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
17
Q
What is aid?
A
Assistance in the form of grants or loans at below market rate
18
Q
Why are most LICs keen to accept aid?
A
- foreign exchange gaps
- savings gap
- development gap
19
Q
Arguments for aid?
A
- allows countries to develop raw materials + energy resources
- helps a country to recover from natural or human disasters
- provides health care development e.g. vaccines + medical staff
- can help a country feeds its rapid growing pop, possibly by developing high yield crops
- can reduce the need to import goods by developing own factors = employment opportunities
20
Q
What is official government aid?
A
Aid provided by Department for International Development in UK
21
Q
What are NGOs?
A
- Non-profit organisations that operates independently from the government
- addresses social + political issues e.g. Christian aid
22
Q
Difference between short term aid + long term aid?
A
- short term aid = emergency aid in response to disasters or refugees from war
- long term aid = development aid
- both can vary in amount
23
Q
What is relief/humanitarian aid?
A
- covers intervention in areas such as food, shelter, healthcare, water + sanitation in emergencies
- usually short term
24
Q
What is development/international aid?
A
- ODA = official development assistance
- aid given by governments + other agencies to support economic, environment, social + political development in developing countries
25
Q
Example of relief/humanitarian aid
A
- Somalia = EU allocated €85.3 million for humanitarian projects
- a total of 7.1 million people face acute food insecurity amid the driest conditions in 40 years + three consecutive years of drought
- drought has led to increased food prices
- Somalia imports grain from Ukraine = further rising in pricing
- political instability means Somalia has not got access to the HIPC initiative (debt relief)
26
Q
Advantages + disadvantages of relief/humanitarian aid?
A
- UN world food programme has scaled up its emergency food + nutrition response to reach a total of 4.5 million
- BUT the WFP is short of funding = needs a further $327 million until January 2023 to continue savings lives
- also doesn’t deal with underlying causes of food shortages = promoting over reliance on
27
Q
Example of development aid?
A
- WaterAid in Mali —> an NGO working in 28 countries mainly in Africa
- The Hunger project (NGO) —> mobilises + empowers local communities to work together to be self-reliant
28
Q
Adv + disadv of development aid?
A
- WaterAid in mali working to strengthen Covid 19 prevention by providing hygiene kits, installing hygiene facilities in public spaces + training healthcare workers in disease prevention
- BUT 3.5 million people in Mali still don’t have access to clean water + 4000 children per year still die from diarrhoea
29
Q
What is tied aid?
A
- the country receiving the aid must spend the money on goods + services from country providing it
- economic colonisation
30
Q
Example of bilateral aid
A
- 1991 UK offered £234 million to Malaysia to help them finish the Pergau dam, in exchange for a £1 billion arms deal
- China’s belt + road initiative announced in 2013 = a massive trade infrastructure project that aims to connect China physically + economically to dozens of economies across Asia, Europe + Africa
31
Q
Adv + disadv of tied aid
A
- enabled Malaysia to complete the project = gave them much needed funding
- BUT project was capital intensive + did little alleviate the conditions of the poor (those most in need)
- Malaysia was now tied into an arms deal with Uk which would cost them huge amounts of money + prevent them looking elsewhere for a better deal
- Chinese loans to countries involved has strings attached = Chinese access to natural resources (oil + gas) or market entry for cheap Chinese goods
- debt trap diplomacy = Sri Lanka borrowed $361 million from China to build Hambantota port = debt became unsustainable + repayments were negotiated with China = China takes a 99 year lease on the port + hence territorial control near Indian water (major trade rival)
32
Q
What is bilateral aid?
A
- aid from one country’s govt to another
- may be tied + often for political reasons
- e.g. Malaysia + UK
33
Q
What is multilateral aid?
A
- indirect = richer countries donate to inter-governmental organisations e.g. IGOs or UN agencies
34
Q
What is top down aid?
A
- government led aid programmes that are capital intensive
- often don’t consult with the local people
35
Q
What is bottom up aid?
A
- use strategies which mobilise local people
- work on projects which are sustainable + use appropriate technology
- e.g. Hunger Project
36
Q
WaterAid in Mali
A
- training local people to manage + maintain the water network system + raise the money needed to keep it operational = encouraging local community to invest in their own infrastructure
- providing education programmes about the provision of safe water, sanitation + hygiene = empowering the community to continue their development
- this is crucial to provide the building blocks for all other development
- maximises health benefits = more people can work + attend school, people are able to save money to spend on medicines, time saved collecting water can be used productively
- can reduce cases of childhood diarrhoea by up to 95%
37
Q
Limitations of aid effectiveness (left wing economists)
A
- left wing economists (prioritise welfare of state) = believe too often aid fails to reach the very poorest people + when it does it is short lived
- significant proportion of aid is ‘tied’ to the purchase of goods + services from the donor country = UK + Malaysia
- the use of aid on large capital intensive projects may actually worsen the conditions of the poorest
- international aid may create a culture of dependency difficult to break e.g. Somalia
38
Q
Limitations of aid effectiveness (right wing economists)
A
- aid encourages the growth of a larger then necessary public sector
- private sector is ‘crowded out’ by aid funds
- aid distorts the structure of price + incentive
39
Q
Limitations of aid effectiveness (development economists)
A
- believe there are two more issues more important to development than aid
- changing the terms of trade so that LICs get a fairer share of benefits of world trade = e.g. South Korea became one for the four Asian tigers due to investment by TNCs, leading them being a donor country themselves
- writing of the debts of the poorest countries
40
Q
Overall evaluation of the effectiveness of aid
A
- aid is a good starting point, with South Korea benefitting from the initial ODA helping them with the necessary improvements in poverty
- bottom up approaches such as WaterAid in Mali = mobilising local community = sustainable
- HOWEVER, for sustainable development, trade improvements are necessary in order to restore the trade balance + improve the value of goods, which is only possible through TNV investment
- therefore, the effectiveness of aid is dependent on the type of aid (direct or not), and its impact over time + space
