gcse Economic Development - Role of the Private Sector

Economic Development - Role of the Private Sector

Introduction

To what extent can private sector businesses and corporations be a key driver of growth and development in many of the world’s poorer developing countries? Free-market approaches favour giving a larger role to private sector enterprises with liberalization of markets, structural economic reforms to boost incentives for people and businesses and increased transparency and accountability for government given a key focus.

““In Dubai we don’t believe in planning or what you call industrial policy. We believe in the free market.” (CEO of Dubai Chamber of Commerce, 2011)

Growing the Private Sector

The Washington Consensus

The Washington Consensus was a term first coined in 1989 in the wake of the Latin American financial crisis and over the years it has become a highly contentious canvas on which supporters and protestors of western-style globalisation have battled.

According to John Williamson, the economist who came up with the idea of the Washington Consensus it comprised a group of market-friendly policy prescriptions favouring the private sector including:

• Fiscal discipline - keeping control of government budget deficits and national debt
• Reallocating state spending from subsidies towards health care, education & infrastructure.
• Tax reform - widening the base of taxation and encouraging lower tax rates to boost enterprise and work incentives as a means of creating wealth
• Liberalising interest rates - allowing financial markets more freedom in setting interest rates on savings and loans and letting market interest rates allocate capital among competing uses
• Exchange rates – supports a choice of fixed or free floating exchange rates but a preference against "dirty floating" i.e. intervention to manipulate the value of a currency
• Trade liberalisation - a gradual reduction in import tariffs and other forms of protectionism – trade seen as an important engine of growth and development
• Liberalization of inward foreign direct investment - capital investment between countries
• Privatization - transferring state-owned enterprises into the private sector
• Deregulation - lowering entry and exit barriers in markets but not at the expense of necessary regulation of aspects such as working conditions and employment rights
• Property rights - protecting intellectual and other rights to encourage innovation and risk-taking

Criticisms of Private Sector Dominated Growth

The Washington Consensus has come under sustained criticism even though private-sector friendly policies in many countries have contributed to an increase in trade and investment much of which has flowed into lower-income developing countries. However, development driven by the private sector has been criticised on several different grounds – some of suspicions about the private sector include the following:

Supporters of the private sector have a firm belief that the wealth generated from private sector activity and investment can have a huge positive effect on prospects for countries at every stage of development.

This quote taken from the UK government website captures this view:

“The private sector is the engine of economic growth - creating jobs, increasing trade, providing goods and services to the poor and generating tax revenue to fund basic public services such as health and education. As well as stimulating growth, new thinking within the private sector, shaped by the market, can also offer insights in to how to ensure better access to vital services or goods such as medicines or information.”

Case Study: Tullow Oil and African Development

Tullow Oil plc is Africa’s leading independent oil exploration business. It has approximately 100 production and exploration licenses in 22 countries. Tullow Oil is an oil exploration business - their job is to find oil and use the latest technologies and top-level human capital both to find oil, drill the wells and eventually bring oil to the ground.

Basic background on Tullow:

• Operations in over 22 countries, employ 1,400+ people
• Explore, appraise, develop and produce oil and gas
• €1 billion+ operating profit in 2011
• No.27 in the FTSE 100 (the business is listed on the UK stock market), market value of £14 billion
• Capital spending (investment) in 2011 of $1.4 billion

Tullow Oil is playing an important role in the broader economic development of Ghana and especially the investment in the Jubilee Field in a country that had no pre-existing infrastructure or deep-water technology in the oil exploration and extraction business.

The capital intensity of Tullow’s operations is breath-taking. Dropping a well in the Jubilee Field cost $100 million and it took a further $3.5 billion to get the oil flowing to the surface. The oil field was developed in a record 40 months - to put that into context, it usually takes over seven years from oil being discovered to a new field being developed. The first oil extraction took place in December 2010 and Ghana is now a world-class oil producing country with the potential for a transformational effect on their growth and development prospects. Tullow employs over 250 people in Ghana; over 85% are Ghanaian and over 1,500 contracts awarded to Ghanaian contractors.

