1 July 2020

In the seventies, the debt of developing countries rose at a tremendous rate because the financial conditions of the loans seemed to be extremely favourable. Developing countries were actively encouraged to take on loans by The World Bank, private banks, and by the Governments of highly industrialised countries. Then there was a sudden radical change at the end of 1979, when the US Treasury imposed a sudden rise in interest rates as neoliberal policies kicked in. This sudden jump in interest rates, combined with the drop in the commodities market, completely changed things. During the 1980s the creditors were making huge profits. Since the 1997 South-East Asia and Korean financial crises, the net financial transfer on debt in favour of the creditors (including The World Bank) has been growing at a considerable rate, while at the same time, the debt has continued to soar to peaks never seen before.

The following flow charts show the structure of the external debt of Developing Countries (DCs) first from the point of view of the creditors, then from the point of view of the debtors. The figures are those provided by the WB for 2004, which have been rounded off here.

From the point of view of the debtor nations:

The table shows the period 1970 – 2004. It is a long period which shows both the 1982 crisis and those which came after it.

TOTAL DEVELOPING COUNTRIES (DCs)
			(in US$ billions)
	Total External Debt		External Public Debt		Debt owed to the World Bank
	Total Debt Stock	Net Debt Flows	Total Debt Stock	Net Debt Flows	Total Debt Stock	Net Debt Flows
Years
1970	70	4	45	4	6	0,3
1971	81	7	53	5	7	0,5
1972	95	10	61	6	9	0,7
1973	113	10	74	8	10	0,9
1974	141	20	92	12	11	1,3
1975	171	27	113	20	13	1,9
1976	209	29	139	20	17	2,0
1977	283	51	177	24	20	2,0
1978	358	39	231	28	23	1,8
1979	427	44	278	31	27	2,6
1980	541	51	339	29	32	3,0
1981	629	41	383	26	38	4,1
1982	716	21	442	30	45	4,6
1983	782	-14	517	17	53	4,9
1984	826	-21	571	9	54	5,0
1985	929	-27	672	-5	71	4,4
1986	1.020	-25	782	-5	91	3,7
1987	1.166	-13	920	-2	116	2,7
1988	1.172	-24	932	-10	116	0,6
1989	1.238	-22	982	-16	120	0,4
1990	1.337	-8	1.039	-14	137	2,4
1991	1.414	-3	1.080	-14	147	-0,8
1992	1.480	31	1.099	-6	149	-2,8
1993	1.632	45	1.193	9	158	-0,8
1994	1.792	0	1.290	-16	174	-2,6
1995	1.972	61	1.346	-16	184	-2,1
1996	2.045	27	1.332	-24	180	-0,9
1997	2.110	4	1.309	-24	179	1,9
1998	2.323	-54	1.395	-7	192	1,6
1999	2.347	-98	1.405	-30	198	0,9
2000	2.283	-127	1.363	-52	199	-0,4
2001	2.261	-114	1.326	-65	202	-0,5
2002	2.336	-87	1.375	-67	212	-7,3
2003	2.554	-41	1.450	-81	223	-7,0
2004	2.597	-19	1.459	-26	222	-6,1

Source : World Bank, Global Development Finance, 2005

The second column shows the change in the total external debt stock of all the DCs which the World Bank provides data for [1] (Long and short term debts owed and guaranteed by the government of the DCs and also the debt owed by private companies of the DCs).

Column 4 with the title “External Public Debt” shows the change in the total stock only of that part of the external debt which is owed and/or guaranteed by the government of the DC. Column 6, entitled “debt owed to the World Bank”, shows that part of the external debt of DCs which is owed to the World Bank (IBDR and IDA).

Columns 3, 5 and 7 show the net financial transfer on these three types of debt stock.

What is the net transfer on debt? It is the difference between what a country receives in the form of loans and what it pays back (capital and interest). If the figure is negative, that means the country has paid back more than it received.

