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The Role Played by Debt in Maintaining the Global Development Gap

Updated on June 29, 2016

National debt is the accumulation of sustained fiscal deficit, which occurs when a government’s total spending exceeds the country’s GDP. This means that borrowing from commercial or bilateral sources, such as export credit agencies, becomes the easiest route to continuing development. In many poorer African countries, governments took control of implementing development in the 1960s, and soon developed a fiscal deficit, leading to agreements for large loans from Western organisations. Many countries are overpaying the lenders, such as Indonesia, which has so far overpaid more than $150 billion – 90% of its GDP. As so much of the country’s revenue goes towards repaying debts, governments have a massively diminished budget for investing in infrastructure and development, possibly leading to further borrowing. This process contributes to sustaining the development gap. On the other hand, the largest debts are incurred by MEDCs, but these countries are able to service the debt, as they have large revenues from their higher terms of trade.

Uganda borrowed heavily from the West in the 1970s, after commodity prices fell sharply and exports crashed, but it has since reduced its debt through the IMF’s Structural Adjustment Programme, and a trade liberalisation scheme, which has attracted foreign direct investment. The SAP involved privatisation and deregulation, forcing the country towards a market-based economy, with a focus on trade. In return, the country’s debt was cancelled. This allowed the government to invest more in infrastructure, via diversification into the industrial sector, e.g. construction and mining. After the debt was cancelled, Uganda’s economy grew significantly, and it is now cited by the IMF as an example of the success of its SAPs; between 1992 and 1997, GDP per capita growth in Uganda averaged 4.2%. However, whilst there was a significant increase in imports, there was no such change in exports, and the country’s terms of trade has decreased; there is still a very low per capita income of $340 per year, equating to a low quality of life. This example shows the extent to which unserviceable debt can affect a country’s level of development. Whilst there was hardship during the SAP – the introduction of school fees reduced the education rate, and therefore the level of development – after the debt cancellation, Uganda’s public spending increased – school fees were removed, education rates improved, and health care spending was increased by 70%, implying that the debt was a restriction to its development.

The Executive Board of the International Monetary Fund, Washington, D.C. (April 19, 1999).
The Executive Board of the International Monetary Fund, Washington, D.C. (April 19, 1999). | Source

The first world developed through capitalism, and used manageable debt to enable the rapid development of infrastructure and improvement of the balance of payments, increasing international trade in an upwards-spiralling system, thereby increasing GNP per capita, as the incoming wealth ‘trickles down’ to the masses, in the form of jobs, often resulting from FDI. The USA has the most debt in the world, but maintains the 5th highest HDI; in this case, the debt permits investment.

The HIPCs (Highly Indebted Poor Countries) include sub-Saharan nations with the highest levels of unmanageable debt, relative to GDP, such as Mozambique – once the country most reliant on foreign aid. These countries are eligible for the IMF’s SAPs; many of them have accepted, but the effects have not been as positive as in Uganda. 40% of the region’s population suffers from malnutrition, and the SAPs have reduced the already minimal healthcare spending. This has increased the number of families trapped in the poverty cycle; this model predicts that poor health/education in one generation is passed on to the next – this process becomes particularly prevalent when school fees are comparable to annual incomes.

There are two distinct types of debt: runaway debt, incurred by LEDCs, which limits a country’s ability to invest in healthcare and education – two of the most important development indicators, and serviceable debt, possessed by MEDCs, allowing them to invest in the key development indicator areas at an ever increasing rate. Debt can both reduce and increase development, and so it can make the development gap wider in more than one way.

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    • cam8510 profile image

      Chris Mills 24 months ago from Missoula, Montana at least until August 2018

      I like your straight to the point, cause and effect style in this hub. I'll share it with my readers. Well written and full of helpful information.

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