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Rutgers Model United Nations - Institute for Domestic and ...

Rutgers Model United Nations - Institute for Domestic and ...


Rutgers Model United Nations 19 developing countries. When these first world lending institutions attempt to address the needs of developing, pre-industrial countries with the same approach as previous lending practices, the consequence is crushing ineffectiveness. The problems which a lending institution faces in the developing world are much different than the problems of the developed world, and trying to apply the same practices to both can lead to irresponsible lending. Government Corruption Another factor that leads to irresponsible (or at least inefficient) lending practices in the developing world is government corruption. Government corruption is prevalent in many developing countries and it creates a bad lending environment. The most damaging thing about government corruption is how it can affect lending in almost every possible way. Corruption is particularly damaging in regards to public lenders such as the Paris Group, IMF, and World Bank. These institutions work through public institutions as a rule, and public institutions are where government corruption exists. Lending funds into a country with rampant corruption creates an abundance of risks for a lender. So lenders must increase interest rates to compensate for the risks and try to enforce good behavior, and even then, they cannot be sure the funds aren’t being diverted into a government official’s pocket or pet project. No major lending institution themselves has bad intentions for the funds which they lend, as their entire goal is to see their debtor succeed so the debtor will be able to pay back the loan, and perhaps even take more loans in the future to grow even further. Therefore, lending institutions do not want to see their money diverted, because once that happens there is little chance of repayment. The danger of government corruption is that it not only takes funds out of the pockets of the people, but it also makes lending institutions raise interest rates and demand a high level of oversight as to how their money is used, and neither of these Academic Search Premier.

Rutgers Model United Nations 20 things are good for a developing economy. Major private lending institutions and international lending institutions such as the IMF and World Bank often cite the widespread government corruption in their debtor countries as one of the reasons they employ their lending strategies. 36 The IMF in particular is often criticized for its highly structured loan agreements, but its economists contend that without the proper level oversight on its own money, the Fund would not be making the loans in the first place and the governments cannot be trusted to apply the money to their problems correctly. The World Bank’s publicly stated opinion has a similar focus on combating corruption. The Bank believes that loans with interest are more effective at development than grants, because the prospect of paying back the loan helps guarantee better behavior. 37 In the end, government corruption not only steals directly from the loan targets but it also forces financial institutions to alter their policies. Underdeveloped Financial Infrastructures The countries of the developing world have financial infrastructures that range from weak to non-existent. For example, in Haiti, most of the economy is based on foreign remittances and this leads to a hand to mouth cash economy which has little need for banks. 38 The lack of financial institutions in a country creates many problems with regards to lending to that particular country. The lack of financial personnel with technical knowledge on the subject of finance is also a critical factor, but that can be developed over time. One thing to consider is the nature of many development loans. These loans are given by huge private banks or international banks and funds, so loaning to individuals is nearly impossible considering the scope of these loan agreements. Financial institutions 36 Thomas Pepinsky, Studies in Comparative International Development; Spring2007, Vol. 42 Issue 1/2, p136-163 37 Steven R. Weisman, New York Times (1/1/1985 to present); 04/03/2008 38 Luis Alberto Moreno, Haiti: Rural Supply Chain Markey Linkage Services, Date Accessed 4/9/08

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