13.2 International debt and international aid

Question 1

is debt becoming a problem

Answer 1

• between 1995 and 2010 debt-service ratio of LICs fell from 17.2% to 4.8%
• because of increased export earnings and debt relief from private creditors such as HIPC and MDRI
• COVID has also played a major role as countries decreased exports, worried they may default on debt
• total external debt stocks owed by LICs increased by 437 billion dollars over 12 months
• LICs have to use a high proportion of income to service debts instead of health care, education and other development
• international debt crisis: problem that has been around since the 70s due to Petrodollars and Cash Crop rises followed by Recession

Question 2

Odious debt:

Answer 2

• Odious debt: loans paid to dictators and corrupt officials, as well as Colonialism continue to have a significant legacy on this issue

Question 3

what is debt relief

Answer 3

• The Paris Club set up in 1956 dedicated debt-relief, aiding Argentina to renegotiate some of its bilateral debts
• many of early attempts to deal with debt were ineffective in many cases self-serving
• from the 1990s onwards these attempts became more co-ordinated on a global level
• HIPC: heavily indebted poor countries initiative
• MDRI: multilateral debt relief initiative
• limited number of countries involved

Question 4

HIPC: heavily indebted poor countries initiative

Answer 4

• a group of 39 developing countries with high levels of poverty and debt overhang which are eligible for special assistance from the International Monetary Fund (IMF) and the World Bank.
  -All multilateral, official bilateral and commercial creditors
• It provides debt relief and low-interest loans to cancel or reduce external debt repayments to sustainable levels, meaning they can repay debts in a timely fashion in the future.
• To ensure deep, broad and fast debt relief and thereby contribute toward growth, poverty reduction, and debt sustainability in the poorest, most heavily indebted countries.
• before:eligible countries sent more on debt serving than education and health combines, now such spending is around 5 times the amount of debt-service repayments

Question 5

MDRI: multilateral debt relief initiative

Answer 5

• To provide additional support to HIPCs
  to reach the MDGs.
• helped 37 countries
• Countries reach the completion point if they maintain macroeconomic stability under an ECF-supported program, carry out key structural and social reforms, and satisfactorily implement for a minimum of one year Poverty Reduction Strategy. Debt relief is then provided
  irrevocably by the country’s creditors. MDRI relief is provided upon reaching the completion point.
• IMF, IDA and AfDB fully relieve the debt of countries which attain termination point — the step where a country is eligible to receive total and irrevocable relief of its debt
• The difference with HIPC consists of MDRI not covering all creditors
• under MDRI, IMF also provided debt relief to non-HIPC countries whose per capita income did not exceed $380

Question 6

international aid

Answer 6

• aid is assistance in the form of grants or loans
• grants/loans at below market rates
• often needed due to
• foreign exchange currency gap: lack hard currency to buy imports, economy replies on small range of exports
• savings gap: pop pressures and other drains on expenditure prevent the accumulation of enough capital to invest in industry and infrastructure
• technical gap: lack of skills for development, or enough capital to invest in development
  -natural or economic disaster

Question 7

types of aid

Answer 7

• official government aid/ voluntary aid
• tied aid/untied aid
• multilateral/bilateral aid
• top-down strategies/bottom up strategies
• short term emergency aid/long term development aid
• financial aid/humanitarian assistance

Question 8

bilateral aid vs multilateral aid

Answer 8

b:
- one government directly transfers money or other assets to a recipient country: Norway development aid to Brazil
-given by one country to a single other, amount is decided by the government of giving nation
- majority tied
- financial: funding government policies that aim to reduce poverty
- Technical co-operation: enhances knowledge, skills and technical expertise of the receiver
m:
- provided by several countries, organised by an international body such as the United Nations or World Bank
- collects funds from various contributing nations and executes the delivery of the aid: EU covid recovery fund
- UK donates 40% of their DFID budget to NGOs
- World Bank: loans to developing LICs for infrastructure

Question 9

tied vs untied aid

Answer 9

• t: stipulates that goods and services bought with it can only be purchased from the donor country or from a limited selection of countries
• donor country increases exports: economic
• donor country has historical links, or wishes to strengthen geopolitical interests and cultural ties: political
• May increase LIC costs if local supplies are cheaper, so value of aid is questionable as is aid altruism
• significant proportion of foreign aid is tied to purchase goods and services from donor country

