According to World Bank third-world country has mid to low levels of (GDP) Gross National Product. Most of these countries have similar characteristics in their dependence on agriculture or tourism as their main source of foreign revenue.
An example Antigua and Barbuda has 60% of the GDP and 40% accounted for tourism. Their other option is agriculture which is highly affected by climatic conditions, limited technological advancement, and high vulnerability to shocks from the main markets in the US, Canada, and Europe.
Most third-world countries in Africa and Southern America have slipped into the grip of the lending institutions like the World Bank and the International Monetary Fund. These institutions have failed to keep their promise of developing these countries and instead have left them at their mercy. Many decades later and most third-world countries are still victims of money borrowing leading to debt and inability to service their loans.
The huge needs of its people and demands from these institutions have created a circle that will need radical miracles to change the situation. Why then do these third-world countries keep borrowing? The answer is pretty simple, they need their loans to finance their development projects like infrastructure and to compensate for needed revenue, which because of many factors cannot be obtained through taxation.
Most of these countries have the highest population, especially of the younger generation with 80% of the world's population in these countries. One major factor subjecting them to poverty is the rate at which their population grows in comparison to their Gross Domestic Product (GDP) and the effect it has on economic progress. This situation leads to higher demand than supply forcing the government to outsource revenue.
There are many internal and external factors accounting for these states' debt including;
Poor production management and very low government revenues mostly due to poor government tax rules that is; the tax laws put in place do not generate enough revenue to adequately service the loans plus poor spending where the government uses the loans to service recurrent expenditures like food and needs and salaries instead of productive techniques that will produce more resources.
External shocks. Dropping in commodity prices that significantly reduces foreign income greatly affects these countries. For instance, a third-world country like Kenya in East Africa is highly dependent on agriculture and agricultural exports like tea and coffee for foreign revenue. It would be highly affected if the commodity prices drop in the world market. Other shocks like natural disasters also affect most developed countries. Although not 100%, these strong economies can take the shocks of natural disasters better than developing countries.
Hurricanes like in Antigua and Barbuda, a country in the Caribbean that highly depends on tourism as a source of standing revenue, will be highly affected due to the hurricane's destructive nature on her beaches.
Natural disasters like the most recent Covid 19 pandemic not only take precious lives but also slip the poorest countries further into the grip of the debt crisis. The International Monetary Fund (IMF) recently warned that no fewer than 20 countries in sub-Saharan Africa are either already in debt crisis or at high risk of debt distress.
Unfavorable lending environment. The biggest lenders like developed countries in North America and Europe have in place high-interest rates resulting in soaring interest payments for African governments over market-based loans. Most of these lending institutions come up with unreasonable conditions for their loans that succumb most countries further into debt.
IMF for example has put in place compulsory Structural Adjustment Programs (SAP) measures that have ended up with large current account deficits, inflation, and dropped aggravated currencies in Africa. This Structural Adjustment Program undermines the African governments and reaps apart the political economic reforms and social developments while intensely benefiting the lenders of the external world.
A vicious circle The Western world, especially and IMF has always ensured (it seems), that any developing country that seems to get a grip of itself with the likelihood of self-redemption is put back to level one. An example of Zimbabwe which, around the 1980s and 90s was put into an economic crisis and slower Gross Domestic Product (GDP) growth after adopting Structural Adjustment Programs.
Disproportional budget temperance under the programs severely hindered the country's human capital development and public welfare investments leading to mass unemployment and social unrest. This outcome is evident in more developing countries plundering them into more borrowing succumbing to the circle of borrowing and debt.
Debt has hampered the development of these countries since most of their revenue service lenders instead of development. The payment of interest and principal amount. Taxes and most resources in some instances more than half of the total national revenue of a country are paid back to avoid a debt crisis.
Takeaways
Among developing countries, it's of the essence to renew and evaluate the borrowing terms and their effectiveness in consideration of the nature of any country. Ideally, external loans and other internal ones are meant to promote any country's economy through the creation of jobs, production, and enforce foreign revenue among others but to developing countries, external debt has done more harm than good.
