13.2. International Debt and International Aid

Question 1

National Deficit

Answer 1

When a government’s annual spending exceeds the income that it generates through taxes and other means

Question 2

National Debt

Answer 2

Accumulation of yearly deficits

Question 3

Austerity

Answer 3

Policies that aim to reduce government budget deficits through spending cuts, tax increases, or a combination of both

Question 4

Debt Service Ratio

Answer 4

The proportion of country’s export earnings needed to meet its debt repayments. (can be 30% in some African nations)

Question 5

Debt Crisis

Answer 5

A proliferation of massive public debt in a range of LIC countries relative to tax revenues during the 1980s-2000s

Question 6

Why is a national debt seen to be negative for LIC / MIC countries?

Answer 6

• For LICs debt is a greater problem.
• A high proportion of their income is spent on interest payments to the IMF, World Bank and Governments in HICs) limiting the amount of money available to spend on infrastructure such as roads, schools, hospitals and developing the economy through industry and agriculture.

Question 7

Why is it not quite so bad for large HICs to have a large debt?

Answer 7

• HICs have large assets against which they can borrow money, therefore the debt is thought to be manageable, unless there is a global financial crisis.
• Example: In 2012 USA spent around $220 billion in net interest on its debt.

Question 8

Odious Debt

Answer 8

when a country’s government misappropriates money it has borrowed from another country
- a nation’s debt is considered odious debt when government leaders use borrowed funds in ways that do not benefit its citizens, and to the contrary, often oppress them.

Question 9

Reasons for debt in countries

Answer 9

• excessive spending - budget compliance
• low GDP growth rates and poor competitiveness
• tax evasion
• corruption
• hidden borrowing

Question 10

Causes of the International Debt Crisis

Answer 10

1) Levels of interest were historically low in the 1970s
- At same time Middle Eastern oil money was being invested in Western banks, reducing the interest rates.
- Low interest rates mean cheap, easy borrowing, but a shock if interest rates rise.
2) Falling commodity prices with LICs dependent on the export of commodities;
- Most LICs vulnerable as often based on one or two products, making them vulnerable to price fluctuations. As an example, coffee price has fallen by 50% in last 30 yrs.
3) 1979 Oil Crisis
- Led to a rapid increase in oil prices, with many countries not able to afford oil imports.
- Increased oil prices led to world recession in late 1970s and 1980s – forcing interest prices up to unmanageable levels.
4) Much of the debt accrued was odious debt.
5) Significant amounts of borrowing was misspent by
governments, meaning that the developmental benefits were not realised.
6) Drought (cash crops) and civil war.

Question 11

Impacts of the International Debt Crisis

Answer 11

1) Between 1980 – 2010 HICs received over $500 billion in debt repayments;
- Much of these repayments were to cover the interest and not repay the debt.
2) As examples:
- In 2005, Sub-Saharan Africa, excluding South Africa, had debts of $230bn.
- Debt - service payments (repayments) amounted to $12bn annually – about four times what the region spent on health and education.
- Per capita debt was $365 but GNP per capita was only $308.

Question 12

Debt relief

Answer 12

• Partial or total removal of debt, or the slowing or stopping of debt growth, owed by nations
• Achieved by the Heavily Indebted Poor Countries
• Initiative (HIPC), launched in 1996 by the World Bank and International Monetary Fund (IMF)
• Initially, 41 countries were singled out to receive debt relief, including 30 African states
• A key point to note is that not all debt is cancelled; just the part that is unsustainable

Question 13

To Qualify for Debt Relief, countries had to

Answer 13

1) Prove their debt was unsustainable, i.e. that it would be impossible - not just difficult - to pay it off.
It was argued that cancelling this debt would actually cost nothing because it could never be repaid anyway
2) Agree to IMF economic policy for 3 years. After the 3 years, the countries were then said to have reached decision point when a debt relief package would be agreed (show 3 years of good economic behaviour);
3) Agree to follow IMF economic policy for another 3 years, following which debts would be written off

Question 14

Criticisms of Debt Relief

Answer 14

• IMF’s economic policy often took the form of Structural Adjustment Programmes

Question 15

Structural Adjustment Programmes

Answer 15

• consist of loans provided by the International Monetary Fund (IMF) and the World Bank (WB) to countries that experienced economic crises
• SAPs were a requirement if a country wanted debt relief and further financial aid

