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Is Debt Cancellation the Answer to World Poverty?

The bulk of the $1.21 trillion dollars that developing countries owed the rich countries by 1987 was largely accumulated unfairly through lopsided financial agreements. There are four major ways that have contributed directly to the significant debt that developing countries have accumulated over the years: high interest rates, tied aid, corruption, and historical debt. Until recently most loans that were given to developing countries usually attracted high interest rates that resulted in the principal sum more than doubling in just a few years. Besides this, the fact that development aid continues to be tied and has been so for many years means that developing countries are being shortchanged in the process and instead amounting to a more financial burden.

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The other two reasons are due to government mismanagement of funds and at other times outright embezzlement of financial assistance, lastly many developing countries after colonization inherited debts that were passed over from previous regimes or were required to pay for their freedom so to speak, as is the case for Haiti. This is the reason why developing countries continue to be weighted by the financial burden that is not in their own making or in that case which they hardly ever benefited from.

However, these are hardly the only ways of how the developing countries were oppressed and made to accumulate the current monumental financial burden that is now approximately $2 trillion. The Jubilee Debt Campaign, an organization that spearheads a campaign for debt cancellation of developing countries has listed other numerous unorthodox methods that donor countries applied that have contributed to the current debt levels.

Some of these methods were downright illegal, while others actually made donor countries complicit in some of human rights injustices that their financial assistance was funding with their full knowledge, such was the case in South Africa which accumulated more than $20 billion during the apartheid era. In Zaire, it is the same case where donors continued to provide more funds well aware that Mobutu was embezzling most of the funds and financing a superfluous lifestyle.

If these are not good enough reasons why debt cancellation should be done away with, then a look at the havoc that this debt continues to cause to the developing countries should be sufficient to warrant cancellation. Weighed by massive debts that are beyond the GDP level, most of the developing countries in their desperation to sustain debt servicing have drastically cut back on financing crucial programs that have directly compromised their economic growth and at times even caused death.

For instance, most African governments cannot afford to meet the full budget of healthcare and usually rely on aid in form of drugs in a sector that is very critical to population survival. On average over the years per capita, food production has gradually been falling attributed to a lack of adequate funds that are necessary to stimulate and sustain the agriculture sector.

The result is a never-ending circle very similar to the drug trade, orchestrated by donor countries with multilateral and bilateral as the pushers where the developing countries are hooked at both ends. On one end where they cannot live without the development aid and another where they are compelled to continue debt servicing so that they remain eligible for the development aid, which is the fix.

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It was not until the start of the millennium that donor countries finally bowed to the pressure of debt cancellation in what they have always known would significantly stimulate economic activity but which they have always been reluctant to concur.

In 2008 at the G8 Summit of the most developed countries, two-thirds of all debt owed by developing countries was canceled; a total of the first 18 countries that qualified got a significant debt relief. During the earlier 2004 G7 summit, the developed countries have taken the initial steps of debt cancellation by initiating a moratorium on debt servicing for several of the third world countries. There is no doubt that debt cancellation is one of the most single effective approaches to poverty eradication, perhaps more effective than development aid. In the aftermath of the G8 debt cancellation initiatives, numerous studies have attributed economic stimulation and poverty eradication in third-world countries to this financial relief.

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