Looking Into Debts of Countries Essay

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External Debt Crisis of Developing Countries

Past studies on external debts have been done for two reasons. First, is that while borrowing from external sources can increase a nation's access to funding, borrowing from internal sources only transfers the existing resources within a country from one party to another, thus, only external borrowing can result in a 'transfer' problem (Keynes, 1929). Second, is that since financial regulatory authorities cannot just print hard currency that is required to repay debt from external sources, only external borrowing is associated with the vulnerabilities that may bring about debt crises. In terms of external debts, most countries don't know who specifically holds their debts, and thus, they categorize all debts from the international market as external, and all debts from internal markets as domestic (ECESAUN, 1999), thus, so-called external debt is, but a poor proxy for the transfer of financial resources between nations.

Foreign Debt Management

In a meeting held by ESCWA in 2008, a World Bank consultant and the Executive Director of Centre for Project Evaluation and Macroeconomic Analysis of the Ministry of International Cooperation of Egypt, Mr. Talaat Abdel-Malek, stated that the member countries of the organization had profited greatly from the ODA in the last three decades, which had helped to increase living standards and levels of economic growth. He also noted that ECSWA members were facing quite a number of challenges, including high unemployment rates and gaps in technology. He emphasized on the need to have better institutions and more skilled human resources at various levels, so as to increase the effectiveness of ODA (ESCWA, 2008). The Islamic Development Bank, the Qatar Development Bank, and other financial institutions were represented, and they made comments on the debt crisis. However, Mr. Abusdra, the director of the department of Economics at the Lebanese American University, made a special contribution to the meeting with his detailed report on the external debt situation among the community's member countries. His report revealed that many ESCWA nations continued to suffer from external debt crises, despite the financial reforms that had been initiated by their respective governments. According to Mr. Abusdra, to reduce external debt countries should:

a) Continue with the privatization of government corporations and use the monies acquired to pay off external debts.

b) Improve their investment climates to decrease reliance on borrowing in the international marketplace.

c) Join together to form one institution to deal with the evaluation of the foreign debt situation, and a long-term strategy to reduce it (ESCWA, 2008).

Another report on the situation was released during the meeting by the Public Debt Bureau of the Lebanon's Finance Ministry, which revealed that among the ESCWA member countries, the ratio of external borrowings to Gross Domestic Product (GDP) was increasing among the members who were net importers of oil, such as Lebanon and Jordan, and decreasing among the members who were net exporters of oil. The report further stated that to manage public debt, its growth should not exceed the average growth rate of the GDP (ESCWA, 2008).

Reasons for Internal and External Indebtedness

Debt in developing countries has for quite some time been said to be a major challenge to human development. Many other challenges have emerged due to huge external debts that developing nations owe to developed ones. Debt has thus been cited as an obstacle to security, economic, and political stability and also sustainable development (Shah, 2007).

Neocolonialism: According to a paper released by a development institution, South Centre (2004), the debt of third world countries was to some extent caused by the transfer of debt from colonizing states to them. The cycle, the paper argues is likely to continue and increase debt to even greater levels, unless the debt is cancelled. Another paper released by Mr. El Hadji Guisse for UN Sub-Commission on Human Rights (E/CN.4/Sub.2/2004/27) titled "Effects of debt on human rights" agrees with the arguments made on the South Centre (2004) working paper. According to Guisse, debt in developing countries can be partly attributed to unjust transfer of debts from colonizing states; Guisse approximates that to about 59 billion dollars of external debts, which was transferred to newly independent states in the sixties (Shah, 2007).

Odious Debt: According to Jubilee USA (2003), odious debts are unfair debts rising out of loans to dictatorial or illegitimate governments that later utilized the money for personal gains or to suppress oppositions in those countries. In certain cases whereby the loans were utilized contrary to the citizens' interests and the lenders were aware of this, the lender can be said to have committed an act of hostility against the country. Thus, such loans are illegal and the countries are not under any obligation to pay them, for instance, the loans taken by the apartheid government in South Africa, which used the money to oppress the country's citizens (Shah, 2007).

