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- This page: http://www.globalissues.org/article/29/causes-of-the-debt-crisis.
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Further debt resulted from mismanaged spending and lending by the West in the 1960s and 70s. As summarized from Jubilee 2000 (and reposted here) :
- 1960s saw the US spend more than it had, resulting in the printing of more dollars.
- Oil-producing countries, pegged to the dollar were affected as the value of the dollar decreased.
- In 1973, the oil-producing countries hiked their prices as a result, earning a lot of money, which they put in to western banks.
- Interest rates started to plummet resulting in more lending by banks to try and prevent a crisis.
- A lot of the borrowed money went to western-backed dictators, resulting in little benefit for most people.
- In 1982 Mexico defaulted on its debt payment, threatening the international credit system.
- The IMF and World Bank stepped in to Mexico and other nations facing similar problems, prescribing their loans and structural adjustment policies to ensure debt repayment.
- The poor have suffered the most as a result of the harsh conditions of structural adjustment.
Most loans to the third world have to be paid back in hard currencies (which do not usually change too much in value, e.g. the Japanese Yen, the American Dollar, etc.)
- Poor countries have soft currencies (values which can fluctuate).
- Debt crises can also occur just by the value of the developing country’s money going down, which can be due to a variety of other inter-related factors.
- Paying off loans implies earning foreign exchange in hard currencies.
- Combined with falling export prices for many poor countries, debts become even harder to pay off.
- Refinancing loans implies taking on new debts to service the old ones.
- Structural adjustment advice in the past from the IMF and others, has led to the cut back on important spending such as health, education, in order to help repay loans. This has implied a downward spiral and further poverty.
The World’s Poor Are Subsidizing the Rich
Another cause for large scale debt has been the corruption and embezzlement of money by the elite in developing countries (who were often placed in power by the powerful countries themselves). These moneys are often placed in foreign banks (and used to loan back to the developing countries). Many loans also come with conditions, that include preferential exports etc. In effect then, more money comes out of the developing countries than is given in. This depresses wages even further due to the spiraling circle downwards to ensure that enough exports are produced. (See the structural adjustment section on this web site for more on that aspect.)
J.W. Smith, from the Institute for Economic Democracy, is worth quoting at length:
Susan George, in her 1992 book, Debt Boomerang: How Third World Debt Harms Us All, calculated a net of $418 billion borrowed funds flowed right back north between 1982 and 1990.
The world’s poor are subsidizing the rich. The net gain to the over-capitalized countries (loss to the under-capitalized ones) of $418 billion between 1982 and 1990 is more than double what was spent to rebuild Europe after World War II. “Capital flight from Mexico between 1979 and 1983 alone [was] $90 billion — an amount greater than the entire Mexican debt at that time.”
... How this is accomplished is well-known to American bankers,
Their real role has been to take funds that Third World elites have appropriated from their countries and to loan them back, earning a nice spread each way.
... Loans from the U.S. government are almost invariably tied to the purchase from the creditor nations. Over 80 percent of America’s foreign aid returns directly through its exports. Commenting on such generosity, the prime minister of Malaysia pointed out that, “Although Japan furnishes loans, it takes back with its other hand, as if by magic, almost twice the amount it provides.” Central American authorities estimated that by 1986 the wealth drained from Latin America was “more than $70 billion in a single year in the form of money or merchandise for which [Latin America] didn’t receive anything in exchange.” The effect of this multifaceted assault on the wealth of the Third World is that real wages in Mexico declined by 60 percent in the decade of the 1980s, in Argentina by 50 percent, and in Peru by 70 percent.
... With overcapacity [excessive production] in the developed world and with the buying power — thus the only consumer market — being in the First World, the Third World cannot capitalize. The world’s powerless cannot obtain their share of capital, high paying jobs, and markets. Thus, they trade their valuable resources for products manufactured by well-paid labor in the over-capitalized countries. Just as cheap imported agricultural products destroy an undeveloped country’s agricultural economy, imported consumer goods forestall the building of industry to produce these products regionally and build an internal market economy. If a loan is to be of lasting value to the country to which it is granted, it must be put to productive, not unnecessary consumptive, or wasteful use. Only by building the tools of production (industry) instead of spending borrowed funds on consumption can a society become self-sufficient, build an internal market economy, gain equality in world trade, and eliminate poverty.
[Because the First world wasn’t concerned too much about developing the Third World the loans] created debt traps, and reduced competition; the indebted world must strip their resources to repay those debts. (Emphasis is original)
— J.W. Smith, The World’s Wasted Wealth 2, (Institute for Economic Democracy, 1994), pp. 139-141.
Backbone to Globalization
The economic decisions and influence in various international agreements, treaties and institutions by the wealthy and powerful nations also help form the backbone of today’s globalization. That such immense wealth and prosperity for some have come at a time when most nations in the world have steeped into further poverty and debt is no coincidence. The policies of those who have the power and influence have been successful to help raise standards for some in their own nations, but at a terrible cost. Rich nations as well as poor incur debts, but often the wealthier and more powerful ones are able to use various means to avoid getting into the dilemmas and problems the poor nations get into. In fact, the following summarizes it quite well using the U.S. as an example:
The US began by abandoning the system of fixed exchange rates established by the Bretton Woods Agreements in 1944 and introducing a system of generalised floating exchange rates. There was a strong economic motive for the decision, which the US authorities took unilaterally in 1973. They were seeking to compensate for declining competitiveness and a growing national debt by exporting the country’s macroeconomic imbalances. The floating exchange rate system provided a flexible and efficient monetary tool that enabled them to avoid the adjustments that would otherwise have been required by America’s new situation as a debtor. In a system of fixed exchange rates and gold convertibility, the US would have been obliged, like every third-world country today, to pay for its indebtedness with a relative loss of sovereignty and highly unpopular domestic austerity measures.
The new system also allowed the US to maintain a high standard of living at home by dipping into the planet’s savings. Thanks to its political power and to the dollar, which was the world’s only reserve currency, the US was able to keep its monetary sovereignty intact. Its allies could not question American policy without destabilising the institutional fabric and the cold-war security system from which they derived undoubted benefits. The burgeoning US deficit was funded for decades by Japan and Europe.
— Has Globalization Really Made Nations Redundant? The States We Are Still In, Le Monde Diplomatique, April 2000
While many western-backed dictators borrowed and went into debt, the impact is longer lasting and the poor people of today still suffer the impacts. For additional information see:
- How It All Began from Jubilee 2000.
- Debt: A Silent War from Jubilee 2000.
- Structural Adjustment — a Major Cause of Poverty from this web site.
- Bringing it all back home from Jubilee 2000 explains why debt in developing countries affect the industrialized nations too.
- The Institute for Economic Democracy does a great job in providing a historical look at the political economy of the world and how it has led to the conditions of today.
- Beginner’s guide to debt from the debtchannel.org provides a good overview.
- Africa’s Debt is a position paper by Africa Policy with a look at the debt situation of sub-Saharan Africa in particular.
- Challenging the legitimacy and legality of Third World Debt, a web site about Odious Debt (debt incurred by regimes that were not in the interest of their people).
The following are some simple examples of the problems that the current lending schemes have caused. (They are by no means extensive or exhaustive.)
- Causes of the Debt Crisis
- The Scale of the Debt Crisis
- The Heavily In-debt Poor Countries Initiative is Not Working
- Debt Cancellation and Public Pressure
- Debt and the Global Economic Crisis of 1997/98/99
- Debt and the Effect on Children
- Debt and the Environment
- G8 Summits: Empty promises each year
- Third World Debt and Disaster Recovery
- Poverty Links for More Information