Developing Countries' Debt
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The debt of developing countries usually refers to the
external debt A country's gross external debt (or foreign debt) is the liabilities that are owed to nonresidents by residents. The debtors can be governments, corporations or citizens. External debt may be denominated in domestic or foreign currency. It incl ...
incurred by governments of
developing countries A developing country is a sovereign state with a lesser developed industrial base and a lower Human Development Index (HDI) relative to other countries. However, this definition is not universally agreed upon. There is also no clear agreem ...
. There have been several historical episodes of governments of developing countries borrowing in quantities beyond their ability to repay. "Unpayable debt" is external debt with interest that exceeds what the country's politicians think they can collect from taxpayers, based on the nation's
gross domestic product Gross domestic product (GDP) is a money, monetary Measurement in economics, measure of the market value of all the final goods and services produced and sold (not resold) in a specific time period by countries. Due to its complex and subjec ...
, thus preventing it from ever being repaid. The debt can result from many causes. Some of the high levels of debt were amassed following the
1973 oil crisis The 1973 oil crisis or first oil crisis began in October 1973 when the members of the Organization of Arab Petroleum Exporting Countries (OAPEC), led by Saudi Arabia, proclaimed an oil embargo. The embargo was targeted at nations that had supp ...
. Increases in oil prices forced many poorer nations' governments to borrow heavily to purchase politically essential supplies. At the same time,
OPEC The Organization of the Petroleum Exporting Countries (OPEC, ) is a cartel of countries. Founded on 14 September 1960 in Baghdad by the first five members (Iran, Iraq, Kuwait, Saudi Arabia, and Venezuela), it has, since 1965, been headquart ...
funds deposited and "recycled" through western banks provided a ready source of funds for loans. While a portion of borrowed funds went towards
infrastructure Infrastructure is the set of facilities and systems that serve a country, city, or other area, and encompasses the services and facilities necessary for its economy, households and firms to function. Infrastructure is composed of public and priv ...
and economic development financed by central governments, a portion was lost to
corruption Corruption is a form of dishonesty or a criminal offense which is undertaken by a person or an organization which is entrusted in a position of authority, in order to acquire illicit benefits or abuse power for one's personal gain. Corruption m ...
and about one-fifth was spent on arms.


Debt abolition

There is much debate about whether the richer countries should be asked for money which has to be repaid. The
Jubilee Debt Campaign Debt Justice (formerly Jubilee Debt Campaign, Jubilee Debt Coalition and Drop The Debt) is a UK-based campaigning organisation that exists to end unjust developing countries' debt and the poverty and inequality it perpetuates. The organisation’s ...
gives six reasons why the third world debts should be cancelled. Firstly, several governments want to spend more money on poverty reduction but they lose that money in paying off their debts. Economist
Jeff Rubin Jeff Rubin (born August 24, 1954) is a Canadian economist and author. He is a former chief economist at CIBC World Markets and is currently a senior fellow at the Centre for International Governance Innovation. Rubin had worked at CIBC World Ma ...
agrees with this stance on the basis that the money could have been used for basic human needs and says it is
odious debt In international law, odious debt, also known as illegitimate debt, is a legal theory that says that the national debt incurred by a despotic regime should not be enforceable. Such debts are, thus, considered by this doctrine to be personal debts ...
. Secondly, the lenders knew that they gave to dictators or oppressive regimes and thus, they are responsible for their actions, not the people living in the countries of those regimes. For example, South Africa has been paying off $22 billion which was lent to stimulate the
apartheid Apartheid (, especially South African English: , ; , "aparthood") was a system of institutionalised racial segregation that existed in South Africa and South West Africa (now Namibia) from 1948 to the early 1990s. Apartheid was ...
regime. They have yet to recover from this, their external debt has increased to $136.6 billion while the number of people in the housing backlog has increased to 2.1 million from 1994's 1.5 million. Also, many lenders knew that a great proportion of the money would sometime be stolen through corruption. Next, the developing projects that some loans would support were often unwisely led and failed because of the lender's incompetence. Also, many of the debts were signed with unfair terms, several of the loan takers have to pay the debts in foreign currency such as dollars, which make them vulnerable to world market changes. The unfair terms can make a loan extremely expensive, many of the loan takers have already paid the sum they loaned several times, but the debt grows faster than they can repay it. Finally, many of the loans were contracted illegally, not following proper processes. A seventh reason for canceling out some debts is that the money loaned by banks is generally created out of thin air, sometimes subject to a small capital adequacy requirement imposed by such institutions as the Bank of International Settlements. Maurice Félix Charles Allais, 1988 winner of the Nobel Memorial Prize in Economics, commented on this by stating: "The 'miracles' performed by credit are fundamentally comparable to the 'miracles' an association of counterfeiters could perform for its benefit by lending its forged banknotes in return for interest. In both cases, the stimulus to the economy would be the same, and the only difference is who benefits."


