Causes, Nature + Problems of Debt for Countries Flashcards
1
Q
What is debt?
A
- money that an individual, organisation or country owes to another individual, organisation or country
2
Q
What is the World Bank + Internation Monetary Fund (IMF)?
A
- World Bank: an international financial institute, which provides loans to fund dev. projects to improve a country’s economy + ppl’s standard of living
- IMF: an international financial institute, which offers financial support to countries facing crisis, so they can implement policies that restore eco. stability + growth (doesn’t lend for specific projects)
3
Q
What are the causes of debt?
A
- international financial (debt) crisis in 1970s
- Odious debt - dictator’s dev.
- legacy of colonialism
- debt rescheduling - strict eco. conditions imposed by IMFs
4
Q
Explain how the international financial (debt) crisis in early 1970s is a cause of debt for many LICs.
A
- Arab-Israeli war, in 1973, resulted in inc oil prices, + so gov.s in oil producing countries invested profits, earned from selling oil (petro-dollars), into banks of HICs
- these banks were keen to make profits from investments, so offered low-interest rate loans to LICs, who borrowed large sums of money from HICs (e.g. UK/USA) to help them dev, by using money to invest in infrastructure, education + healthcare
- the LICs were encouraged to exploit raw materials + grow cash crops, so they could earn enough money from exports to pay back loans
- however, periods of recession in 1980s to 90s led to inflation + rising interest rates in HICs, inc loan repayments in LICs
- in addition, LICs experienced a fall in prices + exports, bc of surpluses of cash crops on world market, leaving many LICs unable to repay interest + loans to HICs
5
Q
Explain how Odious debt is a cause of debt.
A
- debt collected when HICs loan money to dictators or corrupt leaders, who waste money for personal gain or to maintain power, which goes against interest of citizens + so don’t benefit from use of borrowed funds
- e.g. shortly after S. Africa become free from apartheid, it had to pay debts collected by apartheid region, leading to little improvement in QOL for majority of pop, + instead burdened them w LT debt
6
Q
Explain how legacy of colonialism is a cause of debt.
A
- when colonising powers left former colonies w high + unfair lvls of debt when they became independent, which were often at v high interest rates
- e.g. 1949: Indonesia, as a condition of independence from Netherlands, was required to assume Dutch colonial gov.s debt, which was collected fighting pro-independence rebels in previous 4 yrs
- e.g. Haiti, as a condition of independence from France, was required to pay France 150M francs
7
Q
Explain how debt rescheduling is a cause of debt.
A
- when countries (e.g. Mexico in 1982) can’t repay debt or interest on its loans, gov.s can agree for World Bank + IMF to reschedule debt + loan more money by imposing strict eco. programmes (Structural Adjustment Programmes - SAPs)
- these SAPs require countries to prioritise debt + interest payments over funding critical social + health services, which esp. effects Sub-Saharan African countries bc alr have poorest economies in world
- however, although delaying or dec. immediate payments helps in ST, it inc debt burden over time, as new loans + extra interest are added to previous debt, inc total amount of debt, proving SAPs to be unsuccessful
8
Q
What are the problems of debt?
A
- countries w high debt lvls must spend a high portion of income on repaying debt, limiting money spent on public services, infrastructure or dev. projects, thus dec. eco dev.
- countries w high debt lvls often depend on foreign lenders (e.g. international financial institutes), + so are prone to external eco. shocks + changes in global interest rates
- LICs that borrow money to repay previous loans, enter a debt trap, leading to an unsustainable, inc debt burden
- countries w high debt lvls discourage FDI from TNCs, bc debt burden is viewed as risky, + so slows eco dev.
