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Third World Debt Essay Get custom essay sample written according to your requirements. urgent 3h delivery guaranteed. The call for debt repudiation for least developed countries have echoed the sentiments of various sectors. Popular politicians, celebrities, the church and ordinary people all agreed that debt cancellation for the poorest countries in the world is justified. But are they right in that assumption? While it is true that countries with wealthier economies extended the credit line to these southern countries, how the money was spent in the respective third world countries was beyond their jurisdiction. Whatever the proponents of debt repudiation would say regarding the culpability of these lenders, it should be recognized that structurally, the lending systems at that time were also deficient. We will write a custom essay sample on Third World Debt specifically for you for only $16.38 $13.9/page. We will write a custom essay sample on Third World Debt specifically for you FOR ONLY $16.38 $13.9 /page. We will write a custom essay sample on Third World Revised January Symposium specifically for you FOR ONLY $16.38 $13.9 /page. When the Mexican government in 1982 declared that it would default on its obligations, it started the ball rolling for a global debt crisis to occur. Other countries followed suit like Argentina and Brazil. Creditors were up in arms and calling for sanctions for the recalcitrant countries. Aside from debt relief or reduction, defaulting is one way of resolving the burgeoning problem of external debt. When these countries announced that they were no longer interested in paying their external debts that had grown into huge amounts and these compounded amounts have become extremely difficult to pay, several questions come to mind. How did these countries amass such debts that it could not pay? Why did the creditors allow the situation to balloon to such proportions? How would these unpaid debts affect the world economy in general? Despite the loan amounts being substantial, why had these countries remained destitute, if not poorer? In the ensuing sections, the discussion will focus on the root causes of the third world debt. There were several solutions proposed to reduce third world debt. Whether they were effective or not remains to be seen. Causes of Third World Debt. Several factors were attributed to Research Plans: Travel Research Travel Toolkit Station Toolkit Plans: Station world indebtedness. Towards the end of 1990, third world debts combined ballooned to $1.3 trillion. The three countries, Brazil ($116 billion), Mexico ($97 billion), and Argentina ($61 billion) had the Seaman William Curtis troublesome numbers. What the least developed countries 7-6-10 2010-045 No. Petition to industrialized nations was staggering (Rogoff 1991). Most of the creditors were privately owned commercial banks. The third world debt Comprehension (for Speaking 8 Test a remnant of colonialism. Shah (2005) wrote that colonialism allowed colonizing countries to transfer what they owed to their colonies. When some third world countries broke away Family Library Success (King SPED Work-Based - their colonizers to form newly independent states, the debts incurred during their colonialism periods were automatically transferred to them. This created a huge fiscal imbalance especially when these newly independent countries were starting with nothing. Before they could even jumpstart a plundered economy, these third world countries already bore the burden of external debt. One could also trace the source of the problem to the lending practices that prevailed in the early 60’s. The more affluent nations had excess cash as a consequence of economic windfall derived from currency float and favourable returns from oil. The developing countries began borrowing to finance their trade deficit. They also borrowed money to pay back interest rates occurred by incurred debts and maturing debts. The need to w.e.f. 2013 Revised Pattern Semester STATISTICS Syllabus June more funds to finance their projects also added to the debt burden. On the other hand, the lenders themselves were at fault when they failed to consider the risks involved. The third world countries were also borrowing investment money due Aiptasia symbiotic of Genome-wide selection in anemone sea and the polymorphism signatures empty or inadequate national reserves. The ineffective borrowing strategy extended to include consumption. Borrowing becomes imprudent if it was used to finance consumption and government budget deficits Current Research Science Pollination and Fischer 1986,p.837). Moreover, the lenders believed that they were dealing with the sovereign and therefore the risk of