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The role of international debt
Terms in this set (13)
all public and private debt within a country that is owed to foreign lenders
How can foreign debt and borrowing be beneficial?
If the government spends it on infrastructure leading to economic growth and enabling the government to service its debt (financial account credit)
When does a foreign debt problem arise?
When there is a trade deficit and low economic growth - causes deficit in current account
How to help countries with foreign debt problems
1) Debt rescheduling
2) Conditional assistance from the IMF
3) Conditional assistance from the World Bank
What is debt rescheduling?
When money is lent money to pay their existing debt but at a concessionally low interest rate
Conditional assistance from the IMF
IMF pays part of their debt on the conditional that they adopt some trade liberalisation reforms.
Conditional assistance from the World Bank
Money is lent on concessional terms, similar to IMF conditions
Problems with foreign debt
- Balance of payments problems
- Opportunity cost
How does foreign debt lead to a balance of payment problems?
Borrowing is a credit in the financial account. It is used to offset the current account deficit. If debt is very high, the interest rate owed on the debt leads to a bigger deficit in the current account. Therefore, there will still be a current account deficit and the country will continue to borrow to pay interest on it.
How does foreign debt create an opportunity cost?
The LEDC government has to use its revenue to service its debt. Can't be used on development objectives e.g. education
How do LEDCs benefit from debt cancellation?
They can now spend on development objectives. In order to achieve economic development, the LEDC has to allocate resources properly, and reduce future borrowing.
How do MEDCs benefit from debt cancellation?
If the LEDC achieves economic development, then they can become a future trading partner
Money lent to an LEDC and not used for the benefit of the population - should not have been lent so repayment should not be expected.
THIS SET IS OFTEN IN FOLDERS WITH...
Measuring economic development
The role of domestic factors
The role of international trade
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