Crucial to Tullow’s success is in recruiting some of the top geologists in the world - they employ over 200 of them and they are a major recruiter of geo-scientists from top universities. The quality of their human capital is essential and they have worked closely with University College Dublin to develop industry-specific courses and build up an expertise that few other players in the industry can enjoy. Many of Tullow’s African employees come to the UK to study on scholarships and who are frequently top of the class beating their Far East Asian counterparts.

Non-Financial Trans-National Corporations (TNCs) from Developing Countries

Corporation	Home economy	Industry
Hutchison Whampoa Limited	Hong Kong, China	Diversified
CITIC Group	China	Diversified
Cemex S.A.	Mexico	Non-metalic mineral products
Samsung Electronics Co., Ltd.	Korea, Republic of	Electrical & electronic equipment
Petronas - Petroliam Nasional Bhd	Malaysia	Petroleum expl./ref./distr.
Hyundai Motor Company	Korea, Republic of	Motor vehicles
China Ocean Shipping (Group) Company	China	Transport and storage
Lukoil	Russian Federation	Petroleum and natural gas
Vale S.A	Brazil	Mining & quarrying
Petróleos De Venezuela	Venezuela	Petroleum expl./ref./distr.
Zain	Kuwait	Telecommunications
Jardine Matheson Holdings Ltd	Hong Kong, China	Diversified
Singtel Ltd.	Singapore	Telecommunications
Formosa Plastics Group	Taiwan Province of China	Chemicals
Tata Steel Ltd.	India	Metal and metal products
Petroleo Brasileiro S.A. - Petrobras	Brazil	Petroleum expl./ref./distr.
Hon Hai Precision Industries	Taiwan Province of China	Electrical & electronic equipment
Metalurgica Gerdau S.A.	Brazil	Metal and metal products
Abu Dhabi National Energy Company	United Arab Emirates	Utilities (Electricity, gas and water)
Oil And Natural Gas Corporation	India	Petroleum expl./ref./distr.
MTN Group Limited	South Africa	Telecommunications
LG Corp.	Korea, Republic of	Electrical & electronic equipment

Non-Financial TNCs (World)

Corporation	Home economy	Industry
General Electric	United States	Electrical & electronic equipment
Royal Dutch/Shell Group	United Kingdom	Petroleum expl./ref./distr.
Vodafone Group Plc	United Kingdom	Telecommunications
BP PLC	United Kingdom	Petroleum expl./ref./distr.
Toyota Motor Corporation	Japan	Motor vehicles
ExxonMobil Corporation	United States	Petroleum expl./ref./distr.
Total SA	France	Petroleum expl./ref./distr.
E.On	Germany	Utilities (Electricity, gas and water)
Electricite De France	France	Utilities (Electricity, gas and water)
ArcelorMittal	Luxembourg	Metal and metal products
Volkswagen Group	Germany	Motor vehicles
GDF Suez	France	Utilities (Electricity, gas and water)
Anheuser-Busch Inbev SA	Netherlands	Food, beverages and tobacco
Chevron Corporation	United States	Petroleum expl./ref./distr.
Siemens AG	Germany	Electrical & electronic equipment
Ford Motor Company	United States	Motor vehicles
Eni Group	Italy	Petroleum expl./ref./distr.
Telefonica SA	Spain	Telecommunications
Deutsche Telekom AG	Germany	Telecommunications

Land Grabs – Private Sector Investment in Land

Land Grabs have become an important and controversial issue in development economics in recent years. Throughout the world, it is estimated that 445 million hectares of land are uncultivated and available for farming, compared with about 1.5 billion hectares already under cultivation. About 201 million hectares are in sub-Saharan Africa.

