It is gratifying, even a source of some pride, that the UK has taken a lead within the G8 on issues of debt relief and aid and, through the African Commission, is spearheading the international effort to mobilise external support for African development.

I would love to believe that the G8′s modest plan to cut African indebtedness was a “historic event” as the Chancellor claims. I recall working with the late Lord (Harold) Lever on the report on indebtedness to Commonwealth Finance, and Prime, Ministers 20 years ago which was amongst the first to analyse the debilitating effect of low income country debt to official creditors (as well as to banks) and which helped pave the way for a succession of initiatives by Conservative and Labour Chancellors. Each was hailed as ‘historic’ at the time, particularly the HIPC initiative in 1995, which first enabled multilateral debt to be rescheduled or cancelled: that is debt owed from past loans by the World Bank and the IMF and regional development banks.

This latest initiative by the G8 Finance Ministers (in truth, the G7 since Russia is scarcely involved) tries to take forward action on this problem which has lingered and grown as African countries have become more dependent on multilateral institutions. There has been a reluctance by some donors to jeopardise the lending capacity of the IMF, World Bank and regional development banks and not to undermine the creditworthiness of the World Bank in particular since it depends on its AAA rating to raise fresh funds from the markets. Also much of the multilateral debt is on highly concessional terms and does not necessarily present servicing problems in the same ways as commercial debt or export credit debt, which is virtually commercial. Despite these continuing concerns, the large and growing amount of multilateral debt and the sheer scale of African debt problems has forced the issue to the top of the agenda.

As a result of the G8 agreement $40bn debt for 18 countries is to be written off with another 20 countries to benefit in due course. Analysis has suggested that this will save Africa $1.25bn pa in interest payments of which $100m is from the UK. To put these (‘historic’) numbers in perspective, the African Commission is looking for $25bn a year in additional resources for Africa.

Even the $1.25bn estimate may be an optimistic statement of what has been agreed. The IMF will receive no additional funding to finance its write off and will utilise money from past gold sales; clearly, therefore, its future lending will be affected. The World Bank and regional banks will receive compensation for their write offs but there is no guarantee that donor countries will not switch funds from their bilateral programmes. Partly to meet these concerns about lack of additionality, the G8 have pledged increase sums of aid, mainly from Western Europe but these promises are, frankly, not believable in most cases.

The debt relief agreement is, in its own terms, a significant achievement and it will make a difference to some African countries which qualify. There are, however, some difficulties in the HIPC programme, in terms of demanding qualifications. Nor will it, as some commentators suggest, free African governments from the shackles of debt so that they can finance the ‘millennium goals’. Domestic debt (as opposed to external debt) is unaffected and governments which have the capacity to tap banks and embroyonic capital markets will still borrow, if not in convertible currencies. Moreover, two of the main advantages of debt relief from the recipient standpoint are not those which are advertised to idealistic debt campaigners. The first is that it improves the national ‘balance sheet’ and enhances the credibility of residual (mainly private) external claims, making the country more attractive to new commercial lending and foreign investment. In some cases, additional debt is necessary and desirable, notably trade credit debt to facilitate trade. The second consequence is that it promotes ‘free’ foreign exchange less tied to donor preferences than new aid. For this reason debt relief is, in practice, very firmly tied by donors to policy reform, which is often unpopular and difficult to implement.

The debt relief and aid initiative are part, but only a modest part, of a broader approach to African poverty reduction. Trade is more important but there is little sign of the French and Americans giving up damaging export subsidies, as for cotton or sugar, or of the EU, US or Japan opening their markets to African agricultural exports. Whenever enterprising African farmers – from Kenya to Senegal – develop a new market in fruit and vegetables, tight restrictions are applied. Domestic policy reform and good governance are crucial too but much ink has been spilt in analysis and advocacy of reforms which never happen or never last long. There are, however, encouraging examples of good practice – in Senegal, Ghana, Mozambique, Uganda and, for longer, in Botswana; South Africa has potential for leadership (enhanced by President Mbeki’s stand against his allegedly corrupt deputy); Nigeria’s resource wealth, recent democracy and talented, entrepreneurial middle class must surely combine, soon, to produce something better.

Forty years ago arguably the world’s worst ‘bread basket’ case was India (and East Pakistan, now Bangladesh) and the greatest suffering from hunger and poverty was found in the wake of the murderous madness of Mao’s Great Leap Forward. Yet these countries have since seen major advances in poverty reduction. The post independence Kenya in which I then worked as a young Treasury official was, like its neighbours Tanzania, Uganda and Zambia, by contrast with much of Asia, a place of hope and ambition, and well endowed by nature. There is no fundamental reason why Africa, any more than India or China, should remain stuck in hopeless despair. A modicum of competent, conflict-free government; economic policies geared more towards development and less to rent-seeking and organised theft; as well as a liberal trading system and generous aid flows: these could transform Africa, remarkably quickly.