THIRD WORLD DEBT

 

In the 1960s, many developing countries with low productivity, low income, and low saving rates began to borrow large sums of money from Western banks, in order to industrialise.

 

In many countries, this worked successfully for a few years, but after the huge rise in oil prices in 1973, while the oil-exporting nations were depositing their "petrodollars" in Western  banks, many developing countries needed to borrow more money to pay for their imported oil.

 

After the second oil shock in 1979, and the economic slowdown that followed it, interest rates rose and the prices of the commodities and agricultural goods exported by the debtor countries fell.

 

For these reasons, many of the heavily indebted Third World Countries are now unable to service their debts with Western commercial banks: i.e.: they cannot pay the interest , let alone repay the principal.

 

Consequently they need to rollover or renew the loans, to reschedule or postpone repayments, or to borrow further money from the International Monetary Fund (IMF) just to pay the interest on existing loans from commercial banks.

In these circumstances, when rescuing or "bailing out" indebted countries, the IMF insists on "structural adjustment" and "austerity" measures, obliging governments to devalue, to privatise as much as possible, to cut spending on health care, education and transport, to end food subsidies, and to export everything that can be sold, including food.

 

All this obviously makes most of the people in these countries much worse off that they were before their governments began borrowing to finance development.

In the late 1980s, many Western banks and governments (but not the IMF) began to write off or cancel a proportion of the loans made to Third World countries which had defaulted , although the proportion cancelled is generally less than the amount that the countries were repaying anyway.

 

In the 1990s, while much of  the Third World countries was paying billions of dollars of interest to the IMF (but hardly reducing the size of the loans themselves), the commercial banks started to lend billions of dollars to the former "Second World"-the previously communist countries of Eastern and Central Europe.