• The vast majority of land deals are for agricultural projects. Forestry is the next largest sector. Of the agricultural deals, fewer than 30% are for food crops alone. Almost 20% are for non-food crops such as bio-fuels and livestock feed.

Arguments in favour of land purchases

The buying of land by transnational investors / companies is viewed favorably by some economists. They see it as an opportunity to reverse under-investment in developing countries’ agricultural sectors, tocreate new jobs, and to bring improved technology to local farming industries that will boost productivity, raise farm incomes and reduce the extreme poverty.

Criticisms of land grabs

Opponents of “land grabs,” argue that transnational land buyers neglect local rights and do not pay a fair price for the land. They seek to extract short-term profits at the cost of long-term environmental sustainability. They claim that land grabs are closely connected to corruption on a large scale. Another argument is that selling thousands of hectares to large-scale investors hurts small-scale farmers. Mechanized farming reduces employment in labour-intensive farming and can accelerate forced migrationinto urban areas.

A report published by Oxfam in 2011 claimed that much of the farm land bought by western investors in recent years has been left idle or given over to bio-fuel production for motorists in rich nations instead of being used to grow food and reduce malnutrition among the poorest communities

According to development economist Professor Paul Collier there are two main types of land grab:

• Pioneer commercial investment: buying unused land at low prices to see if it is viable for production; risky but high-gain. Increases factor productivity; if successful, draws others – as such, it should be encouraged because there is a net benefit
• Speculative acquisition of large areas of useless land: may not stay useless – it has an option value. The investor hopes that the land will become useful in the long run (e.g. because of climate issues), causing the market value to rise.

Paul Collier believes that the 1st type beneficial to developing countries but the 2nd is not. Some countries are introducing legislation to constrain overseas buyers of land.

From January 2013, Tanzania will start restricting the size of land that single large-scale foreign and local investors can "lease" for agricultural use. The vast majority of Tanzanian small-scale farmers do not have legal protection for their property. Tanzania has an estimated population of 42 million people and 12,000 villages, but only 0.02% of its citizens have traditional land ownership titles.

gcse economics - tools of the trade: taxation - why use it?

1. To collect money to pay for Government expenditure. In 2002 it will collect approximately £400 billion. This will be spent on health, education, social security, roads etc.

2. To influence buying patterns. High taxes on cigarettes discourage smoking. Taxes on petrol encourage motorist to buy less fuel.

3. To help redistribute income between individuals. It is highly likely that high earners will pay more income tax and VAT, this is because they earn and spend more. If this money is given to the poor and unemployed in the form of benefits it has been redistributed.

4. To manage the economy
(a) Increasing the level of income tax will usually slow down the economy. This is because people pay more tax, have less disposable income and buy fewer goods. This is a policy for slowing down inflation.

Increase income tax
> People pay more tax out their wage
> their disposable income falls
> they are able to buy fewer goods
> less demand in the economy
> helps to control inflation / price rises

(b) Decreasing the level of income tax will usually ‘kickstart’ the economy. This is because people pay less tax, have more disposable income and buy more goods. This is a policy for increasing economic growth and reducing unemployment.

Decrease income tax
> People pay less tax out of their wages
> their disposable income increases
> they can buy more goods
> more demand in the economy
> helps economic growth and reduces unemployment

 ACTION

A About 70% of the price of a pint of alcohol is tax. What are the arguments for and against this?
B Try to explain why a reduction in income tax will kickstart the economy
C How could income tax redistribute income? Should the tax be progressive or regressive?

 SMART THINKING

D Would you be more likely to tax a price inelastic or price elastic good?

gcse economics - tools of the trade: taxation

Taxation is money paid to the Government by individuals and businesses. This money is usually spent by the Government on essential services such as health or education.