Interpretation of the table

From 1970 to 1982, the DCs greatly increased their loans. The total external debt (public and private) in current dollars was multiplied by 10 (going from 70 to 716 billion US dollars). The external public debt was also multiplied by 10 (from 45 to 442 billion US dollars). The public external debt owed to the World Bank was multiplied by 7.5. During this period, the net transfer on debt was consistently positive, which means that the DCs borrowed more than they paid back. They were encouraged to take more loans since the real interest rates were extremely low. Furthermore, the export revenue with which they were reimbursing the debt was increasing, since the price of raw materials was high. Consequently, the DCs on the whole did not have repayment problems. [2]

The table does not immediately reflect the downturn which started at the end of 1979 with the sudden increase in interest rates imposed on the world unilaterally by the United States government. The real interest rates exploded at the beginning of the 1980s: 8.6% in 1981, 8.7% in 1982, compared with -1.3% (the real interest rate was actually negative) in 1975, 1.1% in 1976, 0.3% in 1977. [3]

This increase in interest rates, which meant an increase in the sums to be repaid, was compounded by a drop in the commodities market (although initially crude oil was not included in this downturn).

When this drop finally brought down the price of crude oil, the main debtors, who were oil producing nations such as Mexico, were no longer able to pay. This started in 1982. [4]

Going back to the table it can be seen that at this point, the DCs moved into a debt payment crisis and there was a negative net financial flow on the total public and private debt between 1983 and 1991 (nine consecutive years of negative net transfer).

During this time, while the DCs were paying back more than they were borrowing, their total external debt did not go down at all. Between 1983 and 1991 it went up by 632 billion US dollars, that is to say, it increased by 81%.

Explanation: because the DCs were in difficulty due to their drop in revenue and the high interest rate, they took on further loans mainly in order to be able to make the payments due, or in other words, to be able to service the debt. In such conditions the new loans were even more expensive (high interest rates and high risk premiums) [5]

It should also be noticed that the net transfer on the external public debt moved into negative values with a time lag of two years. Why is it that in 1983 and 1984 the net transfer on the public external debt was still positive? Because the governments at that point started to borrow considerable amounts (from the IMF and the World Bank) in order to begin to take on debts which had initially been taken out by the private sector but which the government agreed to take over. These enormous loans, which the nation started to pay back a few years later, explain the subsequent negative flow, from 1985 onwards.

This was especially true for Argentina, where 12 billion US dollars of private debt was transferred to the state by the military junta. [6]

Between 1982 and 1984, the public external debt increased by 129 billion dollars (from 442 billion to 571 billion US dollars (see column 4) while the private external debt went down by 19 billion (from 274 to 255 billion US dollars ). [7]

Taking the period 1982 -1988, the public debt increased by more than 100% (from 442 to 932 billion dollars – see column 4) while the private external debt went down (from 274 to 240 billion US dollars) The capitalists in the DCs get out of their debt by getting the Treasury of their country to pay it for them, that is to say, the salaried workers, smallholders and the poor, who pay proportionally far more tax than the capitalists. Furthermore, it will be seen in a later chapter that a very high proportion of these loans go straight back to the creditor countries through capital flight. That is to say the capitalists of the DCs sent a large part of the loans which had been taken out by the country straight back to the North!

Looking at column 5 over the period 1985-2004, it can be seen that after 1985, the net transfer on debt was consistently negative except in 1993. Over twenty years, the negative transfer weighed heavily on public finance, reaching a total of 471 billion US dollars, i.e. the governments of the DCs transferred to their creditors an amount equivalent to five Marshall plans. At the bottom of column 5, it can be seen that between 2000 and 2004, the negative transfer increased. Over this period, this negative transfer totalled 291 billion US dollars, i.e. the equivalent of three Marshall plans were provided by the DCs in just five years.

After twenty years of negative transfer, economic reasoning would make it logical to suppose that the authorities of a country had paid off their debt. Obviously, if they reimbursed more than they borrowed, it would be logical to think that the principal sum was going down or could even reach zero.

