The Challenge of Economic Development: A Survey of Issues and Constraints Facing Developing Countries


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Introduction Most National Institutions Respected, Especially Military

This project brings forth issues related to measurement of health indicators, establish composite indexes of health status, conduct rigorous empirical work on both trends and causal factors behind health inequality within and between countries, analyze the implications of health deprivations on poverty traps and suggest practical policies which can be implemented without much difficulty. Aid is one of the most challenging development issues facing the international community.

There is now a pressing need to evaluate performance to date, and the future for aid in light of recent events such as the post-Monterrey consensus to substantially increase aid to meet the Millennium Development Goals, recent initiatives from donors, and an ongoing focus on Africa, among others. The project is timely given the agreement at the G8 Meeting in Scotland in to significantly expand aid flows and discussions around development finance at the UN Summit in September About participants attended the conference, more than of them coming from outside Finland.

The conference was open to younger researchers as well as established scholars. The project aims to assemble data about the distribution and composition of personal assets in developing, transition, and developed countries and to study the implications of personal asset-holding for economic development.

The most important asset types — financial assets, land and housing — will be given special attention. Life-cycle saving, self-insurance and other motives for saving, as well as their consequences for asset-holding, will also be studied. International development in the era of globalization needs an effective transfer of knowledge and human capital from the main centres of knowledge creation to developing countries for supporting their growth and development process.

Most of the new knowledge is embodied in people. This process has raised concern, particularly in developing countries. This process, however, needs not be irreversible as people tend to return to their home country bringing with them knowledge and experience thereby contributing to national development. Achievement of the MDG goals by is an ambitious undertaking. The donor community is now mobilizing resources behind the goals, and efforts to implement the goals are now underway at national and international levels. It is inevitable that progress in achieving the goals will vary considerably across developing regions, and indeed within individual countries.

Activities to monitor the achievement of the goals both globally and nationally are now being put in place by international agencies. This is a highly demanding task, particularly in the area of collecting the relevant data which will require much faster progress in building the capacity of national statistical agencies. Development aid has become an increasingly hot topic in international research and policy circles, especially following the adoption of the Millennium Development Goals. Donors are paying increased attention to how they allocate aid across countries.

Consisting of three linked activities, the project builds on expertise in aid and related areas of research among current WIDER resident researchers. WIDER possesses a very strong comparative advantage in this area, and is in a position to lead the development aid research effort internationally. It also builds on the many strategic contacts of the two project directors in policy and research circles. The mobilization of domestic savings for private investment plays a crucial role in achieving growth and poverty reduction; this is demonstrated by the historical experience of the now developed countries as well as East Asia.

However two problems have become apparent. First, the construction of regulatory and supervisory capacity has often lagged behind liberalization, and a number of low-income and transition countries have experienced major bank crises. Second, the domestic investment response to financial liberalization has often been disappointing and the newly liberalized systems have often not effectively intermediated savings into new and higher levels of domestic investment.

Millions of people remain desperately food insecure, and over a decade of agricultural-sector reform appears to have achieved little in the way of improving entitlement to food in many countries. This project will investigate why progress in achieving food-security has been disappointing in so many countries especially in Africa despite the implementation of extensive donor-inspired reform in agriculture, and the possibility of transferring lessons learned from the successful reduction of hunger in many parts of Asia.

Creating better institutions for development has come to the fore in recent years, reflecting the often poor results of economic reform programmes that failed to take account of the need to develop appropriate supporting institutions. This project looks at the role of institutional reform in accelerating development through an in-depth investigation of the historical experiences of the now-developed countries, as well the success stories among the developing countries thereby drawing practical lessons for institutional change elsewhere in the developing world.

The Challenges of Financing Development in Africa: Theme Paper

Globalization offers new opportunities for accelerating development and poverty reduction. And there is much concern about the distribution of benefits; in particular whether the poor gain from globalization, and under what circumstances it may actually hurt them.

This project aims at producing rigorous theoretical and empirical analysis of the poverty impact of globalization, thereby providing a framework upon which to build strategies for 'pro-poor globalization'. The project is interested in understanding better the mechanisms through which globalization ultimately affects poverty. Reconstruction from conflict is a complex and demanding task, and a major challenge for the UN system as well as the wider donor community. National authorities and their donor partners are faced with multiple priorities - rebuilding infrastructure, assisting war-damaged communities, and re-creating weakened institutions - with often insufficient resources to meet these needs.

The scale and causes of international income inequality and poverty continue to be much debated. Yet, the quality of the analysis and data underlying this debate still leaves much to be desired. A wide variety of policy relevant studies including cross-country analyses of the determinants of poverty and income inequality, and the role of income inequality in determining development outcomes, will be undertaken.

