StudentShare
Contact Us
Sign In / Sign Up for FREE
Search
Go to advanced search...
Free

Debt crisis in Africa - Essay Example

Cite this document
Summary
In the paper “Debt crisis in Africa” the author examines impact of debt cancellation on international financial market. He believes that debt cancellation would free Africa from its debts, which is originally not its own, is ethically right and fair…
Download full paper File format: .doc, available for editing
GRAB THE BEST PAPER97.2% of users find it useful
Debt crisis in Africa
Read Text Preview

Extract of sample "Debt crisis in Africa"

Debt crisis in Africa Introduction Debt has never been a great issue to be a conversational topic in international arena but it is later become the hot topic and is relatively well known after Mexico decided to suspend the payments of its debt to American and other foreign banks, says King. The question is, is there really a debt crisis? Countries are ending up in debts because of bad management or bad policies, adds King but also “a tool of domination used by rich country governments and creditors like the IMF and World Bank,” say the campaigners of African Social Forum from Lusaka, Zambia. During the The First AU Conference of African Ministers of Economy and Finance (CAMEF) held on 7 May 2005 in Dakar, Senegal, one of the recommended issues was the Debt Cancellation. The ministers agreed that debt cancellations should be the ultimate goal for Africa. However, according to the author of the Conference report, they also require that Africa should link the debt cancellation with the Millennium Development Goals (MDGs), and the access of African products to foreign markets. Other recommendations during this Conference concerning debt cancellation were Africa’s domestic debt; debt cancellation should not result in reducing Official Development Assistance (ODA) to Africa; establishment of an African Debt Management Fund to facilitate all debt or cancellation mechanisms and initiatives, which is yet to be established; African countries should come together and propose a common position on debt cancellation; African Countries should carry out an audit indicating the amount of debt, its origins and terms; African countries are responsible to ensure that Africa’s debt remains indivisible so that any initiative associated with African debt should benefit all African countries; and African leaders should avoid being subjected to conditionalities related to debt cancellation. However, the conclusion of the recommendations was that it has to be approved by the World Bank and the IMF. Never once the World Bank or the IMF prescriptions of economic policies reform was successful but vice versa. Countries affected by economic crisis are required to undergo structural arrangement and conditional arrangements by the World Bank and the Fund, but their prescriptions have proven failure not only in Africa but also in other developing countries. According to Dembell, their structural adjustment program has led to economic stagnation, fewer investments, more external dependence, and has weakened the state’s role in developing social and economic welfare. It even aggravates debt crisis among the dependence countries. Debt creation v. Dutch disease As business dominated the government, quick decision, quick performance, quick result, and risky behavior become a leadership games. Developing countries governments begin to risk the nation social and economic welfare to engage in risky borrowing by taking debenture bonds or secure loans or stocks as the collateral of private sector innovative economic development programs. Many governments prefer taking less risky schemes through long-term borrowing scheme while some are taking more risky short-term scheme. As government becomes more focus, export promotion becomes the government guarantee for taking more loans because of the notion of its ability to pay off the debt within the stated period. Soft loans give government the confidence of their ability to pay cushioned by the exports. Their borrowing habits soon become addiction. Political actors are no longer politicians but agents of development although Colfer and Capistrano allege they are not agents of development. Many perceive that private innovations represent the engine of development while borrowing is the engine of economic growth. They devote their attention and dominate their thinking to foreign direct investment to a degree, which is difficult to justify, say Cooke and Morgan. Soft loan often causes country borrowers to become addicted to borrowing. They quickly jump into the bargaining table to negotiate foreign direct investment with the confidence of their ability to pay and slowly develop a chronic Dutch disease. Ontario Minister of Energy Dwight Duncan during the Energy Commission meeting said, “If you want to increase profit, you need to reduce the supply and increase the demand.” So is in the case of foreign borrowing cushioned by exports. Market is congested with export commodities and countries were able to pay off their debt. Unfortunately, by the time developing countries governments are on the mood for borrowing spree, their exports are later restricted at the same time, the interest rates on their loans are increased says King. Since foreign borrowing rates fluctuate, soon these countries find themselves in a trap. Not only are these countries addicted to take loan from the World financial institution but also from multilateral institutions. Kapoor declares “for the Heavily Indebted Poor Countries, external debt has gone up 320% since 1980 to $189 billion. Debt owed to multilateral institutions has increased 800% to $70 billion so it now constitutes a full 37% of the total debt up from 14% in 1980.” Jeffery Sachs writes, “Many debtor