Unit 13 - Essays - Debt UPDATED Flashcards
How far do you agree that trade can solve the problems of the international debt crisis?
Paragraph 1: How Trade Can Help Countries Pay Back Debt
Topic Sentence: Trade can help countries manage their debt by increasing export revenues, which improves the balance of payments and helps repay loans.
Key Points to Include:
Explanation: Exporting goods and services brings in foreign exchange, which can be used to pay back international loans.
Examples and Evidence:
Vietnam: Adopted an export-led growth strategy that resulted in 7% annual GDP growth from 2016 to 2019, stabilizing its debt-to-GDP ratio at 45%.
Bangladesh: The garment industry generates significant foreign exchange, helping to manage debt repayments.
Analysis:
Spatial Variation: Benefits of trade are not evenly distributed. LICs and MICs often face trade barriers imposed by HICs, reducing the effectiveness of trade as a debt solution.
Scale Variation: Large countries with diverse exports benefit more compared to small economies relying on a few products.
Evaluation: Trade helps but only if poorer countries gain fair access to international markets.
Paragraph 2: How Trade Can Help with Currency and Inflation Problems
Topic Sentence: Trade can help stabilize national currencies and control inflation, making it easier for countries to repay their debts.
Key Points to Include:
Explanation: Diversifying exports helps maintain a stable currency value, which in turn makes debt repayments less costly.
Examples and Evidence:
Chile: Diversified exports (copper and agriculture) stabilized the peso and reduced inflation to 3% by 2018.
Angola: Reliance on oil exports caused severe currency volatility when oil prices dropped, making debt repayment harder.
Analysis:
Sectoral Variation: Countries exporting a mix of goods fare better than those relying on a single commodity.
Scale Variation: Larger economies can absorb shocks better than smaller ones.
Evaluation: Trade helps stabilize currencies and inflation but requires a diverse export base.
Paragraph 3: Limitations of Trade in Addressing Structural Debt Problems
Topic Sentence: Trade alone cannot solve debt issues caused by structural problems such as corruption, odious debt, and low-value exports.
Key Points to Include:
Explanation: Structural issues like corruption and a lack of value-added industries prevent trade from significantly reducing debt.
Examples and Evidence:
Mozambique: Despite increasing trade, its debt-to-GDP ratio reached 120% in 2021 due to undisclosed loans and corruption.
Primary Product Dependence: Many LICs export low-value raw materials, limiting their earnings and ability to pay debt.
Analysis:
Spatial Variation: LICs and MICs are more affected by structural issues than HICs.
Scale Variation: Larger and more diversified economies can better absorb structural problems.
Evaluation: Trade must be paired with governance reforms and efforts to add value to exports.
Paragraph 4: Short-term vs Long-term Effects of Trade on Debt
Topic Sentence: The effectiveness of trade in solving debt problems varies between short-term and long-term impacts.
Key Points to Include:
Explanation: Trade liberalization can worsen debt in the short term by increasing imports faster than exports.
Examples and Evidence:
Kenya: Trade liberalization in the 1990s increased its trade deficit by 22%, worsening its debt situation initially.
South Korea: Strategic trade policies focusing on high-value exports reduced its debt-to-GDP ratio from 45% in the 1980s to 35% by 2000.
Analysis:
Temporal Variation: Trade can worsen debt in the short term but improve it in the long term with strategic planning.
Scale Variation: Larger economies benefit more from long-term trade strategies.
Evaluation: Trade is more effective for managing debt in the long term if planned carefully.
Paragraph 5: How Trade Works Better with Debt Relief Programs
Topic Sentence: Trade can be more effective in solving debt problems when combined with debt relief programs.
Key Points to Include:
Explanation: Debt relief frees up resources that can be used to invest in export sectors.
Examples and Evidence:
Uganda: The HIPC Initiative reduced its debt stock by 90%, allowing reinvestment in export sectors.
Jamaica: Trade alone failed to reduce its debt-to-GDP ratio, which remained above 120% until 2015.
Analysis:
Spatial Variation: LICs benefit more from combining trade with debt relief compared to HICs.
Scale Variation: Smaller economies find debt relief more impactful in enabling trade-led growth.
Evaluation: Trade must be part of a broader strategy that includes debt relief to be truly effective.
Conclusion
Summary of Key Points:
Trade can help reduce debt by increasing foreign exchange, stabilizing currencies, and improving creditworthiness.
However, structural issues, unfair trade rules, and the need for debt relief programs limit trade’s effectiveness.
Judgement:
Trade alone cannot solve the international debt crisis. A combined approach, including trade, debt relief, and governance reforms, is essential for sustainable debt management.
Evaluate the view that it is the lenders who are responsible for the international debt crisis.
Paragraph 1: How Lenders Create Debt Problems
Point: Lenders encourage borrowing even when repayment is uncertain, leading to unsustainable debt.