Many developing and transition countries have considerable regional variation in average household income, poverty, and health and educational status. National human development indicators can therefore mislead policy-makers when large regional disparities exist. This project will investigate the size and determinants of regional disparities in a representative selection of countries.

It will use indicators such as poverty incidence and depth, within-region income inequality, human development, and gender indicators to better understand why some regions fall behind in the development process. The real value of official aid flows fell for much of the s, and private capital flows to low-income countries remain mostly limited. The decline in aid flows may endanger the development process, since they finance much of the development budget in many poor countries. However, while aid in aggregate is in decline, some have argued that better use is now made of each aid dollar, so the decline in aid flows may have been partially offset by an improvement in its quality.

This project looks at the likely outcomes for the levels, structure, and effectiveness of official flows. When the Uruguay Round was being negotiated and it was coming to a close, a number of estimates were made about the impact of the agreement on poor countries. Many assessments indicated that there would be a net loss for them while others came up with a more positive scenario. Now that the agreement has been in place for several years there is scope for an empirical assessment of the issue to identify the winners and the losers ex post.

The project makes recommendations to improve the participation of the least developed countries in international economic policy regimes, especially the WTO. Summary measures of human well-being are increasingly used to compare and monitor performance within and across countries. This project aims to provide guidelines for the future design and practical application of human well-being indicators by taking stock of and reviewing current practice.

Members of the CFA-zone enjoy currency convertibility, fiscal and monetary policies which are more prudent than SSA as a whole, and a large amount of financial and technical assistance. These advantages do not appear, however, to have resulted in more rapid economic and human development in the CFA-zone and CFA countries in the Sahel face major structural handicaps. This project aims to understand why CFA-zone performance has been disappointing given the advantages enjoyed by the region, and will devise policy recommendations to improve longer-term development.

Topics include: environmental taxation for development; revenue potential of the Tobin tax; Special Drawing Rights; the International Finance Facility; private donations for development; a global lottery and a global premium bond; remittances by emigrants; global public economics; national taxation, fiscal federalism, and global taxation. Fleeing poverty, violence and 'ethnic cleansing' millions of people leave their homes every year in search of safety and economic opportunities.


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In contrast to the migrations of the nineteenth century today's migrations often take place through illegal channels. Such migration is therefore very difficult to control and tends to be an important new source of poverty, social exclusion and social deviance. The project aims to document the extent of this phenomenon, to assess its economic and social impact on sending and receiving countries, and to develop humane policy recommendations. Households in developing countries face many risks. Informal insurance mechanisms marriage, the extended family, and investment in social capital provide some protection but are weak in the face of major calamities that affect households en masse.

The Urban Challenges — The Urban Challenge Alliance

Most people cannot obtain formal insurance. The incomplete insurance market therefore constrains investment, growth, and poverty reduction. Public action to remedy this deficiency is merited, but what form should it take? The project will evaluate alternatives in widening insurance provision, including sustainability and poverty effects. Micro-simulation models play an important role in policy analysis in developed economies, particularly in connection with the distributional impact of tax and benefit reforms. The objective is to show how the changes affect different households in different ways, and to assess the overall impact on individual living standards, poverty rates, and other indicators of household well-being.

The project will aim to produce studies assessing the distributional impact of past changes to the tax and benefit structure, and possible future changes to programmes such as pensions and housing subsidies. Latin America has now privatised a large number of utilities water, electricity, transport, and telecommunications and now makes more use of market approaches to delivery in the social sectors education and health.

Privatisation has major consequences for efficiency and therefore long-term growth , consumer welfare and income distribution. But insufficient attention has been paid to regulating privatised enterprises in the public interest. The project will assess how privatisation and regulation processes can be improved, particularly in the light of experience elsewhere.

The project will consist of two parts: 1 analysis of new trends in the supply of different categories of capital flows since the Asian crisis and 2 evaluation of national policies to reduce both the volatility of capital flows and its' negative domestic impact. Many developing countries are characterised by weak budgetary and revenue institutions, insufficient public spending on priority investments and the macro-economic instability associated with repeated fiscal crises.

This project will re-examine the design of fiscal policy including public expenditure management and taxation with the aim of improving its role in supporting growth and poverty reduction. A property rights regime covers rights to use, lease, donate, bequest, and sell assets or collect the incomes generated by assets. A clear and transparent property rights regime facilitates investment and economic growth.

