Nature and problems of debt at the national scale
national deficit occurs when governments annual spending exceeds income it
generates through taxes and other means. national debt is accumulation of years
deficits. problem for governments with debts is that interest payments must be
made, reducing amount of money available to spend.
debt is expressed as a % of GDP.
USA owes most, then UK. HICs have large assets which they can borrow money,
debt is manageable, unless global financial crisis. 2012, USA spent $220b in net
interest on its debt.
debt is bigger problem for LICs. high proportion of their income is spent on interest
payments, limiting amount of money to spend on infrastructure or developing the
economy. before the HIPC initiative, countries were spending more on debt service
than health and education. debt service ratio is proportion of a country export
earnings needed to meet its debt repayments (can be 30% for some African
countries).
ease with which a country can borrow money is shown by credit rating. reported by
4 major credit rating agencies; standard and poor’s, fitch, Moody’s and DBRS
(produce indices differently)
reasons for debt crisis
during 70s, low interest rates, easy for developing countries to borrow externally
for development projects. excessive lending to African governments
lenders prepared to invest in countries with poor governance, corrupt leaders and
no democratic scrutiny of government borrowing and spending
middle east wars in 70s led to rising oil prices. oil producing counties invested in
banks. banks then targeted LICs with cheap credit
1979-81 global recession caused commodity markets and prices to collapse. hit
the LICs, heavily dependent on export of primary products
drought between 1981-84 severely affected Africa’s cash crop production
high interest rates throughout 80s made it difficult for Africa to service debts
previously built up when interest rates were low
dollar decreased between 1985-90. most of Africa’s debt was in currencies which
appreciated against dollar, the debts grew
debts rescheduled to provide cash flow, on disciplinary terms
protectionism in worlds markets for agricultural products make it difficult for
African countries to increase exports and earn way out of debt
civil wars affected Africa in 1970s
pop growth rates over 2.5% a year led to growing demand for goods/services
before 2008, debt crises thought just for Africa bit global economic recession
triggered debt crisis in south Europe (Greece).
Greece started to have deficits at start of 80’s, since 1996, deficits grew after
Greece joined euro currency in 2001.
reasons for deficits
excessive spending. deficits financed large military expenditure, pensions and
other social benefits
low GDP growth rates and poor competitiveness
government debts, debt wasn’t reduced during years with strong economic growth
so government couldn’t continue running large deficits in years with low growth
budget compliance. government exceeded its spending plans
accuracy of statistics. in each of 5 years from 2005-09, EU statistical agency
aerostat noted a reservation about accuracy of Greece’s data
tax evasion and corruption. tax incomes have fallen below the expected level
hidden borrowing. in 2010 revealed that various banks developed financial
products which enabled Greece and Italy governments to hide borrowing. allowed
Greece to exceed recommenced limits of deficit and debt
April 2010, credit agencies downgraded the Greek economy so private capital
markets no longer available for Greece as a source of funding. May 2010, euro
currency zone and IMF agreed on €110b bailout loan on the conditions of
implementation of austerity measures to restore fiscal balance, privatisation of gov
assets with €50b by end of 2015, implementation of reforms, to improve
competitiveness and growth prospects.
Debt relief
south Europe countries with debt problems are part of euro currency zone,
measures to reduce debt have been agreed by EU. LICs in debt, other systems.
1996, heavily indebted poor countries (HIPC) initiative is a joint IMF-world bank
approach to debt reduction, to make debt manageable for MICs and LICs. 2014,
debt reduction packages for 36 countries agreed, 30 in Africa.
in 2005, to help accelerate progress towards UN’s MDGs, the HIPC initiative was
supplemented by the multilateral debt relief initiative (MDRI). provides 100% relief
on eligible debts by the IMF, world bank and African development fund for
countries completing the HIPC initiative process. 2007, inter-inter-Americas
development bank decided to provide additional debt relief to the 5 American
HIPCs (Bolivia, Guyana, Haiti, Honduras and Nicaragua)
in the 2-stage approval process, countries must meet certain financial criteria,
commit to poverty reduction through policy changes and demonstrate a good track
record over time.
