Farmers in western countries are wealthy

Are other countries poor because we are rich?

Our sample country has therefore opened up to foreign trade and the international capital markets. It can now sell its products in the world and borrow money from investors. That has advantages.

But it is now also with the rest of the worldentangled. And that can have disadvantages.

1. Unstable

"Globalization has increased the interdependencies between countries, but also banks, institutional investors and the banking system," says Martina Metzger, Professor of Monetary Economics.

Among other things, networking increases the risk thatregional crises to the rest of the worldskip

Corona is an example: What started in China has now almost reached the whole world. The virus hits in particularPoor country's - because they do not have the necessary cash buffer to take countermeasures.

2. No reserves to counteract

For example, there is a lack of money to provide help for those who have lost their livelihood due to Corona. The United Nations warned that the number of people going hungry could increase dramatically, perhaps even double.

And then we remember the discussion about vaccine distribution. In addition, underfunded health systems quickly reach their limits anyway. The Corona crisis has also shown that.

3. Mobile capital

Another point becomes a problem not only, but more often for developing countries: capital is very mobile due to globalization and digitization.

That means: internationally operating banks, insurance companies and asset funds can invest billions in seconds in the financial market of a developing country. And they can withdraw the money just as quickly if the risk becomes too high for them.

Reasons to withdraw

The possible reasons for withdrawal are numerous and frequentunpredictable.Perhaps an event is causing investors to worry about the unstable political situation, or they believe that a nation is threatened with insolvency, or a herd instinct sets in: investors are withdrawing because others have already done so. Or their withdrawal is part of the plan because they speculated.

During the Corona crisis, many investors withdrew from developing and emerging countries because they prefer to have their money in safe havens like the industrialized countries.

4. Ordinary fluctuations

Both capital inflows and outflows can - if they dofasthappen - too substantialFluctuations lead: with stocks and bonds, with real estate and withExchange rate

This scares off investors and trading partners - because they cannot calculate in the long term. The uncertainties are too great. And that puts a lot of pressure on the countries concerned.

Loans in other currencies

This can become a problem, especially when the currency depreciates sharply: the explosive power lies in the fact that most countries only settledebt in foreign currency can, explains the German economist Hansjörg Herr.

So your loans are usually internationalreserve currency U.S. dollar codified.

Or in another major currency such as the euro, yen or pound. Because the world monetary system is made up of this “small number of currenciesdominates”States economist Mr.

The mountain of debt is growing

The problem: when a country's currency devalues, its mountain of debt grows.

Developing countries in particular would have onestructural disadvantage, “Which makes your development process even more difficult,” according to economists Johannes Schmidt and Hagen Krämer.

Let's take a look at our example country and its newcomer currency.

An example

Our sample country needed money some time ago. To get a loan, it had to take it out in foreign currency. The newcomer is now stuttering off debts of one million US dollars.

So far, he has always paid the installments for the loan. However, things are not going so well with the economy at the moment, they areweakens. That has led to the novice currency devaluedHas.

We remember: this is great for exports. Not only the currency, but also the country's products are now cheaper for other countries. But: It's not so great for the current loan.

Because now the country has to do a lotmore of thebecome cheap Raise newcomer currency than before to reach the sum of one million US dollars and pay off. So the mountain of debt has grown.

Now it may be that the country no longer manages to service the loan. Then it is effectively broke.

Loans:Those who are poor have to pay a lot

In order to get money, a country can also issue so-called government bonds. Then it undertakes to repay its investors the amount after a certain period of time.Plus interest, of course. Or the country borrows capital from other countries. Plus interest too.

In particular, the nations that are in a tight spot can often only agree expensive conditions Lend money.

Because: If the donors have doubts that they will get their money back after the deadline, they charge higher interest. So it becomes expensive for the borrower if the trustin his solvencyis low.

Policy implications

The lender country then, to a certain extent, capitalizes on the borrower's difficult situation. A much discussed example: Germany was criticized for enriching itself with Greece during the euro crisis.

In addition, the lender has given the borrower aPressure mediumThis can have an impact on (economic) political decisions.

Example China and East Africa

For example, China has been active with infrastructure projects in Africa, especially in the East African countries, for years. The Chinese have invested their own money, but have mainly granted loans for roads, ports and energy lines.

Opinions about this are divided among the public. Some say that China simply recognized the African countries as a growth market. Others fear that China could exercise control if states fail to pay off their debts. Evil tongues even speak of a modern form of colonization.

Loans:IMF and World Bank

Countries can - if they adhere to conditions such as strict austerity programs - receive loans from the World Bank and the International Monetary Fund (IMF). Both are specialized agencies of the United Nations.

The approach of the two institutions is not without controversy. Many researchers are of the opinion that with their intervention, the IMF and World Bank often do more harm than good.

The rich states dominate

German sociologist Jens Greve says some of the political decisions have been "devastating" for developing countries. Social economist RalfPtak and colleagues accuse the institutions of forcing developing countries into the world market in the 1980s - without them being able to survive there.

Economist Wolfgang Flic explains that the IMF in particular was used by US governments to “enforce American financial interests.” Because the US pays a lot into the fund - and whoever pays a lot also has a lot of voting rights in decisions.

Both institutions were approved by therich states dominated, summarizes sociologist Greve. To what extent this contributes to “systematic and persistent inequality effects”, however, is not easy to determine.

ThePoverty trap

So there are a multitude of reasons that make it difficult for developing countries to generate surpluses - which they can invest in education, infrastructure or health - and it is difficult for them to break out of this poverty trap, says US economist Jeffrey Sachs.