Transcript Why is Development unequal Part 2 Debt

Debt
The debt Crisis - Background
Watch the next section of Red Nose video on Debt and answer
the questions in the worksheet in your booklet
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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.
What happened next?
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MEDCs imposed tariffs on imports.
E.g. Mexico in 1982 couldn’t even pat off the interest so
defaulted.
World 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.
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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 principals
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Poorer countries need cash, so borrow from western creditors
and international finance institutions.
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.
Governments spending on social services e.g. health care and
education is then cut to increase exports and make the economy
more efficient.
WB imposes SAPS (structural adjustment programmes) to make
economies more efficient.
Poorer countries should embrace the idea of a free market.
Was the money used effectively?
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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.
Tasks:
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.
Structural adjustment
programmes (SAPs) – A solution?
The main theme is intervention by the World Bank:
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Countries should cut back on social spending,
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Privatise the public sector enterprises
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Devalue their currency which leads to an increase in
exports BUT imports become more expensive.
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However, in Mozambique this lead to rising
unemployment (50% in 1992)
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It caused protests in countries, civil unrest and increased
unemployment mainly due to the decease in Public
spending.
The four elements of SAPs
Greater use of a countries resource base
2. Policy reforms to increase economic efficiency
3. Generation of foreign income through diversification of
the economy and increased trade
4. Reducing the active role of the state
They 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.
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Let’s examine some case studies:
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.
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Task:
1.Use this site:
http://www.imf.org/external/np/exr/facts/mozam/mozam.ht
m to write a summary of Mozambique's debt service
2. Use the Uganda case study provided, take notes and
decide from the evidence how effective SAPs have been.
Problems 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.
Taxes
MEDCs countries which decide to pay off debts is at the tax payers
expense.
Unemployment in the North
Loss of exports due to poorer countries not being able to afford imports
can lead to closure of factories and unemployment in the North.
Drugs
Illegal drug trade increases e.g. Cocaine in Columbia, Bolivia db Peru.
These are sent to the North creating problems in those countries.
Conflict
Debt increases conflict and spending occurs in the MEDCS e.g. war in
Iraq.
What do you notice about all these points?
What has been done to deal with
the problem of debt?
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
Solutions to the debt problems.
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Rescheduling –Different time
Debt for nature swaps-i.e. must preserve an
area e,g, rainforest
Debt sold to Transnational at a discount and the
country can use the money to invest in social
and economic growth.
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 initiative
This 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)