“The IMF and World Bank hurt poor countries and undermine de

I will in this paper, present some arguments for and against the IMF and the World Bank possible undermining of democracy in Less Developed Countries, it is perhaps a common belief that poor countries suffer with economic policies from both institutions and the economic global order, nevertheless, one could argue that domestic political instability and policy making, can be also destructive. I will therefore try to provide points of view and answer the question, and in the process present some relevant arguments to sustain my opinion.

The debt crisis is the problem that heavily indebted countries have in servicing their debts

Debt service is the payment of amortisation

[liquidation of the principal] and accumulated interest; it is a contractually fixed charge in domestic real income and savings. (Todaro 2000, p.550)

Table1. Average Terms of New Credits to Low Income Africa. (all creditors)

It is important to consider that there are a significant number of people who believe that despite the problems associated with excessive debts, debtor countries have the obligation to fulfill the contractual agreements to which they committed themselves to when they took out loans. Their argument is that, vast quantities of official loans that were provided in very favorable terms to these heavily indebted countries were misused by corrupt governments who engaged themselves in capital flight, weapons buying and bad projects that failed to generate the required amount of profits necessary to service their loans. Given that, it is the view of many that it is unfair and unreasonable to expect taxpayers from the rich creditor countries to pay financially for the mistakes of policy makers from the debtor countries, particularly as many of these mistakes were made intentionally as it allowed these in positions of power to amass considerable personal fortunes. Evidence of this can be found in the case of the Democratic Republic of Congo under President Mobutu, who while he was in power gave foreign companies access to Zaire’s vast natural wealth which includes an estimated quarter of the world’s copper and half its cobalt and in exchange for his cooperation, Mobutu received support from major Western governments and investors including half of all US aid to black Africa in the late 1970’s. The former President, rather than investing the funds in productive projects, used his position of power to obtain a staggering personal fortune that was estimated to have reached some $4 billion by the mid 1980’s with which he bought luxurious states in Europe and enjoyed Concord shopping trips to Paris (Roodman, 2001, p.2). Had the Democratic Republic of Congo borrowed the money from the World Bank or the IMF, perhaps, due to their restrictions and conditions, the country would not be in the situation that it is at present. One could argue that such institutions do not undermine democracy; instead, they prevent or try to prevent economic discrepancies and mismanagements. The facts above help us to understand the reasons why there is significant opposition to debt relief from some sectors. This feeling is made stronger by the knowledge that there is evidence which confirms that, when governments act in a responsible manner and with the best interest of the their countries in mind it is possible to use loans to their best advantage so that they help a country achieve its development objectives and South Korea, provides a good example of this. In 1982, South Korea had the third largest amount of debt amongst all the LDC’s yet, despite its heavy borrowing, it managed to increase its world export market share from 0.1 per cent in the mid 1990’s to an impressive 1.6 per cent in 1982 (Nunnemkamp 1986, p.73). The reason for their success can be attributed to the fact that, policy makers were quick to realize that in order to avoid debt servicing and repayment difficulties in the future it was vital that the country raised its export volumes and so they pursued a policy of Export Orientated Industrialisation (EOI). EOI involved the rapid development of domestic industries that would be able to sell high quality products at competitive prices in the international market. The success of this strategy depended on the hands on approach taken by the South Korean government who had

Some topics in this essay:
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