While private property is considered by many to be the most superior type of regime, this is not always the case, especially when important markets are imperfect or missing and when key institutions are underdeveloped. This project will evaluate alternative property rights regimes at different development stages. Previous UNU-WIDER research has shown that the risk of internal conflict is high in low-income societies rich in natural resources and characterised by ethnic fragmentation. Yet for each country in conflict there are many others with similar characteristics that are at peace.

Understanding why some countries avoid conflict while others fail is critical. The project will focus in particular on the impact of different patterns of public expenditure, the distribution of government jobs and the overall benefits of government operations in social stability and integration. Past policies, an erroneous approach to adjustment, and 'geography' are repeatedly cited as explanations for Africa's poor performance. But, weaknesses in the institutional capacity of the African State may be as important.

In particular, economic policies continue to be donor-driven in many cases, with a lack of local ownership. A key challenge for policy makers is how to bring about the successful integration of the less developed countries into the international system. Many of the obstacles to the meaningful participation of vulnerable developing economies in the international system are domestic in origin, but external factors beyond the control of these countries play an important part as well.

The project identifies and analyses these factors and develops policies that could ameliorate the domestic obstacles and help overcome the external constraints. It is a widely held opinion among policy-makers and social scientists that the so-called 'information revolution' is having a substantial impact on the world economy. It is often also presumed that this impact is beneficial to all those countries having the necessary infrastructure for the adoption of IT.

The policy implication of this line of argumentation is that governments should assign priority to high-tech industries and promote public investment in the related infrastructure. In contrast, an increasing gap has been emerging between the changing problems of the world economy on the one hand and the policy agenda and the ability to govern of world institutions of the other.

Emigrants from developing countries can contribute not just to their host societies, but the money they send to their families back home is also helping consumption and poverty reduction in such countries. Progress towards achieving these goals remains disappointing. We are essentially talking about the need to tackle poverty.

I have said this many times before, but let me say it again: Poverty is the ultimate systemic threat. We must address it not just on ethical and moral grounds but also for purely economic reasons. Important promises have been made to increase aid. But increasing aid flows is not enough. We have to ensure that aid is effective and helping to lift people out of poverty.


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  7. The Declaration sets out commitments on improving aid practices, with targets to measure progress in 12 areas. Access to a reliable supply of clean water and sanitation services would help achieve progress on virtually every single one of the Millennium Development Goals. Without water, life cannot exist. You cannot grow food. Without clean drinking water you are prey to many waterborne illnesses. I have seen the impact that access to clean water and sanitation can have on the poorest, on women and children — on their lives and their dignity. It is therefore imperative to guarantee clean water and sanitation to the billions who still do not have it.

    While I am discussing issues of emerging and developing economies, it is perhaps a good moment to mention the issue of new members of the OECD, and the OECD's co-operation with non-member economies. I understand that this is an issue which has been of great interest to the Parliamentary Assembly. This same period also saw a rapid development in the OECD's co-operation with non-member economies.

    Thus, capital flight is a diversion of domestic savings from domestic real investment. Second, income and wealth generated and held abroad are outside the purview of domestic authorities, and therefore cannot be taxed. Thus, potential government revenue is reduced, thereby constraining project execution and debt-servicing capacity Ajayi, Third, income distribution is negatively affected by capital flight.

    The poor citizens of African countries are subjected to austerity measures in order to pay for external debt obligations to international creditors. Given the magnitude of capital flight and its macroeconomic significance, the policy challenge is how to stem capital flight and cause its reversal. In order to achieve this objective, there is need for an understanding of the causes and means of effecting capital flight from Africa. The causes of capital flight are many—economic and otherwise.

    Other causes include corruption of political leaders and extraordinary access to government funds Ajayi, Trade faking is a key instrument for illegally effecting capital transfer. Four categories of international trade faking have been identified in Africa Ajayi, : under-invoicing of exports and over-invoicing of imports, over-invoicing of both exports and imports, under-invoicing of both exports and imports and over-invoicing of exports and under-invoicing of imports.

    Second, the existence of high import duties can provide the incentives among importers to under-invoice imports in contrast to the usual case of over-invoicing imports when a premium exists on foreign exchange in the black market. Third, if there is a subsidy on imports it will likely cause over-invoicing of imports. Fourth, if a subsidy exists on exports, it will lead to over-invoicing of exports. Econometric analysis clearly shows that domestic macroeconomic policy errors are the culprit in capital flight. Of particular significance are policy errors that cause inflation, exchange rate misalignment generally, currency overvaluation high fiscal deficits and the lack of opportunities for profitable investment within the domestic economy.

