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Sample Essay on Causes of Public Debt in Developing Countries

Sample Essay on Causes of Public Debt in Developing Countries

Public debts are one of the main problems that many countries are facing globally. In fact, national debts have become a common problem for developing countries. Debts have become a new sequence of slavery for many African countries and other underdeveloped nations around the globe. Public debt is all about the money owed by a central government. Many nations borrow money with intention of improving the economy by providing employment, creating opportunities for making revenue, or building better infrastructures to improve living standards.

Public debt can be grouped into internal debt- one owned by leaders within the country and external debt –owed by foreign leaders. In many developing countries, governments usually borrow issuing securities and government bonds. Others borrow directly from multilateral companies like the World Bank and the IMF. Public debts usually make it easy for the government to invest in the most substantial areas of the nation’s economy where the capacity of tax revenue to embark on these projects may be restricted to situations where printing extra money will disrupt the stability of the country’s economy.

There are many historical perspectives on the causes of public debts in developing countries. In the 1970s and 1980s, most of the developing countries were faced with negative growth rates, food shortages, record levels of unemployment, hyperinflation, and weak health and social welfare systems. It was not that easy to overcome these challenges and the governments had to come up with great ways to solve the crisis. For instance, the affected nations undertook expansionary fiscal policies which were mirrored in the growing public spending.

Unfortunately, with revenues not meeting the desired expectations, these increased expenditures pushed the government to borrow funds to be able to undertake these expansionary policies. These were tough times for many of these developing nations as they were borrowing money anyhow. The debt-to-GDP ratio broadened resulting in fiscal imbalances due to the collapse of the prices of goods and services. These also resulted in the shortfall in donor budgetary support affecting even how these governments are run. A number of reasons could be said as the cutting-edge causes of the ever-increasing public debt. This includes;

  • Tilting- this is a situation that makes it easy for the equitable manner in which a country can exploit investment opportunities within a speculated duration. This could be equitable to tax current generations to pay for investment that will benefit the future generations in the growing global environment. Tax revenue will go to finance government spending.
  • Poor political budget cycles- Any stage of election in a country affects fiscal policy. During election periods many governments tend to spend more than invest. Many politicians will follow expansionary fiscal policies as voters do not comprehend the effects of such undertakings.
  • Smoothing- The rise and decline of taxes may result in efficiency losses and it generates economic insecurity. Instead of the government reducing taxes, it opts to borrow from external sources to boost economic activity so as to avoid efficiency losses and economic instabilities.
  • Stability- Whenever there is an increase in printing of more money without growth in productivity, hyperinflation may occur and affect foreign investment.

Public debts can aid developing countries. They enable governments to facilitate growth take-offs simply investing in vast infrastructural projects and social segments if the economy where taxation amount may be limited. Moreover, there will be excessive printing of money and compromise macroeconomic stability. Nevertheless, these countries need to reduce dependence on short-term borrowing from domestic markets and go for issuance of long-term bonds and borrowing that comes with a prolonged repayment period.

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 Online sources:

http://www.modernghana.com/news/466065/1/public-debt-as-an-alternative-to-taxationcauses-an.html

http://internationaldebtcrisis.wikispaces.com/African+Debt+Crisis

http://en.wikipedia.org/wiki/Debt_of_developing_countries