As a result it can be seen that Debt cancellation should be part of a campaign to create the preconditions and good governance needed for economic growth. Similarly a stable framework for lasting self determined growth and take-off is essential for an ldc to move away from dependency. It also allows MDCs to demand reforms to end rural isolation and also to help the modern sector grow in town as well as country to replace the informal economy.
It can be seen that debt cancellation is a very effective method of setting tough conditions to ensure micro credit reaches the poor. This gives them the power at village grass root level to create an economic framework they can use to end their own poverty rather than rely on remote and untrustworthy governments. Similarly it can be used to give power, property rights and loans to local government. This helps improve infrastructure such as roads or utilities.
Our debt cancellation judgment must look at each country individually and ask whether debt cancellation can reduce poverty. This should be far more important than the self interest of a country and banks. Similarly governments declare aid and debt cancellation but fail to carry out promises made.
The conditions set must be sensitive to the obstacles and potential of each country. Therefore fixed conditions or free market ideology should not be imposed. In contrast negotiations should take place with local officials and economists as they know what’s best for a country.
In order to make the best use out of debt cancellation it may be best to gradually relieve debt in a number of instalments. However, there is an extreme position when immediate relief is essential. This occurs when debt servicing is unsustainable and repayments of capital with interest are greater than a country’s annual exports. At this it seems morally incorrect for mdcs to demand there money back.
Another major issue surrounding 3rd world debt is the demand for foreign currency. Debt can only be repaid with internationally trusted foreign currencies like the pound. When an LDC runs out of foreign currency it cannot repay its debts and therefore must increase exports or cut imports to repay debts.
The IMFs Heavily Indebted Poorest Nation (HIPC) programme is good in principle as it promises debt relief to the poorest countries and focuses on unsustainable debt. This is only if they meet strict conditions for sustained growth and human development. However it has been too slow and demands too many conditions in return for too little money. The strain of paying back debts which are on average 4 times annual exports of the HIPC countries may cripple reforms through collapse of the country before any debt is cancelled. Also commodity prices keep falling so many HIPC countries have gone further in debt in spite of the programme.
Ldc didn’t know risks and couldn’t predict the crash in long run commodity prices. Similarly had their not been an arms race between America and Russia their may not have been a significant rise in interest rates.
As a result Mdcs are partly to blame and therefore have a moral responsibility to cancel debt to the poor countries. In comparison Incompetent government borrowed and wasted money as institutions didn’t exist to utilise the spending. Similarly why should banks suffer because of these misjudgements in LDCs. There is a high opportunity cost of cancelling 3rd world debt including education spending and pension funds.
If we cancel the debt of Pakistan because they have improved their institutions and have worked towards improving human development it can create a dilemma. India will argue that they have worked hard in paying off debt and deserve debt cancellation.
Debt cancellation is too often a tax on poor people in rich countries that ends up as benefit to the rich in poor countries Encourages people to muck about and waste money then go back and ask for more. Should this misallocation of money be payed for by the west instead of spending on healthcare and education?
Overall it can be concluded that third world debt is extremely damaging to an ldc and should be cancelled. However, debt cancellation should be a process where demands associated with economic growth and human development are met. The process should include debt cancellation in instalments and not in one go.