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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 1 Policy Dilemma Lending policies in the developing world often can do more harm than good. The financial institutions of the world are built in the developed states and operate on developed world business models. When those behind the institutions of the developed world try to work within the developing world, they often have little concept of the trials they will face, and more often than not their endeavors fail. The problems created by dealing with the economies of developing nations are enormous. Unstable economies have any number of factors that can shift the balance of the economy for the worse, coupled with inefficient government handling of these problems, which in turn leads to poor reporting of the overall financial data. Business investments and economic decisions based on suspect data can lead to disaster. Countries that are in different parts of the business cycle than reported or have hidden massive faults in their economy, whether on purpose or by oversight, create extreme risks when accepting loans. In many cases, these countries have little choice but to play out these risky scenarios or end up receiving no money at all. Moreover, the factor of governmental inefficiency does not even include the entirely separate category of rampant corruption rooted in many developing countries. There, government officials of all levels can divert funds intended for economic development. Aside from this facet of the problem, additionally, making loans is risky in the developing world because of unstable currencies, exchange rates, and inflation. Loans to countries that have unstable exchange rates create situations in which the real value of the loan may shift even if the nominal value remains the same, because the currency may be worth more or less. Many loans have built-in measures to protect against inflation and deflation affecting the value of the principle loan, but the accuracy of adjusted loan settlements is questionable. In the global economic market, countries with unstable currencies and exchange rates are much harder to trade with, driving exports down and only worsening the economic situations of the unstable countries. Not only that, but

Rutgers Model United Nations 2 there is a much higher chance of an overall economic collapse. From a lender’s point of view, all of these risks must be factored into the interest rates in order for the lending institution to remain economically viable. The problems with lending in the developing world revolve around government inefficiency, corruption, and unstable markets. These factors make loaning to developing nations extremely risky. To limit the amount of risk they take on, banking institutions must charge high interest rates and make many stipulations about the usage of loaned money. Unlike developed countries, the oversight of the money lent by banks is not very well regulated by the governments, so the banks themselves must retain a large amount of oversight over their loaned assets. The problem is that the high interest payments make debt in the developing world even worse, the stifling level of oversight from banking institutions is hindering economic growth in the developing regions because banks adopt risk-averse policies. There are many critics of developing world lending practices who have proposed solutions to the status quo. Human rights activists champion debt forgiveness to assist indebted countries with their economic development processes. Many call for reform of the two large UN lending bodies, the International Monetary Fund (IMF) and the World Bank. Most of those who call for reform want the functions of these institutions to be reformed so they can better serve the developing world. Another proposed solution is the creation of new banks with smaller, regional focuses and can tailor their practices to the countries they serve. An example of this would be Venezuelan President Hugo Chavez’s proposed Banco del Sur, a development bank for Latin America. The IMF and the World Bank are major sources of irresponsible lending in terms of the volume of what they give, but there are many different actors who make irresponsible loans in the developed world. Whether they are private banks, countries, or supranational banks such as the IMF or World Bank, there are many pitfalls in the way developing world lending is treated. This committee needs to seek solutions that address

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