countries will be unable to repay their commercial bank debts in full, even if repayment is stretched out over time” (King, 390). Zambia finance minister, on the other hand, declares, foreign debts represent the strategic of the rich and in 20 years, they have made Zambia to be poor. Conditions for Africa debt relief Ronca says conditions for Africa debt relief is like serpent in the grass. During the G-8 Conference, finance ministers agreed to cancel these countries debt but they must handle corruption, increase private sector development, and attract foreign investment; improve legal framework, and eliminate impediments to private investment, both domestic and foreign. The conditions for the countries to be eligible for debt cancellation are that they must adhere to IMF programmes for a minimum of six years; their eligibility would be approved and determined by the World Bank and IMF according to their credibility record,” debt relief should be closely linked with poverty reduction. Poverty levels should help determine how much debt relief a country requires. The Bank and the Fund should do more to promote schemes such as Uganda's "poverty action fund," which channels the savings from debt relief into publicly monitored and audited social programme” (Smith, 1998). Ronca’s analysis indicates that, these conditions “seems to require the selling off of water and natural resources to international bidders before these developing countries have the skill and experience to wrangle a fair price; to let foreign investors in before regulations are in place to prevent fraud; and to allow imports to compete with domestic products with no provision for protection of local producers,” The conditions for debt also require good governance but “only for foreign corporations, not for the countries receiving debt relief,” add Ronca and greater trade liberalization, which deems the countries to be under a new era of modern colonialism. Taking loan and service the debt is similar to shifting wealth within and outside the country, say Dany Glover. The impact has been a destruction of people’s welfare. Lal claims, developing people’s social and economic welfare through foreign borrowing indeed is an ill advice policy. Debt relief Before discussing about the impact of debt cancellation, it is better understanding the background of the current propose debt relief policy outlined by the G8 countries. In the section “Economy Outlook,” the head of the IMF’s Africa’s branch said, “We all agree the debt issue is unsustainable and we believe that the country needs an agreement on debt relief as soon as possible.” Hakata even claims that Africa has been burdened by foreign debt and poverty. Over the years, he continues the IMF and the World Bank’s prescriptions for debt relief have proven a failure. Rather it continues “haemorging of African economics which continue to have low growth rates.” Twenty years later, Hakata says the song becomes, what John Wolfensohn, previous World Bank president said, “At time of unprecedented prosperity, rich countries should be increasing, not cutting their budget, reaching out, not turning their backs on Africa and its children.” But sometimes, talk is cheap. Hakata writes that in 1999, both the World Bank and the IMF had taken $267 million more from Africa than they lend to the continent. Again, several years later, the song became “more aid, not loans.” Unfortunately, the heralded song is circling around and around while the World Bank and IMF’s policy prescriptions induce greater corruption, greater dependence, and higher incidence of poverty. Sometimes, when policies don’t work, experience is the best teacher. Neither Brady nor Baker Plans help countries to rid of their debts or reduce poverty but vice versa. For instance, the Brady Plan, introduced in 1985, requires that in order to qualify for debt relief, country borrowers should implement sound economic policies aim at encouraging domestic savings and foreign direct investment, which is done through yet, another foreign borrowing. Corporate elites do increase their investment in the countries but avoiding taxes, which does not help the countries alleviating policy program. Similarly, foreign direct investment increases the debt burden rather then reduces it as foreign corporations get the opportunities to expand their operations in developing countries under the host countries loan guarantee. In other word, private firms are taking the opportunity for massive expansion by taking loans from either the World Bank or commercial banks on the mandates of the host countries government. Similarly, the Brady Plan opens the door for foreign banks to operate in the host countries under its guarantee and widens the road toward privatization of the financial institutions. When business or the elites dominate the government, public affairs become individual affairs. Foreign debts initiated to reduce poverty and spur development become like lottery winning for the elites in the government. The author of “An addictive lullaby” says that 80% of the loans are flowed out of the country in a form of capital flight. The Romania Country’s Outlook pictured the inefficient use of foreign direct investment. The fund is used to create financial surplus, which is not to benefit the intended recipient but as a profit to the deliverer. The Romania Country’s Outlook says, “Foreign direct investment has underpinned massive surpluses on the financial account in recent years.” Like the case of lottery winning, Uganda's president, Yoweri Museveni is proposing "Aid without trade" – a winning lottery one can use for extravagance expenses by the elites in the government and their cronies such as the purchases of luxury vehicles or travels and accommodations. Later, aid is recycled into debt