Third World Debt CrisisThe Scale of the Debt CrisisSome examplesDebt and DevelopmentThird-World Debt CrisisGeneral CausesGeneral CausesGeneral CausesTimelineTimelineZaire: Inga Dam exampleTimelineTimelineTimelineTimelineTimelineTimelineTimelineImpactOdious debts?Cancel the debts?Cancel the Debt?Cancel the Debt?SummaryImpact of debt reliefIs the U.S. going through Structural Adjustment?Student Loan DebtDebt in Historical ContextEurope and Debt.Europe and DebtIceland’s alternativeThird World Debt CrisisThe Scale of the Debt CrisisConsider the following:•In 1970, the world’s poorest countries (roughly 60 countries classified as low-income 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 borrowingGeneral 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.Timeline1. 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.Timeline2. 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 exampleTimeline3. 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)Timeline3. 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 low-grade rice to feed its people!–So what happens to these countries when prices fall?Timeline4. 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.Timeline4. 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.Timeline5. 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).Timeline6. 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