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What is meant by the problem of ' international debt'? Discuss the main policies that a country can use to reduce the problem of international indebtedness (i) in the short run and (ii) in the long run.

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Introduction

Economics Essay 12) a) What is meant by the problem of ' international debt'? (6 marks) b) Discuss the main policies that a country can use to reduce the problem of international indebtedness (i) in the short run and (ii) in the long run (7 marks + 7 marks) a) The Balance of Payment account shows all monetary transactions between our country and the rest of the world over a period of time. It is made up of the current account (trade in goods and services), capital account (Investments, Saving, Borrowing) and the balancing item, which represents the total of all errors and omissions from the above values, which are estimates. When a country spends more than it earns i.e. it imports more than it exports (Current account), or it saves and invests more abroad than other countries save and invest in that country (Capital account), it is said that the country has a current account deficit and a capital account deficit respectively. The country facing a BOP deficit must take actions to rectify it. ...read more.

Middle

The government of a country may take actions to rectify this deficit. In the short run a country can borrow from financial institutions and other countries to correct its Balance of Payments deficit. An alternative would be to use its reserves (Gold and foreign currencies) to correct its deficit. These are temporary ways to correct the deficit and do not fight the source of the problem, they do not stop it from occurring the following year. ii) In the long run the country can take actions that would eliminate the problem that cause the BOP deficit. A country can use many different policies to correct and reverse the deficit. If the government increases taxes and, or, decreases public expenditure, there will be less money circulating in the economy and the aggregate demand would decrease. People will have less money to spend on imports, imports would decrease and the BOP deficit will be corrects. Nevertheless, a decrease in aggregate demand also affects the domestic industries. Less of their products would be demanded, they will produce less and as a result they will cause unemployment. ...read more.

Conclusion

In the long run a country may decide to improve the competitiveness of its Industries through supply side measures such as regional policies. Nevertheless, these policies are very time consuming and will take a lot of time to work. The country can also demand through the IMF a debt rescheduling and or new loans. This involves lowering the interest rates on existing loans, lengthening the repayment period and, or, canceling part of the debts. The IMF can provide additional loans or arrange so that financial institutions do it, with a guarantee from the IMF. In order for the IMF to do these it sets certain conditions and structural adjustment programmes that the country must follow. These conditions and programmes involve most of the policies discussed above. A further, policy would be to encourage commercial banks to finance private sector development. If governments spend too much they have a budget deficit and their income is less than their expenditure. This deficit is financed by borrowing large amounts from commercial banks and as a result not many funds are left to lend to the private sector. The IMF wants commercial banks to lend more money to the private sector, which is expected to make better use of the funds for development projects. 1 Nicolas Savva 5E ...read more.

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