Question 10

official government aid vs voluntary aid

Answer 10

• o: government aid designed to promote the economic development and welfare of developing countries, amount and who it is given to is decided by the government
  v:
• NGOs take a bottom-up approach, by directing money generated by charities at the needs of the poor, local communities and environments
• 3 functional roles: disaster relief, technical assistance, network and institution building
• Oxfam/ActionAid: collect money from individuals and organisations: increasing amount of government aid goes to NGOs

Question 11

top-down strategies vs bottom up strategies

Answer 11

-T: government of the developing country so that they can spend it on the projects that they need
-B: target the people most in need of the aid and help them directly, without any government interference

Question 12

short term relief emergency aid vs long term development aid

Answer 12

s:
- provides immediate support during or after a disaster such as famine or a tsunami
- Humanitarian relief raised for specific circumstances
- May come from bilateral sources and specific appeals by NGOs
- IOM Disaster Emergency Committee live appeal contributions: 2019 £650,000 to Yemen, East Africa, fleeing of Myanmar, Indonesian Tsunami appeals
l:
- designed to alleviate long-term, systematic issues, such as entrenched poverty, a continuous programme which aims to improve standards of living
- longer termed development programmes involving local communities
- Targets education and skills for sustainable development
- Does not include Foreign Development Investment; but can be in the form of grants and low interest loans
- food aid, programme aid, project aid, budget support, technical assistance, international research, intermediate technology

Question 13

financial aid/humanitarian assistance

Answer 13

f:
- repayable, funds provided to developing countries to spend in support of government policy and expenditure programmes whose objective is to reduce poverty
h:
- designed to save lives and alleviate suffering during and in the immediate aftermath of emergencies,
- it tends to be higher-profile than other types of aid, humanitarian efforts receive more private funding than most other types of aid- not repayable
- food aid, shelter, advice and medical care in humanitarian disasters

Question 14

WaterAid in Mali

Answer 14

• established in 1981, active in Mali since 2001
• pays for a school sanitation block for 150 pupils in India
• UK’s charity dedicated exclusively on provision of safe domestic water, sanitation and hygiene education to poorest people: crucial building blocks for development
• Mali: one of world’s poorest nations
• low rainfall, spreading desertification
• 65% desert/semi-desert, 11 million ppl lack safe water
• fully privatised water industry fails to provide to poorest urban and rural areas
• pilot scheme in slums surrounding capital: water and sanitation to poorest people
• objective is to demonstrate to government and donors that projects in slums can be successful
• financed construction of the area’s water network
• training locals, raising money for maintenance
• already significant improvements: takes generations to embed into culture
• reduce incidences of childhood diarrhoea by 95%
• a child dies every 15 seconds from diseases associated with a lack of access to safe water and adequate sanitation

Question 15

debt relief strengths

Answer 15

• allows loans to reschedule: more manageable
• makes country’s economy more competitive
• improve foreign investment potential by removing trade/investment restrictions
• boost foreign exchange by promoting exports
• reduce government deficits through cuts in spending

Question 16

debt relief weaknesses

Answer 16

• often accompanied by a shift from domestic food cultivation to production of cash crops or commodities for exports
• reduce government expenditure by cutting social programmes
• privatisation of state enterprises to cut government expenditure results in assets being sold to TNCs
• increased pressure on countries to generate exports to pay off debt, likely to increase deforestation, land degradation and other environmental damage
• some MICs accused of protecting their own interests

Question 17

critics of aid

Answer 17

• often fails to reach poorest people
• significant proportion is tied
• use of aid on large capital-intensive projects may worsen conditions eg the substitution of food aid for land reform
• international aid can create a culture of dependency
• aid is often wasted of grandiose projects of little or no benefit to majority
• more important: changing terms of trade so that LICs get greater share of benefits, writing off debts of the poorest countries

Question 18

debt

Answer 18

accumulation of yearly deficits

Question 19

Deficit

Answer 19

occurs when government spending exceeds income generated from tax and other means

Question 20

External (foreign) debt

Answer 20

• the part of total debt in a country, owed to creditors outside the country
• Negatively affects a countries credit worthiness and overall economic stability

Question 21

Sustainable debt

Answer 21

considered manageable without causing long term economic damage, and that will not be paid out of future borrowing

