GLOBAL INTERDEPENDENCE - INTERNATIONAL DEBT AND INTERNATIONAL AID

  • Created by: Frances
  • Created on: 14-04-18 20:09

THE NATURE AND PROBLEMS OF DEBT

A national deficit occurs when the government anual spending exceeds the income that it generates through taxes and by other means. A national debt is accumulation yearly deficits. A problem for governments with debt is that interest payments on debt must be made, reducing the amount of money available to spend on other things. To give a better indication of the seriousness of a country's debts, debt is often expressed as a percentage of GDP

The country which owes the most money is USA with the UK second. Like other HICs these countries have large assets against which they can borrow money, therefore debt is thought to be manageable unless there's a global financial crisis. In 2012 USA spent around US$ 220 billion in net interest on its debt

For LICs debt is a greater problem. A high proportion of their income is spent on interest payments to the IMF,  world bank and governments of HICs, limiting the amount of money available to spend on infrastructure such as roads, schools, hospitals and developing the economy through industry and agriculture.

DEBT SERVICE RATIO is the proportion of a country's exports earnings needed to meet its debt repayments. For some African countries this can be as high as 30%

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THE DEBT CRISIS & DEBT RELEIF

Reasons why the poorest countries in Africa have a debt crisis

  • During the 1970s interest rate for low which made it easy for developing countries to borrow externally for development projects. There was excessive lending to African governments.
  • Lenders were prepared to invest in countries with poor governance corrupt leaders and no democratic scrutiny of government borrowing and spending 
  • Wars in the middle east in the 1970s lead to rising oil prices. The oil producing countries invested in banks. In turn the banks targeted LIC's with cheap credit
  • The global recession of 1979 to 1981 cost commodity market and prices to collapse. This hit the LIC's which were heavily dependent on the export of primary products
  • Droughts in 1981 and 1982 affected Africa's cash crop production
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THE DEBT CRISIS & DEBT RELIEF #2

  • High interest rate throughout the 1980s made it difficult for Africa to service the debts previously built up when interest rates were low
  • The US $ decreased in value between 1985 and 1999. Much of Africa's debts was in currencies which appreciated against the us dollar therefore the debts grew
  • Debts were rescheduled to provide cash flow, but on punitive terms
  • Protectionism in the world market for agricultural products made it difficult for African countries to increase exports and earn their way out of debt
  • Civil wars affected much of the continent in the 1970s
  • Population growth rates of over 2.5% per year led to a growing demand for goods and services

Greece started to have deficits at the start of 1980s. Since 1996 the deficits began to grow particularly after Greece joined the euro currency in 2001. The reasons for the deficits include:

  • Excessive spending. Deficits finance large military expenditure pensions and other social benefits
  • Low GDP growth rate and poor competitiveness government jobs
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THE DEBT CRISIS & DEBT RELIEF #3

  • Debt was not reduced during the years with strong economic growth so the government could not continue running large deficits in the years with low growth
  • Budget compliance. The government exceeded it's spending plans
  • Accuracy of statistics in each year of the five years from 2005 to 2009 so EU statistical agency Eurostat noted reservation about the accuracy of greece's data
  • Tax evasion and corruption. Tax incomes fell below the expected level
  • Hidden borrowing. In 2010 it was revealed that various banks developed financial products which enabled the governments of Greece, iItaly and many other European countries to hide their boring, this allowed Greece to exceed recommended limits of deficit and dept

In April 2010 the credit agencies downgraded the Greek economy so that private capital markets were no longer able for Greece as a source of funding. On 2nd May 2010 the euro currency zone countries and the international monetary fund agreed on 110 billion euro bailout loan for greece conditional on the following points:

  • Implementation of austerity measures, to restore the fiscal BALANCE
  • Privatisation of government assets worth €50 billion, by the end of 2015
  • Implementation of reforms, to improve competitiveness and growth prospects.
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DEBT RELIEF

  • Because the southern European countries with debt problems are part of the euro currency zone measures to reduce the debt have been agreed by the EU
  • For LICs with debt problems, other systems exist. The Heavily Indebted Poor Countries (HIPC) initiative is a joint IMF - World Bank approach to debt reduction. Launched in 1996, it was intended to make debt manageable for MICs and LICs. By 2014 debt reduction packages under the HIPC initiative were agreed for 36 countries, 30 of them in Africa.
  • In 2005 to help accelerate progress towards the United Nation's Millennium Development Goals (MDGs) the HIPC initiative was supplemented by the Multilateral Debt Relief Initiative (MDRI). This provides 100% relief on eligible debts by the IMF, the World Bank and the African Development Fund (AfDF)  for countries completing the HIPC initiative process. In 2007 the Inter-American Development Bank (IaDB) also decided to provide beyond HIPC debt relief to the five American HIPCs (Bolivia, Guyana, Haiti, Honduras and Nicargua)
  • In the two stage approval process, countries must meet certain financial criteria, commit to poverty reduction through policy changes and demonstrate a good track record over time
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DEBT RELIEF - HIPC