    The policy challenge lies in establishing a stable macroeconomic environment, avoiding an overvalued exchange rate, maintaining free access to foreign exchange through the market system, and maintaining a trade liberalization policy, where high tariffs and subsidies are eliminated.

    In many African countries, surveillance and monitoring are also necessary. Indeed, where policies to meet these objectives have been sustained, there is evidence of reversal of capital flight. But the significant edge foreign countries have over Africa in terms of investment safety and flexible investment instruments cannot be ignored. It stems from the financial repression which was characteristic of most African countries until recently. The financial liberalization embarked upon by a number of African countries is helpful, and will be even more so as capital markets develop, in the process of stopping or reducing capital flight, and encouraging capital inflows.

    Capital flight from Africa has political dimensions that must be addressed. First, there is anecdotal evidence that some African leaders and government officials — through the perquisites of their offices — operate huge, foreign currency-denominated accounts outside their countries, which is tantamount to abuse of office. Those who illegally acquire such assets should not be allowed to circumvent the due process of law.

    The time has come for transparency and accountability in governance. The second political dimension is the responsibility of countries that play host to such accounts to discourage the placement of such money by refusing to accept it. This can be very helpful to African countries in retaining within their borders funds which they badly need for development. It would also be very helpful to Africa if the whole of the international community enforced a system of account disclosure, whereby the accounts of foreigners with owner's name after a given account balance threshold are periodically say quarterly published in papers that circulate internationally.

    In the case of large accounts where the owners have died, it would be helpful if access to such illegally acquired wealth could be given to the treasury of the country of origin of the depositor. Much of capital flight from Africa appears to have originated from illicit diversion of public funds rather than to have been constituted by business incomes seeking economic stability or high yields abroad.

    To that extent, market confidence and policy credibility considerations probably play a minor role in the decisions about where the funds are invested. A change in the banking regulations of those developed countries where these funds tend to be invested would probably be a more effective measure towards their repatriation, as indicated above, and also by UNCTAD UNCTAD: a , pp. It should, however, also be recognized that considerations of risk and return are not completely irrelevant in explaining capital flight out of Africa. The need for African countries to mobilize domestic resources as a medium- to long-term goal is now widely accepted.

    In the past, savings rates in Africa have been low, as have investment rates. While savings performance varies between countries, African countries have lower savings and investment rates than other less developed countries. In , domestic savings as a percentage of GDP was A sustained increase in growth rates requires higher levels of savings and investment, as well as increased investment productivity. Thus, policies to promote savings have a central role to play in driving growth via investment and reducing aid dependency in SSA, particularly in the face of the anticipated global reduction in aid.

    Identifying policies that promote savings and the policy distortions that inhibit it should be an essential element in any strategy for the long-term development of the continent Elbadawi and Mwega, This is a basic policy challenge for decision makers in Africa. Given that savings come from households, the business sector and from the government, what can be done to promote savings?

    There is abundant theoretical and empirical literature on private saving behaviour even though different studies focus on one or two aspects of the issue. Surveys suggest that the literature is somewhat fragmented, with no single model able to deal with every dimension of the savings issue Edwards, Among the determinants of private savings are economic growth, terms of trade, fiscal and financial policies, macroeconomic stability and demographic factors.

    However, for most low-income African countries, it is generally recognized that a significant autonomous increase in the domestic savings rate is not feasible as a way of accelerating growth. Rather, efforts would need to be directed at increasing output, income and aggregate savings by greater utilization of existing resources, increased inflows of ODA and by improving the allocation, quality and efficiency of investment. Macroeconomic Stability: Empirical results suggest that macroeconomic stability is critical to stimulating savings.

    Mason et al find that saving is negatively correlated with inflation. The rate of savings is, therefore, enhanced in an environment where the rate of inflation and level of budget deficits are low. Uncertainty about the real returns on savings, and about the direction of macroeconomic policies, has deleterious effects on savings Hadjimichael et al This conclusion calls for increased transparency and debate in the culture of economic decision making. At the technical level, it calls for the determination of a sustainable growth path for national income consistent with non-expansionary monetary policies and sustainable balance of payments and budgetary positions.

    Financial and Capital Market Reforms: The effects of financial and capital market reforms on private savings work through various channels, and the effects can be negative or positive. First, capital market reforms may reverse capital flight, thereby raising the portfolio share of domestic assets and increasing measured income, measured net exports and measured domestic savings. Second, financial liberalization and capital market deepening may raise the efficiency of intermediation, thereby increasing growth and thus private savings.

