What would be the PPP impact of cancellations of debt?

July 16, 2013 9:18 AM

Economics question regarding the relationship between the relatively high purchasing power of the "developed nations" and the debts (sovereign and other) of the so called "developing nations". If the Make Poverty History campaigns to cancel debts of developing nations are successful will this result in a noticeable reduction in the purchasing power of average people in "creditor nations" like the UK, USA, Germany, etc?

Is the relative wealth of the 'west' largely reliant on the indebtedness of other countries? When you look at the history of a country like Haiti, they have been burdened with massive debts (mostly to France) for centuries. How much relative benefit has France received from this?
And there are similar countries for the UK, USA etc where massive wealth extraction has been going on for years.

If the debts are cancelled will we in the west still be able to buy a pair of jeans at Primark for £9?

posted by mary8nne to Society & Culture (1 answer total)

Best answer: There would be no first order effects on purchasing power of the average citizen in the "developed" world if debt relief were applied. Going off the Jubilee site, debt service (which is the annual payment on these debts) is around 135 billion/yr. In reality, some of that debt is held locally but even if we assume it's all held by Americans, the overall impact is trivial in a $15 Trillion economy. If some of these notes/bonds are held in Europe and Japan, then obviously the impact is even more distributed.

Second order effects are more difficult. One could postulate that an economy which doesn't have these debt service costs could invest more in infrastructure and education and eventually raise the standard of living of its citizens (and that individual companies could buy better, more efficient factories). This could cause the currently indebted countries to bid up resource prices and/or move up the value added supply chain (build cars instead of textiles) but 1. that's a huge leap that takes a lot of time and many things can go wrong in the interim and 2. even if this happens, it's less about all of the "developed" nations winning or losing and more about certain sectors being hit while others benefit (you could see a resumption of textile manufacture in the UK for instance helping certain workers there).

There's a related question on second order effects of how willing external creditors will be to extend credit to these countries or companies within them if there is a forced debt cancellation or even a coerced "voluntary" cancellation. Without the ability to raise external capital it would be exceptionally difficult for these countries to grow
posted by limagringo at 10:09 AM on July 16, 2013 [1 favorite]