Introduction
Debt in developing countries remains a big challenge even after the IMF and World Bank efforts to cut down these debts to a manageable level. This study aims at identifying some of the factors which have contributed to the increased debts in developing countries. The purpose of selecting the issue is to carry out an investigation as to why the debts in developing countries persist even after the IMF and World Bank efforts to cut them down. Developing economies are characterised by with low GDP, high inflation rates, high interest rates, and low per-capita income hence have unstable economies (Toussaint, 2012). With unstable economies, these countries opt to borrow more from the IMF and the World bank in order to supress their economy. That’s why the goal of the study is to identify factors that contribute to increased debts in the developing countries by analysing the information provided by IMF.
Statement of the problem
Despite the International Monetary Fund and World Bank efforts to cut down the huge external debts held by the poor countries, research still show that the debts are on increase. The effectiveness of the HIPC program initiated by IMF and World Bank is expected to have far reaching effects in addressing this problem however, this is not the case. The study therefore focuses on identifying factors which influence adversely the functioning of this strategy. This topic is important as it will help to come up with various strategies to overcome the increased external debt in the developing countries (Brownbridge & Canagarajah, 2010).
Literature Review
Debt in developing countries still remains wanting even after International Monetary Fund cancellation of huge dollar debts in these countries. This can be linked with increased poverty levels and low standards of living in the world. According to the World Bank’s 2012 report, there is an increasing trend in the developing countries debt since the year 2010 up to 2012. The report shows that the debt increased by $437 billion landing to $4 trillion in 2012. Following the world financial crisis of 2008/2009, developing countries where hardly affected (Toussaint, 2012).
A large number of developing countries are for the recent being relieved of their debt burden through the Heavily Indebted Poor Countries (HIPC) initiatives, established by the World Bank in collaboration with the International Monetary Fund in late 19th century. Some of these countries include developing countries from the sub-Saharan Africa whose income per capita is too low to meet IMF and World Bank expectations (Toussaint, 2012). However, The IMF and the World Bank have eliminated poorest countries from Latin America and Asia from these exercises. The argument has been that this countries income per capita is too high thus able to meet the IMF and World Bank criteria.
Economists have often argued that high external debt makes it more difficult for countries to achieve the Millennium Development Goals (MDGs). (Brownbridge & Canagarajah, 2010). This is because instead of a country focusing on development projects it opts to meet its current expenditure. Analyzing information provided by the IMF and the World Bank will helps us to see that while some high income countries have increased both domestic and external debt levels as part of their crisis management strategies, debt stock levels of some developing countries have barely risen. It is surprising to find that these countries which did not qualify for the debt cancellation exercise are facing it rough and there is a noticeable increase in their external debts. The study will involve the analysis of debt data as provided by the IMF. With reference to IMF debt data on developing countries, the following are the findings for the cause of increased debts among these countries.
Several different methods of aggregates are used to analyze data. Aggregates marked by an s are sums of available data, Aggregate of ration, growth rates. Also Least-squares growth rates are used wherever there is a sufficiently long time series to permit reliable calculations.
The following shows the combined external debt for all developing countries from the years 2000, 2005 to 2011 as provided by the World Bank.
ALL DEVELOPING COUNTRIES
(US$ million, unless otherwise indicated)
There is an increasing trend on debt for the developing countries from 2000 to 2011. The debt increased from 2,137,041 to 4,876,042 (Brownbridge & Canagarajah, 2010). Using the high low statistical method, the debt can be calculated as 4,876,042 – 2,137,041 = 2,739,001
The percentage ratio of the external debt between 2000 and 2011 is calculated as; % ratio = (2,739,001/2,137,041) x 100 = 128.17%
This implies that the external debt in the developing countries has increased by more than double despite the IMF and World Bank efforts to cut down the debts.
The trend shows an increase in the reserves to external debts stocks from year 2000 to 2011 as dictated by the values 28.6% in 2000 and 120.8% in 2011 (Brownbridge & Canagarajah, 2010). This is a clear indication that the IMF and World Bank’s strategies to cut down the debts are not working.
