Global Debt & Deficit Policies
Economics: Edexcel A A Level, topic 9.1.1
Financial IGOs - SAPs and HIPC
Since the 1970s, tougher rules and strict conditions have been applied for large-scale lending, especially for developing countries. These have included the SAP and HIPC schemes:
SAPs
- SAP stands for Structural Adjustment Programmes. They are usually made up of loans from the IMF and World Bank.
- SAPs have made countries that receive lending follow specific routes to development, such as privatisation.
- Africa Action, an NGO, is critical of SAPs, claiming that the assumption that the market leads to benefits for the rich and poor is flawed.
- Ghana launched its structural adjustment plan in 1983. The IMF and World Bank say it is one of the most successful SAPs in Africa.
HIPC schemes
- HIPC stands for Heavily Indebted Poor Countries. There are 37 nations in this group, including Ghana, Ethiopia, Afghanistan and Senegal.
- HIPC schemes aim to make sure that no country faces an unmanageable debt burden (amount of debt).
- Under HIPC schemes, countries must reduce poverty over time and meet other criteria. If they meet all of these criteria, then they may have all their external debt cancelled.
- Chad achieved this in 2015.
- Some people argue that SAPs and HIPCs mean the sovereignty of these nations is questionable - are they perhaps neo-colonial?
Examples of Fiscal Deficit Reduction Policies - Greece
Following its entry into the EU, Greece had to reduce its fiscal deficit. It did so in the following ways:
Eurozone Crisis
- Greece joined the Euro and instead of borrowing money at 4.5%, the Greek government could now borrow at 3%.
- Greece’s budget deficit rose from 4.1% of GDP in 2000 to 10.2% in 2008.
- Train drivers working in a nationalised Greek rail industry were being paid over $50,000 in many cases.
- Greece was forced to reduce its fiscal deficit by EU authorities.
Deficit reduction policy - Tax avoidance/evasion
- Estimates suggest that Greece’s black market economy was worth 25% of GDP.
- Only 200 Greeks earned over €500,000 according to tax records.
- Individuals were prosecuted for tax evasion.
- Efforts were made to reduce corruption and bribery.
Reduce government spending
- A program to reduce government spending by €41bn was introduced.
- Government employee salaries were cut by 7%.
Increase tax revenues
- VAT rose from 4.5% to 21% over a period of many years.
- The indirect tax on petrol rose to 15%.
- Taxes on imported cars rose from 10% up to 30% in some cases.
Test yourself on Global Debt & Deficit Policies
How many Heavily Indebted Poor Countries are there?
Which nation does the IMF promote as its most successful SAP in Africa?
What does the World Bank's SAP stand for?
Which of these nations are classified as Heavily Indebted Poor Countries?
Once Greece joined the Euro, at what rate could the Greek government borrow?