Question

Analyze the role of debt in development.

Hint:

Balance the benefits and risks of debt. Discuss how it can finance development but emphasize the importance of repayment capacity and debt sustainability.

Answer 1

Meaning of Debt:
Debt refers to money borrowed by governments, businesses, or individuals that must be repaid with interest. In the context of economic development, debt can be used by countries to finance infrastructure projects, stimulate growth, and achieve development goals.
Role of Debt in Development:
1. Source of Investment Capital: Debt allows governments and businesses to borrow funds for large-scale investments in infrastructure, education, health, and industry, which is crucial for development.
2. Developmental Projects: Countries use borrowed funds for public goods like roads, bridges, schools, hospitals, and energy projects, which are essential for improving living standards and economic productivity.
3. Boosting Economic Growth: Debt is used to finance projects that have long-term returns (e.g., education and health) that boost productivity, innovation, and employment.
4. Short-term Funding for Crisis: Debt can provide immediate funds in times of economic crisis or natural disasters, enabling the country to stabilize and recover.
5. Foreign Debt and International Trade: Borrowing from international markets helps a country to increase foreign exchange reserves, making trade and imports more feasible.
Challenges of Debt in Development:
1. Debt Servicing: High levels of debt lead to large interest payments, diverting funds from other developmental sectors.
2. Economic Instability: Excessive borrowing can lead to financial instability, inflation, or a balance of payments crisis if the country cannot meet debt obligations.
3. Dependency on Foreign Credit: Reliance on external debt can make a country dependent on international creditors, leading to foreign influence on national policies.
Conclusion:
Debt, when used wisely and for productive purposes, can play a crucial role in the development of a country. However, it must be managed carefully to avoid over-indebtedness and ensure that the borrowed funds lead to sustained economic growth and development.