In the mid-1990s a broad coalition of religious activists, ordinary citizens, and high-profile cultural figures undertook an unprecedented global campaign called Jubilee 2000 to convince the rich countries and the multilateral lending institutions to cancel the debt of the poorest developing countries by the year 2000. The idea of a jubilee year, during which all debt is forgiven, derives from Judeo-Christian tradition--not normally the source finance ministers and bank officials look to when setting lending policies. Nonetheless, several years of vigorous campaigning seemed to bear fruit. Officials in Europe, Japan, and the United States acknowledged that debt was placing a heavy and growing burden on the poorest countries, and many of these wealthy creditor countries agreed to cancel large portions of bilateral debt--that is, the debt owed to them as individual countries. In addition, the International Monetary Fund (IMF) and World Bank adopted a program designed to cancel portions of poor countries' multilateral debt and to bring their overall debt payments to a manageable level.

Problem solved? Hardly.

Today, developing countries still owe staggeringly high amounts of money to rich countries, and instead of gradually pulling themselves out of debt, many of these countries are falling further behind. The external debt of developing countries rose from US$1.4 trillion in 1990 to US$2.3 trillion in 2002. In the world's least-developed countries, the amount of external debt rose from US$137.3 billion in 2001 to US$144.9 billion in 2002. In 2002 those countries paid US$5.1 billion in interest on that debt, nearly one-third of the US$17.5 billion they received as official development assistance. Moreover, countries often undertake more borrowing in order to service existing debts, and in some cases the net flow of financial resources goes from poor countries to rich countries, instead of vice versa. For every dollar that Sub-Saharan African countries collectively receive in aid, they pay US$1.30 in debt service.

At a United Nations conference on hunger in Africa in July 2004, Jeffrey Sachs, a special adviser to UN Secretary General Kofi Annan, said, "The time has come to end this charade. The debts are unaffordable. No civilized country should try to collect the debts of people who are dying of hunger and disease and poverty."

Like Sachs, many advocacy groups and development experts are arguing that debt is hindering economic growth and exacerbating poverty in dozens of poor countries. With governments forced to pay 20 percent or more of their revenue to service their debts, they have little leeway for increasing spending on, for instance, education, health, and infrastructure. "A heavy public debt burden squeezes public fiscal space," says Sartaj Aziz, former finance minister of Pakistan. "Public spending gets cut, which leads to loss of public jobs, reductions in social services, and declines in subsidies for food and energy." Without drastic increases in social spending, poor countries have little hope of stimulating economic growth, fighting poverty, or improving the well-being of their citizens. In 2000 the international community committed itself to eight Millennium Development Goals (MDGs), including halving the rates of poverty and hunger by 2015, but developing-country debt is acknowledged to be a sizable obstacle to meeting them. Sentiment is rising that piecemeal efforts to solve the debt problem simply will not work.

Each country's story is somewhat different, but the broad outlines of the current debt crisis are similar for many poor countries. Much of the debt owed by developing countries dates to the 1970s, when commercial banks, awash in money deposited by oil producers, lent freely. Some of the loans to developing countries were used for domestic development projects that did little to meet countries' actual needs, or they ended up lining the pockets of domestic elites and dictators. At the same time, interest rates rose, and prices began to fall for the agricultural and mineral exports with which developing countries earned the foreign exchange to repay their debts. When developing countries began to have trouble repaying the interest, much less the principal, on their debts, the IMF and World Bank stepped in to reschedule or refinance the loans. They gave countries more time to repay or more loans with which to pay off the original loans. IMF and World Bank involvement came with strict conditions concerning the policies debtor countries had to follow to achieve macroeconomic stability, but in the end countries' ability to stimulate economic growth or increase exports showed no significant improvement. In the meantime the debt continued to mount.

In 1996 the IMF and World Bank began the Heavily Indebted Poor Countries (HIPC) Initiative, which offered 38 low-income countries, mostly in Sub-Saharan Africa, an opportunity for debt relief. In 1999, partly in response to pressure from debt relief advocacy groups like Jubilee 2000, the HIPC initiative was enhanced to provide deeper and faster debt relief to more countries.

Under the HIPC initiative a heavily indebted poor country is deemed eligible for the program's debt relief if it shows a good track record of economic stabilization, public sector reform, and public spending on health, education, and pro-poor growth. When a country meets these requirements, it reaches what is known as the "decision point" and is granted interim debt relief.

