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Major Developments Since The Birmingham Summit

As with last year, debt relief for the "heavily indebted poor countries" (HIPC) has remained a central theme leading up to the Köln Summit. It was a main topic of discussion at the Commonwealth Finance Ministerial in September 1998, as well as at a number of recent G8 Finance Ministerial meetings. At least Canada and Japan have taken unilateral steps to forgive outstanding loans to the HIPC countries, and the Clinton Administration's February 1999 budget proposal to Congress requested further funds for debt relief for fiscal year 1999-2000. Most G8 countries have also established proposals, to be considered in Köln, that seek to reform the World Bank / IMF HIPC Debt Initiative and to expand bilateral debt relief as well.

Despite reports that 1997 saw the lowest level of official development assistance (ODA) spending since 1981, there are signs that this downward trend may be changing. In 1998, new governments in both the United Kingdom (UK) and Germany promised to stop the decline in their respective ODA budgets, and Canada will increase aid spending by more than $100 million in 1999/2000. Although difficult economic times in Japan are likely to prevent it from increasing its ODA expenditures, Prime Minister Keizo Obuchi's government has given billions of dollars in aid to countries affected by the Asian crisis. Japan has also announced $776 million in spending for health and education projects in Africa.

The Discussions At The Köln Summit

Debt relief has gained renewed prominence in recent years. Total debt owed by the 41 HIPC countries is now $200 billion, and there is concern that repaying this money is taking resources away from vital areas such as education and health care, amongst others. Furthermore, a highly public campaign by a non-governmental organization called Jubilee 2000 has gained the support of high profile former politicians, religious leaders and entertainers, and has put debt forgiveness squarely and openly on the public agenda.

Discussions on the subject at Köln will focus on both bilateral and multilateral initiatives. Bilaterally, Canada, Germany, the UK, and the US have proposed forgiving 100% of ODA debt and 90-100% of Paris Club debt and trade credits. There is also significant support for providing all future ODA on a grant basis rather than as loans. Multilaterally, G8 discussions on reforms to the HIPC Initiative have focused on reducing the time it takes to receive debt relief from six years to three years, increasing funding for the HIPC Trust Fund and the IMF's Enhanced Structural Adjustment Facility, expanding the number of countries that are defined as a HIPC, and financing these measures through the sale of IMF gold reserves.

The consensus that has developed on many of these initiatives makes progress at Köln very likely. Some countries, including Canada and Japan, have already implemented some of the bilateral proposals. Although a solid consensus is lacking in many of the multilateral initiatives, all countries have given at least tentative support to the most controversial issue, namely the selling of up to 10 million ounces of the IMF's gold reserves to finance expanded debt relief. In the past, Italy, and the previous German government were staunchly opposed to such sales.

Opposition to the sale of IMF reserves has been voiced by the World Gold Council and others who feel that a selloff will force gold prices down, thus hurting gold producing countries in both the developed and developing world. Nonetheless, in April, Switzerland de-linked the Swiss franc from gold and in May, the UK decided to sell 58% of its 715 tonnes of gold reserves despite the predictable impact that these moves would have on gold prices and producers. The decreasing importance of gold as a monetary instrument, as demonstrated by these and other actions, increases the likelihood that the G8 leaders will approve the selling of IMF reserves. Therefore, with such funding likely, progress on expanded debt relief is very possible.

Official development assistance levels will also be discussed at Köln. The UK would like to see a commitment made to increasing global ODA spending to $60 billion. The establishing of such specific targets in Köln, however, is unlikely. Countries such as Canada and the US are just beginning to achieve budgetary surpluses and do not want to be tied to spending commitments that could cause them to slip back into deficits. Japan, on the other hand, is in the process of expanding its already massive debt in an effort to revive its economy. Therefore, it will also oppose stringent spending targets for aid. As a result, the leaders are likely to support only a vague commitment to ensure that a "significant" or "appropriate" level of aid will be provided.

Integrating developing countries into the world trading system will probably be discussed, if only peripherally in the context of broader talks on multilateral trade. The 1997 Denver Summit, trade liberalization talks within APEC and the Americas, US efforts to liberalize trade with Africa, and upcoming negotiations to renew the Lome Convention between the European Union and many African, Pacific Rim and Caribbean countries have put trade liberalization near the forefront of relations between developed and developing countries. At Köln, the subject will likely come up in the context of discussions on the upcoming WTO round of trade talks. It is unlikely, however, that anything more specific than a general recognition of the need to consider the special circumstances of developing countries in such talks will be agreed to. Anything more specific may undermine the developed world's bargaining position during the negotiations.

Finally, the leaders will likely discuss combating public and private sector corruption. It was discussed as a central issue at the Commonwealth Finance Ministers' meeting last September, and, along with other policy areas, it is a central pre-requisite to the receipt of debt relief under the HIPC debt initiative. World Bank President, James Wolfensohn, has also indicated that clean government and fighting corruption are to be central considerations in the Bank's future lending practices. Despite the continued importance of the issue, however, there do not seem to be any new initiatives in the making at Köln. The leaders will likely just re-state the importance of overcoming corruption if development is to proceed, and express their continued commitment to focussing development aid on those countries that have made progress in reducing corruption.

Compiled by: Jason Krausert and Mike Youash
June 1999