Debt Crisis In Developing Countries

Debt crisis in developing countries:developing countries will also experience high poverty
INTRODUCTION:levels due to the debt burdens, this burden is shifted
In the 1980's the debt problem emerged wherebyto generations to come and this means that they will
Argentina defaulted to pay for its international debt,also be poor because they will also be forced to pay
this led to the emergence of a debt facilitating plandebts, this causes what is known as the poverty
introduced by the World Bank and the internationalvicious cycle which is diagrammatically demonstrated
monetary fund (IMF). The paper focuses on thebelow:
problem faced by these countries, the causes of highLow capital stock:
debt levels and the solutions to the debt problem inDue to high payment levels of the debts developing
developing countries.countries have experienced a reduction in capital
Developing countries are faced with low standards ofstock; a large proportion of a country's GDP is spent
living, underdevelopment, and high poverty levels,on debt repayment, low capital stock in a country
weak and unstable currencies, low capital levels andmeans that the level of investment is low leading to
low GDP. All the above problems faced by developingunderdevelopment in these countries. High levels of
countries are caused by debts which affect not onlycapital stock promotes investment and development,
those who acquire loans but also generations thattherefore if a country has low capital stock it will
follow.experience low investment levels and also
However despite the many problems associated withunderdevelopment and high unemployment levels
developing countries it is still possible to solve thebecause the higher the levels of investment the
debt problem and to attain high levels ofhigher is the level of employment.
development, this can be done through well laidWeak currencies:
strategies that involves all the sectors in an economyAs the developing countries repay their debts they
and this will be analyzed in this paper.experience a devaluation of their currency against the
Debt problem in developing countries:other hard currencies, this will result to an increase in
Debts in developing countries have increased overthe cost of imports which may lead to an
the years, many factors have caused this increase inunfavorable balance of payment and contribute to
debts including unfavorable terms of trade, risingthe increase in debts, therefore weak currencies will
international interest rates, increasing protectionism inlead to an increase in the value of the debts the
the international market, irresponsible lending bydeveloping countries and therefore contribute to the
international finance organizations and the reschedulingdebt problem.
of punitive terms where countries delay payment.Credit worthiness:
The above mentioned factors are external factorsA country will be faced with the problem of
and that there exist internal factors that have led tocreditworthiness whereby it may be denied funds by
the increased problem of debts include economicinternational finance organizations because of its
mismanagement, unsustainable government deficitssolvency level, the solvency level is a measure of
and the maintenance of unrealistic exchange rates. Allwhether a country has the capacity to repay debts,
the above factors have led to the increased debttherefore according to the solvency index a country
problem in developed countries.may be denied funds which may have helped the
Factors that have led to the debt problem:country to develop and this is caused by high debt
Terms of trade:levels.
As a result of unfavorable terms of trade countriesInflation:
are faced with the problem of balance of payment,Developing countries are faced with high inflation
developing countries mainly export agricultural goodslevels which are caused by the high liquidity levels
and in turn import machinery and electric goods, thecaused by the funds, the amount of money that is in
value of imports in most cases exceeds the value ofsupply in the economy is usually very high when the
exports and as a result the increasing debt problem,country receives the funds and this triggers inflation
countries are faced with an increasing balance offor a long period in the developing country.
payment which lead to rising debts.Solutions to the debt problem:
Rising international interest rates:Budget deficit:
Most international finance institutions will raise theirDeveloping countries will reduce debt problems
interest rates which in most cases affect developingthrough maintenance of a balanced budget, in this
countries, for example a country may obtain fundscase governments should always make sure that
from a financial institution but the country may facetaxation which the source of revenue for
increasing interest rates on the loan which willgovernment spending does not exceed the planned
increase the pay back value where in most cases thegovernment spending, therefore governments should
country may end up paying more than double itstop including international funding in their budgets and
acquired from the institution, therefore this hasstop over relying on loans to finance their activity.
added to the problem of debts in developingMaintaining realistic exchange rates:
countries.Overvaluing of a currency will tend to reduce the
Increased protectionism in the international market:price of imports but at the same time because the
Increasing protectionism in the international marketsexports tend to more expensive then the less a
has led to an increase in the debt problem in thecountry will export. Overvalued currency will also raise
developing countries, most of the products producedexpectations for devaluation and this will lead to
in developing countries are exported to developedcapital freight, on the other hand if currency
countries, when the products are faced with highdepreciates it raises the value of external debts,
levels of protectionism in the developed countries theincreases the level of exports and at the same time
developing countries will experience a reduction inreduces imports because imports become more
exports leading to unfavorable balance of payment,expensive, therefore a country should at all times
this means that the country will experience debtmaintain proper and realistic exchange rates in order
problems.to solve the problem of debts.
