Benefits of Debt Cancellation...

Only available on StudyMode
  • Download(s): 328
  • Published: July 11, 2010
Open Document
Text Preview
Benefits of Debt Cancellation and Agriculture Pricing Policies

Benefits of Debt Cancellation and Agriculture Pricing Policies
The authorities recognize that debt relief under the initiative would provide a unique opportunity to free up resources for additional poverty reducing spending. They also recognize that debt relief under the initiative would provide a unique opportunity to free up resources for additional poverty reducing spending. They also recognize that, to enable the country to benefit from the resources made available for the overarching objectives of poverty reduction and economic growth, structural reforms initiated in critical areas , including governance and anti-corruption, need to be accelerated. Against this backdrop, the authorities formally communicated to the Fund and the World Bank (in a letter dated March 23, 2006) that they wished to initiate discussions on the possibility of debt relief under the Heavily Indebted Poor Countries (HIPC) Initiative and, subsequently, under the Multilateral Debt Relief Initiative (MDRI). In 2006 the World Bank, International Monetary Fund and African Development Bank agreed to completely cancel the debt of 18 qualifying countries. The total debt cancelled amounted to approximately $40 billion dollars with expected annual debt payment savings of one billion dollars. These countries were so indebted that they were spending upwards of 30% of total income purely on servicing the debt. Many were forced to take out new loans to repay the old loans. The condition described in these countries reflects similar conditions as in the theory of the vicious cycle of poverty. These countries spent a large portion of money on servicing debt and the rest was dedicated to immediate needs of the people, such as food and water. The focus was on repaying debt and providing means to get by as opposed to saving and making important social overhead investments. The projected benefit to the debt cancellation was that the countries would be able to take the savings from the debt payments and start building important infrastructure, as well as invest money in education and healthcare. Freeing up this money allowed the government to focus on improvements that would not be supported by private investment in the free market. Projects that require large economies of scale such as building roads and providing public transportation are key drivers to facilitating economic growth that would not be profitable for a private institution. Easing the ability to travel between communities promotes growth and efficiency. For instance, if a farmer has the ability to produce more wheat than is needed by his family or his village, he has two options. He can produce the excess and let it go to waste, or he can opt to not produce more than is needed and utilize only part of his farmland while the other part sits unused. Meanwhile, a farmer in another village has land that is extremely fertile and great for producing corn. This farmer is faced with the same prospect as farmer one, either produce excess corn and let it go to waste, or utilize only part of the land to produce only the amount of corn that is needed. By creating a road, or mode of travel between these two villages, trade can be initiated. Farmer one can utilize his land to its full potential to grow wheat and sell or trade the excess to the other village. Farmer two can now utilize his land to its full potential as well, growing corn to provide for his village as well as trade with the other village in return for wheat. In this case, easing the ability to travel between the two villages has made both villages more productive, more efficient and wealthier in terms of corn and wheat. Additional funding towards education and public literacy is another investment these countries are now able to money towards. Literacy and education is extremely important in creating entrepreneurs in developing countries. By providing...
tracking img