DECISION POINT, to be considered for HIPC assistance a country must fulfill the following four conditions

  • Being eligible to borrow from the World Bank's International Development Agency, which provides interest free loans and grants to the world's poorest countries and from the IMF Poverty Reduction and Growth Trust, which provides loans to low-income countries at subsidised rates.
  • Face an unsustainable debt burden that cannot be addressed through traditional debt relief mechanisms
  • Have established a track record of reform and sound policies through IMF and World Bank supported programs
  • Have developed a Poverty Reduction Strategy Paper (PRSP) through a broad-based participatory process in the country
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DEBT RELIEF - HIPC

In 2014 Eritrea, Somalia and Sudan had been identified as potentially eligible for HIPC Initiative assistance, but had not yet reached their decision points. Four years on and they are still Pre-Decision-Point Countries.

COMPLETION POINT, in order to receive full and irrevocable reduction in debt available under the HIPC Initiative, a country must:

  • Establish a further track record of good performance under programmes supported by loans from the IMF and the World Bank
  • Implement satisfactorily key reforms agreed at the decision point
  • Adopt and implement it's PRSP for at least one year

After the completion point, fill debt relief committed at the decision point is provided.

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DEBT RELIEF - SUCCESSES & WEAKNESSES

SUCCESSES:

  • The countries have been able to increase expenditure on health, education and other social services. On average, such spending is about five times the amount of debt services payments 
  • The debt service payments declined 
  • The countries have more cautious borrowing policies and strengthen their public debt management 
  • It has allowed exports to increase, providing more foreign exchange 

WEAKNESSES: 

  • It encourages a shift to cash crops for export and away from food crops for domestic consumption 
  • Cuts to government expenditure have encouraged the sale of state assets to TNCs. This may also lead to land degradation and deforestation
  • Chad, Eritrea, Somalia and Sudan face difficulties of preserving peace, stable government and delivering basic services
  • Resources available are insufficient to finance the costs of debt relief to all countries that meet the initial conditions for debt relief and may reach the decision point. If Sudan and Somalia progress to the decision point, there would be an urgent need to find more resources 
  • Creditor participation in the HIPC Initiative is voluntary. Eligible countries get full debt relief from the largest creditors, but some smaller creditors have only delivered a small share of their expected relief 
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TYPES OF AID & DONORS

Why should HICs help MICs and LICs to develop?

  • Making up for past mistakes- many problems in LICs are the result of activities by HICs, e.g. colonialism, unfair trade and globalisation
  • Security- political instability caused by poverty in LICs can threaten the HICs are materials and markets
  • Aid helps trade- with a richer economy, an LIC can afford more imports, often from the HICS that gave the aid

RELIEF AID

Relief aid is also termed emergency aid humanitarian or aid. It is help given to people in distress or immediate threat of death. It aims to relieve suffering and not the causes of the problem. The causes of the suffering are wars or natural disasters such as drought, earthquakes or floods. Relief aid involves providing vital services such as food, water, shelter or medical assistance and the logistics or transport to support them. It does not involve armed forces protecting civilians from violence. The World Food Programme’s (WFP) work in the drought-stricken areas of the Sahel in 2012 and 2013

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TYPES OF AID

RELIEF AID CNTD.

United Nations General Assembly Resolution 46/182 gives powers to the United Nations Office for the Coordination Humanitarian Affairs (OCHA) to coordinate the of international humanitarian response to natural disasters. The 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

Development aid is given by HICs to support economic development or social development in LICs. It aims to alleviate poverty in the long term, rather than alleviate immediate crises.

The Organisation for Economic Co-operation and Development (OECD, an international economic organisation of 34 countries) uses official development assistance (ODA) as a measure of development aid. The OECD reported that ODA rose by 6.1 per cent in real terms in 2013 to reach the then highest level ever recorded.

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TYPES OF AID- DEVELOPMENT AID

Donors provided a total of US$ 134.8 billion in net official and development assistance. Aid to developing countries grew steadily from 1997 to a peak in 2010. It fell in 2011 and 2012 as many governments took austerity measures and trimmed aid budgets. Some OECD countries have a target of spending 0.7 per cent of their gross national income (GNI) on development aid.

The largest donors by volume were USA, UK, Germany, Japan and France. Denmark, Luxembourg, Norway and Sweden exceed the 0.7 per cent ODA/GNI target and the UK met it for the first time in 2013. The Netherlands fell below 0.7 per cent for the first time since 1974. Aid includes grants (where no repayment is needed), loans p where interest rates are lower than market rates and debt relief . It does not include foreign direct investment (FDI) or remittances from migrant workers to their home countries. In practice the boundary between relief aid and development aid can become blurred.

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TYPES OF AID- DEVELOPMENT AID

Money is spent on the following things:

→ Food aid, either by importing food from the 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, such as debt relief.

→ Technical assistance, such as engineers, doctors or teachers.

→ International research, for example into 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 (e.g. micro-HEP projects).

