Question

Do you believe developing countries should be given the capital and education to enable them to avoid financial distress over and over again?

Can you explain why countries are given the opportunity to have their loans forgiven? How does this action affect our global economy?

Answer 1

Solution

Inorder to progress at a faster pace the developing countries should be given the capital and education.Capital and education (which results in skilled labour) are the two most important factorsof production.Strenghthening/improving the production would improve the financial position of the country due to reduction in imports and /or increase in exports ultimately resulting in the country/economy becoming self-sufficient thus the probabilty for financial distress will not occur again in the future.

But the developed countries and other international donors should monitor whether their funds are utilized / have utility for the countries they are donating to.

Countries are given an opportunity to have their loans forgiven sometimes when they are unable to pay back due to multiple reasons like climatic disastors,political uncertainity,economic disaters etc.,

Example : When Greece was suffering with financial distress,the country was given bail-out package by the European Union.

This would have a negative impact on the economy as the countries which are lenders would loose out on the principle amount and also the interest payments on the lending amount.This situation can be imagined as a transfer of wealth from one people of lending country to the loan receiving country.If it happens on for a considerable time,then imbalances between the regions take place.

Forgiving loans can be done on case -on- case basis depending on the situation but not to be done frequently.If done frequently,the borrowing countries will be loosing the financial discipline i.e., loan forgiving will functiona as a morale hazard for the borrowing countries.Loans forgiving indirectly becomes "subsidizing ".

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