Financialization and economic downturns have increased issues of debt forgiveness for struggling countries. Debt relief initiatives aim to partially or fully cancel debts owed by developing nations to external creditors. Key institutions like the World Bank and IMF, as well as initiatives like HIPC and MDRI, have provided over $130 billion in debt cancellation to 35 countries. However, there are counterarguments that debt relief may encourage moral hazard and that sustainable growth requires economic reforms rather than just debt forgiveness.

1. Debt Relief for Poorer Countries
A2 Macro – Aspects of Economic
Development

2. The Creditor-Debt Relationship
• Financialisation in the world economy has led
to a surge in public and private debt
• Economic recession and falling asset prices +
deflationary pressures always raise the issue
of debt forgiveness in struggling countries
• In the USA alone, students owe more than
$1tn, or about 6% of USA GDP
• Much private sector debt has become public
sector debt through nationalization

3. International Net Debt

4. What is debt relief?
• A partial or total remission of debts, especially
those owed by developing countries to
external creditors.

5. Debt cancellation map

6. Government debt to GDP ratios

7. Debt-to-GDP ratios for regions

8. Context: Institutions & Initiatives
• Key institutions
– World Bank Group
– International Monetary Fund
– United Nations
– African Development Fund
• Key initiatives
– Heavily Indebted Poor Countries Initiative (HIPC)
• $130 billion of debt has been cancelled for 35 countries
– Multilateral Debt Relief Initiative (MDRI)

9. Jubilee Debt Campaign
Over the last forty years, the removal of regulations
on lending has driven devastating debt crises
affecting people on every continent. The Latin
American and African debt crises of the 1980s and
1990s were followed by the East Asian Financial
crisis of the late 1990s, the Russian and Argentine
defaults at the turn of the century, and the
European debt crisis in the late 2000s. Failure to
cancel unjust and unsustainable debts continues to
increase poverty and inequality around the world.

10. Building the case for debt relief
• Debt overhang and impact on growth & poverty
• High interest-service burdens – reduce resources for much-needed
investment in physical and human capital
• Impoverishment hurts structural development outcomes
• Moral arguments - the concept of a debt jubilee
• Should the poorest countries be forced to allocate scarce
resources to pay rich creditors?
• Many of poorest countries are vulnerable to external shocks –
collapse in export earnings can create severe external debt
problems
• Link debt relief to economic and political reforms
– Whose reform agenda?
– Governments receiving debt relief had to follow IMF and
World Bank economic policies such as privatisation, trade
liberalisation and removal of agricultural subsidies

11. Some counter arguments
• Moral hazard argument – countries will take
bigger risks if they know that their debts will be
rescheduled / partly cancelled
• Enforcing debt repayments can promote better
governance (i.e. make debt relief conditional on
improving policies)
• Debt relief generates aid, but on its own, it
cannot generate sustainable long run growth
• Better economic policies lowers the interest rate
on issuing new debt – this should take priority