Examine the Role Played by Debt in Maintaining a Global Development Gap.

Topics: International Monetary Fund, World Bank, Poverty Pages: 2 (591 words) Published: February 4, 2013
A ‘debt trap’ arises when a country borrows money and struggles to meet debt repayments as interest rates have increased. The lending of money to less developed nations often results in these countries owing debt, creating a debt trap and leading to a cycle of poverty.

In the 1970s, OPEC members banked their earnings in Western banks, money became available to lend to developing countries for projects – often to finance conflict and to keep regimes in power. Idi Amin came to power in Uganda in 1971 with a militant regime, which was confronted by civil war, providing the need for weapons. The wealthy Asian community was expelled, meaning a loss of assets, which led to the collapse of government tax revenue. Therefore, large-scale borrowing was required to maintain government spending and finance weapons. The situation persisted until Amin was overthrown in 1979, meaning an 8-year cycle of borrowing took place. Due to the doubling of global interest rates in the 1980s, the country got into debt and was unable to meet its repayment. This unpaid interest was added to the original loan amount and by 1992, the country had $1.9 million worth of debt.

Uganda has been ridden with debt for decades and suffers a significant lack of development, illustrating the link between these factors. The land is fertile with good resources and a population of about half the UK’s within the same land area; yet Uganda’s HDI rating is 0.505 in comparison to the UK’s 0.946. Furthermore, Uganda’s GDP per capita (PPP$) in 2005 was $1454 – just 4.4% of the UK’s $33,238. Debt evidently affects a country’s development and plays a significant role in maintaining a global development gap.

The effect that a debt burden has on a country’s level of development is considerable. To prevent a collapse of the world’s banking system, the International Monetary Fund constructed Structural Adjustment Packages (SAPs). They re-scheduled loans to make them more affordable, but this was in return for...
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