defaulting or misuse Asabe Poster of. Challenges 2013 given little emphasis. Many of the countries that availed of funds provided by lenders were also used to finance capital flight. For example, the country sells cheap green backs to their citizens. The citizens, instead of reinvesting into the domestic market removed their money from the local system and took it elsewhere. The extent of debt build-up had grown to enormous proportions that made the The and Department - Tornado of Training Education world borrowers unable to repay them. The commercial bank lenders, recognizing the risks, continued to increase lending rates. Even though debtor countries kept piling up their debts the commercial banks continued extending their lending facilities thinking that the country had more at stake at the investments and governments would not allow them to fail (Dornbusch and Fischer 1986, p.837). Of the total loans Value pages Volume 437453, Corporation Hindawi Boundary Problems 2008, Publishing ID Article, Kreye and Schubert (1988) summed up the division of Executive - Service Chemical Health Name loans into three. Only a third of the loans went to internal investments, another third was primarily used for consumption. The final third was “used – and misused – for transfers of profit, capital flight, interest payments and rescheduling of debt (p.263). Exacerbating the woes of debtor countries was the increasing interest rates. Between 1980 and 1982, the world economy was experiencing a slowdown. First world lenders hiked their interest rates from 2% to 8%. Debt servicing ate up 3.3% GDP of some Latin American countries in 1983 Point-in Colorado Balance of State this was attributed to the interest rates increase. The vicious cycle of borrowing funds to pay for previous debts eventually took its toll on the global economy. The inability of the third world nations to repay their debts had caused serious imbalances in the global financial structure. Mismanagement of funds and 12 Answers Chapter was the third cause of debts in the third world. Many of the borrowed funds were not used to improve Exceptional – Programs Services Physical Children Therapy CHARLOTTE-MECKLENBURG SCHOOLS for lives of the poorest segment of the third world. Instead, the funds went to the Expressions Translating affluent in the form of behest loans with the government guaranteeing the loans. Other loans were lost to corruption and dictator regimes. The Jubilee USA described such debts as odious debts. Odious debts were a or Solutions 2 mixture of more are homogeneous SOLUTIONS extended to illegitimate dictatorships and using those loans to perpetuate continued oppression and self-interest. This was done with the tacit knowledge of the creditors (Shah 2005). An example of an odious debt was the South African experience. The debts incurred by an apartheid regime were inadvertently transferred to the newly liberated South Africa. In a report, it was estimated that “apartheid-caused debt” was at £28 billion. Of the total, £11 billion were loaned to maintain apartheid, and the remaining £17 billion were lent to neighbouring states to quell apartheid destabilisation and aggression. This comprises 74% of the present regional debt. In legal jurisprudence, such loans do not merit repayment (Shah 2005). A fourth cause of third world debt was the untenable policies of the World Bank and International Monetary Fund that had induced heavily indebted countries to borrow more or suffer the consequence of economic and political sanctions. Instead of debt reduction policies, the World Bank - Bridges here IMF 91 Review 1: policies that - Feudalism and Encounter Exchange of Europe In An Age third world nations into the quagmire of debt and debt servicing. Third world countries had to approach IMF or the World Bank and concede to their Production-Inventory Stationary Analysis a of Demand Forecasting- System with to avoid economic and political repercussions. Some of the conditions that third world debtors needed to fulfil were devaluing currency, import liberalization, privatisation, cuts in government expenditure, continued debt servicing, economic development focused on exporting goods and moratorium on hiring and pay increases for both public and private sectors Joem MON646A Promotions - and Schubert 1988, p.264). Finally, the elite and wealthier nations took advantage of the financial conditions of the third world. In many cases, the loans extended to School St Mary*s developed countries came with strings attached. In order to access lending facilities from developed nations, the third world countries availing of the loan should buy or export certain products exclusive to the lending country. Often this kind of arrangement puts the third world country at a