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4.7 Foreign Debt and 4.8 Balancing markets and Intervention (importance of…
4.7 Foreign Debt and 4.8 Balancing markets and Intervention
causes of the first debt crisis
recession in USA: world DD for pri X of LEDCs
decrease, lowering prices and hence export earnings
high US i/r: appreciate USD and increase real debt value
world i/r increases: COB increase
PPC not enhanced as funds by LEDCs used wastefully
costs of high indebtedness
no healthcare and education e.g.
sub-s africa
low business confidence
cannot undertake projects
forex used to service debt: can't increase PPC
Heavily Indebted Countries Initiative (HIPC)
contribute to EG and poverty reduction
debt sustainability
basis of debt relief
2010: 36 heavily indebted countries have benefitted: value of their debt to their X declined from 457% to 78%
importance of market and prices
incentive for innovation and R&D
profit oriented - efficient use of resources
create incentives
competition - lower prices and better quality
provide signals for resource allocation
importance of market state
education and health: +ve externalities
market cannot guarantee an equitable Y distribution
institutional environment
necessary for markets to operate
state protect property rights and laws
protection of environment
infrastucture
stable macroeconomic environment
private sector
rectify market failures
set framework for economic activity
provide necessary vigour