GCSE Geography | Reducing the Development Gap: Borrowing and Debt Relief (Development Gap 15)

There are a number of strategies that can be used to reduce the development gap. One such strategy is borrowing and debt relief...

In the 1970s many LICs borrowed large sums of money to invest in industry and infrastructure to help them develop following independence. These loans came from other countries (often through commercial banks), or organisations like the International Monetary Fund (IMF) and World Bank.

Loans have to be repaid with interest over a number of years - which is fine as long at the money is invested wisely so it generates enough money to repay the debt and help the economy develop. An example of this is Laos who borrowed $1 billion from the World Bank to construct a hydroelectric dam on the Nam River. Laos has electricity to help develop industry and also makes $2 billion a year by selling electricity to neighbouring Thailand - so Laos' GNI has increased significantly in the country and the loan has been paid back with ease.

Debt crisis

However, there are times when borrowing large sums of money can damage LICs. In the 1980s interest rates rose sharply so the debts of many LICs spiralled out of control, resulting in a debt crisis. For example, Zambia borrowed money to develop its copper industry (such as the Kansanshi copper mine processing plant pictured below), but then prices for copper crashed and interest rates shot up, leaving Zambia with a debt of nearly $7 million at the end of the 1980s. There were also instances where corrupt leaders actually used the loans to fund their own lavish lifestyles, rather than invest into things that would help the country.

The debt crisis meant that LICs were spending a huge proportion of their GDP on repaying their debts, therefore had little money to fund essential services such as healthcare, education, or to invest in important utilities like water supply, sanitation and electricity.

Debt relief

During the 1990s many people in the UK (and other HICs) started to voice their anger over the debt crisis, and protested against the major banks who were making billions of pounds of profit each year but were still forcing LICs to repay their loans, along with the issue amount of interest that had built up, which was stopping them from fighting poverty. Throughout the decade there were calls to cancel the debts of the world's poorest countries.

In 2005 the G8 (Group of Eight) met to discuss the issue of global debt. The G8 consists of leaders from Canada, France, Germany, Italy, Japan, Russia, the UK and the USA. They voted to cancel many of the debts, providing the LICs proved 3 things:

• that were not corrupt
• that they could manage their finances effectively, i.e. they couldn't get into debt again and expect to have their debts written off in the future
• that they would spend the money they were saving by not having to repay their loans on things that would help to reduce poverty, such as education and healthcare

By 2015 the IMF had cancelled the debts of 36 countries who met the conditions - providing debt relief of $75 million. Meaning that these countries can spend money on providing free universal education, providing access to safe water and sanitation and providing more clinics and vaccination programmes, therefore increasing the quality of life for their people. However, some of the countries still owe money to other organisations, and some have borrowed money since.

'Debt for nature' swaps

'Debt for nature' swaps are a debt reduction initiative which sees HICs writing off the debt of developing nations, to enable them to invest in conservation projects within their own countries. These agreements are important for all parties involved - it means that the developing nations can protect valuable wildlife habitats, and they help the HIC government governments meet their own targets for supporting conservation and tackling climate change.

For example, the USA agreed to allow Brazil to convert the $17.5 million it owed in debt repayments, into a fund to protect large areas of the Amazon rainforest, and agreed to write-off Indonesia's $30 million debt to enable the money to be spent protecting the Sumatran forests which are home to endangered tigers (pictured below) and rhinos. Western governments also agreed to reduce what Costa Rica owed them in debt repayments, as long as they spent $25 million on conservations projects.

Microfinance loans

In contrast to large-scale borrowing are microfinance loans. Microfinance banks, such as the Grameen Bank in Bangladesh, have been set up to loan small amounts of money to people so that they can improve their lives. The borrowers are often people who don’t have access to traditional banks - and over 90% of those who borrow money are women. These microfinance loans are used to start or improve small businesses, for example, small-scale textile production - you can see this in the image below where the lady has used her loan to buy a sewing machine to make garments to sell.

Microfinance loans can also be used by farmers to buy better seeds and fertilisers to improve crop yields, providing them with a surplus that they can sell at the market, and helping them to move away from subsistence farming where they are just growing enough for themselves, to growing enough to provide them with an income.

Those who take out microfinance loans are able to become self-sufficient - they pay back the loan with a small amount of interest and can use the profits they make to improve their homes, send their children to school and pay for healthcare, helping to close the development gap.