GEOG 2400 GEOGRAPHY OF WORLD DEVELOPMENT

1
GEOG 2400 - GEOGRAPHY OF WORLD DEVELOPMENT

• Debt and Development Assistance

Spring 2002
2
The Geography of Debt

• According to the UNDP (2000), the debt owed by
  all developing countries in 1998 was 2.05
  trillion, up from 857 billion in 1985, some 448
  per person.
• This works out to be an average of 43 of annual
  GNP although the share of the least developed
  nations represents 99.5 of their GNP (UNDP
  2000).
• Based on updated figures in UNDP 2001, the
  interest payments alone on this debt for all
  developing countries totaled 22.3 of export
  earnings in 1999, up from 18.7 in 1990, and
  representing 5.8 of total GDP.
• For Latin America, debt interest payments totaled
  41.6 of export revenues
  
• The most indebted medium and low HDI nation as a
  of GDP was Guyana (93) at 15.5 and as a of
  export earnings was Brazil (69) at 110.9.

3
Debt and AID

• It appears that the Medium and Low HDI nations
  were obliged to pay out around 283 billion in
  debt servicing in 1999 (calculating their
  revenues from exports multiplied by 20.4 and
  15.3 respectively) or around 56 per man, woman
  and child.
• In 1999, the developing countries received some
  57 billion in grants or loans as part of net
  official development assistance (ODA), not
  including other types of AID (military, etc.) -
  around 11 per man, woman and child.
• This includes development assistance offered by
  wealthy non-OECD nations like Korea and Saudi
  Arabia but does not include development
  assistance by China, which does not disclose its
  ODA.

4
ODA - from where?

• The 21 countries of the OECD Development
  Assistance Committee gave 56 billion to other
  nations in 1999, some 0.24 of their combined
  GNP, down from 0.34 in 1990.
• Spending on their military by the OECD DAC
  members was 510 billion or 2.2 of GDP.
  
• The UN expects the industrialized nations to
  devote at least 0.7 of their GNP to ODA.
  
• Only four nations meet or exceed this target each
  year - Norway, Sweden, Netherlands, and Denmark.

5
Who gives what?

• The US has the lowest ODA in 1999 as of GNP
  (although the second largest after Japan in ) at
  0.1 - some 9.1 billion or 33 per person.
  
• This is down from 55 per person only 9 years
  ago.
  
• Norwegians gave 298 and Danes 331, both up from
  1990.
  
• Japanese gave 106 and Canadians 55.
• Even the cheapskate Brits gave 57 in 1999.

6
Who gets what?

• The UK announced in 1999 that it would start to
  give the majority of its ODA to the 20 poorest
  nations (in 1999 they only got 21, down from 31
  in 1990!).
• HDR 2001 shows that the least developed nations
  got only 19 of the 1999 global ODA money,
  compared to 26 in 1990.
  
• The US gives only 16 of its ODA to the poorest
  nations, Norway 33.
  
• More than 3.3 billion is given to countries that
  have High HDI status (e.g. 1 billion to Israel,
  1 billion to Poland) and 26.3 billion to Medium
  HDI status nations.
• Low HDI nations got 11.8 billion.

7
Aid per person

• Incredible inequities exist concerning who gets
  what kind of hand-out and why.
  
• The greatest aid per capita goes to the Cape
  Verde Islanders at 319, No. 91 in the HDI list,
  a whopping 23.5 of GDP.
  
• By region, aid varies from 3.1/cap in South Asia
  to 18.3 for Sub Saharan Africa.
  
• Note that Eastern Europe and the old Soviet
  states get 18.6/cap, an amount that continues to
  rise and get a larger share of global ODA.
  
• The average per capita ODA received by the
  developing countries was 7.2/cap or only 0.6 of
  their GDP and for the least developed nations it
  was 17.8/cap or 7 of their GDP.
• Contrast this with interest payments on debt of
  5.8 of the combined GDP of the developing
  countries.

8
Sinking into Debt

• Many developing nations cannot even pay the
  interest on their historical loans, let alone pay
  down the principal.
  
• Many new loans in the 1980s and even today
  were/are issued to help pay the interest on other
  loans.
  
