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Debt of developing countries
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Debt of developing countries
The debt of developing countries usually refers to the external debt incurred by governments of developing countries.
There have been several historical episodes of governments of developing countries borrowing in quantities beyond their ability to repay. "Unpayable debt" is external debt with interest that exceeds what the country's politicians think they can collect from taxpayers, based on the nation's gross domestic product, thus preventing it from ever being repaid. The debt can result from many causes.
Some of the high levels of debt were amassed following the 1973 oil crisis. Increases in oil prices forced many poorer nations' governments to borrow heavily to purchase politically essential supplies. At the same time, OPEC funds deposited and "recycled" through western banks provided a ready source of funds for loans. While a portion of borrowed funds went towards infrastructure and economic development financed by central governments, a portion was lost to corruption and about one-fifth was spent on arms[citation needed].
There is much debate about whether the richer countries should be asked for money which has to be repaid. The Jubilee Debt Campaign gives six reasons why the third world debts should be cancelled. Firstly, several governments want to spend more money on poverty reduction but they lose that money in paying off their debts. Economist Jeff Rubin agrees with this stance on the basis that the money could have been used for basic human needs and says it is odious debt. Secondly, the lenders knew that they gave to dictators or oppressive regimes and thus, they are responsible for their actions, not the people living in the countries of those regimes. For example, South Africa has been paying off $22 billion which was lent to stimulate the apartheid regime. They have yet to recover from this, their external debt has increased to $136.6 billion while the number of people in the housing backlog has increased to 2.1 million from 1994's 1.5 million. Also, many lenders knew that a great proportion of the money would sometime be stolen through corruption. Next, the developing projects that some loans would support were often unwisely led and failed because of the lender's incompetence. Also, many of the debts were signed with unfair terms, several of the loan takers have to pay the debts in foreign currency such as dollars, which make them vulnerable to world market changes. The unfair terms can make a loan extremely expensive, many of the loan takers have already paid the sum they loaned several times, but the debt grows faster than they can repay it. Finally, many of the loans were contracted illegally, not following proper processes.
A seventh reason for canceling out some debts is that the money loaned by banks is generally created out of thin air, sometimes subject to a small capital adequacy requirement imposed by such institutions as the Bank of International Settlements. Maurice Félix Charles Allais, 1988 winner of the Nobel Memorial Prize in Economics, commented on this by stating: "The 'miracles' performed by credit are fundamentally comparable to the 'miracles' an association of counterfeiters could perform for its benefit by lending its forged banknotes in return for interest. In both cases, the stimulus to the economy would be the same, and the only difference is who benefits."
Some people argue against forgiving debt on the basis that it would motivate countries to default on their debts, or to deliberately borrow more than they can afford, and that it would not prevent a recurrence of the problem. Economists refer to this as a moral hazard. It would also be difficult to determine which debt is odious. Moreover, investors could stop lending to developing countries entirely.
An example of debt playing a role in economic crisis was the 1998–2002 Argentine great depression. During the 1980s, Argentina, like many Latin American economies, experienced hyperinflation. As a part of the process put in place to bring inflation under control, a fixed exchange rate was put into place between Argentina's new currency and the US dollar. This guaranteed that inflation would not restart, since for every new unit of currency issued by the Argentine Central Bank, the Central Bank had to hold a US dollar against this – therefore in order to print more Argentine currency, the government required additional US dollars. Before this currency regime was in place, if the government had needed money to finance a budget deficit, it could simply print more money (thus creating inflation). Under the new system, if the government spent more than it earned through taxation in a given year, it needed to cover the gap with US dollars, rather than by simply printing more money. The only way the government could get these US dollars to finance the gap was through higher tax of exporters' earnings or through borrowing the needed US dollars. A fixed exchange rate was incompatible with a structural (i.e., recurrent) budget deficit, as the government needed to borrow more US Dollars every year to finance its budget deficit, eventually leading to an unsustainable amount of US dollar debt.
Argentina's debt grew continuously during the 1990s, increasing to above US$120 billion. As a structural budget deficit continued, the government kept borrowing more, creditors continued to lend money, while the IMF suggested less state spending to stop the government's ongoing need to keep borrowing more and more. As the debt pile grew, it became increasingly clear the government's structural budget deficit was not compatible with a low inflation fixed exchange rate – either the government had to start earning as much as it spent, or it had to start (inflationary) printing of money (and thus abandoning the fixed exchange rate as it would not be able to borrow the needed amounts of US dollars to keep the exchange rate stable). Investors started to speculate that the government would never stop spending more than it earned, and so there was only one option for the government – inflation and the abandonment of the fixed exchange rate. In a similar fashion to Black Wednesday, investors began to sell the Argentine currency, betting it would become worthless against the US dollar when the inevitable inflation started. This became a self-fulfilling prophecy, quickly leading to the government's US dollar reserves being exhausted. The crisis led to riots in December 2001. In 2002, a default on about $93 billion of the debt was declared. Investment fled the country, and capital flow towards Argentina ceased almost completely.