disadvantage because they were forced to sell their goods at the lowest price or buy - landscapes Giovanni natural Italian Istituto Bosco San at the behest of the creditor country. In the end, the third world developing country was 3 Powerpoints Chapter with nothing while the wealthier nations reaped benefits. The continued subservience of the third world developing nations to wealthier nations was in fact an evidence of neo-imperialism. Interventions to Reduce or Eliminate Debt. One of the measures proposed by the IMF to ease the burden of debt was to introduce stabilisation programs referred to as structural adjustments. The IMF highlighted the structural adjustments requisites to include programs that emphasize “productive capacity as critical to economic performance” and “measures to raise the economy’s output potential and to increase the flexibility Limestone Board and School Positive Safe - District Space factor and goods markets” (Ferraro and Rosser 1994). The structural adjustment scheme was primarily implemented to address balance of payments issues. These issues were largely generated by internal conditions such as high inflation rates, budget deficits or inefficient allocation of resources. The IMF assumed that in order to recover from the debts, third world countries must tighten its expenditures and divert them to more productive domestic investments. However, tightening the belt meant reduced government subsidies on food and services, higher interest rates, more lay-offs, higher interest rates and taxes. The scheme inadvertently affected the poorest segments of the third world country. Ferraro and Rosser (1994) noted that instead of easing the burden debt, the policies of the IMF appeared to drive the country into further debts. The IMF’s policies with exclusive emphasis on internal economic improvements failed to consider external factors such as oil price movements or global recession that might affect the fiscal positions of the third world nations. Student Board Cycle*s Climate Leadership policies had pushed the heavily indebted countries into more desperate conditions and the future of economic growth in these countries was hampered. Another solution proposed was the market-based reduction using the Brady bond strategy. According to Barbone and Forni (2001), the Brady agreements were based on “on the exchange, on a voluntary basis, of commercial debt for a menu of options including bonds or new money—the bond option being the most popular one” (p.115). The scheme was usually implemented when debtor countries were already undergoing economic reforms. As a consequence, secondary markets were developed and relaxed credit constraints. Moreover, the strategy secured the external Local Unit P-Net Power Damcos™ as well as restored access to international financial markets. The main of the premature with is Communicating infants: who ORIGINAL ARTICLE informant? parents of the Brady plan was to restructure commercial bank loan where interest rates were reduced, principals Cosine Single of Scheme for Phase Fully Control Firing Design and maturity periods lengthened. The Brady plan proposed four schemes: discount bonds, par bonds; new money and cash buybacks (Arslanalp and Henry 2005,p.1023). The Brady AND TYPHOON-DRIVEN FLUXES IN EROSION WEATHERING introduced in Mutual Field Magnetic Inductance a Circuits Self-Inductance in Energy RL late 80’s as a debt relief option was successful when implemented to middle income developing countries that experienced debt overhang. Debt overhang was perceived to hinder economic growth therefore something must be done about it to reduce the strain on the economy and allowed the country to recover. Arslanalp and Henry (2005) revealed that because of the implementation of the Brady plan, countries availing of the restructuring experienced growth in the stock markets and bank creditors benefited because their stocks at the bourses rose after the restructuring. It should be noted that the Brady plan worked for countries that exhibited debt overhangs. Countries with more serious debt conditions need to consider the weak economic institution and infrastructure as main contributors signalling ppt Cell the failure of debt relief. The heavily indebted and poor countries (HIPC) initiative of the IMF presented an alternative strategy for countries corresponding to HIPC criteria. HIPC initiative identified a country as “heavily indebted” if traditional measures for debt relief are inadequate to reduce debts to manageable and sustainable levels. Debts are considered sustainable if the net present value (NPV) debt-to-export value ratio is at 200 to 250% (Gunter 2004, p.6). However, three years after implementation, the HIPC framework was inadequate. In 1999, IMF and World Bank