Less Developed Economies and Foreign Debt

Readers Question Least developed countries are not benefited by the foreign loan. however, the amount of best stock is increasing in these countries. What would be the measures to control foreign debt? and why such countries are not benefited from foreign debt?

Foreign loans could be beneficial if targeted at useful infrastructure improvements. However, often foreign loans are misspent, they may be siphoned off due to corruption. Also another problem with foreign capital flows is that they tend to be highly cyclical so that they come in boom times but leave in downturns. This exacerbates the problem of boom and bust economic cycles.

Foreign debt can be debilitating for an economy Because, high % of income goes on servicing the debt. e.g in 2002, 75% of Moldavian income went on servicing debt.

Dealing With Foreign Debt

Debt cancellation. There is much pressure being put on developed countries to write off third world debt. Many countries have, in principle, signed up to this. However, there is concern that debt relief is leading to lower levels of Aid.

Reform of Tax Collecting

Many developing countries suffer from an inability to collect taxes, especially off the wealthy. Raising tax rates and also enforcing taxes would help to boost their income to pay off debt.