special and differential treatment for developing countries."

This issue will not be resolved at Gleneagles, and prospects are now fading for a final deal in December when the Hong Kong meeting of world trade ministers take place.

However, the debt deal has produced some momentum, which will encourage both the development lobby and the UK government as they prepare for the more difficult debates that lie ahead.

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