Third World Debt

16 May 2016 by Damien Millet

Accounting for the Third World Debt

Third World indebtedness involves four categories of agents and a threefold external shock:

1. Banks in the North

Towards the end of the 80s, banks in the North found that they had too many ’eurodollars’ (delocalised dollars) and soon also too many ’petrodollars’ (oil-derived dollars). Aware that ’money must not sleep’, they set off to lend huge amounts to governments in the South at high interest rates Interest rates When A lends money to B, B repays the amount lent by A (the capital) as well as a supplementary sum known as interest, so that A has an interest in agreeing to this financial operation. The interest is determined by the interest rate, which may be high or low. To take a very simple example: if A borrows 100 million dollars for 10 years at a fixed interest rate of 5%, the first year he will repay a tenth of the capital initially borrowed (10 million dollars) plus 5% of the capital owed, i.e. 5 million dollars, that is a total of 15 million dollars. In the second year, he will again repay 10% of the capital borrowed, but the 5% now only applies to the remaining 90 million dollars still due, i.e. 4.5 million dollars, or a total of 14.5 million dollars. And so on, until the tenth year when he will repay the last 10 million dollars, plus 5% of that remaining 10 million dollars, i.e. 0.5 million dollars, giving a total of 10.5 million dollars. Over 10 years, the total amount repaid will come to 127.5 million dollars. The repayment of the capital is not usually made in equal instalments. In the initial years, the repayment concerns mainly the interest, and the proportion of capital repaid increases over the years. In this case, if repayments are stopped, the capital still due is higher…

The nominal interest rate is the rate at which the loan is contracted. The real interest rate is the nominal rate reduced by the rate of inflation.
without bothering at all about a significant proportions of these amounts being embezzled.

2. Governments in the North and their transnational corporations

Faced with an equipment crisis at the end of the 1960s, then with a general recession after the oil crisis in 1974, governments in the North urged corporations to invest in the South and backed those investments with public money. This meant that an investment in the Third World was bound to be a juicy operation and corporations went for it without any restraint, not minding embezzlement and corruption in the least.

3. The World Bank World Bank
The World Bank was founded as part of the new international monetary system set up at Bretton Woods in 1944. Its capital is provided by member states’ contributions and loans on the international money markets. It financed public and private projects in Third World and East European countries.

It consists of several closely associated institutions, among which :

1. The International Bank for Reconstruction and Development (IBRD, 189 members in 2017), which provides loans in productive sectors such as farming or energy ;

2. The International Development Association (IDA, 159 members in 1997), which provides less advanced countries with long-term loans (35-40 years) at very low interest (1%) ;

3. The International Finance Corporation (IFC), which provides both loan and equity finance for business ventures in developing countries.

As Third World Debt gets worse, the World Bank (along with the IMF) tends to adopt a macro-economic perspective. For instance, it enforces adjustment policies that are intended to balance heavily indebted countries’ payments. The World Bank advises those countries that have to undergo the IMF’s therapy on such matters as how to reduce budget deficits, round up savings, enduce foreign investors to settle within their borders, or free prices and exchange rates.

The former US Defence minister Mc Namara becoming president of the World Bank in 1968, that is, during the Vietnam war, coincided with a surge of the WB’s investments in the Third World: while from its creation in 1944 until 1968 it had only financed 708 projects for a total amount of $10.7 bn, it was to finance 760 projects for a total amount of $ 13.4 bn from 1968 to 1973 (among which quite a few ’white elephants’).

4. Governments in the South

Governments in the South welcomed investments that were quite disproportionate to local needs and embezzled huge amounts for their private use, while the banks were all the more willing to turn a blind eye that they could shuffle even more money. Today, however, the populations are squeezed dry to pay back debts contracted by former tyrants who accumulated huge private fortunes with complete impunity.

External shocks and the Debt Crisis in the 1980s

In the early 1980s, the Third World had to sustain a threefold external shock that led to the Debt Crisis in 1982 :

1. In 1979, the American government embarked on an anti-inflation Inflation The cumulated rise of prices as a whole (e.g. a rise in the price of petroleum, eventually leading to a rise in salaries, then to the rise of other prices, etc.). Inflation implies a fall in the value of money since, as time goes by, larger sums are required to purchase particular items. This is the reason why corporate-driven policies seek to keep inflation down. policy and drastically raised its interest Interest An amount paid in remuneration of an investment or received by a lender. Interest is calculated on the amount of the capital invested or borrowed, the duration of the operation and the rate that has been set. rates. This meant that interests to be paid back by third world countries tripled practically overnight.

2. In the early 1980s, the price of export commodities Commodities The goods exchanged on the commodities market, traditionally raw materials such as metals and fuels, and cereals. went down, and has been going down ever since, which entails a fall in the income of governments in the South.

3. As they understood they might never see the borrowed money back, banks in the North stopped their loans to Third World countries.

These external shocks led to a state of bankruptcy in the Third World and to the Debt Crisis which started in Mexico in 1982.

First publication : 8 March 2007

Damien Millet

professeur de mathématiques en classes préparatoires scientifiques à Orléans, porte-parole du CADTM France (Comité pour l’Annulation de la Dette du Tiers Monde), auteur de L’Afrique sans dette (CADTM-Syllepse, 2005), co-auteur avec Frédéric Chauvreau des bandes dessinées Dette odieuse (CADTM-Syllepse, 2006) et Le système Dette (CADTM-Syllepse, 2009), co-auteur avec Eric Toussaint du livre Les tsunamis de la dette (CADTM-Syllepse, 2005), co-auteur avec François Mauger de La Jamaïque dans l’étau du FMI (L’esprit frappeur, 2004).

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