Consequences of debt abolition

Some people argue against forgiving debt on the basis that it would motivate countries to default on their debts, or to deliberately borrow more than they can afford, and that it would not prevent a recurrence of the problem. Economists refer to this as a
moral hazard In economics, a moral hazard is a situation where an economic actor has an incentive to increase its exposure to risk because it does not bear the full costs of that risk. For example, when a corporation is insured, it may take on higher risk ...
. It would also be difficult to determine which debt is odious. Moreover, investors could stop lending to developing countries entirely.


Debt as a mechanism in economic crisis

An example of debt playing a role in economic crisis was the
Argentine economic crisis Argentines (mistakenly translated Argentineans in the past; in Spanish (masculine) or (feminine)) are people identified with the country of Argentina. This connection may be residential, legal, historical or cultural. For most Argentines, s ...
. During the 1980s, Argentina, like many Latin American economies, experienced
hyperinflation In economics, hyperinflation is a very high and typically accelerating inflation. It quickly erodes the real value of the local currency, as the prices of all goods increase. This causes people to minimize their holdings in that currency as t ...
. As a part of the process put in place to bring inflation under control, a
fixed exchange rate A fixed exchange rate, often called a pegged exchange rate, is a type of exchange rate regime in which a currency's value is fixed or pegged by a monetary authority against the value of another currency, a basket of other currencies, or another m ...
was put into place between
Argentina Argentina (), officially the Argentine Republic ( es, link=no, República Argentina), is a country in the southern half of South America. Argentina covers an area of , making it the second-largest country in South America after Brazil, th ...
's new currency and the
US dollar The United States dollar (symbol: $; code: USD; also abbreviated US$ or U.S. Dollar, to distinguish it from other dollar-denominated currencies; referred to as the dollar, U.S. dollar, American dollar, or colloquially buck) is the official ...
. This guaranteed that inflation would not restart, since for every new unit of currency issued by the Argentine Central Bank, the Central Bank had to hold a US dollar against this – therefore in order to print more Argentine currency, the government required additional US dollars. Before this currency regime was in place, if the government had needed money to finance a
budget deficit Within the budgetary process, deficit spending is the amount by which spending exceeds revenue over a particular period of time, also called simply deficit, or budget deficit; the opposite of budget surplus. The term may be applied to the budget ...
, it could simply print more money (thus creating
inflation In economics, inflation is an increase in the general price level of goods and services in an economy. When the general price level rises, each unit of currency buys fewer goods and services; consequently, inflation corresponds to a reductio ...
). Under the new system, if the government spent more than it earned through taxation in a given year, it needed to cover the gap with US dollars, rather than by simply printing more money. The only way the government could get these US dollars to finance the gap was through higher tax of exporters' earnings or through borrowing the needed US dollars. A fixed exchange rate was incompatible with a structural (i.e., recurrent) budget deficit, as the government needed to borrow more US Dollars every year to finance its budget deficit, eventually leading to an unsustainable amount of US dollar debt. Argentina's debt grew continuously during the 1990s, increasing to above US$120 billion. As a structural budget deficit continued, the government kept borrowing more, creditors continued to lend money, while the IMF suggested less state spending to stop the government's ongoing need to keep borrowing more and more. As the debt pile grew, it became increasingly clear the government's structural budget deficit was not compatible with a low inflation fixed exchange rate – either the government had to start earning as much as it spent, or it had to start (inflationary) printing of money (and thus abandoning the fixed exchange rate as it would not be able to borrow the needed amounts of US dollars to keep the exchange rate stable). Investors started to speculate that the government would never stop spending more than it earned, and so there was only one option for the government – inflation and the abandonment of the fixed exchange rate. In a similar fashion to
Black Wednesday Black Wednesday (or the 1992 Sterling crisis) occurred on 16 September 1992 when the UK Government was forced to withdraw sterling from the European Exchange Rate Mechanism (ERM), after a failed attempt to keep its exchange rate above the ...
, investors began to sell the Argentine currency, betting it would become worthless against the US dollar when the inevitable inflation started. This became a self-fulfilling prophecy, quickly leading to the government's US dollar reserves being exhausted. The crisis led to riots in December 2001. In 2002, a default on about $93 billion of the debt was declared. Investment fled the country, and capital flow towards Argentina ceased almost completely. The Argentine government met severe challenges trying to refinance the debt. Some creditors denounced the default as sheer robbery.
Vulture fund A vulture fund is a hedge fund, private-equity fund or distressed debt fund, that invests in debt considered to be very weak or in default, known as distressed securities. Investors in the fund profit by buying debt at a discounted price on a ...
s who had acquired debt bonds during the crisis, at very low prices, asked to be repaid immediately. For four years, Argentina was effectively shut out of the international financial markets. Argentina finally got a deal by which 77% of the defaulted bonds were exchanged by others, of a much lower nominal value and at longer terms. The exchange was not accepted by the rest of the private debt holders, who continue to challenge the government to repay them a greater percentage of the money which they originally loaned. The holdouts have formed groups such as
American Task Force Argentina The American Task Force Argentina is a group of American stakeholders that seek the full payment of Argentine debt to holdouts and vulture funds. The Argentine government compared it with an actual task force, operating against Argentina. See al ...
to lobby the Argentine government, in addition to seeking redress by attempting to seize Argentine foreign reserves. In 2016, Argentina cancelled its debt with the holdout creditors, which received returns in the order of the hundreds of percentage points.


