It is becoming a familiar story: A developing country with great potential announces an exciting new infrastructure-development project. The money for the project comes from a generous-sounding loan. The details of the loan aren’t clear, but the amount is large and both politicians and the lenders promise that the project will be a “win-win.”
After the initial wave of euphoria, some people start to ask questions: What are the terms of the loan? What happens if the developing country can’t pay it back in time? Why is the project using foreign workers instead of creating jobs for the local population?
Countries are waking up to the true cost of too-easy credit and the consequences of getting caught in a debt trap, where the lending country uses debt to obtain strategic assets, such as ports or political influence. Sri Lanka opted for the 99-year lease of a key port to China when faced with a difficult loan-repayment situation with few other options.
The United States, the world’s largest provider of foreign aid, avoids these problems by working with countries and local communities to establish long-term partnerships rather than debt relationships.