For several weeks leading up to the Group of Eight (G8) summit at Gleneagles, Scotland, organizers around the world tried to raise awareness about African poverty and called for debt relief and aid to Africa. Their efforts were not in vain. On June 11th, the G8 finance ministers reached an agreement to forgive the entire $40 billion of debt owed by eighteen of the Highly Indebted Poor Countries (HIPC). In addition to that, they agreed to forgive another $15 billion in debt payments from the twenty remaining HIPC countries, assuming that they meet certain requirements for fighting corruption and improving their infrastructure. This was followed up by a pledge at the G8 summit to give $50 billion of additional aid by 2010, and the EU members of the summit committed to giving 0.7% of their GDP to aid programs by 2015.

While this is a big victory for the pro-aid groups, the question remains as to whether debt relief is a viable solution or not. All too often the greatest intentions inadvertently lead to harm. On the surface, one would intuitively think that international aid and debt relief could only help people, but the reality is often different. Any law, any public policy, needs to be looked at carefully before being enacted, and debt relief is no different. What the G8 considers to be charity could, in fact, be making the problem worse.

The most powerful argument against debt relief is that it will encourage irresponsible spending practices. This is not the first time that debt has been forgiven to African nations, after all. Nonetheless, much of Africa remains impoverished. If the industrialized countries continue to forgive debt, they are giving the leaders of Africa a perverse incentive to take out unsustainable loans. Only when world leaders hold poor nations accountable for their actions, will they decide to change their behavior. Imagine a spoiled rich kid, whose father keeps getting him out of trouble. What incentive does he have to act responsibly?

Obviously, there are strong arguments for debt relief as well. The burden of repayment falls on the people of Africa, through taxation. This money could be used to help their economy, but instead it is going into the pockets of the international moneylenders. (Of course, this view is attractive only if you believe that the debt should fall onto the shoulders of the citizens in First World countries, whose governmental institutions are doing the majority of the lending funded by taxation.) By alleviating debt, this money can be refocused into areas that need improvement. Prior debt relief efforts have resulted in increased heath care and schooling, as well as critical infrastructure building. At the same time, however, debt relief has also been shown to increase a country’s military expenditures. It is another unintended, but very real, consequence, and many people are wary of this.

For these reasons, debt relief remains a complicated question. More importantly, however, these reasons ignore the much deeper problem in Africa – political instability. Because the region is so unstable, investors are highly unlikely to put their money there. If they are going to invest, they will offset their risk by charging higher rates of interest, making the loans harder to pay off. The outflow of capital is a major problem in Africa, with overall rates around 40% (compared to about 2% in Asia, another developing part of the world). Dictators who receive aid funds or take out loans often invest this money personally in First World countries, instead of using it to invest in their own nation, or to provide critical infrastructure and growth. Until Africa looks like a good investment opportunity, there will be a serious lack of reliable funding.

One of the essential requirements for the creation of a monetary system is a low overall risk factor. Risk is increased with political instability, or inadequate legal codes. Because of Africa’s underlying problems, it is going to be difficult to encourage investment, or to give out loans. If the loans cannot be repaid, or there is a high chance of default, then interest rates continue to rise and the cycle continues. To Americans, it seems almost natural to live with debts, because in our relatively risk-free environment, we can be assured of a steady income. Even if we go bankrupt, our government assumes the debt, and takes our paychecks until we have returned the money. There is not much risk of the government being overthrown, or of high rates of mortality and unemployment, and other such things.

Debt relief will always remain a short-term solution to a far deeper, far larger, problem. Instead of giving out aid, or relieving debt, the G8 should be working with Africa to develop stability and encourage good legal systems. Some leaders do recognize this, and attempt to work towards it, but the protesters help to drown out real solutions. Kenyan economist James Shikwati sums it up best: “Unfortunately, the Europeans' devastating urge to do good can no longer be countered with reason.” Until the much more pressing issues in Africa are fixed, all of these calls for debt relief are only so much noise.