The point of HIPC is not only to reduce a country's debt burden, but also to ensure that the money that would have been used for debt service is directed to anti-poverty policies and programs instead. After the decision point, therefore, a HIPC country must continue to demonstrate sound economic management, promise to implement key reforms, and adopt and implement a poverty reduction strategy paper (PRSP) for one year. The PRSP, which spells out a set of policies for reducing poverty, is developed through consultations among the IMF and World Bank, the country's government, and community groups in the country. When a country satisfies this second set of requirements, it reaches the "completion point," and the debt relief becomes irrevocable.

According to the World Bank, 27 countries have qualified for debt relief of more than US$54 billion, to be given over time, under HIPC. Thirteen countries have passed the decision point, and 14 have passed the completion point. And indeed, debt relief has freed up substantial resources for these countries. In Burkina Faso annual debt service fell from US$60 million in 1998 to US$24 million in 2002; in Madagascar, from US$166 million to US$68 million; and in Mauritania, from US$88 million to US$53 million.

Critics of the very idea of debt relief often fear that freed-up resources will be redirected to military spending or other unproductive sectors, but in fact the HIPC countries have increased their spending on social programs and poverty reduction. In 1998 Cameroon spent nearly twice as much on debt service (US$401 million) as it did on education (US$218 million), but by 2002 education spending (US$312 million) had surpassed debt service (US$267 million), and health spending had more than doubled. In the 23 African countries that are getting debt relief under HIPC, education spending has risen by as much as 55 percent and health spending is not far behind. The World Bank reports that Ghana, for example, used freed-up funds to construct 509 new classroom blocks for basic education, helped provide microcredit to 43,000 farmers, and funded hundreds of sanitation and water projects. Senegal developed community-based health care services.

Debt relief activists are far from satisfied, however, for several reasons. First, HIPC has offered only partial debt relief. It reduces a country's debt to a level deemed sustainable by the IMF and World Bank--that is, total debt of not more than 150 percent of the value of exports--but it does not ensure that debt will remain sustainable. "Sustainability depends on the country's economic performance," says Susanna Mitchell, a research associate at the New Economic Foundation, a nongovernmental organization (NGO) in the United Kingdom. "The World Bank's assumptions about this have been wildly optimistic." So, if a country's export revenues fall, it is soon back in a position of unsustainability. Uganda, for instance, was the first country to pass the completion point, but its ratio of debt to exports continued to rise even after it received final debt relief, mainly because world prices for coffee, an important Ugandan export, plummeted when Viet Nam substantially increased its coffee output.

Second, the HIPC process is slow--intentionally so, to allow countries to make and sustain the required policy reforms. According to the World Bank, preparing PRSPs can take a long time, and getting reforms right is more important than rushing to permanent debt relief. But critics argue that this lengthy process just delays or prevents desperately poor countries from gaining all the benefits of debt relief. "From decision point to completion point takes about two years, and during that time the debt is not canceled," says Mitchell. "Even in the best possible scenario, it takes a long time, and if anything goes wrong, it takes still longer."

Third, some countries claim that the conditions imposed as part of the HIPC process are onerous, even counterproductive. Jack Jones Zulu, a policy analyst with Jubilee-Zambia, argues that for Zambia to move toward the HIPC completion point and get irrevocable debt relief, it has been required to establish user fees for hospitals and schools and to privatize the national bank, telephone company, and electricity company and says that these moves have resulted in the loss of thousands of jobs. "Zambians are not against privatization and user fees," says Zulu. "These policies are fine if the population is economically empowered. But people have no money. These policies are not in touch with the reality on the ground."

Fourth, other poor countries face enormous debt burdens but do not meet the criteria for participation in HIPC and so are not being considered for debt relief. Ecuador and Peru, for instance, face serious debt troubles but are not participants in HIPC.

People hold unrealistic expectations for what HIPC can do, says Martin Gilman, head of the HIPC unit of the IMF. "People see it as a magic solution to the problems of poor countries, but it was never intended to be that. It lays the basis for reducing the debt overhang, if good policies are followed and the international environment is relatively benign. And it's providing a lot of debt relief to 27 poor countries."

The root of the problem, say some critics, is that the HIPC initiative was designed by and for the real creditors--the rich country members of the IMF and World Bank. "They developed rules and formulae to determine the amount of debt relief based in part on their own willingness to pay, rather than on poor countries' long-term needs for health, education, roads, training, and institution building," says Nancy Birdsall, president of the Center for Global Development.

