The consistent debt trap of developed countries

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Shalishali, Maurice K in the research Dynamics of National Debt Accumulation and Economic Performance writes in the Research Journal regarding the financial problems of those countries which are persistently facing massive budget and fiscal deficits due to their debts and debt arrears which they have to retire in less amount of time. The paper focuses on those under developed countries which are having consistent debt over hang and have not been able to get out of the debt trap by any means, this has led them face unemployment, bankruptcy, high inflation and other economic indicators showing extreme problems. It was also discussed that in such countries, there is always fiscal and budgetary deficits which is to be filled by more taxes to be raised on the citizens of that countries. On the other hand, due to larger debts, there are always decline in foreign direct investments leading to negativity in Gross Domestic Product of the country.

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Usman Ahmed in his research (Efficiency Dynamics and Financial Reforms Case Study of Pakistan, 2009) discusses about the performance of the commercial banks and their role in providing internal loans being another resort after the State Bank of Pakistan. The study also specifies about the financial sector reorganizations in the private banking sector since 1990s in order to create a feeling of competition amongst the handpicked financial institutions of Pakistan under the supervision of The State Bank of Pakistan. On the other hand, there were specific objectives to be achieved by the commercial banks, for example financial stability, reduction in interest rate spread, better enhancements in internal debt taken in expressions of its sustainability, cost incurred, and its better management in every approach. In the case of Pakistan, role of commercial banks is the most important one since the last decade. It was discussed that these were not only the source of providing the industrial borrowings to the people but provided loans to the government in the case of deficits and other problems on financial basis which are to be addressed on instant and direct basis. On the other hand, the researcher also discusses about the market information which the commercial banks of these days have in terms of the demand and supply of money also makes them an excellent contender for the government to rely on taking borrowings after the State Bank of Pakistan. On the other hand, it was also discussed that the reformed commercial bank status in the country has also provided much advantage to the government since there is an ongoing competition which always helped the government's borrowing to be raised as best negotiations . The researcher also explains about the reforms done which helped the management of internal debts raised. The efficiency of financial banks were also to be increased in the financial markets by strengthening the accountability apparatus with enhanced domestic resources to be provided at the door step instead of foreign which are to be used in the need of need, particularly financing the deficits and an efficient financial structure. Government privatized the commercial banks and also gave a free - hand to the private sector to jump in and contribute their investment for the up gradation and formation of commercial banks in Pakistan in order to achieve competition and struggle in the commercial banking arena to boost the economic growth, which is possible by effective and easy financing modes available to the government as well as every individual of the society.

John Irons and Josh Bivens in their research (Government Debt and Economic Growth Overreaching Claims of Debt "Threshold" Suffer from Theoretical and Empirical Flaws) discus in their EPI Briefing paper that there is much carefulness needed in the policy making structure to decide for the economy's prospect in terms of the debt that any government takes from the public and the levels of Gross Domestic Products that it has achieved taking the debt. The researchers acknowledge the efforts of Carmen Reinhart and Kenneth Rogoff who conducted extraordinary research for the sake of bringing together financial indicators for more than ten countries for more than ten decades and wrote a book "Growth in a Time of Debt". It was discussed that the said book the most appealing thing in the book was the explanation of the weak relationship where percentage of debt and economic growth at lower levels of debts raised. It was also mentioned that there exists a threshold point for any government which should be accounted for and that point should not be crossed by any means in terms of getting debt form the nation. Else, the growth in the Gross Domestic Product gets distorted and disfigured. It was discussed that the current situation of United States Economy is not providing an optimistic look, as it is perceived that the threshold point will be crossed by the economy by a probability of 90%. It was argued in the book that there should be drastic cuts in the federal expenditures so that there should be fewer deficits in the financial system, which will help in return in raising low levels of debt for deficit financing. Debt to Gross Domestic Product ratio should be maintained at lower levels since GDP growth should be on the high side with fewer debts to support it. It was additionally explained that any increase in the federal expenditure will increase the probability for the government to opt funds on loan basis from the private sector which includes the citizens as well as in some cases, the international investors. This rises the interest rates since the government begins competing with the private borrowers where supply for savings in fixed. This definitely creates the crowding - out effects for the private investors where overall situation of the economy will get more worse as there will be minimum investment injected into the economy.

