Borrowing:
● Many developing countries have suffered debt crisis → began in 1982
● During 1960 and 1980 → HICs loaned NEEs/LICs large amounts of money to develop their countries
○ eg/ Mexico could not repay the US$80 billion it had borrowed
■ World Bank and International Monetary Fund (IMF)
● Helped re-stabilize economy after WW2
● Based in Washington DC , USA
● Lend money to countries on a global scale
■ Large commercial banks
● US and UK banks lent large amounts of money
● Levels of interest on bank loans were very high at the time
○ Made it difficult for Mexico to repay loans
● If money is invested wisely – country can generate enough wealth to pay back loan
○ eg/ World Bank lent Laos US$1 billion to build a dam
○ Dam generates hydroelectric power
■ Laos can earn US$2 billion by selling electricity to neighbour → Thailand over 25 years
● Will be enough money to repay USA
● Will have extra money to increase GNI of Laos
Drawbacks of borrowing:
● Difficult to pay off
● If country’s income does not increase , they could take out more loans → become dependent on the HIC
● Economic crash → if industry in HICs fails , LICs could suffer
● Source of exploitation if bankrupt → cannot pay back loan
○ HICs take resources and claim ownership of the LIC
● Lag time between loan and paying the debt → high interest rate → need to pay more
Debt relief:
● Debt relief = when HICs write-off LICs/NEEs debts , or lower interest rates so that the LIC has to pay back
less
○ Allows country to keep more money to develop , rather than pay back the debt
● Borrowing money led to serious problems
○ eg/ Indonesia
■ 1970 → World Bank had funded the modernisation of Indonesia with large loans
● Roads, power stations and ports were built to attract TNCs
■ The money went missing as it had been illegally transferred by Indonesia’s ruling family into
their accounts
○ eg/ DR of Congo
■ Previous Prime Minister , Joseph Mobutu pocketed US$4 billion that had been lent to his
country
■ Money was never recovered
■ After his death , World Bank decided that it would be unfair to expect DR of Congo to pay
back
● Their debt was written off
● As a result of pressure from charities/protests → other LICs have also been offered debt relief
● Debt relief can also be achieved by “conversation swaps”
○ HIC may agree to write off a LIC’s debt if the LIC agrees to do something back for the HIC
■ eg/ look after the HICs physical environment
○ eg/ USA allowed Indonesia to keep US$30 million of borrowed money
■ Indonesia had to protect the Sumatran forests (home to endangered species)
Microfinance loans:
● Microfinance loans = very small loans given to people in LICs to help them start a small business
○ Most well-known provider of microloans → Grameen Bank, Bangladesh
■ Has lent money to 9 million people
■ 97% of those people being women
○ Loan must be paid back
● Involves just a few $100 → can help kick-start development at a local level
○ If enough villages are developed in, the whole country can develop
● Microloans are needed because subsistence farmers find it hard to escape poverty
○ They can only grow food for their own needs → cannot sell it to make money
■ Seeds that they use don’t always produce enough crops
■ Soil may be infertile
○ Microfinance provides farmers with money that can lift them out of the poverty cycle
● Advantage:
○ Small commercial loans instead of charitable aid allows poorer people to feel independent
● Disadvantage :
○ It isn’t clear whether microfinance can reduce poverty on a large scale