repayment. The Brady Plan, in short, does not help a country to be rid of debts but worse even during a crisis, it is like getting a “double whammies.” The Baker Plan, introduced together with the Brady Plan in 1985, aims at reducing “the net outflow from the debtor countries in order to spur growth in their economies” (King, 393). This Plan even put the debtor country in more jeopardy as a nation economically, socially, politically and as a whole. Under the Baker Plan, country debtors have their debts traded on the secondary market at a deep discount price so do the stock market values of the commercial banks, which are holding the debts of the developing countries. Thereby, it gives an opportunity to the country with debts to purchase its debt at a deep discount. Yet again, this policy does not help any developing countries with debts but it puts them in jeopardy as a country. Rather it leads the countries to further privatization. By the end of 2006, under its cash strap condition and the pressure to further privatization, Indonesia approved Australia’s proposal to purchase its debt on the secondary market. Under the term of “treaty,” Indonesia and Australia foreign ministers signed a deal to sell of West Papua, one of the biggest islands in Indonesia. Other methods introduced by the world Bank and the IMF for debt reliefs are debt conversion and debt-equity swap. Through these methods, countries in debts can convert their existing debts into new assets or the country debtor’s governments “repurchases existing bank debt using local currency, which must then be used by the seller to make a foreign direct investment in the debtor country” (King, 397). Not only had these two methods put more pressure on privatization but also reliving the process of colonialism. The life of the countries in debts is at the hand of foreign investors, which acquires the bank debt purchased at the secondary market paid with local currency. Debt-equity swap, on the other hand, poses another kind of risk to the country in debt. According to King (397), debt-equity swab causes “tremendous disruptions in the debtor countries.” This policy may reduce the bank debt but the country’s overall debt is still lingered at higher interest rate and eventually higher debt payment the country should pay. The Brady Plan “has been attacked for recommending any use of taxpayer dollars to support debt reduction operation” (King, 405). This plan puts the public to be at greater risk because by putting the public in this situation, the governments of the countries in debts have the obligation to pay the full interest payments. Under Bradley’s proposal, countries in debts are encouraged to consider private lenders, debt capitalization, or debt swap. While debt capitalization requires the indebted countries to retire or recapitalize their debts into capital stocks and reinvest them but this policy represents a gamble. King describes that debt swap would contribute to increasing the community social welfare in both debtor and creditor countries. On page 389, King says that an indebted country swap “an IOU representing some portion of its debt for local property or currency which will be used by a multinational corporation for investment in the country,” but it may lead to, as described by Karl Marx and Frederick Engels, the elimination of individual properties, country and nationality. Despite many efforts or policies described debt relief, there is no relief for the poor. Privatization 2005 G-8 Summit Outcomes and reactions to the calling for debt cancellation is greater trade liberalization, privatization of services and utilities, the further opening up of economies to foreign investments especially to extract industries in Africa’s Continent of Africa, and export-oriented policies but at the expense of domestic needs. Neither country would consider acknowledging the historical measure and the structural causes of debt instilled by developed countries on the indebted countries. Some policy analysts consider this policy undermines the sovereignty and democracy within the countries, intensify repression, militarization, and war. Privatization indeed put the debtor countries to be in deeper economic, social, and political volatility because with the combination of the Brady and Baker Plans, their existence of a nation would likely diminish. King (405) suggests that “debt reduction is a necessary condition for renewed economic growth in the debtor world” through economic reform but the Brady Plan has put pressure that is more tremendous on the government to use public money to pay off their debts of which 80% of the funds borrowed are siphoned back to the donors’ countries. There is no doubt that the debt relief under Brady, the Baker, and the Bradley’s Plans cause poor countries to suffer more than they have already been. King has predicted that privatization, trade liberalization, fiscal probity, etc. would severe these indebted countries’ economies further as they would be pursued politically to adopt unrewarding economic policies, in which under the Bradley Plan Vintage II, bygones debts are not bygones debts. Then you are asking what impact debt cancellation on the international financial market if there is no relief for the poor? Impact of debt cancellation on international financial market From the above discussion, debt cancellation would free a country from its debts, which is originally not its own, is ethically right and fair. It can help the country to pursue a better economic policy and not an ill and misguided policy adopted by wrong management practice, because many fail to understand that the debt crisis prescriptions presented by the IMF or the World Bank represents “One size fits all” while the borrowers do not have control over the funds. Under the Brady, the