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.