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Dr. Mehmet Caner in his research article (Study finds national debt 'tipping point' that slows economic growth) talks about the economies which are not performing well due to taking huge amounts of debt to support government's functionalities. The researcher argues that if any country raises public funds, there is always a point till when every thing remains same. He further explains that if the economy is dependent on public debt in such a way that it gets 77% of the Gross Domestic Product, economic functionalities are greatly disturbed. He explains the phenomenon by 'a tipping point' for national debt which is not to be exceeded in any condition. The linear relationship in the economic growth starts to fall and Gross Domestic Product starts to get disappear in growth terms. He further explains the phenomenon by giving a clear example of an economy where the GDP is growing at a speed of 3% per annum and due to any un - foreseen events, it also has to increase the debt from eighty percent to ninety percent, the economic growth will face a slow - down to around 2.8 percent per year. This shows that 10% change in internal debt causes 0.2% change in the Gross Domestic Growth per year. He also explains that 77% is not a 'tipping - point' for every country, different circumstance of different countries leads to different tipping points, for example wealth of a country. If a country is full of resources, it might not need to raise funds on public level. As in the case of China, which is the most up-and-coming economy of today's world has a tipping - point of around sixty - four percent. On the other hand, a contemporary look on United States is also been given by the Researcher in the article and explained that United States has not yet reached to its tipping - point. It was concluded that during 1980 - 2008, debt taken by the US Government was 61% on an average per year. It was also explained that though United States is far behind the doorsill of 77%, which is a standardized benchmark, but it is an alarming situation and adequate measures are to be taken by the World Super power in order to handle many of the economic problems well in time. The results concluded, according to the researcher, will be cooperative many of the national and international economic authorities in making tong - term decision making fostering economic growth and well - being in the economic set - up of the country.

Brian W. Cashell in his CRS report for Congress, The Federal Government Debt- Its Size and Economic Significance discusses that in the United States there was surplus in the United States Economy between 1998 and 2001 but now there is a complete change in the picture. There are deficits in the United States economy for last three year which is speculated that will remain in the scene till 2014, for which there is an immediate need for the policy makers to take certain actions. It was discussed that when the US economy was in surplus, there should be policies to be enlarged to pay back the loans it has taken for wide - scale economic benefits, but there are growing risks associated to the size with the federal economic authorities have been facing in the shape of expanding scale of public debts it has been raising to finance many of the deficits. Short - term and long - term prospects of taking national debt by the US economy was discussed in detail, as in shorter perspective the public debt offers a growth element in the total output of the economic system. But in the long run, it is seen that interest rates get upward and creates public borrowing more difficult. In the long - term, it was seen that the relationship between economic stability and taking national debt is much complex as higher the debt taken by the government, higher is the chance for the government keeping a good Gross Domestic Product number.

Cristina Checherita and Philipp Rother in their research (The Impact of High and Growing Government Debt on Economic growth: An empirical investigation of the Euro area) investigate the impact of the debt taken by the government and Gross Domestic Product and the per capita growth the economy shows due the debt taken by the particular government. The researchers explain that there is fluctuating collision between the debt taken by the government to fulfill the fiscal loop holes and the Gross Domestic Product. The researcher argue that there is always a turning point in the government's Debt - to Gross Domestic Product ratio which explains a success rate of above 90% in terms of GDP growth but it was explained that, the moment the government crosses the limit, there are much financial problems present in the future which are to be dealt with great care. It was also found out by the detailed studies of the researchers that there are strong evidences available which proof that the rate at which annual debt taken by government changes and the budget deficit to Gross Domestic Ratio are related in a linear and pessimistic was related the economic growth of the country. Numerous channels were also discussed by the researcher in the research paper through which any government's debt is found having a direct relation on the rate at which economic growth and Gross Domestic Product changes, which are the savings on private bases, investment injected by the public into the economic structure, real interest rates and total factors of productivity present in the country. It was further elaborated that over the time, debt taken by the governments of most of the 53 countries noticeably rose which was due to the expansionary sizes of those government. Debt was a necessity of time for the government which was taken on domestic means. In most of the countries, thus, the average debt to Gross Domestic Product ratio was calculated to be 79% of the larger governments and around 63% of the medium sized governments. Where, 52% debt to Gross Domestic Ratio was associated to such countries which had smaller governments and low financial depth. It is further explained that the said ratio played an important role in determining the economic growth of the particular country, since higher the ratio explains an alarming situation and vice versa if the ratio is stagnant on the lower end. In the start of 20th century, Domestic debt was associated to be raised in cases of engaging wars only but the situation today is completely different from the past. Today the Governments have engaged its self getting loans from the capital financed by the general public to use, which definitely helps the people but as mentioned by the researcher, it helps until a turning point, when ever it is crossed; people have to pay back for lending their money in terms of unemployment, inflation, poverty and worst financial situations.

