How did the Third-World Debt Crisis Develop?

The following article was written in November 2005. It goes some way in highlighting the mechanisms involved in Third-World debt but reflects certain discursive modes that are employed ad nauseum by international institutions to blame poorer countries for, or at least, to explain away the emergent effects of very complex socio-historical processes and patterns of development that have less to do with policy-application and political probity and more to do with centuries of pillage and plundering paired with colonial and neo-colonial dispossession of what were to otherwise have been autochthonous processes of human design, collectivisation and advancement.

The issue to be discussed is the development of the debt crisis in the Third-World. Whilst Third-World debt is frequently discussed in academic circles, enough time is rarely expended on evaluating the origin of such a problem, thus, debates on the subject often lack context. The paper required research into the past economic situations of the Third-World which were generally best chronicled by technical books on the subject. The paper sought to treat with the problem as a whole whilst recognizing that each developing country is in a somewhat unique position concerning the crisis.

As early as in 1919, the famed economist, John Maynard Keynes, wrote about the debt countries had incurred as a result of the catastrophe of World War One (1914-1918) (Ferraro and Rosser, 1994). In 2004, the Third-World owed 2.1 trillion dollars in unpaid debt and interest. The situation has captured the attention of the international community as the poor especially try to grapple with a reality that can, at best, be described as a crisis. The enormity of the situation becomes stark when we assess the cost of debt on human and social development. According to Buckley, “extrapolating from the UNICEF data, as many as 5,000,000 children and vulnerable adults may have lost their lives on this blighted continent [Africa] as a result of the debt crunch” (Buckley, 2002/03, Vol. 19, No. 4). So as to understand this economically debilitating problem, it is critical to assess its development. Ergo, how did the Third-World debt crisis develop?

            After the depression of the Second World War (1939-1945), developed economies found themselves on a path of rapid growth; however, their less developed counterparts were not as fortunate. Developing countries found a critical need for foreign exchange earnings, strengthened national reserves and new technologies to offset the shocks of the Great Depression of the 1920s and the war and to spur growth (Corbridge, 1993). It is therefore no surprise that when the developed world sought to make funds available to them in the post war era, mostly through loans, there was a massive positive response. The United States and western Europe- and later the Soviet Union in the 1950s- calculatingly extended their geopolitical influence through development assistance at a time when it was generally accepted that the loans made would give debtor nations the impetus needed to industrialize and become self-sustaining in the long term; so that the question of their honouring their debts was never moot (Corbridge, 1993).

            Rather than developing a capacity to repay, the regions of Latin America; the Caribbean; North and Sub-Saharan Africa; East Asia and the Pacific; the Mediterranean; and Eastern Europe had all compounded their debt servicing as debtor countries found themselves continually wanting more funds, ostensibly to fill troublesome gaps whilst the First World saw the situation as potentially lucrative (Lomax, 1986). As Corbridge so concisely put it, “the 1970s will be remembered as the decade of the […] transfer of funds […] to Southern public and private sector organizations” (Corbridge, 1993, p. 27). Even with the obviously precarious path the developing world was on, few had the foresight to understand the looming crisis and as such, little was done to avoid it. Much of this changed (in some respects), however, on August 18, 1982, when Mexico- then the most indebted developing nation- announced its inability to fulfill its debt obligations, forcing it into default on payments. Subsequently, in 1987, the Brazilian authorities suspended payments on interest owing from foreign loans of US $110 billion (Altvater & Hubner, 1991).

            The accumulation of burdensome external debt was a combination of unforeseen adverse global developments, as well as poor domestic economic policies and management. Concerning the former, the 1970s saw low interest rates on loans and a liberal culture of lending, providing huge incentives for borrowing. Then in 1979, the second largest increase in oil prices up until then, took a devastating toll on non-oil exporting developing economies. The 1980s saw a prolonged world recession and a hike in interest rates internationally, which meant that whilst there was perhaps a greater demand than at any previous time for funds in developing economies, the cost of servicing loans would be significantly greater. The then Argentine president, Raul Alfansoin, characterized the situation as, “a neutron bomb in which men and women remain alive,  but all that generated wealth is destroyed” (Haq, 1985, p. 59) after a one percentage point increase in United States interest rates in 1989 added US $600 million to Argentina’s foreign debt (then $45 billion) (Haq, 1985).

