Skip to main content

How can developing countries solve their indebtedness?

  • They can attempt to expand GDP faster than their debt ratio. For a whole host of reasons that you have read about in preceding sections, trying to bring about significant economic growth in the short-run is very hard to achieve in practice.

Syllabus: Explain that the burden of
debt has led to pressure to cancel the debt of heavily indebted countries.

  • The richer nations could write-off debts. Supporters of this action argue that, once released from a burden they cannot afford to pay, developing economies would import more and so boost developed world trade. Such imports could raise living standards and allow for more investment. Opponents to writing off debt point to irresponsible borrowing being promoted if old debt is wiped off. Such arguments have very much less force since the advent of the 'credit crunch', which largely arose from the irresponsible lending of the financial institutions of the richest countries. The Highly Indebted Poor countries initiative of the EU and others has borne some fruit but, in reality, many of the debts cancelled would never have been repaid.

Another option open to debtor countries is to seek to have their debt re-scheduled or re-structered; here the terms of the debt are renegotiated so they have a longer period to repay the loans and interest. They may seek a moratorium (stopping payment altogether for a time), while they adjust their economies to release the increased sums needed to be allocated to debt repayment.

A further option is debt swaps, where a creditor country cancels a debt at its nominal value. In return, the debtor invests part of the cancelled amount in development projects according to conditions previously agreed by both parties. UNICEF's Debt for Child Relief is an example of how an organisation helped some developing countries with debt problems through a debt swap programme.

UNICEF and international banks made a deal where some of the money that the poorer countries owed the banks was paid to UNICEF, rather than to the banks themselves. Instead of the money, the banks received tax deductions from their national governments. UNICEF collected the debt repayments in local currency, many of which are non-convertible (and crucially not the very scarce hard currency earned through exports) and then spent this money on social programmes to help children within the poorer countries.

  • Structural adjustment programmes can be accepted as part of an IMF loan to clear debts. This scheme tends to impose heavy costs on economies (austerity measures). These are discussed in more detail in section 4.6.