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A Critical Examination of the View That the Debt Crisis Is a Result of Inappropriate Development Policies

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Critically examine the view that the debt crisis is a result of inappropriate development policies. (40 marks)
In 2008, the total external debt for the world’s developing countries was US$3.7 trillion, and US$163 billion for the worlds least developed countries For the developing world as a whole, in 1991, the total external debt was $1.362 trillion, which was 126.5%of its total exports of goods and services in that year, and the ratio of debt servicing to the gross domestic product of the developing world reached 32.4%. For some LEDCs, debt stood at 98% (Congo) and 112% (Nicaragua) of their GDP in 1980. Consequently, we have the situation whereby the last ten years African countries have paid their debt three time over, yet are three times as indebted as 10 years ago. This phenomenon is the result of international debt growing enormously since the 1970s, which became apparent in 1982 when Mexico announced it could not repay its foreign debt. Other, especially Latin American economies, also faced crises in the 1980s and 1990s, when they simply could not service their debt repayments: they defaulted. Mexico was first in 1982, Argentina in 1999-2002. Many other LEDCs continue to exist in a state of massive indebtedness, which persists until the present day. Inappropriate development policies, that is, the ineffective economic policies of many LEDC governments, did cause the debt crisis and indebtedness, but this is an incomplete explanation. Debt and debt crisis were also caused by factors beyond the control of the governments of the debtor countries. As William R. Cline of the Institute for International Economics has pointed out, the issue is a complex one: ‘The external debt crisis that emerged in many developing countries in 1982 can be traced to higher oil prices in 1973-74 and 1979-80, high interest rates in 1980-82, declining export prices and…...

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