Unit 1
Unit 2
Development Economies
Heavily Indebted Poor Countries
Inequality will always exist, and each country will have their own way of responding to the problem. For many countries, the best option that they have available is to try and borrow money so that they can buy the essential goods and services that they need. In some cases, they might also choose to use debt to fund infrastructure projects. This raises an obvious question: Which organisation will lend money to a country that is suffering from extreme poverty?
In 1996, the World Bank and the International Monetary Fund combined to establish the Heavily Indebted Poor Countries (HIPC) program. This program maintains a very simple aim; if a country is assessed as being unable to meet its existing debt repayments, then the World Bank and the IMF can intervene to help this country to overcome its financial difficulties. In the long run, it is hoped that these countries will progress towards a situation in which they are able to financially sustain themselves. To be classified as an HIPC, a country must find itself in a situation where the ratio of its total debt to the total value of its exports is greater than 150%, or the ratio of total debt to total government revenue is greater than 250%.
Based on this measure, the IMF was able to identify 42 countries that were likely to be classified as HIPCs. The majority of these countries (32) are in sub-Saharan Africa. For example, Ethiopia, Mali and Ghana have all qualified for assistance.
When a country is classified as an HIPC, the relevant institutions will step in to offer financial assistance. This assistance could take a number of forms. For example, it might be possible that some level of debt relief is able to be negotiated. If this is not possible, then either the IMF or the World Bank might be able to offer an interest free loan, which can then be used to pay down some of the other external debt that the country has. For some countries the interest alone can consume over 40% of their annual budget, and so access to borrowed money without interest can free up valuable funds for other projects (such as schools, hospitals and roads).
To gain access to these solutions, a country must agree to a series of economic reforms. The exact specifications required will vary based on the country and its existing situation. By early 2010, 29 countries had qualified for significant assistance as part of the HIPC program. In total, this assistance was worth US$62 billion. For example, after the Group of Eight (G8) conference in Gleneagles (Scotland) in 2005, the IMF negotiated US$3.3 billion in debt relief for 19 of the world’s poorest countries. Among them, Benin, Bolivia, Cambodia and Zambia had significant debts cancelled. The impact of these changes has been dramatic. World Bank statistics suggest that in total 4% of GDP was being spent on debt servicing in the world’s poorest countries prior to 1999. Since that time, the figure has fallen to 2%. At the same time, the percentage of the government budget that is spent on policies to reduce poverty has increased from 7% to 9%. This is strong evidence to suggest that the program as being implemented is generating significant gains for some of the world’s poorest people.
However, the program is certainly not without its critics. Between 1996 and 1999, only four countries qualified for support through this program. Non-government organisations argued that the guidelines were too strict, and that while the leaders were working out ways to meet the criteria people were dying. (Since that time the criteria have been relaxed, and the timelines have been made more fluid.) Many people were also highly critical of the economic conditions that were placed on the countries in order to access the program.
For example, a common requirement was that some government run organisations would need to be privatised. Some people believe that this will lead to greater levels of efficiency, while others argue that prices will increase to the point that “normal people” living in the country can no longer afford the service that is being provided. The critics have argued that in order for this condition to be successful, a county must already have an established system of infrastructure, a sound legal environment, and good governance. As these are the very things that the HIPC program is often trying to address, the critics have argued that the solution can’t possibly work.
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