Question 22

Unsustainable debt

Answer 22

cannot be paid without further raising debt and putting future development at risk, or even reversing development (debt ratio > 150%)

Question 23

Unpayable debt

Answer 23

external debt where the interest payments are beyond the means of the country, therefore preventing the debt from ever being repaid

Question 24

Debt service ratio

Answer 24

• proportion of a countries export earnings that it uses to meet debt repayments
• some are forced to choose between service provision and debt repayment
• Expressed as a % of interest and principal payments against exports (goods & services) per year
• 30% in LICs (7.8 trillion dollars in 2018), 10% in HICS

Question 25

causes of debt

Answer 25

• Policy failures: flawed domestic policies fail to develop robust and stable economies, so key industries do not develop sufficient export earnings
• Ineffective control of public finances: excessive spending on inefficient projects, or sub-optimal tax collection, borrowing of money to fulfil promises
• Artificially high exchange rates: local central bank sets high exchange rate that reduce imports and controls inflation, leads to exporting problems
• War: diverts resources from production to defence
• Destabilising shocks: macroeconomic shocks = borrowing
• Commodity prices: If commodity prices collapse, then countries dependent on those prices see a collapse in export revenues. Increase the need to borrow
• Natural disasters: infrastructure destroyed, requires rebuilding. Produces a less efficient economy (due to spending on rebuilding and reduced export/ transport), that is less able to respond to shocks
• COVID-19: huge diversion of resources to healthcare so increased borrowing, industries with close human contact stop operating, reducing exports

Question 26

global debt

Answer 26

• 227 trillion dollars global debts in 2020
• 50% dept to GDP increase in HICs to 432% in 2020

Question 27

Haiti debt relief

Answer 27

2010 – Earthquake killing 200,000; debt to 1.3bn dollars

Question 28

Greece· 1990s

Answer 28

large loans fueled economic boom and German imports, but unemployment still high· 8% govt revenue spent on military· 2008 – financial crisis; lending increased· Spending plans missed, extensive tax evasion· Goldman Sachs bank hid borrowing from books· EU and IMF lent 290bn dollars (65% of total debts)

Question 29

problems with global debt

Answer 29

• Rising foreign debts: Greece’s foreign owed debt has increased from 70% GDP (2007) to 150% (2020)
• Education: 60-70% Ghana children completed primary education between 1980 and 2006
• Mortality: lack of healthcare investments causes increase in mortality
• Malnutrition: Haiti has 48% population undernourished
• Healthcare: births attended by a healthcare professional 45% between 1998 and 2006 in Ghana
• Environmental damage: Brazil increased rate of deforestation to exploit wood and iron resources to increase exports
• Reduced food production: Columbian farmers turn to cocaine, Afghanistan farmers to Opium - they can make more money producing drugs than other crops
• Illegal immigration: people trafficking/sex slavery occurs if locals can’t be employed, or society degrades (Mexico, Greece and the Philippines)
• Unemployment: sharp rise from 8% (2008) to 28% (2013), now slightly lower at 15% (2020) in Greece
• Personal poverty: 22% of Greeks live in ‘extreme material deprivation’

Question 30

the international debt crisis

Answer 30

• The causes and impacts of the debt crisis are varied between a range of countries – in particular LICs
• International debt: money borrowed by a government /country from another country or private lender
• Debt crisis: debt payments undermine a county’s economy and/or the government’s ability to protect economic and social rights of citizens

Question 31

the causes of the international debt crisis

Answer 31

• 1973-74 Arab-Israeli war: triggered Organisation of Petroleum Exporting Countries (OPEC) to increase oil price by 4x – sharp increase in oil prices
• Profits deposited in banks of affluent countries
• Banks seeked investments for new funds, so offered low interest, poorly monitored, reckless and irresponsible loans to corrupt LICs to fund development
• LICs forced to exploit resources to grow cash crops and pay back loans with profits on exports
• Some of borrowed money spent irresponsibly by LICs (armaments, corruption and private projects)

Question 32

1980-90 recession

Answer 32

• rising inflation in the US led to tight financial policies, causing inflation rates to rise
• Sharp rise in interest rates globally, hitting LICs the worst
• Worsened by high fuel costs, declining exports as a result of crop surpluses and reduced demand
• Increasingly difficult for LICs to make repayments and interest payments

