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About half a million children died in the developing world last year because their debt-burdened governments have had to cut back on social spending, UNICEF said Tuesday in its annual report.

The fiscal retreat has led to problems that overshadow the substantial progress most developing nations made in the last decade in health and education, the United Nations Children's Fund's executive director, James P. Grant, says in the report."By far, the heaviest consequences are being borne by children," he says in the report titled "The State of the World's Children 1989".

Throughout most of Africa and much of Latin America, average incomes have fallen by 10 percent to 25 percent in the 1980s, the report says. In the 37 poorest nations, per capita spending on health has dropped by 50 percent and on education by 25 percent over the past few years, it adds.

"Children are facing the worst of times and potentially the best of times. It is the worst of times because 35 years of progress is being threatened by falling commodity prices, mismanagement and the debt crisis," Grant told reporters in New Delhi today as he arrived for a news conference on the report.

"A country can do incredible things with a small amount of money as long as the economy holds together. When a country's economy starts having trouble, the children are always the ones who will suffer the most," he added.

"In many of the countries for which figures are available, child malnutrition is on the increase," Grant says in the report.

Ten deeply indebted Latin American and Caribbean nations and six in Africa have experienced a slowing down in the reduction of mortality in children under age 5 from 1980 to 1987, compared with the 1970s.

They are Argentina, Brazil, Chile, Costa Rica, Cuba, Ecuador, Haiti, Jamaica, Mexico, Panama, Benin, Botswana, Liberia, Madagascar, Nigeria and Togo, said Tony Hewett, deputy director of UNICEF's information division.

"For these 16 countries alone, the number of child deaths in the last 12 months is approximately 650,000 more than would have been the case if the 1970-80 rate of decline in under-5 mortality had continued," says Grant.

He says the majority of these deaths are related to "the slowing down or reversal of the development process during the 1980s, which is a result of unprecedented borrowing, rising interest rates, falling commodity prices, inadequate investment of borrowed funds, and the domestic and international management of the resulting debt crisis."

The UNICEF report says "the developing world is now transferring $20 billion a year more to the rich nations than it receives in new aid and loans." Developing nations owe an estimated $1.2 trillion to private banks, development funds, and other countries.

UNICEF, the U.N. General Assembly and the U.N. Conference on Trade and Development have all called for an economic "Marshall Plan" to provide more development aid to poor countries and write off debts of some of the most deeply indebted nations.