Critically evaluate the case for granting debt relief to LDCs (10 marks)

Intro:
- Heavily Indebted Poor Countries scheme established to reduce debt in LDCs
- Multilateral Debt Relief Initiative launched in 2005 to grant 100% relief to 35 eligible countries
- The argument for granting debt relief is controversial:

• relieve poorest countries of financial difficulties --> can develop economically
• effect on other countries-? sceptical
• how well will it actually benefit the country-? Different areas of society-?

Debt relief largely beneficial to receiving country:

• money saved  by not paying back loans --> investing more money into healthcare --> life expectancy and infant mortality rates will improve --> country = healthier
• no debt = government can plan its expenditures better
• government in Guyana decided to promote free healthcare after debt re-structured - population's low income meant they couldn't afford private healthcare
• reduced interest payments by $60 million a year allowed Guyana to increase social spending by >25% --> now over 20% of GDP is spent on health, education, housing, water and sanitation
• now more likely to reach MDGs --> increase in spending on education means that more children will be in primary education ('achieve universal primary education')

Countries able to combat growing numbers in poverty: another MDG making progress as a result

• in response to HIPC scheme - poverty reduced in Uganda from 51% in 1992 to 35% in 2000
• although poverty starting to rise again - 38% in 2002
• suggests that impact from debt relief only short term

No guarantee that country will improve its economic management

• countries may contract further debt with the belief they will also be forgiven
• Ethiopia - debt almost back at 'pre-MDRI' levels
• Ghana - used advantage of debt reductions to take out more loans at interest rates 10x higher than leading providers

Concerns that money gained will go straight to government and not reach the poor, or money used to enhance wealth and spending ability of the rich and not trickle down to the poor

• disproved by Uganda - building better roads that benefit agricultural workers --> farmers with small incomes can bring produce directly to markets - generates more income - improves welfare of people
• pressure from MEDCs to meet criteria for MDRI force them into more stable government

Disadvantages other countries:

• system only benefits LDCs who are in debt --> encourages other LEDCs to over-spend so they get debt relief in the future
• 35 countries had their debt wiped - 'lenders' do not get their money back

Conclusion:

• more advantageous to receiving countries
• certain areas of society benefitted more than others
• agreement disadvantages other countries
• although it allows LDCs to develop country as opposed to using GDP to pay off debt --> more sustainably developed in the future