MAIN TYPES OF TAXES

DIRECT TAX

A tax placed directly on an individual or business

- Income tax - taken out of an individuals wage
- Corporation tax - paid by businesses out of their profits
- National Insurance – taken out of an individuals wage

INDIRECT TAX

A tax placed on a good or service

- VAT - this is put onto the price of most goods and services, usually 17.5%
- Council tax - paid on the value of an individuals property
- Excise duty - extra tax imposed on certain products e.g. petrol, cigarettes and alcohol

FAIRNESS OF TAXATION?

PROGRESSIVE TAXATION

A tax where the higher the income of the taxpayer, the larger the percentage of their total income paid in tax.

PROPORTIONAL TAXATION

A tax where the percentage of total income paid in tax remains the same at different income levels

REGRESSIVE TAXATION

A tax where higher income earners pay a lower percentage of their income in tax compared to low income earners

 ACTION

A Which taxes have you paid / your parents paid? Are they direct or indirect?
B Why is progressive tax seen to be fair and regressive unfair?

gcse economics - tools of the trade: economic systems

No two economies are organised in the same way, but they all have to solve three basic problems

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1. WHAT GOODS AND SERVICES TO PRODUCE
e.g. what cars, leisure goods etc.

2. HOW TO PRODUCE THE GOODS
e.g. how much machinery, which city to produce in

3. FOR WHOM TO PRODUCE
e.g. who should receive the goods and services

SHOULD THESE DECISIONS BE MADE BY PRIVATE FIRMS AND INDIVIDUALS OR BY THE GOVERNMENT?

THREE TYPES OF ECONOMIC SYSTEMS

1. FREE MARKET SYSTEM

These decisions are made largely by private individuals and firms. They decide what to produce, how to produce and for whom to produce. Therefore resources are allocated via the forces of supply and demand.

EXAMPLES

Levi’s and Wranglers have the freedom to make and sell jeans in whatever styles and at whatever prices.

Private firms would provide hospitals for patients. They would also decide how much to charge them.

2 COMMAND OR PLANNED SYSTEM

The decisions are made by the Government. The Government makes plans about what to produce, how to produce and for whom to produce. Therefore, resources are allocated by the Government through a system of planning

EXAMPLES

The Government would tell factories what jeans to produce and what price to sell then for
The Government would provide hospitals for patients. They will probably be free to use

3 MIXED ECONOMY

In this case some decisions are made by private individuals and firms, and some by the Government. Therefore some resources are allocated via the forces of supply and demand and others by the state planning system

EXAMPLES

Most leisure and household goods are produced by private firms
Certain essential services are provided free of charge by the Government e.g. hospitals, schools

THE UK HAS A MIXED ECONOMY

PRIVATE FIRMS ALLOCATING RESOURCES	GOVERNMENT ALLOCATING RESOURCES
Clothes e.g. Next, Top Shop	Hospitals
Some private schools	Many state schools
Industry e.g. Denby Pottery	Police force
Transport e.g. Midland Mainline	Army and weapons

ADVANTAGES OF EACH SYSTEM

FREE MARKET	COMMAND
There is lots of choice for consumers. Private firms understand people better than the Government	Essential services are provided free of charge
Firms aim to maximise profits therefore they try to meet customer needs	Everybody is guaranteed a job. There should be no unemployment
Individuals are allowed to start their own businesses. More enterprise	There should be less inequality in society
People have incentives. They can aim for higher wages or for a better job	Everybody is guaranteed housing
Firms are in competition with each other. They have to improve their efficiency and quality	Most people have the same government wage – whatever their job is

 ACTION

a. Imagine that the UK had a totally free market system i.e. all services were left to private firms. What problems might happen?
b. Why may a businessman or woman be happier in a free market system?
c. Why may the poor be happier in a command system?

 SMART THINKING

d. Which system is a) more efficient b) more equal / greater equality?

