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Politics & Economics

DEBT RELIEF FOR DEVELOPING COUNTRIES AS DEVELOPMENT ASSISTANCE?

by Prof. Dr. Jörn Altmann

Debt relief for developing countries as development assistance? From 1979 to 1989, Jörn Altmann was Professor for International Business at the Bundesfachhochschule für öffentliche Verwaltung, Sigmaringen/Münster. He has won several rewards of important institutions. Since 1999, Jörn Altmann is Professor of International Business at the European School of Business (ESB), Reutlingen University and the Graduate Dean MBA Program.

Developing countries are chronically indebted – this is one constitutive criterion for defining a developing country. But also industrial countries are indebted so that further indicators are required in order to classify the international indebtedness as a specific attribute of developing countries. One such aspect is the endurability of the debt service, and the latter has for many countries run out of the rudder: the debt service – interest and repayment – cannot be financed. Debt service has to be paid in hard currency which would have to be earned by export earnings. Exports would, in addition, also have to finance the import needs of a country. But this is usually out of question in developing countries (DCs) so that the resulting gap in the balance of payments has to be financed by loans.

Debt Burden
The developing countries (DCs) have accumulated a total debt burden of some 2.83 trillion (German billions) USD (2005). The African states south of the Sahara carry a debt load of 200 billion USD which is roughly two-and-a-half-fold the export earnings of the entire continent. Mozambique would have to use it’s entire export earnings for twelve years in order to repay it’s debts. Therefore, (some) debt service can only be paid if fresh money is provided from abroad. Regular interest payment is crucial since otherwise – according to local law – commercial creditors have to write off their receivables, in many countries to zero. This would be a burden to their commercial balance sheet as the depreciation of receivables results in a reduction of profits and is counterbalanced only to the extent of the respective profit tax rate – the rest is loss. No commercial creditor will voluntarily accept that. And also loans from states or international institutions such as the IMF or the World Bank have to be served properly in order to preserve some credibility since otherwise it becomes very difficult to raise further loans internationally.

Appalling Consequences
The consequences are appalling. Indebted countries do not dispose of sufficient hard currency remaining for importing urgently needed goods such as medicine, food, or technology. And since the population is poor – which is a mayor cause of conflicts and violence – public funds resulting from tax payments are low so that the public services in health or education as well as the social and material infrastructure are insufficient. Consequently, also economic development is slow which results in low public funds. “Poor” means in a developing country something else than in an industrial country.