Question 16

Aims of the Structural Adjustment Programmes

Answer 16

1) Aim to ensure country is able to manage its debt.
2) SAPs aim to increase government revenue by:
- Privatisation e.g. water / gas / electric - these companies were often bought at a cheap price by HIC TNCs
- Increase cash crop production - production of crops to be sold abroad although they become more expensive for locals
- Increased exploitation of natural resources (often at environmental cost)
3) SAPs generally aim to cut government spending by:
- Reduce spending on public services such as healthcare, infrastructure and education - affecting the poorer parts of society above all else

Question 17

Foreign Aid

Answer 17

The transfer of money, goods or services from a country or an international organisation, intended to assist another country or its people
- Billions of dollars spent

Question 18

Why offer Foreign Aid?

Answer 18

1) It is the moral thing to do
2) Making up for past mistakes
- An extension of the above. It can be argued that many of the problems that exist in LICs are linked to the historical conduct of HIC countries, such as colonialism and unfair trade
- Moral duty to atone to those mistakes and provide assistance
3) Security
- Political instability in a globalised world caused by poverty in LICs can threaten HIC’s raw materials and markets
- US aid to Mexico may reduce migrants coming from Mexico
4) Aid will further increase trade
- With a more productive economy, LICs can afford more imports, often from the HICs that provided the aid

Question 19

Foreign Aid - Recipient Problems

Answer 19

• Corruption - money does not go where it’s needed
• Misspent money
• Money spent on things that aren’t needed
• Aid is subject to conditionality. Aid is not actually free, but comes at a price, as a developing country must agree to certain conditions in order to receive aid. Like - Tied aid

Question 20

Foreign Aid - Donor Problems

Answer 20

• Money given for the wrong reasons

- Money given for political reasons

Question 21

Criticisms of Foreign Aid

Answer 21

1) Why give aid to other countries when their country already has lots of its own problems like people in poverty?
- Foreign aid takes up only a very small portion of a country’s money so doesn’t really make a dent on domestic spending
2) During the 1990s criticism of foreign aid had started to emerge, with some observers claiming an ‘aid crisis’.
- The conditions in LICs did not seem to be improving to some observers;
- Governments found it hard to justify continued expenditure, so foreign aid budgets were cut.
- For government campaigns it was hard to win the argument for aid, because people didn’t believe that it works
3) One of the largest concerns with aid is that the money will not be used for the intended purpose through:
- The huge difficulty of actually using the money effectively (you can’t build a school in a rural area that has no transport or power).

Question 22

Evaluation of Foreign AId

Answer 22

• Has not solved world’s problems
• Made great progress on health indicators
• Has had real positive impact - also helped countries politically
• But cannot solve all problems and can lead to more problems

Question 23

Types of Foreign Aid

Answer 23

1) Relief Aid
2) Development Aid
3) Tied Aid

Question 24

Relief Aid

Answer 24

• Provided after disasters or emergencies
• Helps countries get over a short-term crisis
  Immediate
• Aims to help out then and then

Question 25

Development Aid

Answer 25

• Long-term financial goods / services aid
• To increase economic growth, development, quality of life
• Providing funding to pay nurses doctors
• Provide funding to train farmers into more sustainable farming practices

Question 26

Tied Aid

Answer 26

• Some foreign aid is considered to be ‘tied’:
• This means that the aid must be spent on goods or services from the donor country
• Often done for economic reasons, to increase exports

A way of getting companies into another market:

• Like subsidising their own companies
• Like lending money to another country, only allowing them to spend on the donor country’s goods / services like construction material
• Can also be done for historical / colonial reaasons, or to strengthen geopolitical interests or cultural lies
• Tied military aid has also been used as an indirect way to counter rival states, or to influence internal politics

Question 27

Criticisms of Tied Aid

Answer 27

1) Aid given for wrong political reasons
2) Tied Aid is not actually free, but comes at a price and with certain conditions.
- These conditions can undermine the effectiveness of the aid programme, or even lead to more problems to the country receiving the aid.
3) We already have an example of aid that is conditional and forces countries to do something before they can receive it:
- Debt relief and structural adjustment programmes in Mozambique undermining the efficacy of initiatives to reduce poverty and boost health and educational services in the country.
Aid does not target the areas which need to be improved, because the donor countries do not know which areas are suitable to be given aid