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Explain the evolution and characteristics of the debt problems of LDCs. In the light of the various steps taken by the international community, has the problem been overcome? If not suggest possible solutions.

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Introduction

Explain the evolution and characteristics of the debt problems of LDCs. In the light of the various steps taken by the international community, has the problem been overcome? If not suggest possible solutions. According to Joint BIS-IMF-OECD-World Bank Statistics on External Debt, the total amount of money owed by LDCs and countries in transition was US$2,444,838 million at the end of December 2002, and it has grown steadily each year since the borrowing trend first started after the second world war. This huge figure represents an average of 57% of each country's GDP, although it varies greatly by country and region. For instance, the lowest income countries owe on average 90% of their GDP and are often obliged to try to make huge repayments on interest and capital1. This crippling debt burden is described by many as the biggest single barrier to the development process, as governments neglect service provision and development projects in order to make repayments. In addition, because debt is mainly held in US Dollars, LDCs have to find foreign currency to make repayments. If we understand the nature of and the reasons behind the build-up of debt, not only can we assess initiatives to overcome it, we can also formulate future strategies to solve this problem. This essay discusses debt in the less developed countries. It first outlines the nature and pattern of debts currently owed by LDCs to the industrialised countries. It goes on to examine the various reasons for the build up of debt and discusses the relative importance of this range of factors in contributing to the 'debt crisis' that was first identified by the international community in August 1982, when Mexico announced a moratorium on its debt repayments. It then details the interventions by a range of international players, focussing on the role of the IMF and World Bank in reacting to the debt crisis. ...read more.

Middle

In the 1970's, several countries, including Zaire and Poland, had defaulted on their external debts, and many countries had taken out further loans through defensive lending just to cover repayments on the original amounts, but it was not until Mexico threatened to default in August 1982 on its US$80 billion debt, that the international financial community began to talk about a 'debt crisis'. Many other Latin American countries, including Brazil and Argentina, quickly followed this move by Mexico, through a combination of synchronicity of economic position and contagion by the international banks. Suddenly, countries regarded as relatively successful in terms of economic development and prosperity, were threatening the international financial system. Banks had overlent in many cases, and it emerged that the nine largest US banks had lent over twice their combined capital base just to non-oil-producing LDCs (Gibson and Tsakalotos, in Hewitt etc al (eds), 1992). Credit dried up overnight, as most commercial banks became very reluctant to lend further to LDCs; they were already in a vulnerable position and unwilling to lend where others did not, the reverse effect of the 'herding instinct' that had resulted in overlending in the first place. A number of banks that were threatened with bankruptcy turned to their governments and to the IMF for assistance. Privately, many Fund officials had made warnings about increasing indebtedness by certain LDCs, especially net oil importers, but these fears had not been voiced publicly because it was not in the IMF's nature to do so13, and up to this point, the IMF's role had been to provide short-term loans for balance of payments shortfalls, but now a larger solution was necessary. In immediate response, the IMF, with the assistance of the US Treasury, put together a series of huge loans, and effectively became the new international lender of last resort, backed by the BIS and the US Federal Reserve. From now on, not only would the IMF's relationship with international banks become much closer, but effectively the IMF would become ...read more.

Conclusion

Introducing a similar set of adjustments in so many countries during a short time period must have worsened commodity collapse. It is by examining and overcoming these underlying factors, coupled with massive donations by multilateral and bilateral agencies in infrastructure, enabling LDCs not only to expand their export base but also specialise, that may enable them to overcome their debt burden and improve economic and social development. Appendices From OECD web site Figures in US$ million Official Bank loans and deposits Debt securities Other TOTAL Debt/GDP % Multilateral Bilateral Loans Export credits Non-bank Bank All Aid Recipients 489 738 206 477 213 883 154 620 562 855 624 707 232 565 2 484 838 57 of which: Sub-Saharan Africa 70 296 25 165 35 596 9 765 24 003 12 913 13 567 191 304 66 North Africa & Middle East 27 385 25 786 41 928 32 513 78 137 31 469 55 086 292 304 43 Latin America & Caribbean 147 085 21 567 28 032 29 309 174 391 299 000 49 059 748 442 123 Asia and Oceania 166 074 124 334 50 420 52 262 187 637 173 026 87 384 841 130 34 Europe 78 898 9 625 57 908 30 771 98 687 108 299 27 469 411 657 38 Table 1: Debt Outstanding at end of December 2002 Table 2: Debt by level of development (from OECD web site) Level of development24 Per capita GNI (US$, 2001) Value of debt (US$million) GDP/ Debt % Least Developed Countries (e.g. Afganistan, Bangladesh, most of Sub-Saharan Africa) 142 919 90 Other Low Income Countries (e.g. India, other Sub-Saharan Africa, countries in former USSR region) <745 465 870 22 Lower Middle Income Countries (e.g. Latin America, North African and Middle East countries, China, Turkey) 746 - 2975 443 478 45 Upper Middle Income Countries (e.g. Chile, Panama, Brazil, Mexico, many Caribbean, Botswana) 2976 - 9205 829 992 46 CEECS/NIS in transition (Eastern Europe) 256 328 31 Other High Income Countries (e.g. ...read more.

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