New York Times slammed for 'racist' cartoon about India's Mars mission - News paper comment from INDIA

New York Times slammed for 'racist' cartoon about India's Mars mission 

By MAIL TODAY BUREAU

PUBLISHED: 22:39 GMT, 2 October 2014 | UPDATED: 22:39 GMT, 2 October 2014

After the worldwide appreciation of India’s successful Mars orbiter mission, The New York Times cocked a snook at the Mangalyaan spacecraft by publishing a cartoon that showed a turban-wearing man with a cow knocking at the door of the “Elite Space Club”. 

The cartoon drew immediate criticism for being racist in content. 

The common refrain from people on social media was that the western world was unable to find any fault with the Mars Orbiter Mission (MOM), and thus resorted to uncharitable tactics to take down India’s impressive foray into space. 

+1

Offensive? The cartoon published by The New York Times has made fun of India’s Mangalyaan mission.

The cartoon showed members of the Elite Space Club reading a newspaper with a headline about India’s Mars mission. They appear unhappy with the Indian man knocking at their door. 

While attempting to be funny, the cartoon failed to register the importance of the Mars mission, which is being seen as a major development in India’s space programme. 

The cartoon left a sour taste for many, particularly as it was published while Prime Minister Narendra Modi was in the U.S. 

The cartoon appeared just days before India’s Mangalyaan sent back stunning photographs of the Red Planet that were shared by NASA.

India and US have signed a pact for sharing research data of the Mars mission, a testament to how the space community is treating Mangalyaan. 

Several people on social media felt the caricature depicting an Indian with a turban and a cow had nothing to do with contemporary realities and that it failed to register the fact that no other country has managed to enter Martian orbit in its first attempt.

Read more: http://www.dailymail.co.uk/indiahome/indianews/article-2778703/New-York-Times-slammed-racist-cartoon-India-s-Mars-mission.html#ixzz3F9dUGfXj
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Jeens - Dr. K.J Yesudas comment

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Economic Development - Overseas Aid, Remittances and Debt Relief

Introduction to aid

What role can and what role should overseas aid play in promoting and sustaining economic development?

These are hugely contentious questions in the subject. Estimates vary from those which suggest that overseas development aid has added about 0.5 per annum to growth in recipient countries to those which suggest that it has had no positive, or indeed negative, effect on growth.

Backgrounds statistics on aid

• In 2011, overseas aid payments were $133.5 billion, equivalent to 0.31 per cent of developed countries’ combined national income
• In 2010, global military expenditure = $1630 billion versus $128 billion on development aid
• The value of trade outweighs aid by a large multiple. The export earnings of all developing countries in 2010 were more than 40 times the level of official aid flows.
• Denmark, Luxembourg, the Netherlands, Norway and Sweden exceed the United Nations ODA target of 0.7 per cent of gross national income (GNI)
• The largest aid donors are the United States, Germany, the United Kingdom, France and Japan
• Korea, China and India now also donor nations
• The main destinations of aid from advanced rich nations in 2010 were Sub-Saharan Africa (44%), which also received more aid per head than other regions, followed by South and Central Asia (19.5%) and Middle East and North Africa (10%)
• In 2010, total UK aid amounted to $13.1 billion

Types of Aid

• Bi-lateral aid: Aid on a country-to-country basis e.g. from UK to Kenya or from Brazil to Tanzania
• Multi-lateral aid: Aid channelled through international bodies / aid agencies such as CARE
• Project aid: Direct financing of specific projects for a donor country
• Technical assistance: Funding of expertise of various types
• Humanitarian aid: Emergency disaster relief, food aid, refugee relief and disaster preparedness - Humanitarian aid accounts for less than 10% of global aid flows
• Soft loans: A loan made to a country on a concessionary basis with a lower rate of interest- for example, India has received over $2 billion in low-interest funds from the World Bank for many of its welfare schemes, these soft loans are set to stop as India heads towards middle-income status
• Tied aid: i.e. projects tied to suppliers in the donor country - the UK abandoned tied aid in 1997
• Debt relief – this may take the form of cancellation, rescheduling, refinancing or re-organisation of a country’s external debts

Financial flows into developing countries (also known as foreign savings) can come in different forms:

Although aid is important for many poorer nations, exports from developing countries are now more than 40 times the level of official aid flows. Remittances for migrants are about three times as large as aid flows. Private capital inflows are 10 times aid flows. The latest available data for aid and private capital flows heading to developing countries is shown in the table below.

