Third World Debt Crisis The Scale of the Debt Crisis Consider the following In 1970 the world s poorest countries roughly 60 countries classified as lowincome by the World Bank owed 25 billion in debt Today its 1 35 trillion For Africa In 1970 it was just under 11 billion By 2002 that was over half to 295 billion Debts owed to the multilateral institutions such as the IMF and World Bank is currently around 153 billion For the poorest countries debts to multilateral institutions is around 70 billion Some examples In 2000 debt servicing which means paying back a loan plus interest was on average 38 of the budget of Sub Saharan African states In 2006 Ecuador devoted 38 of its budget to debt repayment while spending only 22 percent of its budget on social spending health care education etc Nicaragua s debt stands at 6 1 billion and requires 52 of the country s annual export earnings to service It is also almost three times what Nicaragua spends on education and health care combined Debt and Development How can countries develop modernize develop democratic social institutions in the face of this crushing debt Third World Debt Crisis What are the causes of the debt crisis Internal and External Legacy of colonialism Odious debt Mismanaged spending and lending by the West What are the consequences Vicious cycle of poverty and debt Solutions General Causes Legacy of Colonialism external factor Many colonial powers saddled former colonies with debts accumulated by colonial regime 1825 France demanded Haiti pay equivalent of 21 billion for loss of slaves and property General Causes Odious debt internal and external In international law odious debt is debt that resulted from loans to an illegitimate or dictatorial government that used the money to oppress the people or for personal purposes Creditors cannot and should not be expected to be paid back Odious debt is the result of bad lending and corrupt borrowing General Causes Odious Debt internal and external Post apartheid South Africa was forced to pay 11 billion pounds borrowed by apartheid regime Mobutu ruled Zaire for 30 years died with 8 billion dollars 2 3 of Zaire s total debt In 1986 Haiti owed 750 million Duvalier family fled with 900 million Suharto in Indonesia worth 40 billion Why loan these leaders money External factors like drought natural disasters etc Timeline 1 Petrodollars In the 1960 s and 70 s the US spent more money than it brought in So they printed more money More dollars in circulation meant the value of the dollar went down Today 1 buys you two apples Next month 1 buys you only one apple Oil producing countries priced their oil in US dollars so this hurt their profits So oil producers raised their prices in 1973 Timeline 2 Western Banks The money made from oil price hikes petrodollars was deposited in Western banks Banks had to lend this money in order to prevent crashing of interest rates Governments private banks World Bank Lenders saw the Third World as an untapped market that could alleviate banking crisis Third World countries were happy to accept loans at low interest Could use the money for development although many dictators enriched themselves Zaire Inga Dam example Timeline 3 Developing Countries Third World countries need foreign currency to pay back these loans Exporting commodities provides this foreign currency One consequence of these debts is that developing countries base their economies on exports to rich countries Developing countries accelerate natural resource exploitation natural gas oil minerals timber and production of cash crops coffee cocoa cotton tea nuts sugar Timeline 3 Developing Countries This works as long as prices are high If coffee prices are high and you export coffee you make money The reverse is also true But developing countries have often focused on one or two or three cash crops for export and abandoned support of subsistence crops crops that feed local people Madagascar exports luxury grade rice and imports lowgrade rice to feed its people So what happens to these countries when prices fall Timeline 4 The Debt Trap By the late 1970 s interest rates in the U S rose dollar decreased in value If you receive dollars for your exports you now receive less money In addition in 1979 there was another oil price hike Furthermore too many countries were producing the same commodities Too much supply falling prices Sum Less money coming in higher fuel costs no way to pay back loans Timeline 4 The Debt Trap By the late 1970 s early 80 s many countries found that they had to borrow more money to pay the interest on the money they already owed In other words the Third World bought into this idea of development through participation in the global economy only to find themselves vulnerable to fluctuations in the global market initiated by policies and actions in rich countries Timeline 5 Enter the enforcers In 1982 Mexico told its creditors that it was bankrupt U S and Europe didn t want this because they would lose money So the World Bank good cop and International Monetary Fund bad cop the world s two main financial institutions stepped in to provide emergency loans and spread out the debts over longer time period However these new loans come with conditions called Structural Adjustment Programs SAP s Timeline 6 SAPs SAPs consist of measures designed to help a country repay its debts by earning more hard currency increasing exports and decreasing imports In a few countries SAPs appear to have had some good effect in most they have worsened the economic situation In nearly all cases SAPs have hurt the poor the most SAPs are referred to as the bitter medicine of the debt trap Timeline 6 SAPs In order to obtain more foreign currency governments implementing SAPs usually have to Spend less on health education and social services people pay for them or go without Devalue the national currency lowering export earnings and increasing import costs Cut back on food subsidies prices of essentials can soar in a matter of days Cut jobs and wages for workers in government industries and services Encourage privatization of public industries including sale to foreign investors Take over small subsistence farms for large scale export crop farming instead of staple foods So farmers are left with no land to grow their own food and few are employed on the large farms Impact Food Riots The rising cost of food has led some Haitians to eat dirt cookies made of salt veg oil and dirt Bill Clinton on free