However, our table shows that in fact the exact opposite happened; that the external public debt of the DCs more than doubled over the period 1985 to 2005, i.e. from 672 billion US dollars in 1985, it had gone up to 1459 billion US dollars by 2005. [8]

Thus we see that what this table shows us is :

1. The management of the external debt of the DCs has resulted in a powerful mechanism of capital flow from the debtor countries to the various creditors (public and private).
2. Despite enormous and continuous repayment, the total debt has not gone down.

During the 1960s and 1970s, developing countries were encouraged to take out more and more loans, until the trap finally closed on them. As we said above, the turning point was 1979, with the sudden jump in the interest rate and the start of the drop in the commodities market (which did not affect crude oil at the beginning, but then did in 1981).

The theoretical virtuous circle of taking out external loans to promote development and well-being and which would result in self-perpetuating growth [9] did not work. It turned into a vicious circle of permanent debt with enormous capital flow to the creditors.

Figure 1. Comparison of the sums taken out in loans yearly and amount reimbursed each year (total external debt)

Source: World Bank, Global Development Finance, 2005
Legend:
 - - Debt service
 --- Total repayments

Note: between 1983 and 1991, the DCs repaid more than they borrowed, as was also the case between 1998 and 2004.

If we go back to the table at the beginning of the chapter and look at column 3 between 1983 and 2004, it can be seen that the net transfers were negative up to 1991, and then became positive between 1992 and 1997. From 1998 onwards they were very strongly negative, reaching minus 127 billion US dollars for the year 2000. How can this be explained? During the 1980s, the flow was negative up to 1989, both for the private companies within the DCs and for the governments of these countries. As we saw above: 1) the private sector freed itself of its debts by transferring part of its debt to the public sector and was repaying only a part of what remained, and 2) the public sector continued increasing its debt to cover the debts it had taken over from the private sector, and was paying most of the reimbursements. Around 1990, the private sector, having been released from much of its debt, took out new loans, which become massive debts between 1992 and 1997 (the external debt of the private sector rose from 381 to 801 billion US dollars, an increase of more than 110%). The loans taken out by the private sector were temporarily higher than the repayments made. The low point in 1994 corresponds to the Mexican crisis, which was accompanied by massive capital flight.

The situation changed again from 1998 onwards, when the South East Asian crisis (Thailand Malaysia, the Philippines and Indonesia) and the South Korean crisis occurred, followed by crises in Russia and Brazil in 1999, and in Argentina and Turkey in 2001. Repayments from the private and public sectors were enormous and the negative net flow attained its maximum in 2000-2001.

In 2003 and 2004, the net flow remained negative, but lessened since the private sector and public authorities of the DCs took on new loans under conditions that were temporarily favourable because of:

• relatively low interest rates
• considerably reduced risk premiums
• an increasing export revenue because of an upward trend in the commodities market (oil, gas, etc.)

Instead of taking advantage of this situation to pay off existing loans and, with encouragement from the creditors, most medium income DCs took on new loans. Those who, like Thailand, Brazil and Argentina, chose advance reimbursement of the IMF, or those who, like Russia or Brazil, reimbursed the Paris Club, simply replaced their debts to public creditors by new debts to private creditors (who were offering temporarily favourable conditions). These countries considerably increased their internal public debt.

The last two columns of the table concern the DCs’ debt to the World Bank. It can be seen that this debt has increased steadily, as has that to all the creditors. It is the final column, which gives the total net transfer, which changes. The total net transfer remains positive with regards to the World Bank up to 1990 whereas it becomes negative from 1983 onwards as far as the total debt is concerned (column 3) and from 1985 onwards for the public external debt (column 5). This is mainly due to the fact that during the 1980s, the World Bank provided the DCs with loans so that they would be able to reimburse the private banks of the North who were liable to go bankrupt if they did not have this inflow. Of course it is the IMF which plays the major role at this level, but in close coordination with “The Bank”.

The net transfer with respect to the World Bank became negative from 1990 to 1996, then positive from 1997 to 1999 before becoming negative again with the greatest negative net flow ever in 2002, 2003, and 2004. The negative transfer over the period 2000-2004 totals a staggering 21.3 billion US dollars. This is to be compared to the total amount provided in loans each year by the World Bank, which is less than 20 billion US dollars a year.