The Economic Effects of Debt in Developing Countries

According to Levy and Chowdhury (1993), a rise in external debt is correlated to a decrease in GNP levels, since it discourages the formation of capital and promotes capital flight because the anticipation of tax increases. Another researcher, Cunningham (1993), argued that external debt slows down economic growth because of the effect it has on productivity of capital and labor. Effects of high debt levels on growth seem to operate not only through a negative impact on capital accumulation, but also on TFP (total factor productivity). Additionally, it is known that both total factor productivity and private savings are not affected by the level of external debts (Pattillo, 2004).

According to Smyth and Hsing (1995), in 1920, debt ratios increased, but were still below 38.4 and loans helped stimulate economic growth, while between the years 1986 and 1993, debt ratio increased from 40.7 to 50.9%. According to the two researchers, this level is over the optimal debt ration level of 38.4, and thus, any further increases between 1993 and today, could negatively impact economic growth.

Solutions to the Crisis of External Debt

IMF Lending Into Arrears

There is a consensus among economists that the institution lending into arrears could offer a viable solution. In cases whereby the IMF continues to provide funding even as countries continue to reform their financial sectors, the institution would in effect be increasing the bargaining position of the debtor, and that coupled with the financial reforms, could indicate to any unpaid lender that they will be in a better position to be paid by getting into an agreement with their debtors (ECESAUN, 1999).

Contingency Clauses

There should be clauses in debt agreements that provide for extension of maturities in situations where there is a huge liquidity crisis in the country. One disadvantage of such a clause would, however, be an increase in the cost of financing, as the creditors may want to cover for taking on the increased risks (ECESAUN, 1999).

Restructuring of Debt

There are quite a number of cases in history that prove that early restructuring of debts usually brings about early recovery. For example, after the Asia economic crisis, both Korea and Thailand entered into agreements with the creditors to restructure their debts, less than 6 months after the crisis, while Indonesia entered restructuring agreements about 12 months after the end of the crisis. Both Korea and Thailand recovered earlier than Indonesia. Early restructuring of debt provide space for countries to grow and also removes uncertainties about debt repayment obligations, which could be causing capital flight or lack of investor confidence (ECESAUN, 1999).

Transparency and Accountability

The Asian crisis also taught the world that lack of financial accountability and transparency can worsen financial situations and complicate actions taken to resolve a crisis. Measures need to be taken by entities in the private sector (national banks, hedge funds and institutional investors), national regulatory authorities and international development banks (ECESAUN, 1999).


With regards to coordination efforts to resolve debt crises, there is a need for such co-ordination, especially, in areas of debt management and conversion. In terms of debt conversion, institutions have shown a desire to channel resources that were released in debt relief initiatives to human and social development schemes. However, as shown above, several considerations, particularly, the absorption capacities of the countries in debt, have to be taken into account before initiating debt conversion plans. It is important for international banking agencies to first assist the debtors to come up with national strategies for both human and social development before drawing plans for debt relief. Debt conversions, on the other hand, can help bring about more relief and free-up more resources for development purposes. The cost of such initiatives should, however, be carefully assessed so as not to result in higher debts for the debtors (ECESAUN, 1999).


Chowdhury, A. R. (2001). "External Debt and Growth in Developing Countries; A Sensitivity and Causal Analysis." WIDER Discussion Paper No. 2001/95

Cunningham, R.T. (1993): "The Effects of Debt Burden on Economic Growth in Heavily Indebted Nations," Journal of Economic Development, pp 115-126

ECESAUN, 1999. ISBN: 92-1-121239-1…

Sources Used in Document:


Chowdhury, A. R. (2001). "External Debt and Growth in Developing Countries; A Sensitivity and Causal Analysis." WIDER Discussion Paper No. 2001/95

Cunningham, R.T. (1993): "The Effects of Debt Burden on Economic Growth in Heavily Indebted Nations," Journal of Economic Development, pp 115-126

ECESAUN, 1999. ISBN: 92-1-121239-1 Finding solutions to the debt problems of developing countries. Chile: United Nations Publications United Nations.

ESCWA, 2008. Consultative Preparatory Meeting For The Follow-Up International Conference On Financing For Development. Doha: Economic and Social Commission for Western Asia United Nations.

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