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Limits to Development

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Hugo Flower

on 3 December 2013

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Transcript of Limits to Development

Limits to Development
- external debt incurred by governments of developing countries, generally in quantities beyond the governments' ability to repay
It becomes unpayable when the interest exceeds what the government can collect in taxes
Developing countries borrowed money during a time of low interest rates
They borrowed to finance investment spending and during the 1973 Oil Crisis
"The external debt crisis that emerged in many developing countries in 1982 can be traced to higher oil prices in 1973-74 and 1979-80, high interest rates in 1980-82, declining export prices and volume associated with global recession in 1981-82, problems of domestic economic management, and an adverse psychological shift in the credit markets."
William R. Cline of the Institute for International Economics
The Oil Crisis meant inflation (AD/AS?) and so developing governments borrowed from commercial banks and the World Bank who assumed that they would not default.
This fell apart during the 1981-82 world recession where interest rates shot up and demand for commodities fell.
"Commodity prices dropped 28 percent in 1981-82, and between 1980 and 1982 interest payments on loans increased by 50 percent in nominal terms and 75 percent in real terms."
United Nations Conference on Trade and Development (UNCTAD),
Further complications:
Much of the loan was lost to corruption
About one fifth was spent on arms
A fall in the value of the developing nations' currencies made the debt burden worse
Under the Heavily Indebted Poor Countries (HIPC) initiative & the Multilateral Debt Relief initiative, the World Bank provides debt relief to the poorest countries in the world.
What are the implications?
Widens the savings gap
AD is restricted
Political unrest
Declining living standards
Affects developed nations too - debtor nations have had to reduce their imports from developed countries in order to increase their foreign exchange earnings needed to pay back the debts.
One estimate is that the seventeen most heavily indebted nations decreased their imports from the developed world by $72 billion from 1981 to 1986
It is not the amount of debt but the ability to pay it back which is important
Population Issues
In some countries the size of the total population is declining as a result of net outward migration.
The outward migration of skilled workers young and old is known as a brain drain.
If a nation loses younger workers, this can have a damaging effect on growth.
Changing age-structure: leads to a fall in the ratio of workers to dependents.
Case Studies:
Seven countries are expected to see declines of 10 percent or more in their working pop (including China, Japan, Thailand and Vietnam) while three will see declines of over 20 percent (Hong Kong SAR China, Korea and Singapore)
Fall in economic growth
Large strain on government budgets
Large strain on workers caring for dependents
Widens the savings gap
Less attractive to FDI
Starter Activity:
Read the article 'A developing world of debt'
1. Pick out the most important 15 words and justify your choice.
2. What newspaper is this from?
Using your article on debt, draw up an essay plan for the following essay:
With reference to the extract, evaluate the view that Ethiopia will forever be hindered by debt. (12)
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