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Debt of developing countries
The debt of developing countries usually refers to the external debt incurred by governments of developing countries.
There have been several historical episodes of governments of developing countries borrowing in quantities beyond their ability to repay. "Unpayable debt" is external debt with interest that exceeds what the country's politicians think they can collect from taxpayers, based on the nation's gross domestic product, thus preventing it from ever being repaid. The debt can result from many causes.
Some of the high levels of debt were amassed following the 1973 oil crisis. Increases in oil prices forced many poorer nations' governments to borrow heavily to purchase politically essential supplies. At the same time, OPEC funds deposited and "recycled" through western banks provided a ready source of funds for loans. While a portion of borrowed funds went towards infrastructure and economic development financed by central governments, a portion was lost to corruption and about one-fifth was spent on arms[citation needed].
There is much debate about whether the richer countries should be asked for money which has to be repaid. The Jubilee Debt Campaign gives six reasons why the third world debts should be cancelled. Firstly, several governments want to spend more money on poverty reduction but they lose that money in paying off their debts. Economist Jeff Rubin agrees with this stance on the basis that the money could have been used for basic human needs and says it is odious debt. Secondly, the lenders knew that they gave to dictators or oppressive regimes and thus, they are responsible for their actions, not the people living in the countries of those regimes. For example, South Africa has been paying off $22 billion which was lent to stimulate the apartheid regime. They have yet to recover from this, their external debt has increased to $136.6 billion while the number of people in the housing backlog has increased to 2.1 million from 1994's 1.5 million. Also, many lenders knew that a great proportion of the money would sometime be stolen through corruption. Next, the developing projects that some loans would support were often unwisely led and failed because of the lender's incompetence. Also, many of the debts were signed with unfair terms, several of the loan takers have to pay the debts in foreign currency such as dollars, which make them vulnerable to world market changes. The unfair terms can make a loan extremely expensive, many of the loan takers have already paid the sum they loaned several times, but the debt grows faster than they can repay it. Finally, many of the loans were contracted illegally, not following proper processes.
A seventh reason for canceling out some debts is that the money loaned by banks is generally created out of thin air, sometimes subject to a small capital adequacy requirement imposed by such institutions as the Bank of International Settlements. Maurice Félix Charles Allais, 1988 winner of the Nobel Memorial Prize in Economics, commented on this by stating: "The 'miracles' performed by credit are fundamentally comparable to the 'miracles' an association of counterfeiters could perform for its benefit by lending its forged banknotes in return for interest. In both cases, the stimulus to the economy would be the same, and the only difference is who benefits."
Some people argue against forgiving debt on the basis that it would motivate countries to default on their debts, or to deliberately borrow more than they can afford, and that it would not prevent a recurrence of the problem. Economists refer to this as a moral hazard. It would also be difficult to determine which debt is odious. Moreover, investors could stop lending to developing countries entirely.
An example of debt playing a role in economic crisis was the 1998–2002 Argentine great depression. During the 1980s, Argentina, like many Latin American economies, experienced hyperinflation. As a part of the process put in place to bring inflation under control, a fixed exchange rate was put into place between Argentina's new currency and the US dollar. This guaranteed that inflation would not restart, since for every new unit of currency issued by the Argentine Central Bank, the Central Bank had to hold a US dollar against this – therefore in order to print more Argentine currency, the government required additional US dollars. Before this currency regime was in place, if the government had needed money to finance a budget deficit, it could simply print more money (thus creating inflation). Under the new system, if the government spent more than it earned through taxation in a given year, it needed to cover the gap with US dollars, rather than by simply printing more money. The only way the government could get these US dollars to finance the gap was through higher tax of exporters' earnings or through borrowing the needed US dollars. A fixed exchange rate was incompatible with a structural (i.e., recurrent) budget deficit, as the government needed to borrow more US Dollars every year to finance its budget deficit, eventually leading to an unsustainable amount of US dollar debt.
Argentina's debt grew continuously during the 1990s, increasing to above US$120 billion. As a structural budget deficit continued, the government kept borrowing more, creditors continued to lend money, while the IMF suggested less state spending to stop the government's ongoing need to keep borrowing more and more. As the debt pile grew, it became increasingly clear the government's structural budget deficit was not compatible with a low inflation fixed exchange rate – either the government had to start earning as much as it spent, or it had to start (inflationary) printing of money (and thus abandoning the fixed exchange rate as it would not be able to borrow the needed amounts of US dollars to keep the exchange rate stable). Investors started to speculate that the government would never stop spending more than it earned, and so there was only one option for the government – inflation and the abandonment of the fixed exchange rate. In a similar fashion to Black Wednesday, investors began to sell the Argentine currency, betting it would become worthless against the US dollar when the inevitable inflation started. This became a self-fulfilling prophecy, quickly leading to the government's US dollar reserves being exhausted. The crisis led to riots in December 2001. In 2002, a default on about $93 billion of the debt was declared. Investment fled the country, and capital flow towards Argentina ceased almost completely.