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Lawrence A. Hunter, Chief Economist at Empower America, and Steve Connover explained in their IPI Policy Report (Who's Afraid of the National Debt?) explains that National debt is a nightmare for every government of the world to lift as a source of financing. It was mentioned that there should be financial prudence involved in taking and using national debt as it offers salutation to many economic problems in the later stages. It was explained that careful borrowing to finance the deficits by public means cultivate long - term economic development and raises the living standards of the people than might to attained by induce debt and mounting up large private asset portfolios. It was also discussed that on long - term bases, the tax rates are to be kept on minimum levels and borrowings are to be taken on safe and productive giving fruitful economic results. The researcher explained about the practices done by United States in 80's where debt was taken to achieve economic revitalization when ever it was an unmanageable deficit. It was also discussed that, as a result of taking loans beyond the threshold point, there was a great 'stag-flation' in United States, in which accelerated joblessness was coupled with extreme inflationary effects, for which the country was not ready to absorb the shocks of. There were different economists coming up with diverse views and solutions to the problems, for example some of them suggested controlling the prices and wages, where some of them suggested printing more money and raising the taxes which should be levied onto the people. But, President Ronald Regan chose another option to revitalizing the economic soul by cutting taxes across the board, made adequate steps to promote sound money and gave relaxation on unnecessary set of laws. President Regan's set of economic rules worked positively and USA had a unwavering inflation with a boosting economic expansion in every terms. It was concluded that for better economic growth eliminate every chance to get trapped into austerity situations, it is suggested that the debt should be retired according to the set patterns which for every economy different, maintain a healthy and balance budget should be the leading focus and especial emphasis are to be given ensuring each and every step to be taken to stop the debt burden growth, which is easily explained by debt- to- Gross Domestic Product ratio and other vital economic indicators.

Emma Xiaoqin Fan in Pakistan's Public debt explains that public debt is a very important tool for the government for raising capital from the internal resources. These internal sources includes the central bank, which in Pakistan is The State Bank of Pakistan. On the other hand the capital can also be generated from domestic commercial

Banks and domestic non-bank sectors. Debt from external means comes into the segregation of External debt. It was a great point of interest that Government utilizes many of such internal options in an overlapping manner. The researcher explains that each source has a different problem and risk associated to it causing many further economical implications. It is obvious that taking money directly from the State Bank of Pakistan means that it will be printing more money. Thus, velocity of money gets higher which will definitely increase the inflationary problems. Now, if the government can also go to other commercial banks in Pakistan which causes less inflation effects but leaves nothing to the private investors and thus crowds them out. It is a matter of fact that government borrowing from the non-bank local sectors has no potential effect the on the supply side. But the other side of the picture shows that there can be an upward force on the demand side due to the debt taken by people. It is obvious that a country's steps taken for managing the debt are the most important one to see whether the source from which the capital has been raised is beneficial enough and in the country's long term benefit or not. The debt management strategy does not focus on the one side of the game of acquiring cheap debts but also has to take care of effective and efficient use of the borrowed funds. Particular focus should be there to look for the debt servicing capacity and to effectively retire the part of loan well in time for a flawless system. As far as Pakistan's example is taken, Pakistan is facing severe financial problems. The total public debt is 90% of the Gross Domestic Product and 600% of the total annual revenues. The debt servicing is half of the current revenues which create further problems. Dealing with the problem, the economic growth should be fast, fiscal loop holes should be maintained on a minimum level, exports should be increased and foreign direct investment should be welcomed for improving debt management.

Discussed by Nadeem Qureshi, it was said that huge borrowings are playing a very negative role in the economy of Pakistan. It is much negative rather being positive and Pakistan is drowning in a trap of debt. Debt deficit has created huge deficits in budgets which further creates the room for taking more debt to retire the previous one. Future outlook is also very risky as much amount would be on the hands of the future generations to be paid back. Thus, the expenditure on social aspects today is far less than what it should be and the situation will be getting worse in the future where population is also increasing. On the whole, budget deficits are financed by:

a) By printing money

b) Borrowing from abroad

c) Borrowing domestically and

d) Running down foreign exchange reserves

The outstanding debt burden on the economy of Pakistan stood at Rs 4156 billion at the end of the 2004-2005, equivalent to more than 65 percent of the GDP, with Rs 2158 billion as domestic debt and Rs.1998.8 billion as external debt. The domestic debt to GDP ratio increased very fast throughout the decade of the 80s, especially in 1980-87 and later in 2000-05. This shows up some achievement in debt management in recent years but it is still a big burden on our economy. Due to the high debt burden, Pakistan's ability to retire the debt has significantly reduced. In 1998, Pakistan paid 11.7% of the total GDP in servicing the debt it has taken at different times. It was a matter of luck that due to the incident of 9/11 and strategic alliance with the USA, many of the debt programs were restructured and it gave a room to improvement to retire the domestic debt in an efficient way. Now a day, Pakistan is in a big debt burden. The internal debt is decreasing the marginal propensity to save (MPS) as well as marginal propensity to consume (MPC) as the private investor does get crowded out in terms of no funds available in the commercial banks if Government makes them as a source of internal debt. If Government takes loan from The State Bank of Pakistan, it increases inflation and the private investor again faces a lot of problems increasing unemployment and inflation.