13.2 Global Interdependence: Debt and aid and their management
13.2 DEBT AND AID
AND THEIR MANGEMENT
External debt (foreign debt) 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
Debt service ratio is the ratio of debt service payments of a country to that
country’s export earnings.
Debt relief is the 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 towards social development.
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.
Odious debt is a national debt incurred by a regime for purposes that do not
serve the best interests of the nation, such as wars of aggression or internal
Colonialism is the building and maintaining of colonies in one territory (or a
number of territories) by people from another territory.
International aid is the giving of resources (money, food, goods, technology,
etc.) by one country or organisation to another poorer country. The objective is
to improve the economy and quality of life in the poorer country.
Appropriate technology is aid supplied by a donor country whereby the level of
technology and the skills required to service it are properly suited to the
conditions in the receiving country.
Tied aid is foreign aid that must be spent in the country providing the aid (the
Microcredit is tiny loans and financial services to help the poor, mostly women,
start businesses and escape poverty.
Social businesses are forms of business that seek to profit from investments
that generate social improvements and serve a broader human development
The term ‘debt’ generally refers to external debt (foreign debt), which is that part
of the total debt in a country owed to creditors outside the country.
A country’s external debt, both debt outstanding and debt service, affects a
country’s creditworthiness and thus its overall economic vulnerability.
The debt service ratio of many poor countries is at a very high level.
Development economists have pointed to a sequence of events that began in
the early 1970s as the main reason for the debt problems of many poor
The debt service ratio is the proportion of a country’s export earnings that it
needs to use to meet its debt repayments.
Restructuring debt to developing countries began in a limited way in the 1950s.
However, it was not until the mid-1990s that a more comprehensive global plan
to tackle the debt of the poorest countries was formulated.
The Heavily Indebted Poor Countries (HIPC) initiative was first established in
1996 by the International Monetary Fund (IMF) and the World Bank. According
to a recent World Bank–IMF report, debt relief provided under both initiatives
has substantially alleviated debt burdens in recipient countries.
Debt relief is part of a much larger process, which includes international aid,
designed to address the development needs of low-income countries. For debt
reduction to have a meaningful impact on poverty, the additional funds made
available need to be spent on programmes that are of real benefit to the poor.
The origins of foreign aid date back to the Marshall Plan of the late 1940s. This
was when the USA set out to reconstruct the war-torn economies of Western
Europe and Japan as a means of containing the international spread of
Aid is assistance in the form or grants or loans at below market rates.
The basic division of international aid is between official government aid and
voluntary aid run by non-governmental organisations (NGOs).
Official government aid encompasses bilateral aid and multilateral aid.
Aid supplied to poor countries can be in the form of both short-term
emergency aid and long-term development aid.
Many development economists argue there are two issues more important to
development than aid: changing the terms of trade so that developing nations
get a fairer share of the benefits of world trade and writing off the debts of the
Over the years most debate about aid has focused on the amount of aid made
available. However, in recent years the focus has shifted somewhat to the
effectiveness of aid. This has involved increasing criticism of the traditional top-
down approach to aid.
NGOs have often been much better at directing aid towards sustainable
development than government agencies. The selective nature of such aid has
targeted the poorest communities using appropriate technology and involving
local people in decision-making.
WaterAid was established in 1981. Its first project was in Zambia but its
operations spread quickly to other countries.
The development of the Grameen Bank in Bangladesh has illustrated the power
of microcredit in the battle against poverty.
• What do you think would have happened to Western Europe and Japan
without Marshall aid from the USA after the Second World War?
• Look at the Jubilee Debt Campaign website
(www.jubileedebtcampaign.org.uk) to see what the charities involved
want governments to do with regard to the debt of poor countries.
• Suggest why changing the terms of trade and writing off the debts of the
poorest countries may be more important to development than
• Look at WaterAid’s website (www.wateraid.org.uk) and find the section
‘sustainable technology in action’. Produce a 150- word summary of this
• Look at the Grameen Bank’s website (www.grameen-info.org) to find out
more about microcredit.