Backgrounder

Most of us at some stage in our lives will borrow money. Borrowing to buy a home, a car or some other expensive item is something that is a normal part of modern life. Debt can be a good thing if handled with care. Most people cannot save for everything that they want to buy. The advantage of borrowing to buy something is that you can use it immediately but pay for it later. When you borrow you of course have to pay back that amount plus interest. This means that you end up paying back quite a bit more than you borrowed, but this is spread over a long period of time. Home loans are usually paid back over 25 years. This is not of course, a problem if you have an income big enough to cover the loan repayments as well as leaving enough to cover other living expenses. The situation is similar for countries. Borrowing money is good if the money is used wisely and is able to be repaid, leaving some money able to be spent on things like health, education, roads and other essential services.

So what went wrong? As usual there is no simple answer. Almost all countries borrow from other countries. Australia's foreign debt for example is around $500 billion! Countries do this so that they can invest in their own countries. Both governments and private businesses borrow from foreign countries. They do this so that they can invest in new industries, build roads, dams, schools and universities. So far, so good. What happens if a lender is so keen to lend money that they don't really check to make sure that it is being used for a good purpose? If the money is used to wage war on your neighbours or to build monuments to the president of the country then the country does not gain anything from the borrowed money. Spending the money on those types of things does not help to earn the country extra income to help pay back the debt.

What happens if the cost of borrowing, the interest rate, goes up dramatically after the money is lent? This will mean that the amount that needs to be repaid increases dramatically too. This may mean that a country will need to cut back on other spending in order to cover the increased repayments. What does it stop spending money on? Providing cheap food for the people? Education? Hospitals? There are no easy choices. If a country simply refuses to repay their debts, they will find that nobody will lend them money in the future. What happens if a country borrows in a foreign currency like US dollars? If a country borrows in US dollars then it has to pay back US dollars. In that country the currency may be the peso. If the peso was worth the same as a dollar when the loan was taken out but then devalued to only being worth US$0.50 then the original debt would have doubled in terms of pesos! There must be some other way of paying back the loan, surely! There is another way, and that is if the country can earn some foreign currency. It can do this by selling goods or services to another country. This is called exporting. A country might be able to sell something to the US and earn some US dollars. It can then use these US dollars to pay back some of the loan originally made in US dollars. But what happens when the world price for your country's exports drop? This means that the country needs to export more and more just to stay where you were.

What happens when all these things happen at the same time? This is what has happened to many countries in the majority world, like countries in Africa and South America. The governments in these countries borrowed freely in good times. They wasted a lot of the money fighting wars and funding inappropriate development projects. Interest rates rose sharply especially in the 1980s. Prices for the sorts of products that countries in the majority world export crashed. Their currencies also fell in value against the currencies of countries like the US. The result of all this is a crisis. Governments cut spending on essential services to their own populations so that they could repay their ballooning foreign debts.

So the question we must ask ourselves is: Should we in the minority world insist on being repaid in full, even if it means the suffering and even death of ordinary people in the majority world? How much would it cost us? For around $2 per person per year in the rich countries of the world all the debt owed by the 42 most indebted countries of the world could be cancelled.

Religion/ Social Science

1. Find out more about the burden of debt on poor countries by playing the interactive game on: www.catholicrelief.org/kids/interactivegames.htm and simply click on Debt Relief.

2. For another set of puzzle activities related to indebted countries, their currencies and debt relief, go to: http://www.globalgang.org.uk/games/mindbenders/index.htm and click on Nina and Karl's Puzzle Page. There is a wordfind, a crossword, a matching exercise and a maze. There are also answers provided.

3. Go to: http://www.dep.org.uk/globalexpress/29/Argentina%20pupils%20pages.pdf. Scroll down to Defining the Economy. Complete the matching exercise. Read the background information about Argentina. How does this compare to Australia? Scroll down to Struggling with Debt. What are the causes and effects of Argentina's debt crisis? Make a list.

4. Discussion: What's in a label?
    a) List three different ways that we refer to those who live in parts of the world that are particularly prone to poverty.
    b) From whose perspective are these labels named?
    c) What is implied in the different labels?
    d) In recent times, the less value-laden terms :majority world have 14% of the world's wealth.
        · 80% of the world's population, that is the majority world, has 14% of the world's wealth.
        · 20% of the population, that is the minority world, has 86% of the world's wealth.
    e) Discussion topic: "That the poor deserve to be poor."

5. There has been much discussion of what countries in the majority world owe countries in the minority world. For a different view which looks at some reasons why we in the minority world owe countries in the majority world quite a bit, go to: www.newint.org/issue189/simply.htm. Write a list of reasons why we owe countries in the majority world so much.

6. Even if we wanted to we in the minority world cannot ignore the problem of global debt. Go to: www.newint.org/issue243/keynote.htm and scroll down to: The six boomerangs. Outline in your own words how debt-induced poverty affects countries like ours.

Parish and Community Groups

· The Jubilee debt relief campaign will be relaunched on June 29th (Jubilee Sunday). Get involved! Write to your local federal parliamentarian to ask if Australia is participating in the cancellation of debt to the world's poorest countries. Visit: www.jubileeaustralia.org for more information.

· For a free, short video about debt entitled "Drop the Debt", contact Caritas Australia on (02) 9956 5799. Suitable for Year 5 – adults.

· If you are from Sydney, go and see the film: Life and Debt. It is showing at the Valhalla in Glebe. It looks at the crippling effects of debt on the people of Jamaica, in the West Indies. Check the website for the film too: www.lifeanddebt.org.