 

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TYPES OF AID - TIED AID

This is aid that must be spent in the donor country or countries on goods or services. In 2006 the OECD estimated that 58 per cent of ODA was tied. Tying aid implies that the reasons for giving aid are not always altruistic. There are two types of reason for tying aid:

→ Economic reasons: the donor country wants to increase its exports.

→ Political reasons: the 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 capite in the 20th century, the Soviet Union and USA each aid to influence the internal politics of other nations.

Tying aid may increase development project costs if the goods or services could have been found more cheaply in another country, therefore reducing the monetary value of the aid.

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TYPES OF AID - Bilateral and multilateral aid

Government aid can be:

→ Bilateral: between two countries, e.g. the UK gives to Mozambique.

→ Multilateral: involving more than two countries UK, France and USA give money to the UN or the v Bank, which passes it on to an LIC.

In addition non-governmental organisations(NGOs)provide voluntary aid. These are mainly charities devoted to helping people in LICs. Examples include: Oxfam, Save the Children, Christian Aid, Live 8 and Cafod.

 

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IMPACTS OF AID ON RECEIVING COUNTRIES

Aid reliance

Aid can have the opposite effect from that which is intended. For example, in Swaziland between 2000 and 2010, up to two-thirds of the 1.2 million population has relied on donor food assistance. Between 1970 and 1990 life expectancy rose from 48 to 61 but by 2012 it was back to 48. The population has been weakened by HIV/AIDS and other HIV related disease. The United Nations' World Food Programme supplied relief food during emergency situations and food directly to the government during non-emergency times. This led some farmers to think that they would always be supplied and they became dependent on the aid. The market for local produce is also damaged. More recently the United Nat World Food Programme and other organisations have moving away from food distribution towards programmes encouraging self-sufficient food production.

Recipients of donated western clothing will not buy clothing from local producers, putting them out of business.

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IMPACTS OF AID ON RECEIVING COUNTRIES #2

Problems of tied aid

It is often cheaper to use local expertise rather than expensive overseas consultants, engineers, etc. In the USA the 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. As a result, tying aid is estimated to increase the cost of aid by 15-30 per cent. Giving cash or cash vouchers instead of imported goods is a cheaper, more efficient way to deliver aid.

Counterproductive conditions on aid

The World Bank and IMF attach conditions to loans such as the elimination of state subsidies and the privatisation of services. This might mean that local people cannot afford goods such as fertilisers. Subsidies for fertiliser and seed are claimed to have increased agricultural productivity in Malawi.

Unfair conditions

Subsidies are given to producers in HICs such as EU ol subsidies. This subsidy might be greater in wided to the LIC.

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IMPACTS OF AID ON RECEIVING COUNTRIES #3

Prioritising aid

In the health sector, aid often targeted at very high profile diseases whereas it may be more effective to concentrate on more general issues.

Loan repayments

It is sometimes claimed that HIPC Initiative loan repayments are set too high. Other loans lead to further debts which the country struggles to pay off. Instead of using the country's earnings to improve the quality of life of the people, large amounts of money are being repaid to foreign banks.

Corruption

There are many examples of aid not reaching those who need it. Money is paid out to fake bank accountscontrolled by corrupt elites, prices are increased for transport or warehousing, and goods are sold to the black market.

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IMPACTS OF AID ON RECEIVING COUNTRIES #4

Top-down or bottom-up?

There is a philosophical debate as to how aid should be organised. Some people have argued that the top-down model does not work.

Top-down delivery of aid :  

  • Governments implement central programmes

  • Governments held to account by the donors

Bottom-up delivery of aid :

  • Directly aids individuals rather than governments

  • Local markets are developed

  • Implementation is devolved to the local level

  • Local people develop their creativity and entrepreneurship

  • Local people develop the vision for projects delivery of aid

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IMPACTS OF AID ON RECEIVING COUNTRIES #5

Drain of talent

Providing aid to health sectors in LICs and the training of medical staff is undermined by migration policies in HICs that encourage the immigration of LIC doctors and nurses.

Hi-tech aid can be a problem

For example tractors are expensive to run (imported fuel) and difficult to repair when they break down - local people may not have the necessary skills.

The poorest countries are not a priority

Commercial and political interests mean that middle income countries get more help than the poorest countries with small markets.

Fragmentation increases bureaucracy

The large number of government organisations and NGOs involved leads to overlap and inefficiency as time is spent in coordinating the work of different organisations. Donor institutions make proposals for aid projects to recipient countries who make a plan for the use of the aid.

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IMPACTS OF AID ON RECEIVING COUNTRIES #6

Is it working?

There are widely-differing views as to whether aid actually does help development or whether it even is counterproductive. Some argue that the growth that has occurred has been small while others say that without it things might have got worse. The UN Millennium Development Goals (MDGs) provide one measure. The UN Millennium Summit in 2000 established eight Millennium Development Goals. Many of these goals are addressed through aid, but it is difficult to assess the extent to which successes and failures in meeting these targets are due to aid.

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