• Some of the debt is clearly a function of
  corruption (Helms labels many developing nation
  govts. kleptocracies) and wasteful and irrational
  spending.
• Perhaps much of this could have been avoided if
  the lenders had cared how and why the money would
  be used and placed stronger safeguards on loans.
  
• But they didnt!

9
The 60 70s when money flowed like water

• During the 1960s and 1970s, GDP growth in many
  developing countries was robust, prospects looked
  good, so bankers lent money.
  
• The countries were willing to pay higher interest
  than, say, powerful corporations and so attracted
  western lenders.
  
• The dollar was weak, making loans seem cheaper
  because repayments got easier each month as its
  value fell.
  
• Freely available loans made large projects
  feasible, coinciding with a period of pent-up,
  post-colonial fervor for nation-building and
  visible symbols of progress airports, highways,
  etc. (but all to frequently too palaces,
  military toys, and conspicuous consumption).

10
Drowning in Debt

• Free flowing loans soon became millstones around
  the necks of developing countries struggling to
  tread water.
  
• Oil prices quadrupled in the OPEC-crisis of the
  mid-1970s, both hurting developing nation balance
  of payments while flooding the market with even
  more loans (petrodollar deposits made US banks
  cash-heavy).
• Oil price increases accounted for more than 1/4
  of all development loans because of the need to
  borrow just to keep energy supplies coming in
  (Lewellen, 1995).
• Declining prices for raw material exports in the
  early 1980s coupled with global recession in this
  decade crippled many earnings growth forecasts
  and thus their abilities to repay loans.
• The US dollar has strengthened through the 1990s,
  further increasing repayment difficulties.

11
Repaying Debt

• US Federal Foreign Debt was 3,618.8 billion
  dollars in March 2000 according to the Federal
  Reserve Board (13,256 per person).
  
• If the US were to pay 6 or more of its GDP to
  service this debt, it would cost around 500
  billion, more than we spend on defense and
  education.
• Government spending would be eliminated or taxes
  would rise, evaporating what little savings are
  made and thus available for commercial
  investment.
• Interest rates on loans would rise, wages would
  fall, living standards would plummet.
  
• However, thats what we expect the poorer nations
  to do, pay anywhere from 5-15 of their GDP, or
  up to 50 of their export earnings each year to
  international lenders.

12
To pay or not to pay?

• Few debtor countries actually default on their
  international debt, they just renegotiate it.
  
• They often agree to pay commercial lenders a
  given of their principal on higher interest
  loans, borrowing the money from friendly
  bilateral institutions or the World Bank/IMF at
  lower rates to do so.
• What would happen if they defaulted? Hard to tell
  at the minimum, their international credit
  rating would fall, making further loans either
  impossible or very expensive.
• They could/would probably be penalized with
  sanctions by the US and others such as the
  seizure of international assets (airplanes,
  property, deposits with foreign banks).
• They would have restrictions placed on their
  airlines, would lose foreign aid, and might have
  exports seized without payments.
  

13
Renegotiating Debt

• To renegotiate debt, governments frequently have
  to agree to austerity packages designed by the
  IMF.
  
• Devaluation of the local currency to discourage
  imports and encourage exports note that
  historically, this has often failed because of
  export gluts and falling prices.
• Sell-off government owned enterprises and permit
  greater foreign investment.
  
• Eliminate government subsidies, especially on
  food and fuel and eliminate price controls.
  
• Reduce government spending and/or refocus it
  toward projects that will raise GDP (as opposed
  to meet broader development goals).
  
• While these measures might possibly increase GDP
  and improve the abilities of nations to make debt
  payments, the end result is often increased
  poverty and inequality.

14
Should the rich forgive the debtors?

• PRO By forgiving the debt of the world's poorest
  countries, the OECD nations offer developing
  nations the opportunity to fund critical
  education, health care, and infrastructure
  improvements.
• CON Forgiving the debt is a waste of taxpayers'
  dollars that rarely benefits the debtor nations.
  It returns money with no strings attached to
  corrupt and inefficient governments and rewards
  them for past failures and illegal enrichment of
  their elite.
• The total external debt of all developing
  countries is 2 trillion and repayment
  obligations are 283 billion/yr.
  
• Total GDP of the High HDI nations was 25.1
  trillion in 1999 and their population 873.2
  million.
  
• Thus all the annual debt payments represent some
  324 per capita of combined High HDI annual GDP
  or 1.1.