Decision point
to be considered for HIPC assistance, country must fulfil these conditions…
be eligible to borrow money from world bank’s international development agency,
provides interest free loans and grants to poor countries and from IMF’s poverty
reduction and growth trust which provides loans to low income countries at
subsidised rates
face an unsustainable debt burden that can’t be addressed through traditional debt
relief mechanisms
have established a track record of reform and sound policies through IMF and world
bank programs
have developed a poverty reduction strategy paper through a broad-based
participatory process in the country
in 2014, Eritrea, Somalia and Sudan had been identified as potentially eligible for HIPC
initiative assistance but had not yet reached their decision points. after decision point
interim debt relief is provided. chad reached this stage by 2014.
Completion point
to receive full and irrevocable reduction in debt available under the HIPC initiative,
country must…
establish a further track record of good performance under programmes supported
by loans from the IMF and world bank
implement satisfactorily key reforms agreed at the decision point
adopt and implement its PRSP for at least one year
after the completion point, full debt relief committed at the decision point is provided,
35 countries reached this point in 2014
Successes
countries have been able to increase expenditure on health, education and other
social services, on average, such spending is about 5x the amount of debt service
payments
debt service payments declined
countries have more cautious borrowing policies and strengthen their public debt
management
allowed exports to increase, providing more foreign exchange
Weaknesses
resources available are insufficient to finance the cost of debt relief to all countries
that meet the initial conditions for debt relief and may reach decision point. if Somalia and Sudan progress to decision point, would be an urgent need to find
more resources.
encourages a shift to cash crops for export and away from food crops for domestic
consumption
cuts to government expenditure have encouraged sale of state assets to TNCs.
may also lead to land degradation and deforestation
Chad, Eritrea, Somalia and Sudan face difficulties of preserving peace stable
government and delivering basic services
creditor participation in HPIC initiative is voluntary. eligible countries get full debt
relief from the largest creditors but some smaller ones have only delivered a small
share of their expected relief.
Different types of aid and donors
reasons for HICs helping MICs and LICs to develop…
making up for past mistakes, many problems in LICs are result of HIC activities,
e.g. colonialism, unfair trade and globalisation
security — political instability caused by poverty in LICs can threaten the HICs raw
materials and markets
aid helps trade, richer economy, LIC can afford more imports, often from HICs that
have given trade
Relief aid
shown on TV through dramatic and disturbing images. also termed emergency aid
or humanitarian aid. help given to people in distress or immediate threat of death.
aims to relieve suffering and not to address the causes of the problem. causes of
suffering are wars or natural disasters. involves providing vital services and
logistics/transport to support them. doesn’t involve armed forces protecting
civilians from violence. world food programmes work in the drought-stricken areas
of the Sahel in 2012 and 2013.
UN general assembly resolution gives powers to united nations office for the
coordination of humanitarian affairs to coordinate the international humanitarian
response to natural disasters. Geneva conventions give power to the international
committee of the red cross to provide assistance and protection of civilians and
prisoners during times of war.
Development aid
given by HICs to support economic or social development in LICs. aims to alleviate
poverty in the long term, rather than alleviate immediate crises.
organisation for economic co-operation and development uses official development
assistance as a measure of development aid. OECD reported the ODA rose by 6.1%
in real terms in 2013 to reach the highest level ever recorded. donors provided a
total of $134.8b in net official development assistance. aid to developing countries
grew steadily from 1997-2010. fell in 2011-12 as many governments took austerity
measures and trimmed aid budgets. some OECD countries have a target of
spending 0.7% of their gross national income on development aid. largest donors
by volume were USA, UK, Germany, japan and France. Denmark Luxembourg
Norway and Sweden exceed the 0.7% ODA/GNI target and the UK met it for the
first time in 2013. Netherlands fell below 0.7% for first time since 1974
aid includes grants (no repayment), loans (interest rates lower than market rates)
and debt relief. doesn’t include foreign direct investment or remittances from
migrant workers to their home countries.
money is spent on…
food aid, by importing food form donor or providing cash to buy food
project aid for a specific purpose, such as building materials for a hospital or HEP
stations
programme aid: aid is given for a specific sector, such as funding of the health
sector of a country
budget support, e.g. debt relief
technical assistance, e.g. engineering, doctors or teachers
international research, e.g. new crop varieties or vaccines
intermediate technology: more sustainable projects which can be built and
maintained with local resources, employ people with traditional skills and rely on
renewable sources of energy.
