A ‘debt trap’ arises when a country borrows money and struggles to meet debt repayments as interest rates have increased. The lending of money to less developed nations often results in these countries owing debt, creating a debt trap and leading to a cycle of poverty.
In the 1970s, OPEC members banked their earnings in Western banks, money became available to lend to developing countries for projects – often to finance conflict and to keep regimes in power. Idi Amin came to power in Uganda in 1971 with a militant regime, which was confronted by civil war, providing the need for weapons. The wealthy Asian community was expelled, meaning a loss of assets, which led to the collapse of government tax revenue. Therefore, large-scale borrowing was required to maintain government spending and finance weapons. The situation persisted until Amin was overthrown in 1979, meaning an 8-year cycle of borrowing took place. Due to the doubling of global interest rates in the 1980s, the country got into debt and was unable to meet its repayment. This unpaid interest was added to the original loan amount and by 1992, the country had $1.9 million worth of debt.
Uganda has been ridden with debt for decades and suffers a significant lack of development, illustrating the link between these factors. The land is fertile with good resources and a population of about half the UK’s within the same land area; yet Uganda’s HDI rating is 0.505 in comparison to the UK’s 0.946. Furthermore, Uganda’s GDP per capita (PPP$) in 2005 was $1454 – just 4.4% of the UK’s $33,238. Debt evidently affects a country’s development and plays a significant role in maintaining a global development gap.
The effect that a debt burden has on a country’s level of development is considerable. To prevent a collapse of the world’s banking system, the International Monetary Fund constructed Structural Adjustment Packages (SAPs). They re-scheduled loans to make them more affordable, but this was in return for cuts on government budgets and spending. Without IMF approval, no country would get further credit and therefore SAPs were effectively compulsory. The biggest government budget items in Uganda were health and education, and the imposed IMF cutbacks affected both. This particularly impacted the poor, who were most vulnerable to reduced government provision in public services.
Even today, with the cancellation of many debts on part of the Highly Indebted Poor Countries initiative, Uganda shows a clear lack of development. For the poorest 20% in Uganda, infant mortality rates are 106 per 1000 live births, and even for the wealthiest 20% this is 20 per 1000 live births – four times that of the UK. Only 60% of people have access to safe water. There are few Government secondary schools and fees are too expensive for most families, even those on a good income. Women and girls are the poorest Ugandans; unlikely to receive education because of its cost, and therefore facing a life of limited independence and less prosperity.
Debt has made it impossible for many countries to escape poverty, and therefore has limited development in these countries. Although it is not a cause of the development gap, the role of debt can be seen as maintaining the development gap in that repayments consume huge amounts of a country’s income, which limits development for the country. Whilst debt-free countries undergo development, others are held back due to their debt burdens. It is evident that factors such as debt make ‘bridging the development gap’ very challenging.