13.2 International Debt + International Aid Flashcards
1
Q
What is the role of the world bank?
A
- serves as a development bank = providing loans to fund development projects
- helps to reduce poverty by lending to the governments of poorer nations to improve their economy + standards of living
2
Q
What is the role of International Monetary fund?
A
- offers financial support to countries facing crisis, allowing them to implement policies that restore economic stability + growth
- to obtain an IMF loan, countries need to meet certain conditions + adhere to principles imposed by IMF to achieve greater financial sustainability
3
Q
International financial crisis 1970s
A
- Arab-Israeli war in 1973 resulted in an increase in oil prices
- govts. in oil producing countries invested the profits they earned from selling oil into the banks of many HICs
- the banks were keen to make profits from these investments so offered low interest rate loans to LICs to help them develop
- LICs were encouraged to exploit their raw materials + grow cash crops so they could earn money needed to pay back the loans
- periods of recession in 1980s + 90s led to inflation + rising interest rates in HICs = increasing loan repayments for LICs
- at the same time LICs were experiencing a fall in prices + decline in exports due to a surplus of cash crops on the world market
- these factors meant many LICs were unable to pay back interest + the loans to HICs = debt
4
Q
What are the main causes of LIC debt?
A
- odious debt
- legacy of colonialism
- debt rescheduling
5
Q
Impact of odious debt
A
- odious debt is debt occurred from HICs loaning to dictators or other corrupt leaders when it was known that the money would be wasted
- often such loans led to little improvement in quality of life for the majority of the population, but rather gave them long term debt
- e.g shortly after freedom from the apartheid regime, South Africa had pay back the debt occurred from the regime
- international law offers no ‘fresh start’ to countries in such position
6
Q
Impact of the legacy of colonialism
A
- colonising powers left their former colonies with high + unfair levels of debt when they became independent - often also with high interest rates
- e.g. Indonesia 1949 = was required to pay the Dutch colonial governments debt as a condition for freedom, which much of this debt being acquired from fighting pro-independence rebels
- e.g. Haiti was required to pay France 150 million francs to gain independence
7
Q
Impact of debt rescheduling
A
- the IMF + world bank have been involved in lending money + rescheduling debt in countries such as Mexico who can not pay the interest of their loans
- but this comes with conditions = SAPs = structural adjustment programme
- government has to agree to impose strict economic programmes on their countries in order to reschedule debt
- this forces LICs such as those in sub-Saharan Africa whom already have struggling economies to prioritise debt repayments over funding critical social + health services
8
Q
Examples of debt rescheduling
A
- 1982 = Mexico told its creditors it could not repay its debt —> the IMF + world bank stepped in with new loans under strict conditions
- but their debts continued to rise + new loans have added to the burden
- Ebola outbreak in Guinea, Sierra Leone + Siberia —> had to prioritise debt repayments over critical social + health services e.g. limiting the number of health workers hired + cap wages at low levels
9
Q
What are typical SAP conditions?
A
- spend less on health, education + social services
- cut back on food subsidies = so prices of essentials can soar within days
- cut jobs + wages for workers in govt industries + services
- encourage privatisation of public industries (including sales to foreign investors)
- take over small subsistence farms for large scale export crop farming = farms are left with no land to grow their own food + few are employed on large farms
10
Q
What is debt relief?
A
- cancellation of debts owed by an LIC to an industrialised nation or institution
- created in order to allow LIC to shift funds towards social development
- contradicts the failure of debt rescheduling with SAPs
11
Q
Debt relief origin
A
- HIPC = Heavily Indebted Poor Countries Initiative = launched by IMF + World Bank in 1996
- debt reduction so no country should face a debt burden it could not manage
- 2006 Multilateral Debt Relief Initiative (MDRI) = main aim to strengthen the link between debt relief, poverty reduction + social policies
12
Q
What makes a country eligible to be considered for HIPC assistance?
A
- face an unsustainable debt burden that cannot be addressed by traditional debt relief mechanisms
- a track record of political stability
- have prepared a poverty reduction strategy programme (PRSP)
- be eligible to borrow from the WB international development programme with a development project/ goal in mind
13
Q
What allows a country to reach completion point of HIPC?
A
In order for a country to receive full + irrevocable reduction in debt under HIPC initiative it must have:
- a track record of macro-economic stability
- implemented poverty reduction strategy programme (PRSP) for at least one year
- carry out key structural + social reforms (PRSP)
14
Q
Benefits of debt relief?
A
- of the 39 countries eligible or potentially eligible for HIPC initiative, 36 are receiving full debt relief from the IMF
- frees up resources for social spending = supporting poverty relief with it allowing a substantial increase in government expenditure on healthcare + education - on average social spending is about 5 times the amount of debt-service payments
- reduces debt service = for the 36 countries receiving debt relief, debt service paid has decline by 1.5% points of GDP between 2001 + 2015
- improving public debt management = enables countries to pursue more cautious borrowing policies + strengthen their public debt management as improvements in their social development means they are no longer reliant on loans
15
Q
Limitations of debt relief
A
- resources available currently in the IMF’s trust is insufficient to finance the cost of debt relief to all countries that meet the initial conditions for debt relief + decision point
- the financing plan didn’t include the cost of debt relief to Sudan + Somalia + other countries that entered the initiative in 2006 = if these countries progress to decision point, how will it be funded?
- smaller multilateral institutions, non-Paris club bilateral creditors + commercial creditors of the plan account for 27% of total HIPC costs, but have only delivered a small share of their expected relief so far = 1/3 of these creditors haven’t delivered any relief at all
- given the voluntary nature of the HIPC initiative, the world bank + IMF can only use moral suasion to encourage creditors to participate + fully deliver their share
16
Q
HIPC Initiative + Uganda
A
- prior to receiving assistance Uganda had debts of up to $19 billion
- was the first country to formally enter the scheme in 1997
- Uganda’s Poverty Eradication Action Plan = increased access to water + sanitation by 10%, 30,000 benefited from improved access healthcare + medicine, 2 million more children now attend primary school
- BUT some HIPC creditors have not fulfilled their obligations so not all of Uganda’s debt has been cancelled = full debt cancellation is necessary, partial only postpones debt repayment = limiting their development