    Third, financial liberalization and the consequent increase in geographical density of financial institutions, the range of financial institutions, and the quality of regulation and supervision in the financial sector, typically lead to financial deepening that will be reflected in more financial savings Schmidt-Hebel, The flexibility that investing in capital markets gives to all types of savers and the spreading of risks among them, makes a powerful case for pursuing capital market development strategies. Additionally, as noted earlier, development of capital markets is critical to attracting foreign savings to Africa in the form of foreign direct and portfolio investment.

    But its role is limited in part due to the dominance of small, nation-state markets in Africa. Policymakers should adopt a subregional approach to the support and development of capital markets, so as to strengthen their catalytic role in mobilizing savings. Financial Deepening: The monetization of a broader range of economic activities and transactions would facilitate financial savings, as would the broadening of the range of flexible savings instruments — all key elements in the process of financial deepening, which is often measured by the ratio of broad money to GDP.

    There is empirical evidence of the positive and significant effect on savings of the increase in the ratio of broad money to GDP. Thus the process of financial deepening, which is spreading throughout the whole of Africa, has a large pay-off in terms of domestic resource mobilization. With the policy and regulatory framework for financial sector operations established under past and on-going reform programmes, policy makers need to add to their menu of concerns the promotion and development of institutional architecture that will facilitate the process of financial deepening.

    Innovative, flexible and targeted savings instruments, savings schemes and savings mechanisms appropriate to different segments of the population should be promoted. For example, since research shows the life cycle model that the age composition of the population does have an influence on household savings behaviour — with the youth and the elderly saving least — middle—aged working people should be targeted. Instruments such as well-structured, professionally managed retirement funds could be important savings vehicles for this category of the population.

    Experiences of countries with relatively new savings instruments, such as those of Malawi with Unit Trusts, could be shared among conference participants. Interest Rate Policy: According to available research evidence, the impact of interest rates on household savings is ambiguous because there are both income and substitution effects which work in opposite directions. Higher interest rates increase the opportunity cost of consumption, hence households increase savings the substitution effect , while the rising wealth of positive savers as a result of the increase in interest rates increases consumption the income effect.

    Empirical studies usually find a non-significant or small interest rate elasticity of domestic savings. However, it has also been argued that in a situation of financial repression, typical of many African countries before financial sector liberalization, the liberalization of interest rates would increase savings and the supply of investible resources in the economy McKinnon, ; Shaw, ; Elbadawi and Mwega, Terms of Trade: The management of trade booms and contractions can be critical to private as well as public savings.

    To the extent that terms of trade shocks contribute to macroeconomic volatility, undermine fixed exchange rate regimes and destabilize the domestic banking system, booms and contractions can have far-reaching consequences for private and public savings. Depending on how the boom is managed and whether more of the adjustment falls on the public or private sector, the outcome will depend on the combination of fiscal, monetary and banking regulation instruments applied, the availability of hedge instruments, as well as the political environment for fiscal decisions.

    Generally, an improvement in the terms of trade increases incomes, and hence potential private and public saving, especially if the improvement is considered transitory Mwega, This effect is important in Africa where exports which are sold in volatile markets are limited to a few primary commodities. During periods of commodity price booms, savings mobilization campaigns and innovative, flexible, publicly and privately issued hedge and insurance instruments should be developed, as well as improved incentives to hedge and self-insure against the risk of a possible contraction.

    Critical to the success of any hedge strategy is the quality of regulation of financial institutions. The experience of countries with various instruments to manage booms and raise savings, such as that of Uganda with a temporary export tax on coffee in can be shared among conference participants. Fiscal Reforms, Public Expenditures and Public Savings: Besides fiscal action in the commodity boom situation discussed above, other areas hold prospects for increased public savings: further implementation of tax reforms, cost sharing in the provision of public goods and services and enhancing public expenditure productivity.

    Taxes are a principal means of public domestic resource mobilization, but the need for revenue must be balanced against the possible adverse effects of particular taxes and the whole tax structure on relative prices and incentives, which may give inappropriate price signals. Broadly, tax reforms should aim at broadening the tax base, raising tax elasticity with respect to economic growth, reducing exemptions, and simplifying tax administration. The sharing of experience by policy makers in implementing public resource enhancement measures in the above areas will be most useful.

    In contrast, 40 per cent of the debt of African middle-income countries, mainly North African, are commercial. The subregion is the most current on debt service, accounting for over 40 per cent of the total debt service payments by Africa to creditors in Judged by the debt burden indicators and debt servicing capacity, it is clear that many African countries are still in debt difficulty in spite of previous debt relief extended by creditors.

