External debt refers to the amount of money a country owes to other countries or external banking organizations. International Financial Institutions (IFIs) specialize in loans to developing nations to improve infrastructure and economic activities. For external debt to be sustainable, a country must have a high enough GDP to pay off and eventually repay the debt. Countries that cannot pay their external debt often have extension and forgiveness options. The danger in high external debt is that the lending nation may choose to call off all debt as a means of asserting economic control.
External debt, also known as foreign debt, is a term used to classify the amount of money a country owes to other countries or external banking organizations such as the World Bank. There are many reasons why a country may choose to borrow externally, including infrastructure development or economic stimulation. As of 2009, the estimated external debt for all countries in the world has risen to approximately $56.9 trillion (USD).
The idea of external debt is hardly new; since the advent of civilization it has not been unusual to borrow money or resources from friendly territories. Wars have been waged, cities have been built and natural disasters have been overcome thanks to the concept of foreign debt. The United States has used the external borrowing policy since its inception; the revolutionary war was largely financed by loans from nations friendly to the colonial cause.
The near-global use of foreign borrowing has led to the creation of International Financial Institutions or IFIs. These are essentially banks subject to international law and run by officials from member nations. Many of the best-known IFIs were established after World War II, when economic relief was needed to bundle up the many bleeding and damaged countries left in the wake of the global war.
Since then, many IFIs specialize in loans to developing or Third World nations that will help improve both infrastructure and economic activities in the hope of benefiting the global economy. Some detractors of the IFIs suggest that these institutions are riddled with corruption and potential danger, arguing that international law is a fragile and extremely vague set of guidelines created by unelected officials. Many disagree with the idea that a democratic country with a clear set of laws could be subject to international laws that its citizens have neither voted nor elected officials to adhere to.
One term that often comes up when considering external debt is sustainability. For external debt to be sustainable, a country must have a high enough gross domestic product (GDP) to pay off and eventually repay the debt while continuing its economic function. Thus, a country with a high GDP or large employed population may be able to shoulder much more debt than a small or poor country. In the United States, for example, 2009 debt was about $13.5 trillion, but it accounted for only 98% of GDP. Zimbabwe, on the other hand, has a much lower debt of just over $5.8 billion USD, but this amount amounts to 282.6% of GDP.
Since it is generally in the global economy’s interest to keep each other afloat, countries that cannot pay their external debt often have a variety of extension and forgiveness options. Some richer countries will offer debt relief in exchange for trade deals or in exchange for money allocated to improvement programs, such as women’s education. The danger in high external debt is extreme: if one country owes another a large majority of the debt, the lending nation may choose to call off all debt as a means of asserting economic control, forever altering ownership of a nation indebted to its creditors.
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