Answer to Question #256445 in Economics for Deema

Question

8) How do many low- and middle-income countries get into serious foreign-debt problems, and what are the implications of debt problems for economic development? How do financial crises affect development?

Answer 1

Over the past two decades, many firms and governments of developing countries borrowed billions of dollars from banks in the developed countries. But while the 19th century railway companies were able to repay their debts, it become apparent in the 1980s that some of the countries that had borrowed heavily—particularly Brazil, Argentina and Mexico, could not repay what they owed.

The resulting crisis threatened the economic prospects of the developing coun­tries and the financial viability of many banks in the rich countries.

The existence of debt has both social and financial costs. Heavily indebted poor countries have higher rates of infant mortality, disease, illiteracy, and malnutrition than other countries in the developing world, according to the UN Development Program (UNDP).