In this Occasional Paper, Lord Bauer questions the widely held belief that debt service is a major cause of poverty in Third World countries. He points out that:

• Almost all debtor countries restrict direct foreign investment, so reducing their export capacity and increasing their dependence on foreign aid;
• Borrowed funds have been wasted on prestige projects, unviable industries and politically-motivated subsidies;
• Many debtor countries have substantial foreign exchange reserves and state-owned monopolies, assets that could readily be used for servicing debts.

According to Lord Bauer, debt default is ‘a rational response to the reluctance of the creditors to press their claims and to… release further funds’. He urges Western Governments and international financial organisations to abandon debt negotiations so as to encourage Third World Governments to introduce rational economic policies from which their entire populations would benefit.