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Debt relief
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Background:
Debt holds back development
Over-indebtedness can become an obstacle to development if it restricts the scope for reducing poverty. If the debt burden is so large that even with above-average economic growth the country is barely able to meet its interest and redemption payments, then there is no money left for urgently needed investments in infrastructure, that is, in schools, hospitals, sanitation and power supplies. It is the poorest of the poor who are hardest hit. Some countries spend up to nine times more on debt service payments than they do on health care for their people.
The causes of indebtedness
Borrowing is not a bad thing in itself. It becomes a problem when a country’s debt service payments exceed its revenues.
This is often the case with poor and least developed countries. A vicious circle ensues: the poorer a country is, the greater its need for investment in development, the higher its borrowing, the higher its debt service payments and, consequently, its need for further borrowing.
There are many other causes of the extreme indebtedness of developing countries over the past few decades. Here are a few examples:
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During the Cold War both camps lent generously to developing countries to secure their loyalty, without paying attention to their creditworthiness.
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The loans were used not to finance investment but to meet current expenditure. Consequently, investments failed to deliver the hoped for productivity. Over-optimistic growth forecasts by the donor countries, poor debt management, economic mismanagement and corruption compounded the situation.
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Export prices declined steadily over a long period, especially prices for the raw materials exports on which many developing countries depend. Declining commodity prices meant declining foreign exchange revenues. More had to be exported, and that in turn led to further price falls.
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The industrial countries put up trade barriers against products from developing countries. Subsidies for agricultural products and raw materials are an obstacle to fair trade and limit the scope for earning more foreign exchange.
The way out of the debt trap
The collective way out of the debt trap is through debt relief. Debt relief aims to help poor countries scale down their debt burden to an economically sustainable level so that their economies can make a fresh start.
Strict conditions are attached to debt relief. The funds released as a result of debt relief must be used to combat poverty and promote sustainable development – they must be spent on education, health care, the infrastructure or on forestry and agricultural programmes.
But debt relief also brings benefits for the creditors. Economic shocks aggravate political conflict. The collapse of entire economies in developing countries destroys markets, not least for companies in Germany and the rest of Europe. And the pressure to generate foreign exchange for debt service payments leads to overexploitation of natural resources and destruction of the environment in many countries, the consequences of which are felt worldwide.
Historical responsibility
The London Debt Agreement of February 1953 essentially liberated Germany from its pre- and post-war debt burden. Half of all the country’s debt was cancelled and the rest rescheduled, giving Germany more time to repay at more favourable rates. If Germany had been forced to repay all its debt at that time, the country’s economic recovery would probably have been seriously impeded as a result.