What is even more serious is that this enormous negative net transfer does not in the slightest lead to the DCs freeing themselves from debt, but actually leads to an increase in the debt owed to the World Bank.

This shows the total cynicism inherent in the system, which results in artificially increased debt loads which in no way correspond to the money injected into the economies of these countries.

Figure 2. Change in total debt stock compared with the total net transfer on the debt

Source: World Bank, Global Development Finance, 2005
Legend:
 --- Total debt stock
 □ Total net transfer on debt
Left-hand scale: Net transfer on the total external debt (public+private) of all the DCs together (in $US billions)
Right-hand scale: Change in the total external debt (public+private) of the DCs (in $US billions)

This graph shows the content of columns 2 and 3 of the table at the beginning of the chapter.

It can be seen that the net transfer is positive from 1970 to 1982, the year when the debt crisis occurred. It became negative in 1983 through to 1991. Then from 1992 to 1997 it was positive again except in 1994, the year of the Mexican crisis. Since 1998 (the South-East Asian and Korean crises) and up to 2004, the net transfer has been negative. Over the period 1970-2004, the debt stock spiralled upwards from 70 billion US dollars in 1970 to 2597 billion US dollars in 2004.

The following graphs illustrate the public external debt of the major regions of the world.

Figure 3. Change in total debt stock compared with the total net transfer on the public external debts in Latin America and the Caribbean

Source: World Bank, Global Development Finance, 2005
Legend:
 □ Net transfer on public & publicly guaranteed debt
 --- Total stock of public & publicly guaranteed debt
Left-hand scale: Net transfer on the total external public debt of Latin America and the Caribbean (in $US billions)
Right-hand scale: Change in the total external public debt of Latin America and the Caribbean (in $US billions)

The net transfer on the public debt became negative in 1983 and remained negative through to 2004.

Population of Latin America and the Caribbean in 2004: 540 million
List of countries: [10] (Antigua-and-Barbuda), Argentina, Barbados, Belize, Bolivia, Brazil, Chile, Colombia, Costa Rica, (Cuba), Dominican Republic, Dominica, Ecuador, Grenada, Guatemala, Guyana, Haiti, Honduras, Jamaica, Mexico, Nicaragua, Panama, Paraguay, Peru, St. Lucia, St. Kitts and Nevis, St. Vincent and the Grenadines, El Salvador, (Suriname), Trinidad and Tobago, Uruguay, Venezuela.

• Total external public debt in 1970: 16 billion US dollars
• Total external public debt en 2004: 442 billion US dollars

This area, Latin America and the Caribbean, is emblematic of the way the debt crises are managed in order to protect the interests of the creditors.

A quick overview (figures 4 to 8) of the change in the public debt and the net flow on the debt in the other five major developing regions shows that the debt crisis of 1982 which started in Latin America gradually spread to all the other regions. Apart from obvious differences, what stands out is that the net transfer became negative everywhere at the end of the 1990s. This illustrates the fact that nowhere in the world has the crisis been resolved. It also shows that the at the beginning of the 21^st century, the debt is even more of an obstacle to be overcome than it was in the 1980s.

Figure 4. Change in total debt stock compared with the total net transfer on the public external debts in South Asia

Source : World Bank, Global Development Finance, 2005
Legend:
 □ Net transfer on public & publicly guaranteed debt
 --- Total stock of public & publicly guaranteed debt
Left-hand scale: Net transfer on the total external public debt in South Asia (in $US billions)
Right-hand scale: Change in the total external public debt in South Asia (in $US billions)

The net transfer became negative in 1994 while the total debt stock has continued rising.

