Christian Debt Recovery

Debt Percentage Of Gdp By Country

February 28th, 2010 |

Author: Gavin

171991 Debt Problem

Debt crisis in developing countries:

INTRODUCTION:

Developing countries are faced with low standards of living, underdevelopment, and high poverty levels, weak and unstable currencies, low capital levels and low GDP. All the above problems faced by developing countries are caused by debts which affect not only those who acquire loans but also generations that follow.

However despite the many problems associated with developing countries it is still possible to solve the debt problem and to attain high levels of development, this can be done through well laid strategies that involves all the sectors in an economy and this will be analyzed in this paper.

Factors that have led to the debt problem:

Terms of trade:

As a result of unfavorable terms of trade countries are faced with the problem of balance of payment, developing countries mainly export agricultural goods and in turn import machinery and electric goods, the value of imports in most cases exceeds the value of exports and as a result the increasing debt problem, countries are faced with an increasing balance of payment which lead to rising debts.

Rising international interest rates:

Most international finance institutions will raise their interest rates which in most cases affect developing countries, for example a country may obtain funds from a financial institution but the country may face increasing interest rates on the loan which will increase the pay back value where in most cases the country may end up paying more than double it acquired from the institution, therefore this has added to the problem of debts in developing countries.

Increased protectionism in the international market:

Increasing protectionism in the international markets has led to an increase in the debt problem in the developing countries, most of the products produced in developing countries are exported to developed countries, when the products are faced with high levels of protectionism in the developed countries the developing countries will experience a reduction in exports leading to unfavorable balance of payment, this means that the country will experience debt problems.

Irresponsible lending by finance institutions:

Financial institutions will lend money to countries without taking into consideration the current state of an economy, a country may receive a lot of funds which will end up not being used for their intended purpose, finance institutions will lend the developed countries large sums of money and also they lend money even before previous payments are not yet complete leading to the increased debt problem in the developing countries.

Rescheduling of payment terms:

Financial institutions will change payment terms over time and this may end up increasing the debt problem in developing countries, such terms include the increase in interest rates, the delay of payments has also led to the increasing debt problem in developing countries where countries will not pay up debts on time and therefore increasing the debt problem to other generations who may have not been present when the funds were given.

Impacts of debts in developing countries:

Underdevelopment:

The reason why the developing countries are underdeveloped is because they have to repay debts, the debt problem has forced countries to channel a high percentage of their GDP to paying debts and as a result the country cannot develop due to high debt levels. High interest rates on debt have also led to the high amounts of debts which are a negative force to development due to high spending on servicing debts.

Weak currencies:

As the developing countries repay their debts they experience a devaluation of their currency against the other hard currencies, this will result to an increase in the cost of imports which may lead to an unfavorable balance of payment and contribute to the increase in debts, therefore weak currencies will lead to an increase in the value of the debts the developing countries and therefore contribute to the debt problem.

Solutions to the debt problem:

Budget deficit:

Developing countries will reduce debt problems through maintenance of a balanced budget, in this case governments should always make sure that taxation which the source of revenue for government spending does not exceed the planned government spending, therefore governments should stop including international funding in their budgets and stop over relying on loans to finance their activity.

Conclusion:

Developing countries are faced with the debt problem, however these problem can be solved through international trade, high levels of export will lead to reduced reliance on international aid and loans, the high levels of exports can be achieved through the import substitution strategy and the export production strategy, this two strategies will improve the balance of payment leading to a reduction of debt burden and also the country will use the gains from trade to service the debts.

Governments should also avoid deficit budgets and the reliance on foreign aid, governments should therefore collect enough revenue through taxation that will finance its spending and that the spending side should always be equal or less than the revenue side of the budget.

Countries should also look forward in engaging themselves in research and discovery which will help them discover new resources that will help them to develop and discover better crop breeds that yield more, also new ways of farming that will help them yield more, most developed countries are well known for their research and discovery of new resources and that is why they developed, because they are highly mechanized and have the resources to finance research and discovery.

The international finance institutions could also aid the developing countries through debt relief, this would involve the writing off all debt owed to by the developing countries, this will assist the countries in terms of development bearing in mind that most countries will spend a high percentage level of GDP to service debts.

However despite the assistance through debt relief developing countries should formulate good and sound governance whereby policy makers and top government officials make good decisions that aid them to develop and solve the debt problem.

References:

Willem H. and Richard M. (1985) International Economic Policy Coordination, Cambridge University press, UK

Matthew B. and D. Henderson (1991) Monetary Policy in Interdependent Economy, MIT press, UK

Brian Snow (1997) Macroeconomics: introduction to macroeconomics, Rout ledge publishers, UK

Stratton (1999) Economics: A New Introduction, McGraw Hill Publishers, US

Wikipedia the free encyclopedia (2007) developing countries, retrieved on 21st May,

Todaro M.P (2004) Economics for a Developing World, McGraw Hill Publishers, US

Todaro M. P (2002) Economics for Development, McGraw Hill Publishers, US

Philip Hardwick Et Al (2004) Introduction to Modern Economics, Pearson Education Press, UK

eveloping World, McGraw Hill Publishers, US

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