Aid and Private Capital Flows to Developing Countries 2010
Flows	US$ billions	% of total official and private flows
Total Official Development Flows	128	10.9%
Total Private Flows (including remittances)	1042	89.1%
Foreign direct investment	509	43.5%
Portfolio Investment	128	10.9%
Net private long-term debt	84	7.2%
Remittances	321	27.4%

Priorities for UK overseas aid

Assisting Post Conflict Nations
Examples of aid projects from the UK to help fragile countries and those in post-conflict reconstruction:

• Clearing minefields in Nepal, road building in the Democratic Republic of Congo
• Malaria prevention and treatment programmes in Ethiopia, Training midwives in Pakistan.

Does aid help or hinder economic growth and development?
This is the subject of a fierce debate in the development economics literature

• Aid has a range of economic, social, environmental and political objectives
• Economic development can take place without aid - China and Vietnam have both experienced sustained and rapid growth over nearly two decades without receiving much in the way of international aid payments measured as a share of their GDP
• Well directed and targeted aid can enhance a country's growth potential but the effects may not be seen for many years
• Aid that might help finance the building of a power station contributes directly to aggregate demand and increases supply potential
• Aid that is designed to put more children through school or humanitarian aid to vaccinate kids and prevent them dying will have an impact over a longer time horizon
• Different kinds of aid projects can affect growth at different times and to different degrees

Building the Case for Overseas Aid

Counter arguments – Limits / Disadvantages of Overseas Aid

In the "The Bottom Billion" Professor Paul Collier suggests that, ceteris paribus, overseas aid may have added around 1% per year to the growth rate of the poorest countries of the world during the past 30 years. There are few economists who argue that aid has led to a reduction in economic growth of donor countries. Most of those who are critical of overseas aid focus instead on dependency and corruption. It is possible for countries to grow quickly without aid – but equally there are countries who were initially heavy aid recipients who have grown and developed and are now aid donors themselves for example South Korea.

The ceteris paribus assumption is important. Aid can provide a much needed injection of funds for some of the world's poorest countries and communities - but everything else is not equal. Many external factorsmay reduce or enhance the impact of aid on economic growth, for example the quality of government, the efficiency of financial systems and also the absence of conflict.

Key point: The contribution aid makes to growth differs sharply in countries at peace and countries in conflict

Aid Graduates – Countries whose overseas aid as a share of GDP has declined over the years
Country	Maximum aid as % of GDP	Year	Minimum aid as % of GDP	Year	Growth of GDP per capita p.a. 1990–2010
Bangladesh	8.2%	1977	1.3%	2009	5.8%
Botswana	31.6%	1966	0.5%	2005	7.1%
China	0.7%	1992	0.01%	2008	11.6%
Ghana	16.3%	2004	4.1%	2008	4.0%
India	4.1%	1964	0.1%	2009	7.0%
Kenya	16.8%	1993	6.1%	2008	3.1%
Malaysia	1.2%	1987	0.07%	2009	6.1%
Vietnam	5.9%	1992	2.9%	2008	7.4%
Source: World Bank, Global Development Finance

Critics of much of the aid that has gone to Africa in recent decades argue that a high proportion of aid has gone to low-income countries with poor institutional regimes. The UK Coalition government has a target of allocating 0.7% of GDP to overseas development assistance (ODA) - this target came into being in 1970 and has never been revised! But is it right to stick rigidly to such a target independent of what else is happening in both the domestic and the global economy? 0.7% of UK GDP is forecast to equate to around £15 billion in 2015. In November 2012 the UK announced it would end aid to India in 2015, to focus on trade links. It has suspended aid support to Rwanda over its alleged funding of rebels in the Democratic Republic of the Congo, and to Uganda over alleged corruption

