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CAUSES OF THE THIRD WORLD DEBT CRISIS AND ASSESSMENT OF THE EFFORTS TO DATE TO RESOLVE
IT
By Patrick BongoStudent No. 08006299MA in International RelationsStaffordshire University
INTRODUCTIONTo develop, third world countries had to industrialize, as
they didnot want to remain poor forever. Henceforth, financial help
wasimminent, to cope with the costs of development.
Getting themselves into debt was like with most of us, waspremeditated but the ascend of their debts to almost
uncontrollable dimensions was as a result of a number of ‘ecological’
factors beyondtheir control, such as the rise in oil prices and interest
rates. But for themost part, some of their projects for industrialization and
focus onsecurity through growing military spending landed their
economies andthe physical well being of their citizens to a point of no
return. Anumber of approaches would be considered by their
creditors to getthem out of a state of insolvency, but they would all prove
inefficient,and at times exploitive.
CAUSES OF THIRD WORLD DEBT CRISIS
1. INDUSTRIALIZATION2. RISING OIL PRICES3. RISING INTEREST
RATES4. MILITARIZATION
INDUSTRIALIZATION BACKGROUNDThe need for industrialization seems to be thestarting point as to why third world countriesneeded to borrow money from the World Bank. O’Brien and Williams (2007) explain that statesborrowed money to invest in industrializationand would pay off the loans from the profits oftheir new industries.
INDUSTRIALIZATIONPROBLEMS
The money borrowed proved to be insufficientThe new industries did not yield the expected
profitsThe 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 PRICESBACKGROUNDWilliam Cline of the Institute of InternationalEconomics in Washington argues, ‘The single mostimportant [external] cause of the debt burden ofnon-oil developing countries is the sharp rise in
theprice of oil in 1973-82 and again in 1979-80’(George,1988). Cline estimates that rising oil
pricesaccounted for ¼ of debts accumulated by thirdworld countries.
RISING OIL PRICESPROBLEMS
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 RATESBACKGROUNDAs a result of the oil shock, the US raised itsinterest rates, which meant that the cost ofinternational money went up. Hence, where theinterest rates on international loans were about2 per cent in the early 1970s they rose to over18 per cent in the early 1980s (O’Brien andWilliams, 2007).
RISING INTEREST RATESPROBLEMS
The cost of borrowing was highNew loans needed to service old onesRecession swept the developed worldGreat protectionist forces developed in the
West, which meant that buying goods from third world countries proved increasingly less profitable
MILITARIZATIONBACKGROUNDGeorge (1988) remarks that several countriesran up staggering debts for buying toys for theirgenerals. In support of her argument, Georgecites the findings of the Stockholm InternationalPeace Research Institute (SIPRI) which
stipulatesin its conclusions that 20% of Third World debtcan be attributed directly to arms purchases.
MILITARIZATIONPROBLEMS
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
1. AUSTERITY PROGRAMS
2. DEBT RESCHEDULING
3. NEW LENDING4. BAKER PLAN
AUSTERITY PROGRAMSACTOR
IMF
CHARACTERISTICSReducing budget deficitLimiting public sector external borrowingReducing or eliminating subsidies and public
works projectsHigher taxes
(Hart and Spero, 1997)
AUSTERITY PROGRAMSASSESSMENT
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 halto 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 RESCHEDULINGACTORS
IMFParis Club of Government CreditorsCentral Banks
CHARACTERISTICSExtension of repayment schedulesGrace periods given on principal repayment Interest rate adjustment
DEBT RESCHEDULINGASSESSMENT
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 LENDINGACTORS
Commercial Banks
CHARACTERISTICSEmpowering debtor countries to make interest
payments to banks
NEW LENDINGASSESSMENT
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 PLANACTORS
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 PLANASSESSMENT
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
CONCLUSIONIt is true to say that none of the efforts to date has
provensuccessful to contain and eradicate the astronomicaldebt 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.
REFERENCESO’Brien, Robert and Williams, Marc (2007). Global Political
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.
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