Can we swap debt for education?

by Christopher Shaw and Neil Saravanamuttoo

The premise that education is a central pillar of development is widely accepted. Yet what hope is there for universal primary education when African treasuries are crippled by international debt repayments and facing pressure from all segments of their societies for scarce available resources?

One creative solution that deserves attention is the 'debt-for-social welfare improvement swap'. There has been a recent history of debt-for-environment swaps, in which commercial debts were bought on the secondary market and retired in exchange for preserving lands as conservation areas. In addition, there has been a handful of debt-for-development swaps in which debt relief prompted improvements in the health and education sectors. But how extensively can debt-for-education swaps be used?

The push for greater enrolment in African primary education is not a new concept. Between 1970 and 1980, primary enrolment increased from 40% to 79% of the age group although the figure has declined since then. As the graph shows, by 1990, only 72% of African children of the relevant age group were in primary school. It comes as no surprise that this decline has corresponded to falling real levels of spending on education. Between 1980 and 1985, sub-Saharan African spending on education, as a proportion of GNP, actually decreased from 4.5% to 3.5%. For many African countries, this spending was still hovering around 3.5% in 1990 - far short of the figure of 5% of GNP deemed necessary for a sustainable education system. These cutbacks occurred as the debt crisis was taking hold in Africa. In the 1980-90 period, debt service charges increased from 3% of GNP to over 6%. Clearly, as the debt-crisis continues to hit sub-Saharan Africa, education budgets suffer accordingly. And with continuing high levels of debt servicing expected in the 1990s, there appears little prospect that education budgets will be able to keep pace with demographic pressures, let alone increase enough to reach the goal of universal primary education.

Graph: Rising debts and falling enrolments in sub-Saharan Africa

Education spending seen as 'non-productive'

If high debt servicing is crippling African education, then would simply cancelling the debt be enough to get all children into school? Initial investigations suggest not. Cancelling debt will free resources for African governments but where these resources are spent is another matter. Sadly, education is not always given as high a priority as it deserves and any 'windfall gains' from debt relief are likely to be directed elsewhere. Part of the difficulty is the perception among macroeconomic planners that education is a consumption good, rather than an essential investment in human capital. Because the education sector is considered 'non-productive' in that it is non-traceable, does not generate revenue and does not improve the balance of payments or the government budget deficit, it is viewed as costly social welfare spending. This ignores the fact that there is no example of significant economic growth occurring in an illiterate society. It also ignores the broader approach to development in which social improvements, poverty reduction and economic growth go hand in hand. Education and health lay the foundations for a productive economy. Although the logic of this argument is clear, it is still often overlooked. Thus, health and education are likely to be given a low priority for any funds freed up through debt relief. If increased primary enrolment is to be achieved, the funds made available through debt relief will have to be specially earmarked. A debt-for-social welfare improvement swap presents itself as one of the most effective means for channeling this gain into education.

Proposing a debt-for-education swap, however, opens up another debate. With debt relief, foreign exchange is freed up. Should the new funds then be spent on import-intense segments of the education budget? In addition, will new available funds be captured by politically powerful constituencies within the education sector, such as universities? In other words, will a debt-for-education swap actually be effective in helping to improve basic education?

Part of the answer lies in the actual mechanism of the swap. Drawing on the experience of previous debt-for-environment swaps, essentially, an interested foreign third party agrees to buy some proportion of a developing nation's debt - to date almost always commercial debt - on the secondary market at a discounted price. The debt is handed over to the recipient nation's central bank to be retired in exchange for providing local currency for new education spending on an agreed programme. Local institutions and non-govemmental organisations then play a lead role in coordinating how this local currency will be spent, along the lines of the programme.

Problems

Of course, this process is not without its problems. First, once a portion of the debt has been retired, how do we guarantee that money will be allocated in present and future years for education? Will a debt-for-education swap hamper a more natural expansion of education budgets? This suggests that a firm agreement must be in place beforehand between donor and recipient to guarantee that the swap is carried out in good faith. Second, an arbitrary injection of cash into an economy will tend to fuel inflation.

However, if the proceeds are distributed over many years then the risk of inflation is kept to a minimum. Third, debt-forenvironment swaps have been accused of not making a significant impact on the size of the debt. By 1993, these swaps had resulted in the retirement of debt to the value of only $750 million out of a total Third World debt of $1400 billion (less than 0.05%). Nevertheless, specific projects can make significant improvements in the field of education while also making valuable reductions in certain African debts.

We must remember that although in absolute terms the African debt is not overwhelming, the relative size of sub-Saharan African debt is enormous. It accounts for no less than 109% of sub-Saharan Africa's total GNP, compared to the Latin American figure of 38%. This means that retiring any portion of African debt will have considerable effect. However, it is also worth noting that only 11% of sub-Saharan Africa's foreign debt is owed to private banks. The comparable figure for Latin America is 35%. Since almost all of the debt swaps previously undertaken have involved retiring commercial debt this presents a problem of how much scope exists for African debt swaps. Alternately, it suggests a need for governmental and inter-governmental bodies to consider adopting debt swaps as official policy.

Despite these drawbacks, there is a very real appeal for debt-for-education swaps. First, we avoid the problem in educational aid of a mismatch between the type of funds available and the type of funds needed. At basic educational levels, most spending is in local currency - principally on salaries (which accounts for more than 80% of the basic education budgets of many African countries). Only small amounts are spent in foreign exchange. Many development and donor agencies have statutes that preclude the use of their foreign exchange funds for supporting local currency expenditures. Indeed, some agencies finance exclusively the foreign exchange costs of an education project, leaving all the local currency costs to be borne by the government. Furthermore, almost all agencies have limits on the use of such funds for supporting salaries of national civil servants. Given the low foreign exchange content of education sector expenditures, even for capital investments, and given also the substantial recurrent cost implications of such capital investments (principally requiring local currency), current development agency and donor financing restrictions run contrary to the needs of the education sector. Hence, aid donors find their budgets skewed towards providing technical assistance and overseas scholarships and away from supporting a sustainable education system. One of the real attractions of a debt-for-education swap is, therefore, that the problem of inappropriate funds is avoided, while at the same time, donors help to build the basis for universal primary schooling.

Potential gains

Finally, debt-for-education swaps have an appeal because they offer widespread potential gains. Donor agencies raise their profile by simultaneously addressing two critical issues, African politicians and central banks are able to retire their debts at a discount, education ministries gain command of greater resources and the general public gets an improved education system. This is not to say that everyone will be in favour of such sweeping changes, although debt-foreducation swaps hold the potential for a genuine 'win-win' outcome.

The debate on debt-for-social welfare improvement swaps was opened a year after the first debt-for-environment transaction took place in 1987. While the number of swaps in the latter category has increased, there have been few concrete examples of similar arrangements in the health and education sectors. This is partly because the analytical debate on debt-forsocial welfare improvement swaps has been largely undeveloped. Nevertheless, this is an original idea that deserves further attention and certainly represents one of the more innovative approaches to financing a comprehensive primary education system in sub-Saharan Africa.

C.S. & N.S.