Debt Cancellation and its impact on poverty in developing countries - PowerPoint Presentation Example

? DEBT CANCELLATION Cancellation of developing countries debt would NOT solve the poverty problem ……………………… College………………………………. submission …………………. Introduction Millions of people die due to hunger, AIDS and other poverty related diseases every year in most poor countries worldwide. In recent years, there were relentless calls for reduction or cancellation of debt owed by poor countries with a view to reduce poverty existing in these countries. Many economists and various other experts as well as literatures have observed that debt relief has been a strategically effective way to reduce poverty in these countries, but it is not year clear whether debt relief is a win-win strategy that benefits developing countries to reduce poverty. This paper presents a brief report on debt cancellation and its impact on poverty in developing countries. Debt Relief and impacts on poverty Debt relief or debt cancellation is partial or full forgiveness of debt from developed countries to developing or poorest countries. Organisation for Economic Co-operation and Development (p. 84) noted that debt service payments in hard currency in fact scarce domestic resources from major important investments such as in health and education and thus cause poverty as well. Debt relief is thus an integral part of the efforts taken by international community to reduce poverty worldwide. In 1996, World Bank and International Monetary Fund took initiative for Debt Relief whereby Heavily Indebted Poor Countries (HIPC) will get faster, deeper and broader debt relief. This agreement was designed with a view to make these countries introduce measures to reduce poverty in these countries. By 2005, The Multilateral Debt Relief initiative was agreed to provide 100 percent cancellation of IMF, World Bank, African Development Bank and Inter American Development Bank for all those countries that have completed HIPC initiative (Hughes, James and Yianni, 2010, p. 269). The HIPC initiative has been aiming to provide debt relief to 40 most poorest countries, with a condition that all these countries must have high level of poverty and unmanageable levels of debt. In order for a country to be eligible for debt relief, it is required to demonstrate World Bank and IMF that it has plans to reduce poverty in the country (Hughes, James and Yianni, 2010, p. 269). The HIP countries later have shown sincere commitment to put sound macroeconomic policies with a view to reduce poverty (IMF and World Bank, 2001). The main purpose of HIPC initiative and debt relief was poverty reduction, and this has been found to be highly effective for many countries. The debt relief or debt cancellation to poorest countries has been found to be an effective way to improve health and education in the country and thus to reduce poverty. Figure given below illustrates that spending on education and health as improved due to the HIPC debt relief. Lala, Ranganathan and Libresco (2006, p. 6) observed that debt relief was becoming an ongoing mechanism for resource transfer so that the country can free up resources for poverty reduction purposes. It is generally agreed that debt relief to poorest countries has caused improvements in health and education spending due to resources transfer and as a result poverty has been reduced in the poorest countries. But, it is also argued that it may not be the same in the case of developing countries. Cancellation of Developing Countries’ debt and poverty problem It is argued that debt relief or debt cancellation owed by developing countries may result to reduce poverty since these countries will be able to adopt domestic policies and strengthen institutions to take advantages of global markets, which in turn help them increase the share of trade in their GDP. As these countries gain debt relief, they can participate in globalization by exporting to or importing from other countries and thus to be able to maintain favorable balance of payments. These countries also would be able to create opportunities such as improving the investments platforms and social service as well (Akarue, 2005). Debt cancellation can be an effective economic and social strategy to reduce poverty only if the country takes necessary steps to free up the available resources and take measures to improve health and education spending with a view to reduce poverty. One of the major criticisms against debt cancellation as a measure to reduce poverty is that debt is not the direct cause of deaths or poverty. Debt is not the primary reason behind poverty, but many countries have been found to become highly indebted due to heavy purchases of weapons and other unnecessary items. Even though debts are forgiven, these countries may still borrow weapons from other nations. Griesgraber (1999, p. 27) argued that cancelling the debt is not the silver bullet that eliminates world poverty, however it may be a step to achieve that target. Apart from cancelling the debt, much will remain to be done such as ensuring that the local government is answerable to its own people. It was not very evident that HIPC countries were able to reduce the poverty once they gained debt relief. Lombe, Buerlein and Dahl (2010, p. 3) emphasized that the economic situations of many heavily indebted poor countries after the implementation of HIPC didn’t improve, but in fact, poverty conditions have been observed as more worsened. International Monetary Fund (2000, p. 143) also opinioned the same. In order to secure the link between debt cancellation and poverty reduction, the international community still needs to take further steps to ensure its positive results. It becomes very evident from the fact that those countries that have once benefited from debt relief were later found to have accumulated debts due to heavy purchases. Especially, when it comes to developing countries, they have sufficient resources to reduce poverty by improving health and education, but their people suffer from poverty since there are corruptions and other factors that cause poverty (Pogge and Pogge, 2001, p. 21). Most of the poverty issues are mainly fuelled by corruption. So, if concerned governments are not taking effective measures against such factors, debt cancellation can do nothing in alleviating poverty reduction. As United States General Accounting Office (2004, p. 13) emphasized, it is highly important for a country to undertake reforms and achieve economic growth for reducing poverty and maintain long term debt sustainability. Many countries, especially some of the developing countries are facing poverty issues since they don’t have effective economic systems. Effective and good economic system must be there for reducing poverty in any country. Therefore, developing countries need to reform their economic systems before they get their debts forgiven and t reduce poverty existing in their country. In short, debt relief or cancellation can be successful strategy to reduce poverty only if there are effective economic and social systems to free up the resources within the country, improve education and health spending and reduce corruption etc. Conclusion This piece of research work highlighted that debt is not the prime reason for poverty and debt cancellation cannot cause poverty reduction unless there is economic reforms and efforts from the governments to utilize these as a resource to improve health and education spending. Quite different from that of poor countries, developing countries are facing poverty issues due to factors such as poor managing of resources, corruption etc. in order to reduce poverty, there must be efforts to avoid corruption and make positive reforms in the current economic systems. References Akarue, C, 2005, Is Debt cancellation and more financial aid the solution to the end of poverty, Retrieved from http://www.globalmarshallplan.org/infocenter/speakers_corner/debt_cancellation___a_solution/index_eng.html Hughes, S, James, S and Yianni, A, 2010, The HIPC Debt Relief Bill: making forgiveness compulsory, Law and Financial Markets Review, EBSCO database Griesgraber, J.M, 1999, Cancelling the debt would do a world of good, US Catholoc, EBSCO database IMF and World Bank, 2001, Debt Relief for Poverty Reduction: The Role of the Enhanced HIPC Initiative, IMF, Retrieved from http://www.imf.org/external/pubs/ft/exrp/debt/eng/#1 International Monetary Fund, 2000, Fifty-sixth annual meeting of the board of governors, International Monetary Fund, Lala, S, Ranganathan, R and Libresco, B, 2006, Debt relief for the poorest: an evaluation update of the HIPC initiative, Part 288, World Bank Publications Lombe, M, Buerlein, J and Dahl, A, 2010, Do Benefits of Debt Relief Reach Vulnerable Individuals and Households in Heavily Indebted Poor Countries? Some Prescriptions for Future Research, International Consortium for Social Development, EBSCO database Organisation for Economic Co-operation and Development, 2001, The DAC Guidelines Poverty Reduction, Organisation for Economic Co-operation and Development Pogge, TW and Pogge, TWM, 2001, Global justice, Second edition, Wiley-Blackwell United States General Accounting Office, 2004, Achieving Poor Countries’ Economic Growth and Debt Relief Targets Faces Significant Financing Challenges, GEO Read More