    The discrepancy between debt service paid and debt service due has continued to grow. Additionally, the ratio of scheduled external debt service relative to government current expenditure exceeded 50 per cent in a large number of African countries. What African countries need is the release of more resources from debt servicing. The large debt implies that vast amounts of resources are allocated to debt service, thereby reducing what is available for financing development.

    For most countries, it means that inadequate resources are left for national development after debt service. The implication is that the debt has become so large, relative to export earnings and economic size of the countries, that it would be impossible to repay it without imposing an unbearable burden on debtor countries. There is already abundant empirical evidence that Africa's external debt burden is having a severe adverse impact on investment and renewed growth.

    It impedes public investment in physical and human infrastructure and deters private and foreign investment thereby creating a situation that discourages inflows of new external resources ECA, p. While the need to do something about debt appears to be universally accepted, what to do is still being debated, as past initiatives clearly have not been comprehensive enough.

    The most recent one—the Heavily Indebted Poor Countries HIPC Initiative — was born out of the recognition in the s that a significant number of low-income countries had debt burdens that remained above sustainable levels over the medium term. Even strong policy performers that made full use of current debt relief mechanisms were in trouble.

    The primary objective of the HIPC Initiative is to ensure — for countries with a good track record of adjustment and reform — a robust exit from debt rescheduling and the achievement of debt sustainability. During the first two years of implementation of the HIPC Initiative, 10 countries were reviewed for eligibility. Basic concerns have been expressed with regard to eligibility for and the adequacy of debt reduction, the speed at which relief should be granted — the length of the completion period — UNCTAD, , the performance criteria and the technical basis of the debt sustainability analysis.

    Also at issue is the role of the Fund and the Bank, both of which are creditors. The Ministers were of the opinion that the debt sustainability analysis used to determine eligibility for the various stages of the Initiative and the basic assumptions underpinning this analysis were unrealistic.

    They pointed out that a lot of countries are struggling over the seemingly tough performance criteria under the programme — a situation that could result in assistance for too few countries, too late. It has also been argued that during the interim period of three years, greater cash flow relief should be provided. The Ministers agreed that for the Initiative to be effective in re-establishing conditions for sustained growth, significant adjustments need to be made regarding the eligibility criteria, the adequacy of the debt reduction granted and the speeding up of the implementation of the Initiative.

    It has been argued that if the international community is genuinely interested in enhancing the impact of the HIPC, it should seriously consider relaxation of the eligibility criteria — including the length of the workout to the completion point — so that more African countries can benefit from it. Of great importance is the need to increase substantially the amount of relief granted under the Initiative so as to restart Africa on the path of sustained growth. Additional measures to reduce the debt burden over the short run have been advocated.

    Some of the options suggested include debt reduction and, more radically, debt cancellation. Some analysts have argued that there are two realistic options for the African debt situation: debt cancellation and conversion into grants of any remaining official bilateral and multilateral debt UNCTAD, a. Church organizations and NGOs have championed the case for debt cancellation — not the African countries.

    Debt cancellation for African countries can be based on a number of grounds. Second, releasing resources in the form of debt cancellation, or the conversion of debt into grants, will afford the affected countries the opportunity to return to a growth path. No matter what approach is taken, the resolution of external debt problems is a touchy subject because of the underlying and interwoven economic and political issues. Critical to the evolution of the debt debate is the position of the Bretton Woods institutions.

    The position of the IMF is that the debts are obligations that must be honoured and that calls for their cancellation are therefore unrealistic and raise false expectations. Unconditional cancellation raises the risk that debt relief could be squandered on official corruption, increased military expenditure, or grandiose projects, with little benefit, if any, in terms of sustainable growth or poverty reduction IMF Survey, That position is, of course, understandable from the perspective of development institutions to which debts must be paid in order for them to maintain some degree of viability and integrity.

    The reality of the situation, however, is that a number of African countries are too far gone and payment seems impossible under any plausible, human development-centreed economic growth scenario. Other reasons given against debt cancellation include the "moral hazard" argument. In its crude version, the argument is that any scheme of forgiveness will lead debtor countries to pursue irresponsible policies and lead eventually to a new round of over-borrowing.

    A variant of the argument goes further to assert that if debts were reduced through any form of relief or forgiveness, debtor countries would be less concerned with pursuing the objective of domestic stability and the promotion of growth. Some have also argued that the African debt crisis in particular cannot be divorced from recent developments in Africa with respect to governance issues, particularly corruption and lack of accountability and transparency, factors that have led to the mismanagement and derailment of progress in Africa.