Findings
Increased external debt in developing countries is subject to over-borrowing and over-investment (John, 2010). According to IMF report on developing countries debts, it is true that many countries are borrowing much from the fund and the World Bank. Surprisingly enough is that this countries end up spending this money in large projects which consume a lot of money before they are accomplished. As a result, they end up not completing the project. Such projects do not yield any income for the country thus the country pay back the loan without any source of income. These countries are forced by circumstances to borrow more in order to offset these loans. Following regular borrowing without investing on income yielding projects make the countries to have huge debt burdens. In addition, increased debt in developing countries can be attributed to unfavorable terms of trade. Study show that many developing countries have a problem with their balance of payment. Most of them import more than they export these results to unfavorable balance of trade. According to IMF and World Bank survey, large number of developing countries export agricultural products and export machinery. The value of the imports thus overcomes that of the exports. These leads to increased debt problem as these countries opt to borrow in order to correct their balance of payment (John, 2010). Nevertheless, the study suggests that increased external debt among the developing countries is subject to increased protectionism in the international market (John, 2010). A large number of developing countries export their products to developed countries. Many of these developed countries encourage protectionism in their market. As a result, the developed countries are faced with increased protectionism which automatically reduces their exports within these markets. When these countries reduce their exports, they are faced with another problem of unfavorable balance of trade. This is a clear indication that developing countries need to borrow in order to correct this problem hence increasing their debt problems. Moreover, many developing countries in most cases have deficit in their budgets. This occurs when their governments plan to spend more than their revenue dictates. To overcome this, the developing countries source for funds from international institutions namely World Bank and the IMF. Failure to match planned spending by the government and its revenues increase the debt levels for these countries which lead to debt problems. Repeated deficits in developing countries result to the buildup of debts which with time become unsustainable (John, 2010).
Finally, the study suggests that developing countries are prone to poor living standards and increased poverty levels. This comes as a result low government contribution towards social amenities for the citizens. When the government services its debts, it is left with little funds which actually cannot meet the social amenities of its citizens. Moreover, with huge debt problems the country is subjected to high poverty levels. When these debts are shifted to the coming generation they end up being poor since much of the government spending will have to be directed in servicing debts than meeting the social amenities.
Conclusion
The study suggests that there is an increasing external debt existing among developing countries which actually threatens the functioning of the IMF and the World Bank. It discusses some of the causes which have led to the increased debt problem among the developing countries. The findings have important implications to the design of adjustment programs in countries receiving debt relief. Cutting debt service obligations can also provide breathing space for raising public investment. Despite the IMF and the World Bank efforts to overcome the increasing debt problems in the developing countries, the problem seems to be more profound. Cancellation of huge debts held by poor countries is not a good solution to the problem. Increasing external debts rates among the developing countries is subject to many factors. As the study suggests, a large number of developing countries borrow a lot from international organization hence end up overinvesting the funds in projects which do not yield profits. In so doing the countries end up paying back the loans without earning any revenue from the projects thus increasing the debt rates.
Furthermore, the study suggest that a large number of developing countries experience unfavorable balance of payment thus forcing them to borrow more hence increasing their debts. Budget deficit is another problem facing many developing countries. Planning to spend more than the available revenue force the countries to source for funds to suppress the deficit thus increasing the debt problems. Other factors as discussed in the study that causes increased debt problem among the developing countries includes increased protectionism in the international market, increased poverty levels and poor living standards.
Several solutions are available which will help the IMF and the World Bank control the increased rates of debts. First, developing countries need to focus on maintaining a balance budget. Through this, the governments need to always make sure that their planned spending tally with or does not exceed the available revenue. This will reduce the debt problem by ensuring that these governments are not forced to borrow in order to finance their budgets.
Moreover, there is great need for developing countries to join regional integrations since they provide favorable terms of trade. With favorable terms of trade these countries will be able to increase their export value. With this also developing countries will become more dependent in such a way that they will be able to produce what they previously imported. By so doing, the export value will overcome the import value thus favorable balance of trade followed by reduced debts.
Finally, developing countries need to focus on carrying out research and discoveries which can help them to come up with new resources that can help them to create revenue for their countries. On the other hand, international finance institutions can play a role in writing off all the debts for the developing countries. This can help in developing the way forward for the countries when they do not have any issues with the World Bank or the IMF. Nevertheless, there is need for the countries to develop good governance for their country growth and governance. Through this the government policy makers can come up with sound decisions which can help in settling debts.
References
Brownbridge, M., & Canagarajah, S. (2010). The impact of the economic crisis on the fiscal stance of low income countries in the commonwealth of independent states. Public Finance and Management, 10(4), 646-670. Retrieved from http://search.proquest.com/docview/821698821?accountid=32521
John, W. (2010). Debt crisis in developing countries. Article Base. Retrieved from http://www.articlesbase.com/debt-consolidation-articles/debt-crisis-in-developing- countries-2125255.html
Toussaint, E. (2012). The debt in developing countries: a dangerous unconcern. From the Global North to the Global South: debt in its many states (1st part), All. Retrieved from http://cadtm.org/The-debt-in-developing-countries-a