Evidence & Examples:
1970s petrodollar lending: After the 1973 oil crisis, oil-rich countries deposited money in Western banks, which lent heavily to developing nations (especially in Latin America).
Example: Mexico & Brazil borrowed excessively because loans were easy to get. But when interest rates rose, Mexico’s debt grew from $57 billion (1978) to $80 billion (1982), triggering a crisis.
IMF & World Bank’s role: Their loans come with conditions that force borrowing countries to cut public spending.
Example: Zambia (1980–1995) reduced healthcare spending by 50% due to IMF conditions, worsening poverty.
Analysis:
Lenders failed to assess risk properly and gave out loans without ensuring that countries could repay them.
When economic conditions worsened, lenders demanded repayment, worsening financial crises instead of helping.
Link to question: Lenders encouraged reckless borrowing, making them largely responsible for debt crises.
Paragraph 2: High-Interest Rates and Unfair Loan Conditions
Point: Lenders impose high-interest rates and harsh repayment terms, making debt difficult to manage.
Evidence & Examples:
Variable interest rates: Many loans start with low rates but increase over time.
Example: Latin America (1980s) → U.S. raised interest rates, making loan repayments triple in cost.
Example: Brazil (1987) → Spent 40% of its export income just to pay interest.
Higher interest rates for poor countries: LICs (Low-Income Countries) often pay 10%+ interest, while richer countries pay less than 2%.
Example: Sub-Saharan Africa → Debt repayments consume large parts of national budgets, limiting economic growth.
Analysis:
High-interest rates trap countries in long-term debt cycles.
Lenders benefit financially from keeping countries in debt, showing profit motives rather than concern for economic development.
Link to question: Lenders set up unfair loan conditions, making it nearly impossible for countries to escape debt.
Paragraph 3: Loan Restructuring and Debt Relief – A False Solution?
Point: Lenders claim to help by restructuring loans or offering debt relief, but these often fail or make things worse.
Evidence & Examples:
Debt restructuring often delays repayment but does not reduce debt.
Example: Argentina → Restructured debt multiple times (2000s) but still had $323 billion debt in 2020 (90% of its GDP).
Debt relief programs (e.g., Highly Indebted Poor Countries, HIPC) come with conditions that harm economies.
Example: Ghana → Had debt canceled but was forced to cut government subsidies, making daily life more expensive for citizens.
Analysis:
Lenders use debt restructuring to protect their financial interests, rather than helping struggling nations.
Debt relief often comes with new restrictions, keeping countries financially weak.
Link to question: Lenders pretend to help but actually maintain control, worsening the debt crisis.
Paragraph 4: Borrowers’ Responsibility – Poor Governance & Mismanagement
Point: Some countries contribute to their own debt crises by borrowing irresponsibly, mismanaging funds, or engaging in corruption.
Evidence & Examples:
Excessive borrowing based on unrealistic expectations.
Example: Venezuela → Borrowed heavily assuming oil revenues would remain high. But when oil prices dropped, it had $150 billion debt and no way to repay.
Corruption & misuse of funds reduce a country’s ability to invest in development.
Example: Nigeria → $400 billion lost to corruption (1960–1999), leading to massive debt but little progress.
Example: Democratic Republic of Congo → Took loans under dictator Mobutu, but funds were stolen. This is called “odious debt”, meaning the people suffer for the leader’s mistakes.
Analysis:
Some governments borrow without proper planning and fail to invest wisely, making debt unmanageable.
Corruption means that loans do not benefit ordinary citizens, making repayment difficult.
Link to question: Borrowers share some responsibility, but lenders still enable these problems by lending to corrupt governments.
Paragraph 5: Different Debt Crises Across Time and Regions
Point: Debt crises happen for different reasons in different places and have changed over time.
Evidence & Examples:
Latin America (1980s & 2000s) → Caused by high-interest loans & poor economic policies.
Sub-Saharan Africa → Debt crisis worsened by IMF conditions & reliance on foreign aid.
Asia (1997 Financial Crisis) → Caused by private sector borrowing and financial market instability.
2008 Global Financial Crisis → Western banks offloaded risky loans onto developing countries, increasing their financial struggles.
Analysis:
Some debt crises are due to lender irresponsibility (Latin America, 1980s).
Some are borrower-driven (Venezuela’s oil collapse, 2010s).
Many are a mix of both (Asia 1997, Africa’s structural adjustments).
Link to question: Debt crises vary by region and time, but lenders consistently play a major role in making them worse.
Conclusion
Lenders are mainly responsible because they encourage borrowing, charge high-interest rates, impose harsh repayment conditions, and offer debt relief that doesn’t really help.
However, borrowers also contribute, especially through corruption and poor economic management.
The biggest issue is that lenders continue to profit from debt, making it difficult for developing nations to escape financial crises.
Without irresponsible lending, many countries would not have fallen into severe debt. Therefore, lenders bear the greatest responsibility for the international debt crisis.
