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13.2 Global Interdependence: Debt and aid and their management


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13.2 Global Interdependence: Debt and aid and their management

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13.2 Global Interdependence: Debt and aid and their management

  2. 2. KEYTERMSANDDEFINITIONS 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 Bank. 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.
  3. 3. KEYTERMSANDDEFINITIONS 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 corruption. 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.
  4. 4. KEYTERMSANDDEFINITIONS Tied aid is foreign aid that must be spent in the country providing the aid (the donor country). 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 purpose.
  5. 5. TOPICSUMMARY 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.
  6. 6. TOPICSUMMARY 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 countries. 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.
  7. 7. TOPICSUMMARY 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 communism. 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.
  8. 8. TOPICSUMMARY 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 poorest countries.
  9. 9. TOPICSUMMARY 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.
  10. 10. ADDITIONALWORKS • 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 ( 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 international aid. • Look at WaterAid’s website ( and find the section ‘sustainable technology in action’. Produce a 150- word summary of this section. • Look at the Grameen Bank’s website ( to find out more about microcredit.