Download Causes of Third World Debt Crisis

INTRODUCTION
To develop, third world countries had to industrialize, as they did
not want to remain poor forever. Henceforth, financial help was
imminent, to cope with the costs of development.
Getting themselves into debt was like with most of us, was
premeditated but the ascend of their debts to almost uncontrollable
dimensions was as a result of a number of ‘ecological’ factors beyond
their control, such as the rise in oil prices and interest rates. But for the
most part, some of their projects for industrialization and focus on
security through growing military spending landed their economies and
the physical well being of their citizens to a point of no return. A
number of approaches would be considered by their creditors to get
them out of a state of insolvency, but they would all prove inefficient,
and at times exploitive.
CAUSES OF THIRD WORLD DEBT CRISIS
INDUSTRIALIZATION
2. RISING OIL PRICES
3. RISING INTEREST RATES
4. MILITARIZATION
1.
INDUSTRIALIZATION
 BACKGROUND
The need for industrialization seems to be the
starting point as to why third world countries
needed to borrow money from the World Bank.
O’Brien and Williams (2007) explain that states
borrowed money to invest in industrialization
and would pay off the loans from the profits of
their new industries.
INDUSTRIALIZATION
PROBLEMS
 The money borrowed proved to be insufficient
 The new industries did not yield the expected profits
 The political and socio economic setting of third world
countries were not conducive to transform them into
rich and industrialized powers like the West
 Investment in ill considered and ill conceived projects
A Nuclear Power Plant
in the Philippines , that
costed $ 2.1 billion and
has never been
operational
RISING OIL PRICES
BACKGROUND
William Cline of the Institute of International
Economics in Washington argues, ‘The single most
important [external] cause of the debt burden of
non-oil developing countries is the sharp rise in the
price of oil in 1973-82 and again in 1979-80’
(George,1988). Cline estimates that rising oil prices
accounted for ¼ of debts accumulated by third
world countries.
RISING OIL PRICES
PROBLEMS
 Demands for new loans to pay for the supply of energy
 Dramatic effects on the international credit market, as
western countries themselves felt the impact
 Third world countries were constrained to increase their
exports to pay for oil
RISING INTEREST RATES
BACKGROUND
As a result of the oil shock, the US raised its
interest rates, which meant that the cost of
international money went up. Hence, where the
interest rates on international loans were about
2 per cent in the early 1970s they rose to over
18 per cent in the early 1980s (O’Brien and
Williams, 2007).
RISING INTEREST RATES
PROBLEMS
 The cost of borrowing was high
 New loans needed to service old ones
 Recession swept the developed world
 Great protectionist forces developed in the West, which
meant that buying goods from third world countries
proved increasingly less profitable
MILITARIZATION
BACKGROUND
George (1988) remarks that several countries
ran up staggering debts for buying toys for their
generals. In support of her argument, George
cites the findings of the Stockholm International
Peace Research Institute (SIPRI) which stipulates
in its conclusions that 20% of Third World debt
can be attributed directly to arms purchases.
MILITARIZATION
PROBLEMS
 Arms purchases are pure consumption as they do not
produce wealth, nor create jobs and do not even inject
money into the local economy.
 Military spending is more greater than health and
education spending, which are supposed to be given
greater priority to improve the quality of life of the
citizens.
ASSESSMENT OF EFFORTS TO DATE
AUSTERITY PROGRAMS
2. DEBT RESCHEDULING
3. NEW LENDING
4. BAKER PLAN
1.
AUSTERITY PROGRAMS
ACTOR
 IMF
CHARACTERISTICS
 Reducing budget deficit
 Limiting public sector external borrowing
 Reducing or eliminating subsidies and public works
projects
 Higher taxes
(Hart and Spero, 1997)
AUSTERITY PROGRAMS
 ASSESSMENT
 Austerity programs seemed to have worked from 1982 to
1984 as they helped avert the feared world financial
crisis
 Budget deficits were reduced during the same period
(1982 – 1984)
o Dramatic reduction in domestic demands and imports
o Economic growth brought to a halt
o Foreign debt constituted about 30% of government
expenditure, which meant some countries spent had to
spend less on basic social services
o Most debtor states fell into recession
DEBT RESCHEDULING
ACTORS
 IMF
 Paris Club of Government Creditors
 Central Banks
CHARACTERISTICS
 Extension of repayment schedules
 Grace periods given on principal repayment
 Interest rate adjustment
DEBT RESCHEDULING
ASSESSMENT
o No debt relief such as reduction of interest or principal
repayment was provided
o Rescheduling does not solve the debt problem, but
postpones it
NEW LENDING
ACTORS
 Commercial Banks
CHARACTERISTICS
 Empowering debtor countries to make interest
payments to banks
NEW LENDING
ASSESSMENT
o Commercial banks typically loan money to relatively
“wealthy” Third World countries that possess a business
infrastructure and pose some degree of economic and
political security (Bradshaw and Wahl, 1991)
o Third World countries new loans were simply used to
service old ones
o For highly indebted underdeveloped countries, it does not
make sense to increase their debt (Bresser-Pereira, 1995)
BAKER PLAN
 ACTORS
 US Treasury
 World Bank
 IMF
 Commercial banks
 CHARACTERISTICS
 Trade and Financial liberalization
 Financial deregulation
 Privatization of state-owned industry
 Commercial banks to provide $20 billion in new loans over
three years from 1985
 Multilateral development banks were to increase lending by $
3 billion per year
BAKER PLAN
ASSESSMENT
o Baker Plan did not lead to a resurgence of growth
o Structural reforms were limited by political constraints
o Ignition of conflicts between market-oriented versus
government-led approaches to growth
CONCLUSION
It is true to say that none of the efforts to date has proven
successful to contain and eradicate the astronomical
debt ought by third world countries.
Sadly, it seems as though third world countries are financially
enslaved by the West, as the latter in accord with the IMF and
World Bank, dictates how developing countries should spend
their money and in some cases even forces them to buy goods
from the creditor country.
None of the effort by the IMF and the World bank, advocated
debt relief, for excruciatingly struggling states whose GNP
constitute over 40% for debt repayment.
REFERENCES
 O’Brien, Robert and Williams, Marc (2007). Global Political


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
Economy: Evolution and Dynamics. 2nd Edition. Palgrave
Macmillan. New York, USA. Pp 223.
George, Susan (1988). How Much is a $ 1 Trillion? In: A Fate
Worst than Debt. Penguin. London.
Spero, E. Joan and Hart, A Jeffrey (1997). The Politics of
International Economic Relations. 5th Edition. Routledge.
London. Pp 189.
Bradshaw, W. York and Wahl, Ana-Maria (1991). Foreign Debt
Expansion, the International Monetary Fund , and Regional
Variation in Third World Poverty. In: International Studies
Quarterly 1991, Vol 35, September, ISNN 0020 8833.
Bresser-Pereira, C. Luiz (1995). Development Economics and the
World Bank’s Identity Crisis. In: Review of International Political
Economy (1995). Vol 2, No 2, Spring ISSN 0969-2290.