The determinants of external debt crises in developing countries

Some of the major risk factors which increase the probability of the external debt crises in developing countries include high level of inflation, relatively large share of short term debt in external debt, denomination of the debt in foreign currency, decrease of the terms of trade over time, unsustainable total debt service relative to GNI, high income inequality, and high share of agriculture in GDP. At the same time, holding foreign exchange reserves is a strong protective measure against an external debt crisis.


Recent debt relief

37 impoverished countries have recently received partial or full cancellation of loans from foreign governments and international financial institutions, such as the IMF and World Bank under the Heavily Indebted Poor Countries (HIPC) Initiative, see table below. A further two countries, Eritrea and Sudan are in the process towards full debt relief, Zimbabwe has unsustainable debt but has not made the reforms necessary to participate in the program. Under the
Jubilee 2000 Jubilee 2000 was an international coalition movement in over 40 countries that called for cancellation of third world debt by the year 2000. This movement coincided with the Great Jubilee, the celebration of the year 2000 in the Catholic Churc ...
banner, a coalition of groups joined together to demand debt cancellation at the G7 meeting in Cologne,
Germany Germany,, officially the Federal Republic of Germany, is a country in Central Europe. It is the second most populous country in Europe after Russia, and the most populous member state of the European Union. Germany is situated betwe ...
. As a result, finance ministers of the world's wealthiest nations agreed to debt relief on loans owed by qualifying countries. A 2004 World Bank/IMF study found that in countries receiving debt relief, poverty reduction initiatives doubled between 1999 and 2004.
Tanzania Tanzania (; ), officially the United Republic of Tanzania ( sw, Jamhuri ya Muungano wa Tanzania), is a country in East Africa within the African Great Lakes region. It borders Uganda to the north; Kenya to the northeast; Comoro Islands and ...
used savings to eliminate school fees, hire more teachers, and build more schools.
Burkina Faso Burkina Faso (, ; , ff, 𞤄𞤵𞤪𞤳𞤭𞤲𞤢 𞤊𞤢𞤧𞤮, italic=no) is a landlocked country in West Africa with an area of , bordered by Mali to the northwest, Niger to the northeast, Benin to the southeast, Togo and Ghana to the ...
drastically reduced the cost of life-saving drugs and increased access to clean water.
Uganda }), is a landlocked country in East Africa East Africa, Eastern Africa, or East of Africa, is the eastern subregion of the African continent. In the United Nations Statistics Division scheme of geographic regions, 10-11-(16*) territor ...
more than doubled school enrollment. In 2005, the
Make Poverty History Make Poverty History are organizations in a number of countries, which focus on issues relating to 8th Millennium Development Goal such as aid, trade and justice. They generally form a coalition of aid and development agencies which work togethe ...
campaign, mounted in the run-up to the
G8 Summit The Group of Eight (G8) was an inter-governmental political forum from 1997 until 2014. It had formed from incorporating Russia into the Group of Seven, or G7, and returned to its previous name after Russia left in 2014. The forum originated ...