Baker, or the Bradley Plans, there is no relief for the indebted countries. There seems to be a relief for some short-term cash, but the price of borrowing for private investment cost too much of a price for any government to take. Debt cancellation should be reevaluated from the ethical and fairness perspectives even the history of how the debt is created not based on conditions. Debt cancellation has better impact to a country’s long-term economic growth as the countries, in total, would be able to refocus the $1.59 billion a year in debt repayment to rebuild their battered economy. Debt repayment would be better used for the state restructuring programs, improvement of education, healthcare, human development, social welfare programs, and electricity generation. If the economic administration is done right, the impact would have been better prosperity within the countries and crushed is the poverty faced by the populations. The impact of debt cancellation on international financial market is invisible (Smith, 1998). Rather it has filtered into the economy and has had a significant impact in people’s livelihoods, say Benjamin if it is unconditioned. There might be a possibility that the Fund would restrict these countries to access international financial markets, which is often conducted through commodity prices and trade. Some African countries will benefit more from lower oil prices than they lose from lower commodity prices. The Fund expects Africa as a whole, about one-third of the countries "to be net losers" and would force them to further market liberalization through privatization. On one side, the countries may gain freedom to improve their economic and social conditions, on the other hand, the restriction on trading in the international market may cause the countries to pile up surplus of its foreign exchange reserves because of piled of foreign exchange into the countries. Such restriction can be relieved politically by limiting foreign exchange access into the country. For example, tourists who want to travel to Africa countries should purchase local currencies in the countries representatives in foreign countries such as China. References African Social Forum. Lusaka, Zambia. 14 December 2004. 10 April 2007. http://www.cadtm.org/article.php3?id_article=1011] An addictive lullaby. Economist. Vol. 370, 8358 (1/17/2004), 12, special section. Academic Search Premier, EBSCO Publishing, Walden University Library, Minnesota, MN. 27 March 2007 Benjamin, Williot. Debt Cancellation Not A Solution To Southern African Countries Problems. 2006-10-15. April 9, 2007. http://oneworldafrica.org/sasf/newsdetails.php?news_id=00000065 Colfer, Pierce Carol J. & Capistrano, Doris. The politics of decentralization: the forest, power and the people. London: Earthscan, 2005 Cooke, Philip & Morgan, Kevin. The Associational Economy: Firms, Regions, and Innovation. New York: Oxford University Press, 2000 Darwish, Adel. “From Casablanca to Cape Town.” Middle East. 301 (May 2000): 9-10. Academic Search Premier, EBSCO Publishing, Walden University Library, Minnesota, MN. 27 March 2007 Dembell, Demta Mousa. Debt cancellation effort gathers momentum. 9 April 2000. 9 April 2007. http://www.aidc.org/za/?a=book/view/521 Hakata, Michelle. When the IMF visited. New African, 395 (Apr2001), 11. Academic Search Premier, EBSCO Publishing, Walden University Library, Minnesota, MN. 27 March 2007 Kapoor, Sony. Multilateral Debt Cancellation: a Briefing. Jubilee Research at the New Economics Foundation For Debt and Development Coalition Ireland. December 2004. April 10, 2007. http://www.debtireland.org/resources/ King, Philip. International Economics and International Economic Policy: A Reader. New York: The Graw-Hill Publishing Corp., 1990 Matthews, Nadine. Danny Glover backs film exploring Africa's debt crisis. New York Amsterdam News, Vol. 98 (8), (2/152007): 24). Academic Search Premier, EBSCO Publishing, Walden University Library, Minnesota, MN. 9 April 2007 Lal, Deepak. The Poverty of Development Economics. Cambridge, MA: Harvard University Press, 1999 Ronca-Washburn, Jane Conditions for Africa debt relief: serpent in the grass. Christian Science Monitor, Vol. 97 (151), (6/29/2005): p8-8. Academic Search Premier, EBSCO Publishing, Walden University Library, Minnesota, MN. 9 April 2007 Sachs, Jeffery. “Making the Brady Plan Work.” In King, Philip. International Economics and International Economic Policy: A Reader. New York: The Graw-Hill Publishing Corp., 1990 Smith, Patrick. African debt hopes disappointed. World Bank and IMF annual meetings focus on Asia. Africa Recovery, Vol.12#2 (November 1998), Washington, DC. April 10, 2007. http://www.un.org/ecosocdev/geninfo/afrec/subjindx/122debt.htm 2005 G-8 Summit Outcomes and Reactions. 9 April 2007. http://www.afsc.org/africa-debt/news/G-8-summit-outcomes.htm Read More
Cite this document
  • APA
  • MLA
  • CHICAGO
(“Debt crisis in Africa Essay Example | Topics and Well Written Essays - 2250 words”, n.d.)
Debt crisis in Africa Essay Example | Topics and Well Written Essays - 2250 words. Retrieved from https://studentshare.org/business/1539950-debt-crisis-in-africa-is-debt-cancellation-the-answer-what-are-the-implications-of-debt-cancellation
(Debt Crisis in Africa Essay Example | Topics and Well Written Essays - 2250 Words)
Debt Crisis in Africa Essay Example | Topics and Well Written Essays - 2250 Words. https://studentshare.org/business/1539950-debt-crisis-in-africa-is-debt-cancellation-the-answer-what-are-the-implications-of-debt-cancellation.
“Debt Crisis in Africa Essay Example | Topics and Well Written Essays - 2250 Words”, n.d. https://studentshare.org/business/1539950-debt-crisis-in-africa-is-debt-cancellation-the-answer-what-are-the-implications-of-debt-cancellation.
  • Cited: 0 times