    They could similarly undermine the expected benefits of debt cancellation for most ordinary Africans. Many potential benefits of debt reduction can be identified. Studies have shown that the debt to GNP ratio explains upwards of 40 per cent of capital flight. For Guyana, for example, debt forgiveness under HIPC, which is estimated to reduce indebtedness by 25 per cent, would reduce the proportion of Guyanese private wealth held abroad by Second, debt reduction will go a long way towards reducing the high degree of uncertainty for both domestic and foreign investors.

    Third, many of the policy makers will be released from protracted and uncertain debt negotiations. Fifth, the removal of the elements of uncertainty inherent in the huge debt will stimulate private investment.

    Sixth, as a result of the release of new resources there will be growth in the affected African countries, which will have spill-over effects that will benefit developed countries in terms of the demand for their goods and services. Moreover, as some analysts have pointed out, all the arguments against debt cancellation beg the issue.

    It is clear that substantial debt reduction must constitute a major element in any serious, internationally supported effort to restart African development. What is needed for the way forward is strong political will. The debate on the African debt problem has to be conducted within the context of African development. Thus, the impact of debt on the performance of African economies has to be linked to their capacity to alleviate, reduce or totally eliminate poverty.

    Supporting the review, creditors have called for a reconsideration of debt sustainability analysis as well as the impact of the Initiative on poverty reduction. They also acknowledge the political dimensions of the African debt problem and its impact on economic and social development. According to the IMF , the Boards discussed the link between debt relief and social development and concluded that this link should be viewed from the perspective of overall poverty alleviation.

    Although the HIPC framework has always emphasized the need to link debt reduction with effective long-term policies for economic and social development and poverty alleviation, its debt relief is primarily aimed at lowering external debt to sustainable levels with benefits accruing over time, and not in the short run. What is needed for a solution to the African debt crisis is political will on the part of creditors, as was called for at the Sixth Conference of African Ministers of Finance in It is encouraging to point out that a number of creditor governments, e.

    The proposals aim at enabling as many countries as possible to make the necessary adjustments and receive debt relief quickly and comprehensively. Included in the proposals are certain quid pro quo provisions on governance and other issues related to the use of resources released from cancelled debt obligations, as a response to the concerns raised against total debt cancellation. While the current HIPC framework is the point of departure for these proposals, they in a way represent a shift in the official position of the industrialized creditor countries, which hitherto rallied behind the existing mechanisms and terms of the HIPC Initiative, without entertaining pleas for their revision.

    The key elements of the German initiative are: shortening the "work out" period up to debt relief from six years to three years so that the countries qualifying for inclusion can benefit from debt cancellation as early as possible. The proposal stipulates that all countries entitled to participate in the debt relief process will be able to ascertain the extent and date of their debt relief by the year Tacked to the eligibility criteria is the clause that such countries should observe the principles of the welfare state a proviso targeted at poverty and inequality reduction and the rule of law.

    Applying multilaterally coordinated procedures, the initiative further proposes binding and complete cancellation of development assistance-related debts by the Paris Club for countries that qualify for HIPC treatment. However, it qualifies this with the provision that debtor countries use funds released by this action for projects that foster sustainable development and reduction of poverty and inequality, and that fulfill basic legal and economic principles of good governance.

    Recognizing that no improvement in the living standards of the poor can be sustained by any amount of debt relief in a situation of a poor political environment and conflict, the initiative stipulates that every debt relief initiative be embedded in a comprehensive strategy for conflict prevention. Unlike some other proposals, the German initiative does not call for a commitment now to sell additional stocks of IMF gold.

    It proposes a shorter "work out" period, the complete forgiveness of all bilateral concessional loans to the poorest countries and deeper and broader reduction of other bilateral debts raising the percentage from 80 to He also calls for a reduction in the length of the debt "work-out period" before countries qualify for debt relief, in line with the German and US proposals.

    The French and Canadian governments too have put forward a proposal for the Cologne Summit, essentially along similar principles. In sum, these proposals seem to resonate together, except on the matter of additional sale of IMF gold, where Germany would like to keep the matter open. These proposals could significantly reduce the waiting period before effective debt relief is granted. They could also result in significantly more countries becoming eligible for debt relief, in contrast with the current HIPC process.

    Drawing on established national insolvency procedures, UNCTAD has emphasized the need for "independent assessment" and "immediate write-off of all unpayable debt" as possible elements of a strategy for a lasting solution to the problem. UNCTAD, however, recognizes that there may be serious difficulties in applying the insolvency procedures to sovereign or private international debt through an international bankruptcy court. UNCTAD advocates an independent assessment of debt sustainability in the future, arguing that experience has demonstrated that the approaches to debt reduction have fallen short of addressing the problem.