in Scotland, brought the issue of debt once again to the attention of the media and world leaders. Some have claimed that it was the
Live 8 Live 8 was a string of benefit concerts that took place on 2 July 2005, in the G8 states and in South Africa. They were timed to precede the G8 conference and summit held at the Gleneagles Hotel in Auchterarder, Scotland, from 6–8 July 200 ...
concerts which were instrumental in raising the profile of the debt issue at the G8, but these were announced after the Summit pre-negotiations had essentially agreed the terms of the debt announcement made at the Summit, and so can only have been of marginal utility. Make Poverty History, in contrast, had been running for five months prior to the Live 8 announcement and, in form of the
Jubilee 2000 Jubilee 2000 was an international coalition movement in over 40 countries that called for cancellation of third world debt by the year 2000. This movement coincided with the Great Jubilee, the celebration of the year 2000 in the Catholic Churc ...
campaign (of which Make Poverty History was essentially a re-branding) for ten years. Debt cancellation for the 18 countries qualifying under this new initiative has also brought impressive results on paper. For example, it has been reported that Zambia used savings to significantly increase its investment in health, education, and rural infrastructure. The
fungibility In economics, fungibility is the property of a good or a commodity whose individual units are essentially interchangeable, and each of whose parts is indistinguishable from any other part. Fungible tokens can be exchanged or replaced; for exam ...
of savings from debt service makes such claims difficult to establish. Under the terms of the G8 debt proposal, the funding sources available to
Heavily Indebted Poor Countries The heavily indebted poor countries (HIPC) are a group of 39 developing countries with high levels of poverty and debt overhang which are eligible for special assistance from the International Monetary Fund (IMF) and the World Bank. The HIPC ...
(HIPC) are also curtailed; some researchers have argued that the net financial benefit of the G8 proposals is negligible, even though on paper the debt burden seems temporarily alleviated. The 2005 HIPC agreement did not wipe all debt from HIPC countries, as is stated in the article. The total debt has been reduced by two-thirds, so that their debt service obligations fall to less than 2 million in one year. While celebrating the successes of these individual countries, debt campaigners continue to advocate for the extension of the benefits of debt cancellation to all countries that require cancellation to meet basic human needs and as a matter of justice. To assist in the reinvestment of released capital, most
International Financial Institutions An international financial institution (IFI) is a financial institution that has been established (or chartered) by more than one country, and hence is subject to international law. Its owners or shareholders are generally national governments, al ...
provide guidelines indicating probable shocks, programs to reduce a country’s vulnerability through export diversification, food buffer stocks, enhanced climate prediction methods, more flexible and reliable aid disbursement mechanisms by donors, and much higher and more rapid contingency financing. Sometimes outside experts are brought to control the country's financial institutions.


