This investigation will try to test the level of external debt and measure its impact upon the least economicly developed countries economy.

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INTRODUCTION

1.1          The increasing burden of external debt in the least economic developed countries has been a widely discussed topic in the international community.  However, some concepts are shared by most of the economists, being this a reality in third world country economies.

Without a doubt, the increasing flow of external resources from rich countries to poor countries, has contributed, in some cases, to impulse economic development and accelerate economic growth.

However, it is also evident that an increase in the amount of external debt and the hardening of its financial conditions has resulted in a net outflow of payments, mainly capital plus interest, which has slowed down economic development. The logical consequence has been an increase in the external debt; a problem that has worsened since these additional resources have not been used in social projects whereas in the long run, the benefits are higher than the costs (interest rate).

Twenty two years later, Ecuador is still unable to adequately develop its economy, thus making it necessary to question whether its situation is caused by the high stock of external debt. With this said, does Ecuador’s External hinder economic development?

1.2        On the other hand, an international market of capitals developed rapidly, represented among others by private banks, whose funds have been added to the already existing funding.  Access to these funds was relatively easy for developing countries. However, these type of creditors were not interested in the use of these resources for social projects, but only expected the repayment of their debt and high yields in the short term.

In October 1982, a balance of payments crisis forced Ecuador, into a suspension of debt service, mainly capital installments, while interest payments were kept current. Thus it joined other countries which had earlier set off what we now regard as a global debt crisis.

From its earliest stages, Ecuador met its debt crisis by traditional refinancing arrangements – initially on an annual basis and by 1984 on a multi annual scheme – designed to buy time until normal debt service could eventually be resumed. This strategy, based on a liquidity view, assumes that the crisis would be a temporary one. Proponents of a opposed solvency view supported that if similar rescheduling agreements continued, the Ecuadorian debt would be too large ever to be serviced, and that the only reasonable approach was to comprehensively search for alternative strategies that would reduce the external debt problem. Despite various agreements reached by Ecuador to reduce its external bank debt, ironically the country has experienced an increase in its total external debt, which provoked various economic, social and political problems.

1.3                This investigation will try to test the level of external debt and measure its impact upon the countries economy. The research will be based on existent facts and figures, passed papers written on the particular subject and verbal remarks from individuals that have been involved in the negotiation of the countries debt.   

                Without the suitable knowledge off how these phenomenon’s have originated in the past, it’s difficult to judge on any present aspect, and least of all carry out any conclusions on what the burden of the debt holds for Ecuador’s economy.

        

1.4         With the basic comprehension on what has been examined through the analysis, the essay will outline a synthesis with the final conclusions of the study. On the other hand, the study will contain a high degree of objectivity, trying this way to obtain valid sources that will constitute to the theme of external debt. The general content of this essay is summarized in the following aspects:

Chapter I will contain the necessary theoretical framework, which will sustain the explanation of Ecuador’s economy in a practical order that will later be presented.

        

In chapter II, the empirical framework will be undertaken, specifically a critical study of the burden of external debt, from the period of 1990 to April 2004.

        

In the following Chapter, there will be a global analysis from the period 1990 to 2004, which involve the stock of the external debt, the structure by creditor as well as the structure by debtor, and I will finally analyze the new debt that has been incurred in the period mentioned above. It is convenient to deepen the analysis since 1990, because of the notorious increment that the economic activity had, since this year.

        

In chapter IV, there will be a highlight of the social economic indicators that have caused the external debt to rise throughout the years, such indicators include: income distribution, poverty and the external debt service vs. GNP and Exports.

        

Finally, Chapter V will contain the conclusions that will be obtained from this essay, the same that will confirm the verification of the original stated question.

THEORY

Economic Development

Economic development is the process that influences growth and restructuring of an economy to enhance economic wellbeing. Rather than being a simplistic process, economic development typically is a range of influences aimed at achieving objectives like creating jobs and wealth and improving the quality of life. It incorporates co-ordinated initiatives targeted at expanding infrastructure and increasing the volume and/or quality of goods and services produced by a country. Economic development brings many benefits such as: increased employment, viable businesses, enhanced standards of living and a pleasant working environment. According to Franklin development strategy economic development is achieved by “growing the workforce and by increasing the productivity of existing resources or in jargon phrase "working smarter not harder"”.

Indicators that affect Economic Development

There are diverse indicators that affect economic, one of them is Low GNP per capita, and this is the most common method of comparing living standards. However many LDC’s have had a realistic growth in their GNP rate, but the potential benefits that come with this growth is canceled due to the extreme increase in population. Another indicator is poverty, which can be seen in most of the third world economies. The third biggest indicator is the unequal distribution; this is a major factor in the persistence of poverty, unemployment and unequal income distribution.

External debt hindering economic development.

 If the burden, reflected in high payments of capital plus interest of the external debt in the physical account is too high, the situation will be unsustainable in the medium term. If a country wants to develop its economy through a high social expenditure (social projects), it should allocate less payments to the external debt. To the extent that these external resources take away the capability of the country to allocate resources to social projects then clearly the country is not in a position to develop economically. Unless the country decreases the amount of its payment on its external debt, the amount of it will definitely hinder its economic development.

METHODOLOGY & RESEARCH METHODS

2.1          The theory behind this investigation involves finding out how a third world country obtains resources from abroad, how these sources generate the origin of external debt, and the problems that they entail.

The country has to allocate resource from its budget to pay their debt, resources that otherwise could be used or should be used to increase and improve services that the government could provide to the poor like: health, education, transportation, housing , but also crucial sectors of the country, oil, agricultural and  telecommunications among others.

2.2         The information used in this investigation was obtained from visits made to the central bank of Ecuador, Ministry of Finance, University Library, public brochures and statistics, personal interviews with government officials.

        After carrying out a critical analysis on the information compiled, and paying close attention to levels, structure and characteristics of external debt, the investigation will try to determine if the country has used external debt in a manner that has jeopardized economic development.

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RESEARCH RESULTS AND ANALYSIS

THEORETICAL FRAMEWORK

Economic Origin of External Debt Necessities:

The external debt is not a new generated problem, it’s just that in the last couple of years, it underwent and impressive growth, consequently it is interesting to know, from a net economic point of view, how the necessity of a third world country in obtaining resources from abroad originates, which is one of the definite direct causes to the origin of the external debt and the problems that it entails.

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