Question

Discuss the process of debt accumulation in poor countries,

How can a negative cycle be avoided?

What rich world group never seems to bear its share of losses when debts are forgiven

Answer 1

Worldwide events in the 1970s and 1980s like high-interest rate, oil price shocks and recession in industrialized countries and weak commodity prices were major contributors of debt build up in highly indebted poor countries. Countries compensate for lower terms of trade via higher foreign borrowing.

Domestic factors contribute towards debts building up. Many countries were already living with high debts in terms of budget deficits and low saving rates and had no way to cushion themselves from external shocks. Instead, they borrow without any change in policies to reduce their dependence on loans. Poor countries borrowed just to service debt. Funds for new investment became scarce and economic growth ceased.

one of the possible panaceas is HIPC i.e. initiative for heavily indebted poor countries is an approach to debt reduction that requires the participation of all creditors- bilateral, multilateral and commercial. The initiative aims for countries to make debt service burden manageable through a mixture of sound policies, generous debt relief and new inflows of aid. For a country to be eligible, its per capita income must be low enough to qualify for concessional lending from the IMF and World Bank.