Conversion

Last April, Speaker Jose de Venecia wrote UN Secretary General Kofi Annan, proposing a global effort to simultaneously relieve the heavily indebted countries of their servicing load and propel the efforts of these same countries to achieve the UN Millennium Development Goals (MDG).

The central element of the MDG is the reduction of poverty levels to half what they are at present by year 2015. This is an ambitious global program and can have reasonable chance of meeting its targets only if the heavily indebted countries benefit from some relief.

Recently, the Group of 8 wealthy countries agreed to a package that will significantly reduce the debt load of the poorest countries of Africa. This is an important first step towards meeting the MDG targets.

The de Venecia proposal is typically bold, visionary and probably workable if this is done as a global effort participated in by Paris Club, the G8 governments, the multilateral financing institutions and the large international banks. It is a proposal that will take the wind out of reckless but repeated demands for debt repudiation.

Already, the de Venecia proposal has earned the endorsement of Italian Prime Minister Silvio Berlusconi. The prime minister indicated that his government will support the proposed debt conversion scheme once it is brought before the Paris Club.

The essential element of the de Venecia proposal is the conversion of 50 percent of the outstanding debt of the 100 highly indebted countries into a financing program for MDG projects in the developing world. Instead of an outflow of debt service funds from the developing countries, the equivalent amount will be converted into equity in MDG-related instruments. The creditor banks and governments will own the equity resulting from the conversion – although the developing countries, when they can afford it, could buy back the invested equity.

The fund will be used for reforestation, mass housing, irrigation and post-harvest facilities, hospitals and health care programs, schools and computers, clean water projects, infrastructure, ecotourism and other wealth creating projects such as mining, land reclamation and the development of natural resources.

This massive conversion will boost investments in developing countries, address vital social needs, and create engines for expanded wealth creation. It will drive up growth rates, create jobs and develop key economic sectors with high multiplier effects. The net result will be to reduce unemployment, soak up poverty and bring down misery levels in the developing societies.

This is an ambitious program that is staggering in its dimensions. It requires a lot of thinking out-of-the-box.

Above all, it demands from the developing economies a high absorptive capacity for huge investment inflows from the converted debt. That absorptive capacity, in turn, requires high quality administrative institutions in the beneficiary countries.

That might be the weakest point in this ambitious plan.

Many of the highly indebted countries are in that predicament precisely because they have weak institutions of governance. These are weak institutions that could not raise revenues properly, are prone to losing money to corruption and have little capacity to defy populist demands and maintain policy discipline.

Even if such an ambitious debt conversion program could take off, the benefits will not be evenly spread among the indebted societies.

Those countries with higher quality institutions will be more attractive to creditors to invest in by converting debt to equity. They could move quickly, devise plans, open opportunities for investments attractive to the creditor banks. They could rally bureaucratic support for investment priorities and rely on a well-trained cadre of bureaucrats and entrepreneurs for execution of the plans.

Those countries with less developed institutions of governance will not be attractive to debt conversions. Few would want their secure debt paper to be converted to equities in companies that might lose money either due to managerial incompetence, bureaucratic inertia or plain corruption.

In the face of the political turbulence we now find ourselves in, the de Venecia proposal when implemented might, ironically benefit us the least. Our institutions, underdeveloped as they are, today seem even shakier. They are easily caught in the wild tides of highly emotional publics.

Our economic policy architecture is often shafted by immense populist demands. When the challenges loom large, we depose presidents habitually rather than focus on strengthening institutions.

In a word, if we are not credible to the usual flow in investments, we will not be credible to creditor banks who must cooperate in transferring secured debt to unsecured equities.

Still, it must be said that the de Venecia plan is worth exploring further.

It is an impressive, intellectually creative plan where all the players in the debt problem could agree on a win-win formula. The creditors will not lose the value of the money they lent and could even improve their earnings by investing in profitable, well-run companies in the developing world. The indebted countries, trapped in tight budgets and high debt service that prevents them from making vital economic investments that will benefit the people, could now tap investment funds to realize the MDG targets.

This is a plan that does not require charity on the part of creditors and disastrous debt repudiation options on the part of the borrower countries.

The de Venecia plan will be discussed extensively in the major forums of the developed world, the creditor banks and the multilateral institutions. The issues I raise here will probably be raised there as well.

We need to discuss our own opportunities in this plan as one of the most heavily indebted countries on earth. More than that, we need to discuss the actions we have to undertake earlier on – such as the task of institutional modernization – to take full advantage of the promising potentials of this innovative plan.

But then, we are too distracted by destructive politicking to even do that. Indeed, too distracted by power plays to even bother to read the de Venecia plan properly.