Debt Relief

Question 1

Define debt relief

Answer 1

Partial or total forgiveness of debt, or the slowing or stopping of debt growth owed by nations

Question 2

What types of debt rescheduling are there

Answer 2

Extending the repayment period —> reduces size of each debt repayment
OR
Offering concessionary interest rates (preferred as profit is still made and debt is repaid)

Question 3

What is debt forgiveness

Answer 3

Cancelling all or significant part of outstanding debt

Means LEDCs can focus on development projects instead of debt payments

Question 4

What are the benefits of debt relief

Answer 4

Reduces poverty —> erodes opportunity cost of servicing debt on LEDCs —> more funds available to reduce poverty and increase development
Improve infrastructure —> long term efficiency and achieving productivity —> can benefit from globalisation —> stimulates growth —> enables gov to implement progressive tax policies establishing a flow of funds into the central bank
Enables LEDCs to buy imports from MEDCs enabling creditor countries to gain from increases in exports

Question 5

What are the problems with debt relief

Answer 5

Moral hazard —> sends out wrong signals to potential borrowers —> debtors do not take steps to prevent debt problems in the future —> debtors cannot learn from their mistakes
Higher interest rates —> lenders will look to increase their expected return on new loans —> negative effect on other borrowers
Opportunity cost on MEDCs —> money lent could be funnelled to other developing countries who may have been more worthy