13 Global interdependence
13.2 Debt and aid and their management Debt: causes, nature and problems Many experts single out debt as the major problem for the world’s poorer nations. The term debt generally refers to external debt (foreign debt). Many poor countries are currently paying back large amounts in debt repayments while at the same time struggling to provide basic services for their populations. An ever-increasing proportion of new debt is used to service interest payments on old debts. The debt service ratio of many poor countries is at a very high level. Critics say that developed countries should do more to help the poor countries through debt relief and by opening their markets to exports from developing countries. The total external debt of the poorest countries of the world (the ‘low-income countries’) was $375 billion in 2006.
How did the debt crisis come about?
The debt crisis began with the Arab-Israeli war of 1973–74, which resulted in a sharp increase in oil prices. Governments and individuals in the oil-producing countries invested the profits from oil sales in the banks of MEDCs. Eager to profit from such a high level of investment, these banks offered relatively low-interest loans to poorer countries. They were encouraged to exploit raw materials and grow cash crops so that they could pay back their loans with profits made from exports. However, periods of recession in the 1980s and 1990s led to rising inflation and interest rates. At the same time crop surpluses resulted in a fall in prices. As a result, the demand for exports from developing countries fell and export earnings declined significantly as a result. These factors, together with oil price increases, left many developing countries unable to pay the interest on their debts. Loans can help countries to expand their economic activities and set up an upward spiral of development if used wisely. However, many of the loans that burden the world’s poorest countries were given under dubious circumstances and at times at very high rates of interest. Many development economists also focus on the legacy of colonialism, arguing that the colonising powers left their former colonies with high and unfair levels of debt when they became independent. In recent years much of the debt has been ‘rescheduled’ and new loans have been issued. However, new loans have frequently been granted only when poor countries agreed to very strict conditions under ‘structural adjustment programmes’, which have included: l agreeing to free trade measures, which have opened up their markets to intense foreign competition l severe cuts in spending on public services such as education and health l the privatisation of public companies However, despite the disadvantages that many countries have suffered over the medium and long-term from improper lending, debt is a vital component of the global economic system.
Revised
Debt in this context refers to external debt (foreign debt), which is that part of the total debt in a country owed to creditors outside the country. The debtors can be the government, corporations or private households. The debt includes money owed to commercial banks, other governments, or international financial institutions such as the World Bank. Debt service ratio is the ratio of debt service payments of a country to that country’s export earnings. Debt relief is cancellation of debts owed by developing nations to industrialised nations or institutions such as the World Bank, in order to allow the government to shift funds toward social development.
Typical mistake Sometimes student’s answers imply that only poor countries have significant debts. While LEDCs owe substantial amounts of money, MEDCs have borrowed much more. The USA owes more money to the rest of the world than any other country. The point here is that rich countries have huge assets against which they can borrow.
A debt crisis occurs if major debtors are unable or unwilling to pay the interest and redemption payments due on their debts, or if creditors are not confident they will do so. Colonialism is the building and maintaining of colonies in one territory (or a number of territories) by people from another territory.
Figure 13.3 is a Christian Aid newspaper advertisement illustrating the plight of Haiti, one of the world’s poorest countries, after the devastating earthquake of January 2010. Some countries need to put aside between 20% and 30% of their export earnings to meet their debt repayments, which can prove to be a crippling burden for nations with very low incomes. 186
Cambridge International AS and A Level Geography Revision Guide
