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

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

Rutgers

Rutgers Model United Nations 21 and public institutions are necessary to help distribute funds that are appropriated. If loans take their proper effect, solvent banks are also necessary to sustain economic growth in the region. Another factor is information. In a developed world economy, there is a lot of pertinent financial data that is drawn from what financial institutions report; in the developing world, this data does not exist. If international lenders do not have or cannot get this information, this lack of information not only increases risk but also could lead to unforeseen problems (for which were previously not accounted) in the economy. Also, domestic private lending is effected by the lack of information. Credit histories are virtually non-existent to private banks in developing countries, so if an individual tries to get a loan and does not have some sort of collateral such as a business or property, the individual cannot get a fair loan because everyone without significant assets must be regarded as a high risk loan. Many of the financial crises of the 1990s and early 2000s can be attributed to poor reporting by the countries who suffered from the crises. The IMF and World Bank issue yearly reports on each of their member country’s economic situation, and even though they employ hundreds of analysts each, they need to rely on domestically supplied data for much of their analysis. When the country they are studying cannot make truly representative reports because of poor financial infrastructures, financial problems can take the analysts by surprise. For example, two months before the start of the Thai baht crisis, the IMF and World Bank issued a joint report praising 39 the economic growth and stability of Thailand. Comparison of Causes Three of the causes that could lead to the prevalence of irresponsible lending are the deliberate furthering of specific economic agendas, government corruption, and lack of financial infrastructure. Each of these contributes individually and as a result of one 39 Ibid.

Rutgers Model United Nations 22 another in relation to the problem that developing countries are having of getting out from under their past debts, and the debts that will accrue from near inevitable future loans. Each of the actors in the situation chooses different causes for the problems at hand. Developing countries are quick to point out the practices of major institutions such as the IMF and World Bank, which are easy and frequent targets of critics. For many leaders of developing countries, it is much easier to blame the problems on foreign, extortionist banks than it is to reform their country’s financial landscape. Many independent critics and proponents of debt forgiveness also see the major lending institutions and their lending practices as the source of the problem. The lending institutions and developed country lenders are quick to point out other factors, however. The weak financial infrastructure, especially poor reporting of data and government corruption create risks in lending that have to be accounted for. The lending institutions remain adamant that they are not sources of free money, because in an efficient economy nothing is free, and their mandate is to create an efficient global economy. Any lending institution will raise interest rates to compensate for additional risks and they maintain that their lending practices are not irresponsible; it is the countries they are lending to that are irresponsible. Projections If irresponsible lending goes on unimpeded, global debt will continue to soar. This creates many negative effects on the global economy. Developing markets will never develop because a large national debt, in economic terms, lowers investment. Another problem with development is that the structured loan agreements practiced by the IMF and other private lenders create very strict guidelines that call for fiscal austerity. The fiscal austerity helps to achieve a balance budget but it completely shuts down economic growth by discouraging private investment and cutting off government projects and expenditures. The austerity programs force indebted countries to shut down basic goods

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