List of Heavily Indebted Poor Countries


2004 Indian Ocean earthquake

When the
2004 Indian Ocean earthquake An earthquake and a tsunami, known as the Boxing Day Tsunami and, by the scientific community, the Sumatra–Andaman earthquake, occurred at 07:58:53 local time (UTC+7) on 26 December 2004, with an epicentre off the west coast of northern Suma ...
and tsunami hit, the G7 announced a moratorium on debts of twelve affected nations and the
Paris Club The Paris Club (french: Club de Paris) is a group of officials from major creditor countries whose role is to find co-ordinated and sustainable solutions to the payment difficulties experienced by debtor countries. As debtor countries undertake ...
suspended loan payments of three more. By the time the Paris Club met in January 2005, its 19 member-countries had pledged $3.4 billion in aid to the countries affected by the tsunami. The debt relief for tsunami-affected nations was not universal. Sri Lanka was left with a debt of more than $8 billion and an annual debt service bill of $493 million. Indonesia retained a foreign debt of more than $132 billion and debt service payments to the World Bank amounted to $1.9 billion in 2006. In 2015 the total debt of Sri Lanka is $55 billion. Some of this is due to borrowing to help with infrastructure and some of it is due to corruption. The last time they sought help from the IMF was 2009, they received a $2.6 billion loan. They have yet to recover from the tsunami.


G8 Summit 2005: aid to Africa and debt cancellation

The traditional meeting of G8 finance ministers before the summit took place in
London London is the capital and largest city of England and the United Kingdom, with a population of just under 9 million. It stands on the River Thames in south-east England at the head of a estuary down to the North Sea, and has been a majo ...
on 10 and 11 June 2005, hosted by then-
Chancellor Chancellor ( la, cancellarius) is a title of various official positions in the governments of many nations. The original chancellors were the of Roman courts of justice—ushers, who sat at the or lattice work screens of a basilica or law cou ...
Gordon Brown James Gordon Brown (born 20 February 1951) is a British former politician who served as Prime Minister of the United Kingdom and Leader of the Labour Party (UK), Leader of the Labour Party from 2007 to 2010. He previously served as Chance ...
. On 11 June, agreement was reached to write off the entire
US$ The United States dollar (symbol: $; code: USD; also abbreviated US$ or U.S. Dollar, to distinguish it from other dollar-denominated currencies; referred to as the dollar, U.S. dollar, American dollar, or colloquially buck) is the official ...
40 billion debt owed by 18
Heavily Indebted Poor Countries The heavily indebted poor countries (HIPC) are a group of 39 developing countries with high levels of poverty and debt overhang which are eligible for special assistance from the International Monetary Fund (IMF) and the World Bank. The HIPC ...
to the
World Bank The World Bank is an international financial institution that provides loans and grants to the governments of low- and middle-income countries for the purpose of pursuing capital projects. The World Bank is the collective name for the Interna ...
, the
International Monetary Fund The International Monetary Fund (IMF) is a major financial agency of the United Nations, and an international financial institution, headquartered in Washington, D.C., consisting of 190 countries. Its stated mission is "working to foster globa ...
and the African Development Fund. The annual saving in debt payments amounts to just over US$1 billion. War on Want estimates that US$45.7 billion would be required for 62 countries to meet the
Millennium Development Goals The Millennium Development Goals (MDGs) were eight international development goals for the year 2015 that had been established following the Millennium Summit of the United Nations in 2000, following the adoption of the United Nations Millenniu ...
. The ministers stated that twenty more countries, with an additional US$15 billion in debt, would be eligible for
debt relief Debt relief or debt cancellation is the partial or total forgiveness of debt, or the slowing or stopping of debt growth, owed by individuals, corporations, or nations. From antiquity through the 19th century, it refers to domestic debts, in particu ...
if they met targets on fighting
corruption Corruption is a form of dishonesty or a criminal offense which is undertaken by a person or an organization which is entrusted in a position of authority, in order to acquire illicit benefits or abuse power for one's personal gain. Corruption m ...
and continue to fulfill structural adjustment conditionalities that eliminate impediments to
investment Investment is the dedication of money to purchase of an asset to attain an increase in value over a period of time. Investment requires a sacrifice of some present asset, such as time, money, or effort. In finance, the purpose of investing i ...
and calls for countries to privatize industries, liberalize their economies, eliminate subsidies, and reduce budgetary expenditures. The agreement came into force in July 2006 and has been called the "Multilateral Debt Reduction Initiative", MDRI. It can be thought of as an extension of the
Heavily Indebted Poor Countries The heavily indebted poor countries (HIPC) are a group of 39 developing countries with high levels of poverty and debt overhang which are eligible for special assistance from the International Monetary Fund (IMF) and the World Bank. The HIPC ...
(HIPC) initiative. This decision was heavily influenced and applauded by international development organizations like
Jubilee 2000 Jubilee 2000 was an international coalition movement in over 40 countries that called for cancellation of third world debt by the year 2000. This movement coincided with the Great Jubilee, the celebration of the year 2000 in the Catholic Churc ...
and the ONE Campaign. Opponents of debt cancellation suggested that structural adjustment policies should be continued. Structural adjustments had been criticized for years for devastating poor countries. For example, in Zambia, structural adjustment reforms of the 1980s and early 1990s included massive cuts to health and education budgets, the introduction of user fees for many basic health services and for primary education, and the cutting of crucial programs such as child immunization initiatives.


