International Debt and Inequality: A Detailed Analysis Report

This report delves into the intricate relationship between international debt and global inequality, examining the perspectives of various researchers and economists. It highlights how international debt, often intended for development, can exacerbate economic gaps, increase poverty, and challen...Read More

Brave New World 1
Brave New World
Negotiation Social Change
(Question 3: International Debt and Inequality)

brave new world 2
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.

brave new world 3
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
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

brave new world 4
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

brave new world 5
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).
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

brave new world 6
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.
Bibliography

brave new world 7
Bloom, N., Genakos, C., Sadun, R. & Van Reenen, J., 2012. Management practices across firms
and countries. The Academy of Management Perspectives, 26(1), pp. 12-33.
Checherita-Westphal, C. & Rother, P., 2012. The impact of high governement debt on economic
growth and its channels: An empirrical investigation for the euro areaa. European
Economic Review, 56(7), pp. 1392-1405.
Eriksen, T. H., 2007. Globalization: The Key Concepts, New York. s.l.:Bloomsbury.
Essl, F. et al., 2011. Socioeconomic legacy yields an invasion debt. Proceedings of the National
Academy of Sciences , 108(1), pp. 203-207.
Fan, J., Titman, S. & Twite, G., 2012. An international comparison of capital structure and debt
maturity choices. Journal of Financial and quantitative Analysis, 47(1), pp. 23-56.
Fridell, G., 2013. Introduction-Politicising Debt and Development: Activitist voices on social
justice in the new millennium. Third World Quarterly, 34(8), pp. 1492-1496.
Friedman, K. J. & Friedman, J., 2008. Modernities, Class, and the Contradictions of
Globalization. s.l.:AltraMita Press.
Gough, I., 2011. From financial crisis to fiscal crisis. Social policy i challenging times.
Economic crisis and welfare systems, s.l.: The Policy Press Bristol.
Hawkins, M., 2014. Global structures, local cultures. Second ed. South Melbourne: Oxford
University Press.
IMF, 2014. Fiscal policy and income inequaity. [Online]
Available at: https://www.imf.org/external/np/pp/eng/2014/012314.pdf
[Accessed 8 September 2017].
Jones, T., 2013. Global injustices and global alternatives. Third World Quarterly, 34(8), pp.
1497-1498.

brave new world 8
Kavalaski, E., 2015. Encounter with world affairs: an introduction to international relations.
s.l.:Ashgate Publishing.
Kim, S., Ha, Y. & Kim, E., 2017. Public Debt, Corruption and Sustainable Economic Growth.
Sustainability.
Laurance, W., Sayer, J. & Cassman, K. G., 2014. Agricultural expansion and its impacts on
tropical nature. Trends in ecology & evolution, 29(2), pp. 107-116.
Maciag, M., 2017. Study: More corrupt states have higher debt. [Online]
Available at: http://www.governing.com/topics/finance/gov-public-corruption-higher-
debt-research.html
[Accessed 8 September 2017].
Tarrow, S. G., 2011. Power in movemenet: Social movements and contentious politics.
s.l.:Cambridge University Press.
The New York Times, 2012. Inequality, Debt and the Financial Crisis. New York Times, 3 May.
Tsoulalas, J., 2015. Why debt sustains corruption in Greece and vice versa. [Online]
Available at: http://voxeu.org/article/why-debt-sustains-corruption-greece-and-vice-versa
[Accessed 8 September 2017].
Tsounta, E. et al., 2015. Causes and Consequences of income inequality. [Online]
Available at: https://www.imf.org/external/pubs/ft/sdn/2015/sdn1513.pdf
[Accessed 8 September 2017].
Van Reenen, J., 2011. Wage inequality, technology and trade: 21st century evidence. Labour
Economics, 18(6), pp. 730-41.
Woodman, S., 2011. World of debt: David Graeber with Spencer Woodman. s.l.:s.n.

brave new world 9
World Wealth & Income Database, 2017. Top 1% national income share. [Online]
Available at: http://wid.world/world/#sptinc_p99p100_z/US;FR;DE;CN;ZA;GB/last/eu/
k/p/yearly/s/false/4.8255/30/curve/false
[Accessed 8 September 2017].
Zhong, H., 2011. The impact of population aging on income inequality in deeloping countries:
Evidence from rural China. China Economic Review, 22(1), pp. 98-107.