INTERNATIONAL DEBT AND DEPENDENCY - INTERNATIONAL DEBT AND...

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INTERNATIONAL DEBT AND DEPENDENCYIntroductionDebt is an amount of money borrowed by one party from another. Debt is used by manycorporations and individuals as a method of making large purchases that they could not affordunder normal circumstances. A debt arrangement gives the borrowing party permission to borrowmoney under the condition that it is to be paid back at a later date, usually with interest.Dependency is thestateofbeingdependent where a country depends on one another for a debt,markets among other things. The notion of dependence has negative connotations. It may conjureup images of countries using aid to live beyond their means, and so “depending” on aid tosupport their standard of living. In such cases the policy reaction to aid dependency would be toreduce aid (Wynne, 1951). After nearly three decades of more or less sustained growth, real aidhas started to fall. In an era of tightening budgets, critics are keen to highlight the perceivedfailure of aid. Faced with increasing demands for emergency assistance and new forms ofcooperation for peace-keeping and security, supporters of aid are hard-pressed to mount aconvincing defense of conventional forms of aid. Part of aid’s claimed failure goes under thename of “aid dependence” which many see as a situation in which a country sucks in more andmore aid but with increasingly little to show for it (Wood, 1961).Background of DebtEvolution and History of DebtsAfter World War IIWorld War II was financed through debt and higher taxes, by the end of the war, U.S. gross debtwas over 120% of GDP and tax revenue increased more than three times to over 20% of GDP.Although GDP growth skyrocketed to over 17% in 1942, both consumption and investmentexperienced a substantial contraction. One of the key causes was government control of rawresources and materials (Suter, 1992). Trend lines taken from before the war and dating from1933 onwards clearly indicate that for investment, consumption, and GDP growth there was noincrease in the trend lines after the war had finished. While unemployment was virtuallyeliminated, recovery was well underway prior to the war, and the key counterfactual is whethersimilar spending on public works would have generated even more growth. The stock market
initially dropped and once victory was foreseeable then rose to be higher than at the start of thewar.Development of Debt for the Period Of 1970s OnwardsThe onset of debt problems in the 1980s was similar to those of previous epochs. Growing tradeand increasingly available private funding from flush banks encouraged countries to borrow. Animportant departure from earlier times, however, was the development of new financial marketsand mechanisms, which accelerated the lending drive. These mechanisms included theEurocurrency market and the advent of loan syndication. During the 1960s, most lending to thedeveloping countries came from public institutions such as the World Bank and the Inter-

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Term
Fall
Professor
Andrea DeBois
Tags
Psychology, Debt, International Monetary Fund, United States public debt

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