South-Western College Publishing - Economics  
How Do Some Spell Relief? Lower Debt
Subject Debt, Economic growth
Topic Developing and Transitional Economies
Key Words Taxes, sales, law, revenue, retailers, Internet
News Story

Debt relief is a cry currently being heard. Many Third World countries have borrowed heavily in the past-so heavily that repayment consumes most of their budgets. Proponents of debt relief for these countries argue that if funds currently directed toward repayments could be channeled into improving schools, health care or basic sanitation, then these countries would have a chance at economic development. While petitions for debt relief have been advanced previously with little success, there seems to be increased sympathy for helping some debtor nations.

In the 1970s and 1980s governments, as well as institutions such as the World Bank, responded to the requests of Third World countries for funds to finance economic development and modernization projects, by loaning these countries billions of dollars. It was thought that the returns from these investments would be sufficient to repay both principal and interest. But the anticipated returns did not materialize in many cases. In some countries, returns from these investments did not come close to matching expectations. In other cases, funds were diverted from investment projects to either finance civil wars or to line the pockets of the country's leaders. Not only did these countries not achieve the increased productive capacity that was envisioned, their exports and taxes had to be used to finance some of the debt.

As pressure for the richest nations to help the poorest nations advance increases, the major industrialized countries have launched a program of debt relief in the amount of $25 billion. Nine countries have so far qualified for about $15 billion in debt relief. In Uganda, for example, debt relief has lowered annual service payments from $150 to $50 million. Uganda has used these funds to double primary school enrollment. This is the intended outcome of debt relief and the debt relief program spells out in detail that the freed up money must be used for critical needs such as education, sanitation, and health care.

(Updated May 1, 2000)

1. What is a debtor nation? A creditor nation?
2. What is the World Bank? What functions does it perform?
3. Some economists fear that debt relief might undermine the economic system by creating an expectation among Third World countries that they can borrow without repayment. It would then become less likely than borrowers would put their funds in investment goods. Do you agree or disagree? Explain.
Source John Burgess, "Rich Nations Warm to Idea of Debt Relief," The Washington Post, April 8, 2000.

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