Debt Relief in Tanzania
a) The economic concept of opportunity cost in Tanzania is relevant because it essentially underlines what is being lost because the country is servicing its debts.
Opportunity cost is an economic concept that states that for every resource (except free goods) that is allocated there is an opportunity cost, or in non-economic terms, something, somewhere or somebody loses out because the resources were not allocated elsewhere. The opportunity cost of a country consuming consumer goods is often investment in capital goods. In Tanzania’s case, as an economically developing country, the opportunity cost is evidently basic investment in social infrastructure. Education, Health Care, Infrastructure and other such vital things receive very little money because the money that would have been spent on them has to be spent on servicing foreign debt.
b) Countries such as Tanzania have serious debt problems because of their attempts to develop economically. In order to gain a better quality of life, western technology is imported. Capital, Labour and Entrepreneurship are imported from the west to improve healthcare, education, infrastructure, and to develop foreign subsidiaries of western companies. This costs money, which countries such as Tanzania have very little of. Thus, they need to borrow money from Western Governments.
The initial infrastructure and level of production is often low in such societies. There is often a long time lag between the initial rush for development and the break-even point, where the government can begin to pay off the debt that it has run up. To turn a country around without having the economy of the country being foreign owned is difficult, and in some cases preferable to allowing western corporations to enter and take-over the entire private economy. Thus, governments prefer to use public / private capital rather than allow the actual corporations to create their subsidiaries.
The rate of interest on debts is often high because of the risk associated with countries such as Tanzania, which are politically unstable. In order to compensate for the possibility of a Mugabe / Nasser type dictator seizing foreign assets, or an Islamic anti-Western government threatening the interests of the western / government corporation, higher interest rates must be charged. This effectively culminates in a vicious cycle. Because debts are so high, there is little money to be spent on developmental infrastructure, so that debts continue to grow, and more interest needs to be paid.
Many developing countries have tended either to follow a path of Import Substitution industrialisation or the creation of an outward-looking economy so that foreign capital could be earned and spent. Because the former has sometimes collapsed through a lack of resources or expertise, and the latter has suffered from inelastic demand curves and sudden shifts in demand and supply with changing harvests and commodity price movements, countries have often been forced to borrow to adjust to another strategy.
c) Arguments for the cancellation of debt hinge on the notion that HIPC’s should be given a chance to develop. Backers of such a case see HIPC’s as being essentially constrained by debt, not by a historical inability to develop by an innate sociological aversion to such a process. If the HIPC’s were able to be forgiven their debt, then this, they say, would enable them to invest in social infrastructure and develop their society, economy and health-care systems so that they could begin to export and produce. This may not be the only factor prohibiting development, but it may, they say, aid the struggle out of dire poverty. Morally, they argue there is also a necessity, in that we have a duty, as fellow human beings, to help those that are suffering and in need.
Additionally, some countries have become so indebted that collapse is liable to occur and no debt servicing will be paid at all if some of the debt is not cancelled. If developed countries wish to extract the maximum amount possible from developing countries then they are rationally motivated to reduce some of their debt in the short run to increase the capability of the country to pay off debt in the long run.
Arguments against the cancellation of debt focus on the notion that cancelling debt would send the wrong signal to HIPC’s. Many African countries such as Tanzania have been given ample opportunity to develop. In 1960, Zaire and South Korea were in roughly the same situation. Both had economic support and backing, from Belgium and America respectively. However, in contrast to South Korea, Zaire has actually gone backwards in terms of per capita GDP. If debt were to be cancelled, then this would not lead to development. It would merely lead to more money being given back to the developing countries, who would borrow even more, safe in the knowledge that they can borrow as much as they like, without the need to repay it, and without the need to restructure the economy, society or government so that the money was used effectively. Not only would debt cancellation threaten the fundamental basis of loans, but it would also threaten the fabric of the international banking system, as many banks have large liabilities abroad.