If the UK and USA are in deficit then why are people calling for them to let African Countries off their debts

Question

I'm quite ignorant about this subject, I admit. I've even taken economics class, and have trouble grasping it; so please can someone explain it in simple terms? thank you.

Thank you. I'm still a little confused, because I don't get who the money is actually owed to. Do they owe it to a certain bank, or a very rich individual, or a few very rich billionaires? Who are they paying? Who do the UK and USA owe, and pay? Will this really help the very poor in Africa, or will it benefit the people who have been or are leaders, in power, the rich people; and allow or encourage more corruption by the leaders, rich, powerful there?

Answer 1

First of all Current Account Deficits are not the same thing as loans to a country's government. They have more to do with levels of international trade and (particularily) investment. Essentially, more money is leaving the USA than is coming in in the form of investment. Also, more US assets are held by overseas owners. Even if the US and UK were in debt to the same degree and in the same way-their economic propects are better.

Many of the debts in Sub Saharan African countries are from large organisations like the World Bank and soem by other governments. Often when you hear of this or that aid package going to a poor country a large portion of it is actually some form of a loan.

Many of these loans originated in the 1970s when interest rates world wide were massively higher than today, as somebody here already pointed out. So the payments are going to be massive by today's rates especially as many countries are more impoverished now than they were then. Interest rates would have been pushed even higher by the riskiness of lending to a poorer country.

Unfortunatley the ruling elites in many countries have managed to squander the money they got either through corruption or through wars. I know for example that a massive portion of the aid that Ethiopia got was thrown into the war with Erithrea with the result that when displaced people began to starve in the 1980s there was no means at the state's disposal to avert famine. I should point out that many conflicts in Africa were if not actually started the definatley encouraged by the opposing sides in the Cold War.

While there are of course compassionate reasons why people want debts to be abolished including that relief from them would allow the economies of the countries involved to flourish. I have to wonder what would be the point as long as corrupt and wasteful systems are still in place. It would be throwing good money after bad and countries can come dependent on richer countries to bail them out. I suspect that a lot of the wristband wearing, abolish debt brigade are endulging in middle class guilt (which is an opinion that has earned me no friends!).

Anyway this is just my layman's (with a couple of economics courses behind me) opinion. But I think it's broadly in line with current thinking. I hope it helps.

Answer 2

It is not about economics it is about compassion.

Between 1970 and 2002 Africa received $540 billion in loans. Despite the fact that over that same period, African countries paid back $550 billion at the end of 2002 they still owed another $293 billion because of accumulated interest.

Africa is desperately poor, 70% of the population lives on less than $2 a day, and they need money for development and especially public health, because of AIDS, malaria, and other tropical deceases. The US GDP is 12 trillion, and the debt cancellation would be borne by all the developed nations, so our share would be less that 1%, of our income for one year.

I think the debts owed to the World Bank, The IMF and the African Development Bank

Answer 3

In simple terms, it boils down to the ability to pay and who the money is owed to and the best use of the money that would go to service the debts of the African countries.

Simply, many poor countries spent most of their money paying the interest on loans. They do not have the money to pay back the loan back and pay for improving services or the infrastructure in the country. They have to borrow more to make up the shortfall.

So many people argue that we should just stop the cycle of debt. That the countries in question should just use the money for improving the basic services of the country.

Note that this excludes any reference to who the money is owed to(for the most part - ourselves from tied aid, low cost loans to purchase specific products from specific countries etc..) and what it was spent on (corruption, poor service or infrastructure decisions)

If you go to a site like www.one.org you can get a pretty good idea about the problems of the African countries.

Answer 4

This goes back to prior experiences with Central America in the 1970s. Many banks gave huge loans to countries because they thought it would be impossible for an entire country to default on a loan. This must be happening again with these African countries and people don't want the economies of these countries to destroy themselves