Question 33

1990s loan rescheduling:

Answer 33

extended the length of debt repayment, causing the crisis to last even longer

Question 34

2008 financial crisis:

Answer 34

-deregulation allowed banks to engage in hedge fund trading and then subprime mortgages created to support sale of derivatives
- US: 8 million jobs lost, 17 trillion dollars in household net worth evaporated, GDP shrink of 4.7%
- 2020 COVID-19 pandemic: global debts risen to 227 trillion dollars

Question 35

problems created by debt

Answer 35

• people in poverty take on the brunt of the crisis
• World Bank and IMF: take away resources from investments that contribute to socio-economic development. Schools and medical centres understaffed, underequipped, and undertrained
• Austerity: economic restructuring leads to short term pain for long term gain – harsh on poor and small business owners
• Environment: since debt repayments are demanded in ‘hard currency’, environmental destruction is encouraged to repay using profits from exports
• Debt relief: may solve crisis, but is a mind-field of complex and contradictory policies

Question 36

countries most affected by international debt

Answer 36

• primarily LICs, all but 1 country globally is indebted
• Japan: 236% debt-to-GDP ratio
• Sudan: 176.5%
• UK: debt is larger than economy (104% in 2020)

Question 37

debt relief: Jubilee Debt Campaign

Answer 37

• collection of NGOs, Christian organisations and other interest groups
• Pushes for debt cancellation and relief and avoiding debt agreements that cause further problems for debtor countries, where possible
• Fight for debt relief to be on the agenda of Western governments
• Led to the launch of the HIPC after campaigning at the 1998 G8 summit, and pioneered new EU principles for restructuring debt
• 130bn dollars debt cancellation (2000-15) for LICs, 100m dollars debt cancellation for LICs with Ebola crisis

Question 38

debt relief: HIPC Initiative (multilateral)

Answer 38

• requires SAP reforms, and the qualification of countries to participate
• 39 countries participate (33 in Africa), must have income < 700 dollars per person income/per year
• Qualifying: STAGE 1 develop a Poverty Reduction Strategy, and reduce inflation; prove unsustainable debt/track record
• STAGE 2 implement key reforms with a further track record; implement the PRS for at least one year
• Aims: provide a comprehensive approach to debt reduction so that no poor country has to face a debt burden that it cannot manage
• Effectiveness: counties are able to control their finances more strictly and reduce debt, and exports increase
• Criticisms: requires loans to be taken out, creditors participate voluntarily, may lead to environmental degradation

Question 39

debt relief: MDRI

Answer 39

• an extension of HIPC launched in 2005, offering 100% debt cancellation of debts owed by HIPC countries to World Bank, IMF, African Dev. Bank
• launched to accelerate countries completing the HIPC initiative process towards the UN Millennium Goals (income must be < 380 dollars pp/py (IMF gave relief if this was met, regardless of HIPC participation))
• Criticisms: low number of countries involved, so total extent of debt reduced is limited. If debts cancelled, most counties would still rely on concessional assistance
• In 2006, IMF relieved 3.6bn dollars of debt to 19 countries (Bolivia, Cambodia, Ethiopia, Niger…)

Question 40

Rescheduling

Answer 40

• capital and interest payments are rescheduled to a time agreed with creditor and debtor
• Increased pay-off time makes the debts more manageable
• amount may increase due to interest
• Delays the problem· More pressure over time (requirement of more exports increases environmental degradation)

Question 41

Forgiveness/Cancellation

Answer 41

• concept of drawing a line under the debts, essentially forgetting about them
• Reduces poverty (reduced financial burden)
• more investment in infrastructure
• Improves growth and jobs
• ## benefits global trade
• Moral hazard
• higher interest rates on country next lending
• Diverted resources (lost debt repayment revenue could have been used to improve other countries)·
• rare
• Brazil: in 2013 cancelled/restructured 900m dollars of African owed debt

Question 42

Debt-for-Nature swaps:

Answer 42

• debtor agrees to preserve an area of rainforest/natural reserve in exchange for cancelling debt
  Huge environmental benefits (reduced deforestation, maintained biodiversity/ ecosystems)
• Creditors relieved of high risk
• ## Conservation groups kept happy
• Overstated financial benefits (debt is still being paid, instead just to environmental groups)
• Environmental degradation (correlation between debt and deforestation for exports)
• Not enough funding for conservation
• Impacts poor (land taken for conservation)