    This has perpetuated aid dependency and undermined the application of "sound policies" and commitment to and ownership of reform programmes, among other problems UNCTAD, a, pp. For middle-income countries, mainly in North Africa, the standard Houston Terms of rescheduling official Paris Club debt at market rates apply. The arrangements also allow debt swaps and conversions.

    Commercial debt, which is relevant for middle-income countries, is restructured under the London Club and its Coordination Committee constituted of the main creditor banks. Since , restructuring for middle-income countries has been in the context of the Brady Plan, whereby commercial debt can be restructured in the form of debt conversion, using the reduction facilities offered by the secondary debt market through partial discounting. The facilities can be a vehicle for attracting additional investment towards priority sectors and for privatizing public assets.

    Creditors can choose between securitization with old-debt swaps against fresh guaranteed loans at discounted rates; debt repurchasing at substantial discounts; debt swaps against new par value securities at lower interest rates; or debt swaps against equity investment in private and privatized public companies. A number of middle-income African countries have benefited from debt and debt service reduction by the Paris Club and through the Brady Plan.

    Nevertheless, for most middle-income African countries, the reductions obtained on the debt stock and debt service are generally low. The impact of debt-service reduction on the balance of payments has been estimated at a maximum 5 per cent of exports.

    Moreover, the decline in external debt has usually been accompanied by a rise in domestic debt, negating most of the expected tax-reduction benefits. The question is whether the potential exists for Africa to take further advantage of debt conversion; i.

    2.2 SOCIAL DEVELOPMENT

    Comprehensive use of this option is constrained by the low ceiling of eligible non-ODA debt, weakness of the secondary market, the poor interest shown by creditors and the likelihood of the rise in domestic debt, which can unravel the macroeconomic framework under adjustment. The above initiatives present opportunities that Africa must be fully aware of and issues on which to speak with one voice before decisions are taken by creditors. This is even more critical in view of the fact that the impact of the HIPC Initiative has been insignificant, and not all middle-income African countries seem to have benefited from debt conversion and other debt-reduction instruments to reduce their debt to manageable levels.

    The critical importance of African countries speaking with one voice on these issues was recently emphasized by the President of Mozambique on 20 September , when he urged developing countries to fight together to seek not reduction but the total scrapping of the debt. Similarly, UNCTAD has emphasized that the "absence of a consistent debtors' strategy" for effectively dealing with the debt problem is a significant factor contributing to the slow progress towards a lasting solution.

    A follow-up strategy on this issue is an important expected outcome of the Joint Conference of African Ministers of Finance and those responsible for Social and Economic Planning. Asia has been the world's economic miracle for the last 30 years, experiencing dramatic economic growth and poverty reduction: stable growth in per capita income of 5 per cent and above with few downturns, and a fall in poverty from 64 per cent in to 11 per cent in Combined GDP growth in Korea, Indonesia, Malaysia, Thailand and Philippines declined from a pre-crisis level of 7 per cent to negative 7 per cent in , and unemployment has reached 18 million, up from 5.

    Africa has as much to learn from the development strategy that created the miracle as from the errors that undermined it. The East Asian crisis, which began in , had ripple effects throughout the world economy. It occurred despite a benign international economic environment, with low international interest rates and solid global growth of output and trade World Bank, a. As is usual with most financial sector crises, the East Asian crisis was generated by multiple factors, which were rooted mainly in private sector financial decisions against the backdrop of financial sector weaknesses, easy global liquidity, external sector and foreign currency problems and contagion from Thailand to other countries.

    Public sector borrowing was not a factor in generating the crisis Goldstein, A synopsis of what went wrong is essential for a discussion of issues and lessons of relevance to Africa. The growth of bank and non-bank credit to the private sector exceeded by a wide margin the already rapid growth of the real economy.

    The credit boom, which was fueled in part by large net private capital inflows, was directed to real estate and largely to other non-tradable and equities. This over-extension and concentration of credit in non-exportable goods and services sectors left the economies vulnerable to a shift in credit conditions or to a reversal of capital flows.

    When the shift came, it brought down property prices and increased the share of non-performing bank loans in bank asset portfolios. This was in addition to the fact that most of the affected countries already had run moderate-to-large current account deficits in the s. Thailand was hit first. Then the contagion of financial disturbance quickly engulfed the economies of South Korea, Indonesia, Malaysia and the Philippines. Africa is impacted by the East Asian crisis through the contagion effects, which are transmitted through three major channels: trade, financial flows and the international environment in which African countries operate.

    The Asian countries most directly affected account for a relatively modest share of global economic activity — 3.

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