The Role of International Debt in Globalization
Discussions around international debt and its contribution to global inequality is wide. Friedman & Friedman (2008) explain that globalization has pros and cons highlighted in social contradictions that exist within its functions. International debt is at the heart of globalization as national governments or international institutions exchange money given as loans for public interests. The bilateral and multilateral relations lead to debts as governments borrow money from external sources for development, or commerce. However, in most cases, the amount borrowed does not show positive social change (Friedman & Friedman, 2008). Sometimes the debt becomes unsustainable and unmanageable for generations after. Debts have direct and indirect consequences on a nation at large. Though meant for good, a number of researchers’ identify economic gaps created by deficits in economies whose debt is high. Although countries accrue debt for economic activities, its liabilities such as the increased interests and outstanding amounts become high reshaping the civilization process (Woodman, 2011). Often, debt challenges political freedom, social benefits, economic and social rights (Jones, 2013).
Debt has a negative effect on economic out (Tsounta, et al., 2015). The national debt affects the public as much as private credit affects social security. Some of the elements to watch out for include the GDP ratio, export factors, increased poverty, fiscal revenue and structural limitations. Foreign debt affects income share levels, increases poverty rates and impedes trade. These depend on the type of debt for long term and short term borrowings. There are many factors influencing the debt gap. Among them is the loss of money through wastage of debt finances. This is common in developing nations where corruption is high (Kim, et al., 2017) . The justice movement believes that debt causes economic anarchy because of increased inequalities.
Third world nations have massive unpaid debts because the interest debt is too high. This affects the country’s GDP, which is the country’s market value of goods and services. It leads to changes in income shares. A low GDP implies that the people’s living standards are also low. High debts reduce the aggregate demands and macroeconomic factors (Checherita-Westphal & Rother, 2012). This reduces their buying power and hence the monetary value of goods and services.
Hawkins (2014) points at globalization and the social aspects to highlight the impact of structures on the contemporary society. He discuses migration and the impact of resettlments on indigeneous groups. A government, which borrows money from the IMF in order to develop its agricultural industry, may fail to implement strategies to pay back the money efficiently. This affects poor people who depend on agriculture for sustenance (Laurance, et al., 2014). It is important to consider the rate of GDP output from the sector of investment. It is futile to use a loan in a sector whose GDP output is low unless there are proven strategies in place. When people in a country are unable to purchase things, it means their economic activities is low. Countries that lend remain at an advantage because they can afford the cost of supplies. Poor investment options lead to poor borrowing choices such as using the money for current expenses.
The Negative Consequences of International Debt on Developing Nations
Exports are investment causes inequality when multinational corporation’s sets up industries in areas where labour is cheap yet fail to improve the living standards of the locals. India and China are examples of places where the government has had to make reforms in order to ensure that its population if free from cheap labor exploitation (Zhong, 2011). Foreign trade investment leads to inequality when it affects income and production factors. An export led economy inequalities because the export rich regions emerge as better off. This characterizes the domestic income distribution with uneven benefits of foreign direct investment. As a result, social revolts and resistance become common (Hawkins, 2014, p. 220). Rural areas, which may not become host to such benefits, continue to wallow in poverty and income distress. The government needs the wisdom to distribute resources from FDI effectively and efficiently. Higher investments should focus on creating a balance in order to prevent wage or income inequality (Van Reenen, 2011). Unfair debt terms affect national trading abilities through extensive obligations. The investment of multinational corporations in indebted nations comes with unfair exchanges of skills and technology benefits. This is cause for fair debt recovery approaches for long-term debt deals.
International monetary standards are not equal. The International Monetary Fund points out that constant reform are necessary for reviewing policies for equal distribution of funds (IMF, 2014). The report acknowledges that income distribution is one of the causes of inequalities in wealth and income levels. It recommends reforms in tax policies and balanced redistribution. Lender countries have an edge because of their currency power. Fiscal policies coupled with inflation creates deeper economic drifts and debt accumulation makes it worse (Gough, 2011). A country’s economy becomes highly volatile when the debt is high. This has a negative effect on the banking system because of the inflation effects. Countries with high public debts have to face high taxes, which cause disparities. In cases where the debt promotes the rich, it leaves a heavy burden on the poor who have to pay for it over years. This high cost of debt comes with heavy interest rates that may lead to financial crisis in the networked global economy (Eriksen, 2007)
The World Income Database (WID, 2017) shows huge differences in GDP, adult national incmes, general national wealth and wealth income ratio. National debt trickles down to these elements to reveal income inequalities across all levels of income earners. In an effort to make things better, some nations in Africa have turned to new donor countries like China and other emerging nations because these have better fiscal policies (Kavalaski, 2015).
Factors Contributing to the Debt Gap
Eriksen ( 2007, p. 74) highlights the importance of money in global business interaction or communication. However, the increasing debt size across the globe raises concerns over the value of borrowing money. Research indicates that debt needs to complement economic growth and not destroy it. The accumulation of massive debts by governments is among the leading cause of financial crisis. As a result, it is important to revisit the issue of debt with its impact on borrower nations. Evidence of poor debt management from Greece shows how money meant for development ends up in the wrong hands (Tsoulalas, 2015). In fact, research confirms that most corrupt countries have the highest public debts because the debt factor fuels corruption (Maciag, 2017). A country needs to reevaluate its debt policy by considering the costs verses the benefits. The first step towards understanding the inequalities caused by debts is to analyze its effects. The international community has put in place measures to help third world countries in Africa with debt management. Among the suggested measures are structural adjustment and debt cancellation. However, these have come out as tools of manipulation by the lenders (Tarrow, 2011).
Structural adjustment calls for the introduction of public debt management institutions for transparency and accountability. These also facilitate for risk management and policy oversight to ensure that the debt use is effective. These changes address borrowing trends in order to ensure that the process adopts proper management plans (Bloom, et al., 2012). Emerging nations like China have a proven record of effective debt management practices that include risk management systems. However, social scientists point out that structural adjustment policies have worsened the poverty levels because they encourage over dependency on foreign aid (Fan, et al., 2012). Debt cancellation comes with psychological obligations that the indebted may find hard to bear.
Economists agree that income inequalities in the global system worsen because of debt and financial crisis (The New York Times, 2012). National debt affects the poor while the rich become wealthier. In most cases, developing nations are the ones, which seek monetary assistance. Unfortunately, corruption, and mismanagement eats up most of the money leaving the poor nations in high debt. The politics behind debt shows a contrast of the development agenda (Fridell, 2013). Although developed countries have prescribed certain solutions for debt management, inequality persists. Researchers continue to question the benefits of debt when the international fiscal policies do not change. Often, global donors come from countries with strong currencies, which acts in their favor. The payment of debt comes with high interests that continue to eat up the wealth of developing nations. It is evident that these nations continue to depend on donor funding for survival (Essl, et al., 2011). As a result, there is no level playing field for economic development. In order to understand the impact of debt on national economies, it is necessary to understand the economic disadvantages of the borrowing nation. This shows immense disparities that monetary funding cannot solve. It is also notable that donor nations give suggestions for reforms only for these to become control sticks for the poor nations to play to the tune of the rich economies.
The Impact on National Trading Abilities and Income Distribution
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