In a world of increasing resource scarcity, aid can also help achieve three important aims

• Helping to overcome skills shortages
• Funding to relieve infrastructure shortages
• Aid funded projects to help the poorest countries become more resilient to climate change

Smart Aid

• There is increasing interest in the use of "smart aid" - aid programmes that use experimentation and focus on bottom-up projects in order to increase the effectiveness of each £ or $ given in aid.
• The work of Esther DuFlo, the author of the award-winning "Poor Economics" and professor of development economics at the Massachusetts Institute of Technology, has been influential in shaping ideas about smart aid and the importance of randomized trials to improve the effectiveness of aid.
• Oral rehydration therapy, vaccines and the spread of bed nets to reduce malaria in Africa are examples of where randomised testing has had an effect to give aid projects more impact.

Remittances

Remittances

• Remittances are transfers of money across national boundaries by migrant workers.
• Despite a dip because of the recent global recession, total remittance flows have grown in the world economy over the longer-term as the scale of migration between countries has grown
• For many developing countries, money coming in from remittances is an importance source of income.

Advantages of remittances

Officially recorded remittance flows to developing countries are estimated to reach $406 billion in 2012, a growth of 6.5% over the previous year. The top recipients of migrant remittances in 2012 are India ($70 billion), China ($66 billion), the Philippines ($24 billion), Mexico ($24 billion), and Nigeria ($21 billion).

The size of remittance flows to developing countries is now more than three times that of official development assistance.

Limitations of remittances

Debt Cancellation and Debt Relief

Many of the world’s poorest countries are saddled with high levels of external debt owed to other governments, institutions such as the IMF and foreign companies and individuals.

• The current near $5tn of external debts owed by developing countries costs them more than $1.5bn a day in repayments – and much of that comes from the poorest countries
• Most of the world’s poorest countries have limited access to international capital markets – their sovereign debt does not have an official credit rating.
• Without conditional loans from the IMF, World Bank and others, they would have to pay interest rates many times higher on private sector loans.
• Some developing countries have chosen to borrow from other emerging economies such as China or Brazil as a way of avoiding conditional loans from international institutions
• Countries with persistent trade deficits end up accumulating large external debts, so too a government where spending greatly exceeds annual tax revenue leading to high fiscal deficits

External debts can act as a severe constraint on growth and development – often times, the interest on existing debt takes up a large percentage of a nation’s export revenues or annual tax revenues. These debt repayments have an opportunity cost, they might be better used in supporting development policies.

To what extent should richer nations be prepared to write-off external debts of poor countries? The Jubilee Debt Campaign pushes for debt cancellation and debt relief avoiding where possible conditions built into debt reduction agreements that create further problems for vulnerable countries.

One option is to reschedule debt payments and change the nature of the interest rate paid on these loans. In July 2012 a United Nations report made the case for introduced indexed loan repayments where the interest rate is tied to a country’s rates of economic and/or export growth. This would help balance the risk of loans more equally between lender and borrower. In good years when growth of GDP is strong, the borrower country would repay more of their debts. During hard times (i.e. a recession caused by a fall in export revenues), the rate of interest on debt would fall.

Heavily Indebted Poor Countries Initiative (HIPCI)

This is an initiative to provide debt relief to heavily indebted low income countries. Under the Initiative, the International Monetary Fund (“the IMF”) and World Bank calculate the proportionate reduction required in the country’s external debts in order to return them to 150% of the country’s annual exports, which is considered to be a sustainable level. All creditors – multilateral, bilateral and commercial – are expected to provide the proportionate reduction that will achieve this. The Ivory Coast has benefited from HIPCI – it has been granted external debt relief of $7.7bn. As a result the stock of public debt decreased from 69% of GDP in 2011 to 40% of GDP in 2012.