3.2. Debt, aid and their management Flashcards
1
Q
How did the debt crisis come about?
A
- Began with Arab-Israeli war of 1973-74 which resulted in a sharp increase in oil prices
- Governments and individuals of oil producing countries invested petrodollars (profit from oil sales) in the banks of affluent countries
- These banks offered relatively low interest loands to poorer countries to fund their development since they are eager to profit
- These countries were encouraged to exploit raw materials to pay back loans
- However, periods of recession in the 1980s to 1990s led to rising inflation and interest rates => exports of LEDCs fell and earnings declined
2
Q
Define odious debt
A
Describe debt incurred as rich countries loaned to dictators or other corrupt leaders when money would be wasted
3
Q
Define debt service ratio
A
The proportion of a country’s export earnings that it needs to use to meet its debt repayments
4
Q
Causes of debt
A
- Colonialism: colonising powers left their former colonies with high and unfair levels of debt e.g. in order to receive independence, Haiti was required to pay France 150 million francs
- Odious debts
- Mismanaged Lending. e.g. 1960s the US were spending more than it had, resulting in the printing of more dollars
- Fluctuation in the economy
- Corruption and Embezzlement
5
Q
Types of debt
A
- External debt: The portion of a country’s debt that was borrowed from foreign lenders including commercial banks, governments or international financial institutions.
- Odious debt
- Unpayable debt: Describe external debt when the interest on the debt is beyond the means of a country.
6
Q
Define debt relief
A
the partial or total forgiveness of debt, or the slowing or stopping ofdebt growth, owed by individuals, corporations, or nations
7
Q
Strengths of debt relief
A
- Make the country’s economy more competitive
- Allow country’s loan to be more manageable
- Improve foreign investment potential by removing trade or investment restrictions
- Boost foreign exchange by promoting exports
- Reduce gov deficits through cuts in spending
8
Q
Weaknesses of debt relief
A
- Often accompanied by a shift from domestic food cultivation to production of cash crops/ commodities for export
- Reduce government expenditure by cutting social programmes such as health and education
- Privatisation of state enterprises to cut gov. expenditure results in assets being sold to TNCs
- Increase pressure to generate exports => deforestation, land degradation and environmental damage
9
Q
The SAPs (Structural Adjustment Programmes)
A
- 1982- Mexico defaults on debt repayment – leads to formation of SAPs
Key points of SAPs
- Aims to ensure country is able to manage debt.
- Implementation of a SAP was a condition before new loans given to a country.
- SAPs aim to increase government revenue by:
- Privatisation e.g. water/gas / electric
- Increased cash crops
- Increased exploitation of natural resources
- SAPs forces governments to cut spending by:
- Reducing provision of free/cheap health care and education – effecting poor the worst.
10
Q
Examples of SAP
A
Cuts in government spending led to:
- Infant mortality more than doubling.
- Primary school enrolment falling from 96% to 77%.
- Life expectancy falling ( also linked to AIDS) from 54 to 45 yrs.
- The privatisation of companies led to the loss of 60,000 jobs .
- Move to Cash crops (cotton and tobacco) led to significant reduction in food crops and in late 1990s food shortages only avoided due to aid and imports of food crops.
11
Q
The Heavily Indebted Poor Countries Initiative (HIPC)
A
Background information:
- A group of 38 developing countries with high levels of poverty and debt overhang
- Launched 1996 by IMF and World Bank to provide special assistance to these countries
12
Q
Steps taken to join the Heavily Indebted Poor Countries Initiative (HIPC)
A
To join the HIPC, countries must follow the two step process:
- First step - decision point, countries must:
- Face unsustainable debt burden
- Have established a track record of reform and sound policies
- Have developed Poverty Reduction Strategy Paper (PRSP)
- Second step - completion point, countries must
- Establish further track record of good performance under programs from IMF and World Bank
- Implement satisfactory key reforms agreed at the decision point
- Adopt and implement PRSP for at least one year
13
Q
Effectiveness of HIPC
A
- Many of the countries have not completed the requirements for full debt relief, including preserving peace and stability => require continuous efforts
- Ensure eligible countries get full debt relief from all their creditors. Though the largest creditor like IMF and World Bank provide full debt relief, there are smaller multilateral institutions and commercial creditors which account for 25% of total HIPC Initiative costs
- ⅓ of of these creditors have not delivered any aid and these debts are increasing
14
Q
Multilateral Debt Relief Initiative (MDRI)
A
Background information:
- January 6th 2006
- Cancel all debts owed to the IMF, IDA and African development Fund debts
- World Bank and G8 nations
- Aimed to help HIPC only (21 countries- 315m people)
- $36 billions in 2006
- Potentially $50b in the next 40 years
15
Q
Advantages of MDRI
A
Increased spending on health, education and crucial areas to develop the economy
- 25 million children are put into schools with $1.25b
- Uganda gets 80% of its debt cancelled
- Zambia: 4500 new teachers
- Tanzania: subsidised food for 3.7 million
