DebtDebt

The debt Crisis - BackgroundThe debt Crisis - Background

1960’s-MEDCS had high growth rates in their economies (Due to boom in oil prices).

Money earned was invested in Western banks. Money was lent to poorer nations. 1970’s interest rates were low and inflation high therefore

attractive to borrow OPEC forced oil prices higher in mid 1980’s and interest rates

increased Poorer countries struggled to pay off their debts.

Watch the next section of Red Nose video on Debt and answer the questions in the worksheet in your booklet

What happened next?What happened next? MEDCs imposed tariffs on imports. E.g. Mexico in 1982 couldn’t even pat off the interest so

defaulted.

World Bank and IMFWorld Bank and IMF Original aim of both was to rebuild Europe after

recession and WW11. Believed problems solved through increased

international trade (Free movement of goods and capital).

World bank aims to assist countries by loans and technical assistance.

International Monetary fund (IMF)

International Monetary fund (IMF)

•Idea of expanding international trade e.g. providing borrowing facilities and easing exchange rate controls.

•GATT (General agreement on Trade and Tariffs) was established to encourage free trade.

•After WW11, European countries lacked resources for reconstruction and rejected IMF and World Bank due to strict controls (But developing countries are encouraged to strictly follow the plan) e.g. keep economies open to international forces i.e. lower trade barriers.

World bank principalsWorld bank principals1. Poorer countries need cash, so borrow from western creditors

and international finance institutions.2. They buy technology from rich countries to remain competitive

and then produce goods and services and sell back to rich nations to generate foreign exchange and pay back debts.

3. Governments spending on social services e.g. health care and education is then cut to increase exports and make the economy more efficient.

4. WB imposes SAPS (structural adjustment programmes) to make economies more efficient.

5. Poorer countries should embrace the idea of a free market.

Was the money used effectively?Was the money used effectively? Often countries would invest in mega projects e.g. large

dams which do not benefit the people. Corruption was also rife in some countries e.g. the Accra

Metropolitan Authority was accused of corruption and in efficiency. When checked financial records had gone missing and money ended up in individuals accounts.

Choose two case studies (PRD 25) of loans of prestigious schemes built by using money from the World Bank and assess how useful the projects have been-Success or Failure.

Tasks:Tasks:

Structural adjustment programmes (SAPs) – A solution?

Structural adjustment programmes (SAPs) – A solution?

The main theme is intervention by the World Bank:• Countries should cut back on social spending, • Privatise the public sector enterprises • Devalue their currency which leads to an increase in

exports BUT imports become more expensive.• However, in Mozambique this lead to rising

unemployment (50% in 1992)• It caused protests in countries, civil unrest and increased

unemployment mainly due to the decease in Public spending.

The four elements of SAPsThe four elements of SAPs

1. Greater use of a countries resource base2. Policy reforms to increase economic efficiency3. Generation of foreign income through diversification of the

economy and increased trade4. Reducing the active role of the stateThey were grouped into stabilization measures (i.e. short steps

to limit further deterioration of the economy) like wage freezes and reduced subsidies on food and adjustment measures (longer term policies to boost economic competitiveness) e.g. tax deductions, export promotion and privatization.

•In Mozambique SAPs lead to rising unemployment (50% in 1992)•It caused protests in countries, civil unrest and increased unemployment mainly due to the decease in Public spending.

Let’s examine some case studies:

Task:1.Use this site: http://www.imf.org/external/np/exr/facts/mozam/mozam.htm to write a summary of Mozambique's debt service2. Use the Uganda case study provided, take notes and decide from the evidence how effective SAPs have been.

Problems of DebtProblems of Debt

Environment:

Poor countries exploit natural resources to pay back debt( deforestation) etc which can lead to Global warming which also affects the rich North and also loss of biodiversity, soil erosion etc.

Immigration:

100 million legal and illegal refugees due to problems some of which may end up in MEDCs.

TaxesMEDCs countries which decide to pay off debts is at the tax payers

expense.Unemployment in the NorthLoss of exports due to poorer countries not being able to afford imports

can lead to closure of factories and unemployment in the North.DrugsIllegal drug trade increases e.g. Cocaine in Columbia, Bolivia db Peru.

These are sent to the North creating problems in those countries.ConflictDebt increases conflict and spending occurs in the MEDCS e.g. war in

Iraq.

What do you notice about all these points?

Since 1988, the Paris Club of government creditors has approved a series of debt relief initiatives.

The World Bank has lent more through its congressional lending arm

The international Development Agency has given loans for up to 50 years without interest but with a 3-4% service charge

Lending has risen from $424 million in 1980 to $2.9 Billion, plus a further $928 million through the African development bank

The IMF has also introduced a soft loan facility conditional on wide ranging socio-economic reforms

What has been done to deal with the problem of debt?

What has been done to deal with the problem of debt?

Solutions to the debt problems.Solutions to the debt problems.1. Rescheduling –Different time2. Debt for nature swaps-i.e. must preserve an

area e,g, rainforest3. Debt sold to Transnational at a discount and the

country can use the money to invest in social and economic growth.

4. Debt forgiveness and cancellation.

Task: Research examples of the above. You should do this in pairs and then swap notes

Heavily indebted countries

Question: What does this choropleth map suggest about the location of heavily indebted countries?

The Heavily Indebted poor countries initiativeThe Heavily Indebted poor countries initiativeThis was launched in 1996 by the IMF and the World Bank and Endorsed by 180 countries. Two objectives:-to relieve certain low income countries of their unsustainable debt to donors-to promote reform and sound policies for growth, human development and poverty reduection

Task: Read the page on HICs in your booklet and answer these questions:1.What is the difference between debt service and stock relief?2.Write a paragraph explaining what MEDCs could do to increase money made by LEDCs through world trade

Debt relief

Step 1: At the decision point, the country gets debt service (cash required over a given period for the repayment of interest and principal on a debt) relief after demonstrating adherence to an IMF programme and progress in developing a national poverty strategy

Step 2:At the completion point, the country gets debt stock relief (canceling of specific debts, reducing debt service over the life of a loan) upon approval by the World Bank and IMF

Is it only LEDCs that are in debt?

Task:

1. What does this tell you about national debts?

2. Why do you think so many MEDCs are in debt?

When you think of the most indebted countries, who do you think of? You probably think of African countries such as Ethiopia, Malawi or Chad.

Those countries are all on the IMF’s list of heavily indebted countries, all places that are struggling under a heavy burden of public debt.

If you add personal and public debt together, both government loans and private loans, credit card debts and mortgages, the results are a little different. The total amount owed to parties outside the country is called ‘external debt’. The top ten most indebted countries in the world by external debt looks like this:

1. United States – $13,703,567 million 2. United Kingdom – $10,450,ooo 3. Germany – $4,489,000 4. France – $4,396,000 5. Netherlands – $2,277,000 6. Ireland – $1,841,000 7. Japan – $1,492,000 8. Switzerland – $1,340,000 9. Belgium – $1,313,ooo 10. Spain – $1,313,000

As the government regularly tells us, it’s not the amount of debt that’s important, but the ability to pay. It does tell us something about our wealth however – it is created out of debt. For that wealth to continue or to grow, we will need to take on more debt, as we’ve seen repeatedly over the last few months. (the figures above are October 08 and out of date already)