In this video you’ll learn about the impact of external debt to an economy.
Also, you’ll get an overview of the role of the IMF
and World Bank and start to see how they impact global trade and development.
A country’s external debt is the debt it owes to foreign lenders.
The more a country owes to others, the more it has to repay in debt servicing.
Debt servicing is the process of paying back a debt
over a period of time and includes both principal and interest payments on loans.
A government has to carefully consider the opportunity cost of its borrowing and spending.
LEDCs, or less economically developed countries, can rack up significant debts
from external sources, such as governments or multilateral institutions. As a country finds it
increasingly more difficult to repay their debts – they are faced with difficult choices to make.
They may have to choose between cutting government spending on healthcare,
education or infrastructure in order to service the debt. Alternatively,
they could default on their debts – but this decision will have a harmful effect
on future borrowing and also strain relations between the lending and borrowing countries.
This leads us into an overview of the role of the IMF and the World Bank.
The IMF and the World Bank were created in 1944 at Bretton Woods in response to the
devastation of World War II with the aim of improving long-term development and to
strengthen economic order and international cooperation. Today, both organizations aim
to improve the standard of living of their member countries. Let’s take a look at how they do this.
The following explanation of the IMF’s role is taken from the article, the IMF at a glance
available on the IMF website as referenced below the image and in the video notes.
The International Monetary Fund, or IMF, promotes international financial stability
and monetary cooperation. It also facilitates international trade,
promotes employment and sustainable economic growth, and helps to reduce
global poverty. The IMF is governed by and accountable to its 190 member countries.*
Also referenced from the same source, the primary aims of the IMF are to:
Promote international monetary cooperation Facilitate the expansion and balanced
growth of international trade Promote exchange stability
Assist in the establishment of a multilateral system of payments
and Make resources available (with adequate safeguards)
to members experiencing balance-of-payments difficulties.
Next we’ll simplify what the IMF does by focusing on 3 different areas of focus.
The three key focus areas of the IMF include:
First, Surveillance by monitoring member country policies and seeking out
potential risks and suggesting policy adjustments.
Second, Offering financial assistance to countries experiencing balance of payments problems.
Third, Capacity development through technical assistance and training to aid member countries
develop their economic institutions and improve human capital. This could involve fiscal,
monetary or exchange rate policies, regulation, legal frameworks and data collection and analysis.
It is also important to note that loans from the IMF are not without conditions. Governments must
meet the requirements of the IMF, which could include structural or economic policy changes.
Now, let’s take a look at the World Bank.
The Word Bank’s mission is to accomplish two things:
1.To end extreme poverty by reducing the share of the global population
that lives in extreme poverty to 3 percent. 2.To promote shared prosperity
by increasing the incomes of the poorest 40 percent of people in every country.
The World Bank aims to accomplish these goals through long-term lending
and technical assistance to lower and middle-income countries to assist in
their long-term economic development. The focus of the support is generally on health, education,
access to clean water and electricity and environmental protection.
The World Bank provides this support and assistance through its 5 organizations:
The International Bank for Reconstruction and Development (IBRD) – which lends to governments
of low-income and middle-income countries The International Development
Association (IDA) – provides interest-free loans and grants to governments of the poorest countries
The International Finance Corporation (IFC) – focuses on the private sector by financing
investment, mobilizing capital in international financial markets and providing advisory
services to businesses and governments The Multilateral Investment Guarantee
Agency (MIG) – offers political risk insurance to investors and lenders to developing countries
And The International Centre for Settlement and Investment Disputes (ICSID) – which provides
international facilities for conciliation and arbitration of investment disputes.
By now you should have a better understanding of the role of external debt on an economy as well
as a general idea of the roles of the IMF an the World Bank. If you have any questions or comments,
leave them below. That’s us done for now and I will see you in the next one!