Question 43

Debt-for-Nature swaps:

Answer 43

• debtor agrees to preserve an area of rainforest/natural reserve in exchange for cancelling debt
  Huge environmental benefits (reduced deforestation, maintained biodiversity/ ecosystems)
• Creditors relieved of high risk
• ## Conservation groups kept happy
• Overstated financial benefits (debt is still being paid, instead just to environmental groups)
• Environmental degradation (correlation between debt and deforestation for exports)
• Not enough funding for conservation
• Impacts poor (land taken for conservation)
• · Columbia: 63.6 million dollars in nature swap

Question 44

Debt-for-Equity swaps

Answer 44

• debt is sold to multi-national investors
• Less debt for debtor nation
• Improved government image
• ## Reduced interest payments
• Current shareholders are diluted
• Property exchanges with other countries
• Loss of sovereignty (other countries have influence)
• Interest bias (to other counties over local)

Question 45

Structural Adjustment Programmes (SAPS):

Answer 45

• loans from the IMF and World Bank that adjust a country’s economic structure, improve international competitiveness and restore balance of payments
• Privatisation of water utilities and government organisation, to reduce public sector
• Tackle budget deficit, inflation, tariff barriers and allows currency to float (exports are more competitive)
• -
• Harsh conditions (cuts to education and healthcare)
• Removal of subsidies for farmers
• Take out IMF loans to help (only worsens debt problem)
• ## Promotion of grain trade (less food in country)
• India: largest SAP loan recipient since 1990· Loans cannot be spent on healthcare, education or development, so 2bn dollars to banking sector
• High and rising debt (580bn), GDP ratio constant at around 20

Question 46

debt relief

Answer 46

-recently moves has been made to reschedule or restructure debt and some has even beed wiped
- however some has come with conditions that mean imposing authority measure or structural adjustment programmes such as opening up their markets or the privatisation of public services

Question 47

aid

Answer 47

• normally is the flow of resources from HICs to LICs, with occasional return flow from LICs if HICs in need
• Money (grants/loans), goods (food/technology/ machinery), knowledge (education)

Question 48

Aid reliance

Answer 48

• dependency culture created, causing productivity to halt as people realise they can just accept the aid
• Swaziland: 2/3 of 1.2 million population relied on food aid
• Aid now focuses on development projects rather than material aid

Question 49

Tied aid issues

Answer 49

• aid is devalued when it has to be spent in the donor country. Scope of projects is limited, time to complete is lengthened (transport and acclimatisation of workers), costs increased significantly due to transport of aid. Halts productivity and development
• US: 65% of food aid budget in 2015 was spent on transport

Question 50

international aid effects

Answer 50

• Larger public sector: encourages the growth of a bloated government to distribute aid, which crowds out the private sector, and therefore productivity
• Counterproductive conditions: attaching conditions to loans and aid, such as removing state subsidies, means locals cannot afford supplies like fertilisers
• Fragmentation = bureaucracy: closely linked to the bloating of a public sector. Large number of GOs and NGOs reduces efficiency: 10 million: NGOs worldwide
• Prioritising aid: targeted at high-profile or ‘in the moment’ diseases such as Ebola; ignoring health crises such as malnutrition or poor sanitation in a country that counts for more deaths: Niger: overall sanitation access is 9%, 4% rurally
• Loan repayments: HIPC loan repayments are too high, so aid is simply spent on repaying loans rather than development
  -Corruption: aid received by a country may be sent to fake corrupt bank accounts – so it never reaches those who need it. Corrupt money spent on black market
• Talent (brain) drain: health aid and training for LICs is undermined by HIC immigration policies that promote the immigration of nurses into donor countries: 79% of Indian and 88% of Chinese science PhD students in the US remain in the US
• Hi-tech aid: sending over modern, technologically advanced aid (normally in the form of machinery) is not useful to locals if it breaks down
• Poorest priority: middle income countries are priority for aid – the poorest, with the smallest markets receive little interest from commercial or political groups
• Top-down/Bottom-up: top down approach receives criticism, partly because corruption is rife in LICs