Writing Assignment
There has been a rapid increase in the borrowing rate for both third world countries and developed countries in the twenty-first century. The massive debt owed to lending institutions, which include the World Bank and an international monetary fund has proven to have more negative effects than the positives. This is because most countries are not able to generate enough capital to raise the money required to pay for the loan (Sachs, 398). The result of this borrowing problem is commonly known as a debt crisis. The developing countries have an approximated debt of four trillion; this is from the study done by the World Bank. The problem of the debt crisis is controllable and manageable effectively by the leading players in this case, being the lending institutions.
The United States is the top borrower according to research by global liabilities. The borrowing interest rates for third world countries are generally high for third world countries and are usually high as compared to the developed countries. This is because developed countries such as the USA can pay their borrowed money in time, thus evading penalties (Yu, 575). The USA and other developed countries can apply risk and return principle. Contrary to underdeveloped countries such as Iraq may not be able to take into consideration this principle, which is very crucial to all borrowers. Iraq’s interest rates are high as compared to that of the United States; this is achieved due to the failure to implement the economic principle, which leads to a debt crisis. The effect of the debt crisis, in return, causes political instabilities, which are a result of economic policy differences.
Crowding out effect is caused by the government of a particular country, spending more to increase the rate of economic growth. These encourage companies and firms to invest due to the availability of more profitable investment opportunities. The USA has a high crowding effect as compared to other given countries (Abrams,29)This is because of the massive amount from external lenders is spent by the USA government to participate in the economic sector. The increased amount of crowding effect results in the reduced country gross domestic product and vice versa.
Works cited
Abrams, Burton A., and Mark D. Schitz. “The ‘crowding-out’ effect of governmental transfers on private charitable contributions.” Public Choice 33.1 (1978): 29-39.
Yu, Yi-Jang. “Microeconomic Natural Law, Portfolio Principle, and Economics Textbooks.” Modern Economy 7.5 (2016): 575-585.
Sachs, Jeffrey, and John Williamson. “Managing the LDC debt crisis.” Brookings papers on economic activity 1986.2 (1986): 397-440.