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Third World Debt

How Did the Debt Crisis Start?
In the early 1970s, oil-exporting countries found themselves with money to spare, so they invested it in the commercial banks of developed countries. The banks in turn looked for new customers to lend the money to. Poor countries, many of them in Africa and Latin America, took up the offer of finance at low rates of interest. Then, in the late 1970s, interest rates shot up and world prices for commodities - crops and raw materials - began to slump. This left countries which had been dependent on exports other than oil with falling incomes and, because of the high interest rates, spiralling debts.

These countries have borrowed money - shouldn't they pay it back?
Third World countries want to pay the money back - it's just that they can't. If it were only a question of paying off the initial loans, the Third World would have done this many times over. But repaying debt also means paying off high interest charges. In 1982, the total amount that the Third World owed to the developed world was $860 billion. Since then, debtor countries have repaid thousands of billions, yet they still owe $2,000 billion.

The debt is owed to:

  • The International Monetary Fund (IMF), World Bank (WB), and other international bodies (Multilateral debt)
  • Governments (Bilateral debt)
  • Commercial banks
  • Other private investors

    World Bank and IMF Policies
    Both of these bodies claim to be helping poor countries to repay their debts through Structural Adjustment Programmes (SAPs), but these have often failed to bring growth and have made poverty and inequality worse. SAPs often include the cutting of government expenditure, privatisation of industry, the promotion of exports, and the removal of import taxes and quotas in an attempt to open economies to foreign trade. Countries which refuse to implement SAPs may be denied foreign aid and investment because they donžt have the IMF "stamp of approval".

    How SAPs can affect debt-burdened countries
    Servicing debt takes a big slice from Third World governments' budgets, so there is not enough money to run public services properly. They may make drastic cuts in public spending. Social services often suffer. In attempts to increase government revenue, fees are often introduced for health care and education. Subsidies from foods and medicines are often withdrawn, thus forcing up prices of basic goods. Pressured to earn foreign exchange, some governments are encouraging large-scale export projects, like mining and logging, often at the expense of the environment and local people. Or countries are forced to produce cash crops like coffee and cocoa for export, leaving themselves without enough land to grow food for local populations. If too much is grown for export, the crops flood the world market and push the price down.