Essay About Debt Crisis And Key Hypothesis Of This Paper

Resolving The Debt Crisis Of Low-Income Countries
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Poverty Traps and the Debt Overhang
One key hypothesis of this paper is that poor countries are vulnerable
to a poverty trap, which can be caused or exacerbated by an excessive foreign
debt burden. The basic idea of a poverty trap is that nonlinearities in
saving, investment, and production can lead some low-income countries
to remain stuck at low or even falling levels of GNP per capita, despite the
forces of economic convergence that are also at play in the world economy,
such as the potential for capital inflows into capital-scarce countries
and the diffusion of technology from rich to poor countries. To illustrate
the key ideas, I introduce a very simple model in which the net saving rate
falls to zero when income drops below a minimum subsistence level.12
Suppose that individuals require a level of minimum real consumption
m to meet basic needs of personal health and hygiene, food intake, and
shelter. (Unless otherwise noted, all variables are in per capita terms.)
The overhang of unpayable debt, and still more, the buildup
of new debt if aid comes in the form of loans rather than grants, would
convince potential private sector investors that the country remains
trapped. Creditors themselves might promise their help now only to insist
on increased debt service payments in the future if the country starts to
recover. These are among the classic arguments for why a fresh start
rather than a simple postponement of debt is needed in the case of an
insolvent individual or municipality.
What kind of institutional changes are required to reorient the international
system in the recommended direction? I suggest the following:
ЖThe creditors should understand that, in a sovereign insolvency,
whether under Chapter 9 in the United States or an international sovereign
insolvency, the systemic goal is not the simple maximization of debt
repayments to the creditors. Repayments to creditors must be placed in
the context of additional objectives: a fresh start for an insolvent sovereign,
preservation of its public functions, and achievement of broad
development objectives. For low-income countries, the basic standard for
debt collection should be to restructure debts in order to provide a macroeconomic
framework within which the countries can achieve the MDGs.
ЖEach HIPC should be encouragedЖindeed, required, in order to
obtain comprehensive debt cancellationЖto prepare medium-term plans
for scaling up its investments in health, education, and basic infrastructure
during the period from now until 2015. The targets should be set in
order to meet the MDGs. These plans should be designed in conjunction
with civil society, as part of the ongoing poverty reduction strategy
process.ЖThe key U.N. agencies, including the UNDP, WHO, and UNICEF,
and the Bretton Woods institutions should support the countries in this
costing exercise, but they should also carry out independent estimates of
the countries financing needs and incorporate those estimates into their
own key country strategy documents.
ЖAn independent review panel, with representatives appointed by