Tied aid
aid that must be spent in the donor country or countries on goods/services.
in 2006 the OECD estimated that 58% of ODA was tied.
tying aid implies that the reasons for giving aid aren’t always altruistic.
can increase development project costs if goods/services could have been found
cheaper in another country, therefore reducing monetary value of the aid.
two types of reason for tying aid…
economic reasons: donor country wants to increase its exports
political reasons: donor country may have historical former colonial links with a
country or may wish to strengthen its geopolitical interests and cultural ties. during
the conflict between communism and capitalism in 20th C, Soviet Union and USA
each used aid to influence the internal politics of other nations
bilateral and multilateral aid
bilateral: between two countries. e.g. UK gives aid to Mozambique
multilateral: more than 2 countries, e.g. UK, France and USA gives money to UK or
world bank, passes onto LIC
NGOs provide voluntary aid, mainly charities devoted to helping people in LICs, e.g.
Oxfam and save the children
Debt relief
can be considered as a form of aid
Critical appreciation of impacts of aid on receiving countries
aid reliance: aid can have the opposite effect from that its intended. e.g. Swaziland
2000-10, 2/3’s of the 1.2m people relied on donor food assistance. 1970-90, liv
expectancy rose from 48 – 61 but by 2012 back to 48. pop been weakened by aids
and other HIV diseases. UN’s world food programme supplied relief food during
emergency situation and food directly to gov in non-emergency times. farmers
thought always be supplied so became aid dependent. market for local produce is
damaged. moved away from food distribution and towards self-sufficient food
production. recipients of donated western clothing won’t buy clothing from local,
putting them out of business.
problems of tied aid: cheaper to use local expertise. in USA, law requires food aid
to be spent on buying food in the USA, as a result, half of what is spent is used on
transport. tying aid is estimated to increase cost of aid by 15-30%. giving cash or
cash vouchers instead of imported goods is cheaper and more efficient.
counterproductive conditions on aid: world bank and IMF attach conditions to loans,
such as elimination of state subsidies and privatisation of services. may mean
locals can’t afford goods (fertilisers). subsidies for fertiliser/seed claimed to have
increase agricultural productivity in Malawi
unfair conditions: subsidies given to producers in HIC, may be greater in value than
that of aid provided to the LIC
fragmentation increases bureaucracy: large no of gov organisations and NGOs
involved leads to overlap and in efficiency as time is spent coordinating the work.
donor institutions make proposals for aid projects to recipient countries who make
a plan for the use of the aid
prioritising aid: health sector, aid often targeted at high profile diseases whereas
could be more effective to concentrate on more general issues.
loan repayments: sometimes claimed the HIPC initiative loan repayments are too
high. other loans lead to further debts which country can’t pay off. instead of using
country’s earnings to improve QoL, its being repaid to foreign banks.
corruption: many examples of aid not reaching those who need it. money paid out
to fake banks controlled by corrupt elites, transport/warehousing prices increased
or goods sold to black market
poorest countries aren’t a priority: commercial/political interests mean that MICs
get more help than LICs with small markets
top down delivery of aid: argued is doesn’t work. gov implements central
programmes. gov held to account by the donors.
bottom-up delivery of aid: directly aids individuals rather than gov. local markets
delivered. implementation is delegated to local level. locals develop their creativity
and entrepreneurship. locals develop the project’s vision.
drain of talent: providing aid to health sectors in LICs and medical staff training is
undermined by migration policies in HICs that encourage immigration of LIC
medical staff
hi-tech aid can be a problem: e.g. tractor is expensive to run (imported fuel) and
difficult to repair. locals may not have the skills
is it working? widely differing views on whether it does help development or if its
counterproductive. MDGs provide a measure. difficult to assess the extent to which
successes and failures in meeting these targets are due to aid.