There is no shortage of proposed solutions. The IMF and the World Bank themselves have recognized the potential for a debt crisis to arise all over again and are working to develop a long-term debt sustainability framework to help prevent this. The framework would encourage countries to set aside money to help protect them from economic shocks over which they have no control and would offer countries at risk of debt problems new funding in the form of grants or highly concessional loans. "It tries to recognize in advance which countries have a high risk of debt distress and then tries to tailor the terms of the new resources in a way that will ensure that that risk of debt distress is kept within reasonable bounds," said Vikram Nehru, director of the World Bank's newly created Debt Department, in a May 2004 online forum. "We don't want to have yet another HIPC initiative where countries get into debt distress and their debts have to be reduced at very high cost."

Alternatively, Nancy Birdsall and her colleague John Williamson, coauthors of the book Delivering on Debt Relief, have proposed a debt insurance scheme, under which countries that are committed to sound economic and human development policies would be protected for as long as 10 years against unsustainable debt that might arise because of weather and price fluctuations.

The NGO Jubilee Research, a successor organization to the original Jubilee 2000 organization, has proposed a Jubilee Framework, under which debt relief would be determined case-by-case in an insolvency court overseen by the UN secretary general. Such an approach would force all parties to bear responsibility for the debt problem. "In the absence of an international solvency framework, creditors make the loans, set the rates and terms, and cancel or collect the debt without any regard to the human rights of the debtor," says Ann Pettifor, formerly head of Jubilee 2000 and now a research associate at the New Economic Foundation. "Debt is the creation of both the creditor and the debtor, and so both should bear the burden of losses."

For now, to help pull poor countries out of their current indebtedness, Jubilee Research and many other NGOs, as well as the leaders of many poor countries, are calling for cancellation of all outstanding debt. It is an idea that would have seemed farfetched even a few years ago, but it has recently gained powerful new allies.

Any decision to adopt 100 percent debt cancellation depends not on autonomous steps taken by IMF and World Bank staff, but on a commitment to do so by the most powerful members on those organizations' executive boards. Voting power is determined by financial shares held in the IMF and World Bank, and the rich countries who are members of the Group of Eight (G-8) hold most of the shares, with the United States by far the largest shareholder.

In September 2004 both the United States and the United Kingdom advanced plans for debt cancellation. The Bush Administration announced its support for canceling the debt of the HIPC countries, apparently to help build international support for canceling a large share of Iraq's debt. The U.S. proposal offers no new funding and would rely on the IMF and World Bank to cover the losses with existing resources. Meanwhile, Gordon Brown, the chancellor of the Exchequer in the UK, announced that his country would pay its share of the debt service that the poorest countries, not just those participating in HIPC, owe to the World Bank. To cover the amount owed to the IMF, he called for the IMF to revalue or sell some of its gold. At the G-8 meeting last October, however, the finance ministers discussed debt cancellation but came to no agreement.

Is debt cancellation a realistic prospect? Some observers are hopeful for progress in 2005, when the United Kingdom, which has pledged to keep debt relief high on the international agenda, will hold the presidency of both the G-8 and the European Union. The issue of additional funding may be a sticking point. Germany, for example, is facing budgetary constraints of its own.

Debt relief advocates argue, however, that for poor countries to actually make headway toward meeting the Millennium Development Goals, debt cancellation is just a first step. "Debt cancellation is a critical way to mobilize resources," says Neil Watkins of Oxfam. "It is a necessary precondition for meeting the MDGs--we don't see how you can do it without debt cancellation." But the resources freed up by debt cancellation alone, he adds, fall far short of the amount needed to pull nations out of poverty and hunger. Poor countries will need a greater commitment of aid as well.

Research at IFPRI has shown that devoting resources to strengthening agriculture and rural development in poor countries, whose economies are heavily dependent on agriculture, can go a long way toward helping meet the MDGs. "Heavy debt has a negative impact on public investment and therefore on economic growth," says IFPRI senior research fellow Shenggen Fan. "Since public investments in roads, agriculture, and education have the largest growth impact, as well as poverty reduction impact, any reforms or adjustments should not reduce public investments in these areas. In fact, for many developing countries to achieve the MDGs, they must increase public spending in these pro-growth and pro-poor areas."

With or without debt cancellation, part of the burden is on developing countries themselves to create an environment that both attracts investment and uses these resources to generate high returns for poor people. If domestic elites siphon off the resources freed up by debt relief, or if corruption, conflict, and poor governance continue to cause capital flight from poor countries, it will remain difficult for them to mobilize the resources necessary to improve the livelihoods of their people.