The Consequences of Traditional Lending: Some Reasons for the Failure of Global Development Efforts
Severe poverty continues to be endemic to many developing nations despite numerous efforts at its eradication. The current economic practice of offering large-scale loans to nations dealing with poverty perpetuates rather than mitigates economic inequality. The administration of such ineffective or detrimental “aid” is often external to the location of the problem and is globally instead of locally controlled. Because this control is exercised by nations that do not experience such problems and often, nations that potentially stand to benefit from acting as lenders, the root causes of and local issues surrounding severe poverty are not effectively addressed. Since offering loans to nations struggling with poverty fails to be a sustainable solution to poverty, its widespread use must be called into question.
Internationally organized loans such as those provided by individual nations, the International Bank for Reconstruction and Development (World Bank), and the International Monetary Fund (IMF) are commonly marketed as effective strategies for reducing poverty in developing nations. These loans are large-scale loans given by such organizations to the governments of developing nations. Theoretically, they are intended to mitigate poverty by providing governments with the capital to foster national economic growth, in the hope that this will “trickle down” to those experiencing poverty. However, very little money loaned to developing nations actually benefits those in severe poverty. Large portions of the funding officially reported as loan money is actually spent on costs for implementing programs in recipient nations. In addition, those funds that are actually spent in recipient nations usually go to projects such as building infrastructure that rarely benefits those who are truly poor. Between 1977 and 2003, Bangladesh received $30 billion in aid, but only 25% of this was spent in Bangladesh itself (Yunus, 145-146). That so little funding reaches borrowing nations themselves indicates serious structural flaws in this economic practice.
The tremendous scale of these loans themselves also creates a positive feedback cycle wherein nations borrow more money to pay off the original loans. This spiraling indebtedness leaves little to no ability for debtor nations to invest in national programs that would benefit the citizens for whom the loan was originally intended. Additionally, frequent debt crises resulting from the practice of large scale lending has led to the necessity of restructuring loans, consuming monetary resources and energy that could have been put towards sustainable development (Ocampo, 117-119). Fluctuations in amounts of aid given to developing nations also cause periodic economic crises and instability. Thus, poverty in debtor nations is actually exacerbated by this practice, as such circular debt structures burden all citizens with the resulting economic depression and instability (Ocampo, 10-11,19).
Additionally, the lending organizations tend to place severe restrictions on the economic activity of borrowing nations, including restricting social programs. For the most part, lenders to developing nations are strongly capitalistic and attempt to promote free market economies through their international policies. Economic problems are seen as stemming from improper economic structure within a country. Therefore, lenders often place restrictions on nations benefitting from loan money that include privatization of national industries and most strikingly, limits on social programs such as pensions. In nations that already struggle with large sectors of impoverished, underprivileged citizens, strict restrictions on spending that could directly benefit these groups of individuals seems to directly contradict with the claimed purpose of these loans. Not only does limiting this type of aid limit the access of the poor to necessary services, it also limits opportunities for economic advancement, because those who are severely impoverished generally have few means with which to enter an economy that is rapidly growing in its upper sectors (Vreeland, 23-25). In the case of the IMF, this practice is known as conditionality, and claims to help nations stabilize their economies through sound policy. However, these conditions tend to restructure economies so that the burden of debt payment shifts away from the richest members of society. By restricting the use of borrowed monies to only select economic sectors, very little loan money reaches the people for whom poverty is a daily reality. With IMF conditionality, this has been shown to actually be detrimental to national economies in addition to failing to help impoverished members of borrower nations (Vreeland, 2-3).
The practice of international lending also suffers from the fatal flaw of attempting global solutions for largely national and regional issues. Most lenders and aid donors to developing nations are based in locations far removed from the poverty they seek to mitigate. In the case of global lending organizations such as development banks, they are rarely (if ever) located in developing nations. For example, the World Bank and the IMF are both headquartered in Washington, D.C. Thus, they have less sensitivity to the effects of their actions on regional and national circumstances (Yunus, 147). Despite the existence of chains of command, citizens of receiving nations have little to no effect on policies set by these organizations (Vreeland, 38), leading to very little accountability. Both global organizations and lending nations also stand to benefit from offering such loans due to the profit received from the interest on these loans. Therefore, they have tremendous incentive to offer large-scale loans, with very little incentive to act in the best interest of the citizens of borrowing nations.
In addition, because most members of aid-providing institutions do not live in the areas receiving the aid, their perceptions of the results of aid are reduced to numerical measurements that may not accurately reflect actual conditions. Economic progress in debtor nations is generally measured by indicators such as the increase in the Gross National Product , which indicates very little about the actual standard of living of individual citizens (Yunus, 146). Instead of a hierarchical model of institutions and other nations effectively mandating policy and aid methods in other nations as well as how they measure the progress of their programs, global anti-poverty efforts should have a much more egalitarian structure. The input of developing nations should be given considerable weight in aid type, allocation, and the determination of effectiveness of programs. Nationalities and localities should have the greatest amount of control over the allocation of funding, provided that the funding does go to programs that effectively combat poverty. Through such a structure, the problem of nations abandoning possibly beneficial social programs in favor of receiving more aid could be mitigated.
Underlying all of these issues is a refusal to focus on sustainability in seeking solutions to chronic problems. In many situations, the solution applied is not chosen for its ability to actually cure the problem nor for its long-term advantages. Rather, “solutions” seem to be derived from an overwhelming desire for expediency and by the desire of those driving the decision making process to experience a short term gain. In establishing this system of international indebtedness and lending in the years shortly after World War II (Vreeland, opening page), the political victors who now dominate the process (such as the United States) saw not simply an opportunity to encourage development in a capitalistic model, but an opportunity for their own economic benefit in functioning as lenders. Instead of choosing this expedient but temporary method of mitigating poverty a more careful, cautious process, had been employed, sustainable methods of combating poverty, or at least less detrimental ones, could have been arrived at.
Thus, large scale loans from externally focused and located sources offer few workable solutions for poverty and often exacerbate the problem, due to their limited exposure to the actual effects of their actions and their self-interest in offering such loans. Hence, what was meant to be a solution to a problem has become, instead, a significant cause of that problem due to carelessness in the original planning of its structure and implementation. In the future, much more carefully guided and monitored solutions must be sought so as to eliminate this particular cause of poverty if there is to be a chance of mitigating it and its effects.
Ocampo, José Antonio et. al., ed. International Finance and Development. Zed Books Ltd., London: 2007.
Vreeland, James Raymond. The International Monetary Fund: Politics of Conditional Lending. Global Institutions Ser. Ed. Weiss, Thomas G., Wilkinson, Rorden. Routledge, New York: 2007.
Yunus, Muhammad. Banker to the Poor: Micro-Lending and the Battle Against World Poverty. Public Affairs: New York: 2003.