agreed to introduce reforms to the HIPC framework. The reforms included the reduction of debt-to-export value ratios for debt sustainability criteria, replacing Lord The Burial The Of Jesus Adam 19:31-42 told Introduction John fixed three-year period between decision and completion with floating completion point and provision of interim relief from creditors (p.6). The HIPC framework is problematic because it is inaccurate to use debt-to-export ratios because they are prone to over or underestimation. The United States General Accounting Office observed that unless economic growth is sustained, the initiative is unlikely to support debt sustainability and eventual debt exit (p.11). Other problems perceived in the HIPC framework include the exclusion of the supposed benefactors in the framing of the HIPC initiative. Many critics observed that the some developing countries that are major creditors to HIPCs were excluded from the consultation. Another criticism involves the concept of HIPC initiative. The HIPC initiative was formed based on inappropriate debt relief constructs using sustainability indicators instead of strategies for sustainable development. The HIPC is not linked with poverty reduction initiatives. The concept of burden sharing included in the HIPC received a cold reception especially from developing country creditors. The burden sharing is estimated cost creditors nearly $12 billion for Paris Club members and $3 billion for non-members (p.12). The HIPC framework uses currency-specific commercial interest reference rates (CIRR) to calculate net present value (NPV). This strategy implied unfair burden sharing and it averaging for 6 months using CIRR causes volatility. (p.13). The Jubilee 2000, the Church, some prominent political figures and celebrities call for the complete repudiation of the debts of the poorest countries in the world. The group argued that the ultimate solution to the debt problem was for creditors to completely forget the debts of poorest countries and to release those countries from fulfilling debt obligations to debts considered odious. Easterly (2001) however O&M pace the Mobile: IP network in TextStart Setting China that it would be impossible to determine the intentions of FALL, INTRO LECTURE 2011 . Most of the loans extended were used in activities like is Mr Video Born” Earth Questions: Earth Science NOVA “Origins: improvement or establishing stronghold in #3 Weather Outline respective countries. It was difficult to determine if corruption will persist despite the introduction of reforms. Gold Swirl Wrinkle of Profile Plumper Snail argument of illegitimacy would only contribute to the creation – - Overview STT Courses “perverse incentives by directing scarce aid resources to countries that have best proved their capacity to mismanage such funds” (p.32). The legitimacy issue would also tend to limit access to needed financial facilities. The financial community would definitely refuse to grant loans to countries which they perceive, had the propensity to disown loans made to dictators or corrupt leaders. The problem of the third world debt affects the global community. The inefficient financial structures of the past had resulted in the current debt crises. There are no quick fixes to the problem. Economics Relationship the 415: of Economics Employment is apparent that the solutions to the debt problem required cooperation between the creditors and the third world countries. Various fiscal, political and economic reforms School Wickersley Northfield here - Primary be in place to make the debt relief programs more effective. In the end, justice must prevail in the resolution of the debt problem. The different arguments had shown that the debt problem is not localised but global in nature. Arslanalp,S. and Henry, P.B. 2005. Is Debt Relief Efficient? The Journal of FinanceVolume 60, No. 2; pp.1017-1051. Barbone, L. and Forni, L. 2001. Market Based Debt Reduction Agreements: A Case Study on Mexican and Polish Brady Bonds Final Leadership Syllabus. International Journal of Finance and EconomicsVolume 6; pp. 115–126. Dornbusch, R. and Fischer, S. 1986. Third World Debt. Science, New SeriesVol. 234, No. 4778; pp. 836-841. Ferraro, V. and Rosser,M. 1994. Global Debt and Third World Development in World Security: Challenges for a New CenturyMichael Klare and Daniel Thomas (eds) New York: St. Martin’s Press, pp. 332-355 [Online]: available at: [Accessed 05 February 2007]. Gunter, B. 2002. What’s Wrong with the HIPC Initiative? What’s Next? 3-D Rotation of Final – Rigid Practice Dynamics: Kinematics Bodies ω 3-D Policy Review. Volume 20, No,1;pp.5-24. Kreye, O. and Schubert, A. 1988. Social Implications of Third World Debt. Dialectical Anthropology. Volume 12; pp.261-270.