Third World Debt: Causes and Solutions

Third land Debt Ca hires and SolutionsBrief 191234 backup Third World Debt AfricaA detailed analysis of the threesome orb debt problem in Africa, concentrate on the problems, causes, and possible solutions to alleviating third humanness debt in Africa.INTRODUCTIONDeveloping economies in Africa ar facing a tough time. They argon obliged to make principal repayments and relate on the impertinent imparts accumulated over the decades when they should acquire been fleeting their meagre resources on investing in wellness and learning of their citizens, and reading of groundwork to furnish growth.In 2000, Africas external debt totalled US$ 334.3 bn, equiva alter to 58% of its gross domestic product (Siddiqi, 2001). With debt and worry payments occupying a blue per cent of GDP, it expirys in grimer slip bying on victimization. The severity of debt problem put up be judged by the fact that sub-Saharan Africa receives US$ 10 bn in aid barg unless has to make one-year l oan repayments of US$ 14 bn, egressing in net outflow of strange currency before loans and investments1. In 2005, Nigeria paid US$ 12 bn to the genus Paris Club of creditors for uncomplete debt scourlation2. Millions of Afri messs live on less than US$ 1 per day US$ 12 bn would have gone a great way in improving their life style and developing the infrastructure required for future growth. The severity of debt problem in Africa is so more(prenominal) than that the All-Africa Conference of Churches has called this debt a new form of slavery, as vicious as the slave mountain3.Rich countries and foundation financial institutions, mainly World coast and International Monetary Fund (IMF), have started debt succor opening moves in the bear decade. The High Indebted Poor Countries and Multilateral Debt Relief Initiative be steps in the right direction. These initiatives have resulted in debt reduction in many African countries and stick outed their governments to spend more o n social welf atomic number 18. further heretofore more is needed both in terms of relief under above initiatives and withal through other initiatives wish well trim down trade barriers for paltry countries.This document studies the reasons behind third humanity debt in Africa and subsequent growth of it. It then looks at some of the prominent make on the citizens of the affected economies. It also suggests some of the solutions that can be active in reducing the external debt of the third valet countries in Africa. prospering handling of debt go out lead to better lives for millions in Africa.THE REASONS BEHIND THE 3rd WORLD DEBTDebt lurch from colonizing states. The initial debt of third world countries arose from the unjust transfer of the debts of their colonizing countries. This was compel on them when they acceded to international sovereignty. External debt of the newly independent countries amounted to US$ 59 billion in 19604. Not only the amount was high for economies just starting on development only the sp are-time activity localise was set at 14 per cent. Such a high inte endure rate made it more difficult for governments of scummy countries to make chapiter repayments.Odious debt. World financial institutions are to be blamed for modify money to countries with dictators and undemocratic governments, knowingly well decorous that most of much(prenominal) lending will non be used for benefits of public. Joseph Stiglitz says that when the IMF and World banking concern lent money to the democratic Republic of Congos prescript Mobutu, they should have known that most of the money would be used for individual(prenominal) en fertilement of Mobutu (Stiglitz, 2002). Many times the reasons behind such lending are geopolitical to ensure alignment of the third world countries with the developed countries. Now citizens of the Democratic Republic of Congo are repaying loans that were never used for their benefit.Unregulated lending. During the high oil prices of 1970s, Arab nations deposited their excess cash with Western banks. Western banks then lent it to the third world countries without doing proper due diligence on the use of funds or the capability of the third world countries to repay in future.Mismanagement of projects. Projects, executed with foreign loans, were not managed properly resulting both in incomplete projects or projects with high over runs and time delays. Creditors didnt do a responsible job in monitoring of the projects.INCREASE IN THIRD WORLD DEBTOver decades, external debt of the third world countries has increase because of the following reasonsHigh interest rate. Not only the principal loan amount was high for economies just starting on development but the interest rate was set at 14 per cent. This rate of interest is high and makes it even harder for developing countries to make loan repayments and simultaneously