6EC04: Debt cancellation and Trade liberalisation model essay

June 2012 2b Introduction Debt cancellation in this case is the removal of part or all the Debt plus interest owed by a developing country (NIC or LEDC like Jamaica or Liberia) for a World Bank (IMF). Economic development can be measured by the HDI taking into account average incomes, health and education. Trade liberalisation includes the removal of protectionist measures opening up countries to free trade, global markets and competition. Trade liberalisation has come about through membership of the WTO – China joined 2001, Russia 2012 to ensure multi-lateral free trade. http://www.wto.org/english/thewto_e/whatis_e/who_we_are_e.htm First point Debt relief is a key policy, even when looking at developing nations. For every $1 of aid given to LEDC or NIC nations, $13 is spent on debt repayments. Therefore it is clear that before these nations can develop sustainably, their debts must be written off completely. Their attempts to repay the debts, even when it is usually just the interest being paid off, are taking much needed funding out of their economies and putting it back into MEDC nations. By cancelling nations’ debts, funds would be freed up allowing them to invest in their education or healthcare systems and to ensure the removal of absolute poverty. However, it is possible that debt relief can have some negative impacts. The HIPC initiative run by the IMF required Jamaica to cut spending on healthcare and education in order to qualify for debt relief by showing fiscal discipline and preventing the need for future loans as well as, making the country more attractive for Investment. What is needed is no-strings-attached debt cancellation. Alternatively the depreciating US Dollar might mean that the IMF debt which is priced in US dollars become less burdensome for LEDC countries to service - so the world economy may become less polarised as the poorer countries are given a better chance to grow and develop. However other factors may be more significant for in influencing growth and development, for example the level of corruption or political instability in Uganda. http://www.youtube.com/watch?v=JnNvNa7tXV0 http://www.youtube.com/watch?v=5WRdcpDNsdU

Three points selected from the following and evaluated:

Case for trade liberalisation:

• LEDCs have access to markets in developed countries: increased

exports and higher GDP, the proceeds of which may be used for

health, education, improved access to clean water

·         Increased competition might promote increase efficiency in LEDCs

• Incentive for multinationals to establish production plants in the

country so contributing to industrialisation

• Consumers benefit from lower prices and more choice

• More efficient use of resources – based on law of comparative

advantage leading to increased growth

• Enables LEDCS to become less dependent on aid

• Use of tariff diagram to illustrate impact of cut in tariffs e.g. on consumer surplus, producer surplus, welfare gains

However:

• Domestic firms in LEDCs may be unable to compete with TNCs

from developed economies

• Infant industries may be unable to survive

• Monopsony power of TNCs might result in exploitation of

resources of LEDcs

• Environmental arguments against free trade

• Problems of overspecialisation

• Dumping by developed countries

Other evaluative comments:

• It could be argued that without individual freedom, democracy

and the rule of law, economic development is not possible

• Difficulty of defining economic development precisely