Developing countries with extremely large debts have found it easier to obtain debt relief from the IMF (International Monetary Fund) and the World Bank than countries with smaller debts. This is due, in part, to an established theoretical economic model which advises against debt relief in the case of smaller debts. A new economics thesis from the University of Gothenburg, Sweden, shows that, contrary to long-held assumptions, debt relief also leads to higher levels of own investment in the case of smaller debts. The same thesis also shows how diversification can help poor smallholders in Zambia.
It has long been agreed that debt relief is a more productive solution when a country’s debt is so large that the country is unlikely to be able to repay it. It has also been recognized that if a country’s debt is smaller it is best not to grant debt relief since the country burdened by the debt will then have less incentive to improve its own economy. This approach is based partly on a theoretical model established by the American researchers Jeffery Sachs and Max Corden. New Swedish research indicates that the mechanism actually works in the opposite way.
The time perspective is crucial
In his thesis, Sven Tengstam, a researcher in economics at the School of Business, Economics and Law at the University of Gothenburg, has further developed Jeffery Sachs and Max Corden’s model and found that the results differ if development is viewed over a longer period of time.
“The earlier analysis took an extremely short-term view”, says Sven Tengstam. “It only focused on what happens precisely at the time the debt relief is granted. Our study shows that, in the longer term, debt relief will lead to an increase in own investment. The investment is made at a later stage, but the total volume of own investment increases. Also, retaining the debt will mean that a country will remain poor for some time, making it less able to improve its own economy.”
Sven Tengstam is careful to point out that, in general, countries’ debts should of course be repaid, though he also states that the application of the earlier model has prevented even appropriate debt relief from being granted.
Factors that may help reduce poverty in Zambia
The thesis also includes an article on the fight against poverty in Zambia. The countryside in Sub-Sahara is the poorest region on earth. Interviews with 5,000 smallholder households in Zambia presents evidence that it is beneficial for smallholders to have more than one source of income. He has also researched the factors affecting a household’s sources of income: Education opens up opportunities for non-agricultural wage work and own-business and agricultural wage work is used partly as an emergency solution when yields from a smallholder’s own land are insufficient.
“Secure access to land and clear right of ownership are important factors in reducing poverty”, says Sven Tengstam. “It should also be made easier for the more peripheral regions to integrate into the Zambian economy, which will then require investment in infrastructure. It is also important to ensure access to loans.”