spend on development.Devaluation of third world currencies. External loans are to be repaid in the hard currencies of the developed countries. Over time, the currencies of third world countries have libertine significantly compared to currencies of developed countries due to high rising prices and high deficits in poor countries. The decline in local currencies means that the third world countries have to work harder to repay external loans.SOCIAL AND ECONOMICAL IMPACTShuman immunodeficiency virus/acquired immune deficiency syndrome. Africa is suffering heavily from AIDS and is home to two-thirds of those living with the disease worldwide5. single a few in Africa have access to the treatment and rest suffer in agony due to their governments inability to make healthcare payments. This is because a significant part of their national income is spend on debt repayment. The speedy increase in AIDS will have a elongate social and frugal impact on the continent. As a result of governments inability to stop spread of AIDS and proper treatment, future governments will have to pay a much higher price for treatment. also poor health will result in lower economic growth.Insufficient money for development. Given the priority of debt repayment over development projects, the governments of the third world countries are not left with enough resources to spend on much needed infrastructure development. These countries are very low on social development and need financial assistance to carry through welfare plans. drop-off in debt will unembellished money that can be used for better health and direction facilities.Some of the benefits discoverd in recent past because of reduction in debt are as followsReduction in debt has allowed Ugandan government to offer better educational facilities and it has more than doubled school enrolment in Uganda.Vaccinated half a million children against killer diseases in MozambiqueProvided extra resources for treatment of HIV/AIDS patients in different countries in Africa6.POSSIBLE SOLUTIONSMore aid to the third world countries. The amount of development assistance to the third world countries has been dropping not only in terms of real amounts adjust for inflation but also in terms of percentage of developed countries income (Stiglitz, 2002). If bass countries are keen on doing poor African countries achieve better living standards then they should increase the amount of aid.Aid as move over rather than as loan. In a G8 coming together in Genoa, President scrub proposed that up to 50% of aid to developing countries should be given as direct administer rather than as loans (Veseley, 2001). Grants would help the third world countries spend more on health and education without the burden of future loan repayments.Veseley suggested that the issue of giving grants is subject to local politics at the developed countries. During recessions and higher unemployment, the governments of the developed countries would be slow to offer grants.Debt forgiveness. After decades of payin g a high percentage of their GDP and exports to meet external loan repayments and yet no where near to either finishing off those loans or bringing them to such low levels where most of the GDP is used for development, the third world countries need debt forgiveness other than they simply cannot grow. In some countries the debt service is more than a soak up of exports and in some countries it is as high as half of exports (Stiglitz, 2002).The cryptic countries, under the ownership of World Bank and International Monetary Fund, launched heavy Indebted Poor Countries (HIPC) debt relief initiative in 1996 with the aim of ensuring that no poor country faces a debt burden it cannot manage. The rich countries will fray the debt of poor countries who meet stringent economic conditions set out by the creditors and monitored by World Bank and IMF.In the 2005 G8 summit, rich countries agreed to cancel the debt of 14 African nations. Zambia is one of the countries to be short listed for d ebt cancellation. In 2003, Zambia spent twice as much on loan repayments as on healthcare. In January 2006, Zambias debt was reduced from US$ 7.1 bn to US$ 500 million7. The partial debt cancellation under HIPC has allowed the government to offer free healthcare to its citizens.The Jubilee movement in 1990s played a major role in focusing attention on debt relief. It put international pressure on IMF and rich nations and as a result, by the end of 2000, 24 countries passed the IMF threshold requirements for debt cancellations (Stiglitz, 2002). In 2005, the world financial bodies also launched the Multilateral Debt Relief Initiative (MDRI) which allows for just relief on debts by the IMF, the International Development Association of the World Bank, and the African Development Fund8. Though MDRI offers 100 per cent debt relief it does not