            The management and policies of the developing economies were also responsible for the quagmire that is the debt crisis. Many decisions pursued for largely political reasons by governments of poorer countries have proven counterproductive to their socio-economic development and have augmented their debt. Third-World governments deliberately overvalued their currency, making goods less competitive abroad and consequently stifling their exports. In addition to discouraging growth and investment, the effect of this is that the developing economies failed to earn the foreign exchange needed to ease the burden of repaying debt which is principally foreign currency denominated. It should be noted that while experts generally see overvaluation of domestic currencies as imprudent, it does not necessarily translate to a bad fiscal policy depending on the objective of government. There are, however, those policies which have been clearly ruinous to the Third-World. Many Third-World economies possess resources that could have gone a far way in curtailing the need to borrow as well as reducing debt servicing. Corrupt spending, squandering of public resources, purchasing of weaponry, political turmoil and authoritarianism are proverbial problems which have kept the Third-World relatively poor. What is more, the ramifications of extreme indebtedness often in turn, become its very cause, signaling what can only be termed a crisis. Environmental destruction, child mortality, poor health and epidemics, and political instability and terrorism all both provoke and result from Third-World debt (Bittermann, 1973).

            The international community has only recently come to fully accept the problem of the developing world debt as one of insolvency [i.e. an inability to sustain debt over a protracted period due to poor development] rather than one of illiquidity [i.e. a lack of sufficient monies within the economy to cover debt that has matured] (Haq, 1985). With this in mind, the international community has sought to address the crisis from a standpoint of development rather than of merely making currencies available through loans when there is a shortfall. Experts consistently point to having policies of fiscal balance, trade liberalization, privatization, low inflation and interest rates, and incentives for private sector firms as a way to spur economic activity in poorer countries (Cline, 1995). Such a situation then creates the economic climate in the short term which provides the funds to improve employment opportunities, health, education, security, infrastructure, and so forth- the indicators of development. Whatever solution to the problem must also include the developed world which should be willing to aid in the recovery process. Indeed, the “growth, inflation, interest rates, and exchange rates [of the First-World which accounts for 75% of world Gross National Product] set the framework within which the other participants [the Third-World] have to operate” (Lomax, 1986, p. 2). The reality however is that while it is clear that the debt crisis is, as it were, a lethal combination of the actions of both the debtor countries and their creditors, the reality is that it is the debtor nations which ultimately must literally pay for such a crisis.

References

Altvater, E. & Hubner, K. (1991). Lorentzen, J. and Rojas, R. (Eds.). The Poverty of Nations, A Guide to the Debt Crisis from Argentina to Zaire. Atlantic Heights, NJ: Zed

Bittermann, H.J. (1973). The Refunding of International Debt. Durham, NC: Duke University Press.

Buckley, R. (2002). The Rich Borrow and the Poor Repay: The Fatal Flaw in International Finance. In World Policy Journal (Vol. 19, No. 4). The New School, NY: World Policy Institute.

Cline, W.R. (1995, February). International Debt Reexamined. Washington, DC: Institute for International Economics.

Corbridge, S. (1993). Debt and Development. Cambridge, MA: Blackwell Publishers.

Ferraro, V. & Rosser, M. (1994). Global Debt and Third World Development. In M. Klare & D. Thomas (Eds.), World Security: Challenges for a New Century. (pp. 332-355). New York: St. Martin's Press.

Haq, K. (Eds.). (1985). The Lingering Debt Crisis. Islamabad: North South Roundtable.

Lomax, D.F. (1986). The Developing Country Debt Crisis. Hampshire: The Macmillan Press Limited.