Criticism of G8 debt exceptions

Countries that qualify for the HIPC process will only have debts to the World Bank, IMF and African Development Bank canceled. Criticism was raised over the exceptions to this agreement as Asian countries will still have to repay debt to the Asian Development Bank and Latin American countries will still have to repay debt to the
Inter-American Development Bank The Inter-American Development Bank (IDB or IADB) is an international financial institution headquartered in Washington, D.C., United States of America, and serving as the largest source of development financing for Latin America and the Caribb ...
. Between 2006 and 2010 this amounts to US$1.4 billion for the qualifying Latin American countries of Bolivia, Guyana, Honduras and Nicaragua.


See also

*
Committee for the Abolition of the Third World Debt The Committee for the Abolition of Illegitimate Debt (CADTM), formerly called the Committee for the Cancellation of the Third World Debt (CCTWD), is an international network of activists founded on 15 March 1990 in Belgium that campaigns for the ca ...
*
Domestic Liability Dollarization Domestic liability dollarization (DLD) refers to the denomination of banking system deposits and lending in a currency other than that of the country in which they are held. DLD does not refer exclusively to denomination in US dollars, as DLD encomp ...
*
Eurodad Eurodad (European Network on Debt and Development) is a network of 53 non-governmental organisations and seven statutory allies from 29 European countries. Eurodad and its members make up a network, this network researches and works on issues tha ...
(European Network on Debt and Development) * Haiti's external debt *
Jubilee USA Network Jubilee USA Network is a nonprofit financial reform organization based in Washington D.C. Jubilee USA's work began in conjunction with the global Jubilee 2000 movement, founded in the late 1990s to advocate for debt relief for developing countri ...
*
List of countries by public debt Below is a list of countries and territories by government debt , public debt (also called government debt or sovereign debt). ''Gross'' government debt is government financial liabilities that are debt instruments. A ''debt instrument'' is a f ...
* List of countries by household debt * List of countries by corporate debt *
List of countries by external debt This is a list of countries by external debt, it is the total public and private debt owed to nonresidents repayable in internationally accepted currencies, goods or services, where the public debt is the money or credit owed by any level of gov ...
*
Odious debt In international law, odious debt, also known as illegitimate debt, is a legal theory that says that the national debt incurred by a despotic regime should not be enforceable. Such debts are, thus, considered by this doctrine to be personal debts ...
*
Original Sin (economics) Original sin is a term in economics literature, proposed by Barry Eichengreen, Ricardo Hausmann, and Ugo Panizza in a series of papers to refer to a situation in which "most countries are not able to borrow abroad in their domestic currency." The ...
*
Sovereign debt A country's gross government debt (also called public debt, or sovereign debt) is the financial liabilities of the government sector. Changes in government debt over time reflect primarily borrowing due to past government deficits. A deficit o ...
*
World debt The global debt is 305 trillion US $ in 2022, including debt by public and private debtors. (A trillion is defined here as a million millions, or 1012.) This debt consists of * 23% private household debt * 38% private debt of non-financial corporat ...


References


Further reading

*


External links


European Network on Debt and Development

International Debt Observatory

Privatization of Third World
from th
Dean Peter Krogh Foreign Affairs Digital Archives
{{DEFAULTSORT:Developing Countries' Debt Economics in developing countries Third World debt cancellation activism International development