Irresponsible lending by finance institutions:Better terms of trade:
Financial institutions will lend money to countriesCountries should join regional integrations that offer
without taking into consideration the current state offavorable terms of trade, this will lead to increased
an economy, a country may receive a lot of fundsexport value and quantity leading to sustainable
which will end up not being used for their intendeddevelopment which will enable them to pay up their
purpose, finance institutions will lend the developeddebt, and favorable terms of trade will offer
countries large sums of money and also they lendfavorable balance of payment which will lead to
money even before previous payments are not yetreduced debts. Countries should also aim at reducing
complete leading to the increased debt problem inbalance of payment through import substitution
the developing countries.strategies and also export producing strategies, the
Rescheduling of payment terms:import substitution strategies will involve the initiation
Financial institutions will change payment terms overof industries that produce goods that were
time and this may end up increasing the debt problempreviously imported while the export producing
in developing countries, such terms include thestrategy will involve the production of goods for
increase in interest rates, the delay of payments hasexports.
also led to the increasing debt problem in developingThrough research and discovery:
countries where countries will not pay up debts onMany developing countries have not involved
time and therefore increasing the debt problem tothemselves in research and discovery, these
other generations who may have not been presentcountries have not tapped all the resources in their
when the funds were given.countries and bearing in mind that resources are not
Unstable government deficit:they become then the countries should explore and
Most developing countries will at many times havediscover new resources which will help them to come
deficit budgets, this is caused by budgets that haveout of their miserable state, many developing
high planed government spending which is higher thancountries are importers of crude oil but they have
government revenue, this deficit in most cases isdone very little to discovering crude oil deposits in
funded through international funds which are in termstheir countries due to lack of research and discovery.
of loans, this countries failure to balance spending andResearch will also help them to discover better crops
revenue lead to the increasing debt levels which inand ways of farming because these countries mostly
turn increases the debt problem in developingdepend on agriculture for sustainability.
countries. The increased deficits over the years haveThe Paris Club
led to accumulation of debts which are unsustainable.The Paris club was formed by 19 member countries
Maintenance of unrealistic exchange rates:and its objectives is to provide financial support to
Developing countries will in most cases maintainindebted countries, their activities include such efforts
unrealistic exchange which in turn affects their tradeas restructuring of debts, debt relief and debt
balances, when a country is offered funds there arecancellation, this efforts are aimed at reducing the
usually some conditions that are set, such conditionsdebt problem and can act as a resolution to the debt
include devaluing of the currency before the fundsproblems.
are given, this heavily affects the developedThe Baker plan
countries in that after devaluing their currency theThis was a plan by the treasury secretary of the
country receives the funds but the value of theUnited States in 1985, this plan by James baker was
funds in most cases is not equal to the expectedknown as the bakers plan and was aimed at resolving
value, when a country is asked to devalue itsthe issue of international debts, this plan was inspired
currency this means that the value of the currencyby Japan when it used its trade surpluses to help
will be lower than normal and it will be very weak toindebted countries, therefore the bakers plan can be
the hard currency, the country ends up receivingtermed as a solution to the debt problem in
lower value of the funds given resulting to more anddeveloping countries.
more debt problem.Conclusion:
Oil hikeDeveloping countries are faced with the debt
The rise in oil prices over the decades has resulted toproblem, however these problem can be solved
the rise in the debt problem in developing countries,through international trade, high levels of export will
developing countries are importers of crude oil and oillead to reduced reliance on international aid and loans,
products and a rise in the price of oil will lender themthe high levels of exports can be achieved through
to have unfavorable balance of trade and this resultsthe import substitution strategy and the export
to the rise in the debt problem due to increasedproduction strategy, this two strategies will improve
balance of trade.the balance of payment leading to a reduction of
US monetary Policy and rise of neo-liberal policiesdebt burden and also the country will use the gains
US is one of the major importers of goods fromfrom trade to service the debts.
developing countries, the monetary policies and theGovernments should also avoid deficit budgets and
rise of the neo-liberal policies have greatly contributedthe reliance on foreign aid, governments should
to the rise in debt problem in developing countries,therefore collect enough revenue through taxation
the introduction of free market has led to countriesthat will finance its spending and that the spending
to import more and export les resulting to anside should always be equal or less than the revenue
increase in balance of trade and this has led to anside of the budget.
increase in debts.Countries should also look forward in engaging
Embezzlement and capital flightthemselves in research and discovery which will help
The rising debt problem in the developing countriesthem discover new resources that will help them to
may also be as a result of the rise in embezzlementdevelop and discover better crop breeds that yield
of funds, the loans offered to these countries aremore, also new ways of farming that will help them
not used for their intended purposes and as resultyield more, most developed countries are well known
the funds end up in the wrong hands throughfor their research and discovery of new resources
increased corruption, due to embezzlement of fundsand that is why they developed, because they are
there is an increase in capital freight.highly mechanized and have the resources to finance
OECD protectionismresearch and discovery.
The OECD was formed to monitor trade activitiesThe international finance institutions could also aid the
among member countries, as a result it has caused adeveloping countries through debt relief, this would
reduction in the imports from developing countriesinvolve the writing off all debt owed to by the
who are not members of the union, its objectivesdeveloping countries, this will assist the countries in
are to reduce inflationary pressure, reduceterms of development bearing in mind that most
unemployment and monitor trade activities amongcountries will spend a high percentage level of GDP to
member countries, as a result of protectionism theservice debts.
imports from developing countries have drasticallyHowever despite the assistance through debt relief
reduced resulting to the increasing debt problem indeveloping countries should formulate good and
developing countries.sound governance whereby policy makers and top
Impacts of debts in developing countries:government officials make good decisions that aid
Underdevelopment:them to develop and solve the debt problem.
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