CHECK THESE SAMPLES OF Debt crisis in Africa

Africa falls behind: debate over the causes and the policy response

The colonial administrators concentrated in the exploiting of resources in africa.... in africa, corruption affects the development activities because leaders mismanage public resources.... in africa, political leaders are super rich while the rest of the population suffers the effects of corruption.... Literacy levels are low in africa thus affecting their ability to seek for meaningful employment (Smith, 2003).... Other factors leading to lack of development in the region include environmental degradation and climate change, poor advice and harsh conditionality from international agencies, underdeveloped institutions, low savings and investment in non human capital, and debt crisis....
3 Pages (750 words) Essay

The International Debt Burden in the Light of Church Social Teachings

In year 2000, the Church celebrated the Jubilee Year in the context of an escalating global debt crisis, mindful of the terrible price that the world's poor were paying for debts contracted by their governments without their knowledge, much less their consent.... Of all continents, africa is probably the worst hit by the combined blows of poverty and debt, two problems that feed off each other.... africa managed to score a few victories in improving the people's health and lives, only to slide back due to structural adjustment programs imposed by the IMF-WB as a condition to approval of more loans for poor countries....
10 Pages (2500 words) Essay

The Africa of 1960: Social Fragmentation and Economic Disruption

This essay “The Africa of 1960: Social Fragmentation and Economic Disruption” will begin with a brief social and economic description of Africa in 1960 before attempting to identify what role certain events in africa's history played in creating the conditions of Africa in 1960.... As an initial matter, when describing africa in terms of its social and economic structures at the time, it is important to note that there were many inherited philosophies and organizational mechanisms....
3 Pages (750 words) Essay

Structural Adjustment

SAP) in economies of heavily indebted countries can be traced to the late 1970s during the global economic turmoil epitomised by the oil crisis, debt crisis, ‘stagflation', and multiple recessions.... WHAT ARE THE ECONOMIC AND SOCIAL COSTS OF THESE PROGRAMMES? Generally, structural adjustment is a terminology used to… to IMF and World Bank macroeconomic programmes prescribed for developing countries whose economies are going through the throes of stagnation, decline, debt, and fiscal imbalances....
8 Pages (2000 words) Essay

International Monetary Fund

However, this main objective has been hindered by certain challenges brought about by arising of crisis, which needs immediate attention and the IMF often coming in to… Some of these are listed below: The IMF gives little attention to improving structures of finance in developing countries and too much attention to expensive rescue operations.... As a result of the increased number of crisis, the IMF has faced overloading of tasks.... They give first priorities to crisis's hit countries hence these countries tend to drag in developments (Mody & Saravia, 2008)....
4 Pages (1000 words) Case Study

Causes of African Underdevelopment

Diamonds, oil fluorspar etc.... are among many resources that African countries possess.... Regardless of these wealthy resources that it… Countries in the west, north and east e.... .... United States, Britain and China among others have steadily grown economically over the past years to Many African countries are faced with immense challenges and setbacks which deter the continent to economically grow and improve in terms of the general lifestyle of their citizens....
8 Pages (2000 words) Research Paper

Students Debt Crisis in America

The paper “Students' debt crisis in America” seeks to evaluate debt crisis in America, which has grown because of an increasing desire for students to enroll in American colleges and universities.... Solutions to the student debt crisis lie with the federal government policies that address student loans and their associated problems.... Several people proposed policies that are helpful in handling the debt crisis among American students....
4 Pages (1000 words) Assignment

The United States and the World Economy: Foreign Economic Policy

This paper focuses on South africa, its real GDP, its history of the monetary evolution and the factors affecting it, its position after the great recession, what has been done to improve its financial position and what should be done to improve its current economic health.... South africa has the 18th largest economy in the world....
7 Pages (1750 words) Coursework
sponsored ads
We use cookies to create the best experience for you. Keep on browsing if you are OK with that, or find out how to manage cookies.
Contact Us