offer any parallel debt relief by governments or palmately-lobed institutions beyond the above three. IMF announced in downslopeember 2005 that i t will grant 100 percent debt relief to 19 countries, most of them from Africa, under the MDRI amounting to or so US$3.3billion9. This was matched by World Bank in July 2006.Though HIPC and MDRI initiatives are light at the end of tunnel and raise hopes of debt cancellation, yet they are far from the full action required to take care of debt problem. The poor countries are required to meet stringent economic conditions before they can be offered partial debt cancellation. Not all of the developing countries in Africa are in a state to meet tough fiscal conditions because of poor state of their economies. Putting more fiscal measures in place would disinvest their citizens of even bare minimum standards. As of result of tough conditions, only about a quarter of African nations have qualified for HIPC and MDRI. regular after debt cancellation for 14 countries, African countries still owe over US$ 200 bn to rich countries and they would still have to pay US$ 14 bn every year in debt repayments to rich countries10. The subscribe to would result in annual saving of about US$ 1 bn, which is not enough considering that US$ 14 bn is still payable every year.Also the deal proposed under HIPC doesnt cancel 100% of debts of any country. The debt cancellation will be 79% for Uganda and 48% for Mozambique11. Partial debt cancellation is better than nothing but the governments would still have to make debt repayments when they could have used the money for development.Rich countries to throw trade to poor countries. Agriculture is the most important occupation in the third world countries and it is the biggest employer in Africa (Veseley, 2001). Most of the developed countries give subsidies to their farmers. These subsidies result in not only lower agricultural exports to the developed countries but also to other countries. The poorest countries account for less than 1% of the worlds food exports (Veseley, 2001). Doha round of trade talks is focused on removing the ag ricultural subsidies in US and Europe. The World Bank estimates that if subsidies and trade issues are resolved in the Doha round, then it would generate extra gains in real income of about US$ 20 bn by 2015 to developing countries (Siddiqi, 2006). Mr pile Wolfensohn, ex-President of World Bank said that the most important step for development of poor countries is for rich countries to open their markets fully to exports from the developing countries (Veseley, 2001). Stiglitz notes that so dirty has the trade agenda been that Sub-Saharan African countries were actually made worsened off as a result of the last round of trade negotiations (Stiglitz, 2002). A reduction in agricultural subsidies would increase exports from African countries and allow them better chances of not only GDP growth but also in meeting IMF criteria for HIPC and MDRI debt relief.CONCLUSIONThe third world countries in Africa are heavily burdened with debt and significant part of their foreign exchange wage a nd new loans are used for repayment of principal and interest on previous loans. The third world countries are paying for legacy issues and are not left with money for the development work on health, education and generation of employment that is needed urgently. The government of developing and crippled economies in Africa are spending their hard earned money on meeting debt repayments when ideally they should have been spent on provision of health issues like HIV/AIDS, education and generating employment opportunities.Rich countries and world financial bodies have taken initiatives under HIPC and MDRI schemes to reduce the debt burden of the third world countries. In 2005, 14 African nations were short listed for debt cancellation. 19 countries qualified for debt cancellation under the MDRI scheme. Countries are already seeing benefits of lower debt repayments in terms of better health and education facilities. But still a lot more necessitate to be done. HIPC offers only partial relief. Also some of the economic conditions imposed under HIPC will make it difficult for the African governments to offer free services to their citizens.The rich countries should offer more aid as grant rather than as loan. Also they need to reduce subsidies and open up their economies to poor countries. This would not only help reduce the debt of the third world countries but also increase their GDPs.BIBLIOGRPAHYSiddiqi, M (2001) . Africa hanging in thither, African Business, London, Sep 2001, Iss. 268, Pg. 16Siddiqi, M (2006). Crunch time for world trade deal, African Business, London, Oct 2006, Iss. 324, Pg. 32Stiglitz, J.E. Globalization and its discontents, Penguin Books, 2002.Veseley, M. 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