Population of South Asia in 2004: 1 450 million
List of countries: [11] (Afghanistan), Bangladesh, Bhutan, India, the Maldives, Nepal, Pakistan, Sri Lanka

• Total external public debt in 1970: 12 billion US dollars
• Total external public debt in 2004: 156 billion US dollars

Figure 5. Change in total debt stock compared with the total net transfer on the public external debts in Sub Saharan Africa

Source : World Bank, Global Development Finance, 2005
Legend:
 □ Net transfer on public & publicly guaranteed debt
 --- Total stock of public & publicly guaranteed debt
Left-hand scale: Net transfer on the total external public debt in Sub Saharan Africa (in $US billions)
Right-hand scale: Change in the total external public debt in Sub Saharan Africa (in $US billions)

The net transfer became negative in 1998 while the total debt stock rose steadily through to 1995 and dropped slightly in 2004.

Population of Sub Saharan Africa in 2004: 720 million

List of countries: [12] South Africa, Angola, Benin, Botswana, Burkina Faso, Burundi, Cameroon, the Cape Verde Islands, the Central African Republic, the Comoros, Congo-Brazzaville, Ivory Coast, Eritrea, Ethiopia, Gabon, Gambia, Ghana, Guinea, Guinea-Bissau, Kenya, Lesotho, Liberia, Madagascar, Malawi, Mali, Mauritius, Mauritania, Mozambique, (Namibia), Niger, Nigeria, Uganda, the Democratic Republic of Congo, Rwanda, São Tome and Principe, Senegal, the Seychelles, Sierra Leone, Somalia, the Sudan, Swaziland, Tanzania, Chad, Togo, Zambia, Zimbabwe.

• Total external public debt in 1970: 6 billion dollars
• Total external public debt in 2004: 165 billion dollars

Figure 6. Change in total debt stock compared with the total net transfer on the public external debts in North Africa and the Middle East

Source: World Bank, Global Development Finance, 2005
Legend:
 □ Net transfer on public & publicly guaranteed debt
 --- Total stock of public & publicly guaranteed debt
Left-hand scale: Net transfer on the total external public debt in North Africa and the Middle East (in $US billions)
Right-hand scale: Change in the total external public debt in North Africa and the Middle East (in $US billions)

The net transfer became negative from 1990 onwards. In spite of these considerable reimbursements, the debt has not been noticeably reduced.

Population of North Africa and the Middle East in 2004: 290 million

List of countries: [13] Algeria, (Saudi Arabia), Djibouti, Egypt, (Iraq), Iran, Jordan, Lebanon, (Libya), Morocco, Oman, Syria, Tunisia, Yemen

• Total external public debt in 1970: 4 billion US dollars
• Total external public debt in 2004: 126 billion US dollars

Figure 7. Change in total debt stock compared with the total net transfer on the public external debts in East Asia and the Pacific

Source: World Bank, Global Development Finance, 2005
Legend:
 □ Net transfer on public & publicly guaranteed debt
 --- Total stock of public & publicly guaranteed debt
Left-hand scale: Net transfer on the total external public debt in East Asia and the Pacific (in $US billions)
Right-hand scale: Change in the total external public debt in East Asia and the Pacific (in $US billions)

The net transfer was negative between 1988 and 1991, and from 1999 onwards became negative again but even more strongly. In 1999, the public debt shot up after the private debts became public and the IMF provided “emergency” loans. In spite of such a negative net transfer, the debt has not gone down.

Population of the DCs in East Asia and the Pacific in 2004: 1870 million
List of countries: [14] Cambodia, China, (North Korea and South Korea [15]), Fiji, Indonesia, (Kiribati), Laos, Malaysia, Mongolia, Burma-Myanmar, Papua New Guinea, the Philippines, the Solomon Islands, Samoa, Thailand, (East Timor), Tonga, Vanuatu, Vietnam

• Total external public debt in 1970: 5 billion US dollars
• Total external public debt in 2004: 262 billion US dollars

Figure 8. Change in total debt stock compared with the total net transfer on the public external debts in Eastern Europe and Central Asia

Source: World Bank, Global Development Finance, 2005
Legend:
 □ Net transfer on public & publicly guaranteed debt
 --- Total stock of public & publicly guaranteed debt
Left-hand scale: Net transfer on the total external public debt in Eastern Europe and Central Asia (in $US billions)
Right-hand scale: Change in the total external public debt in Eastern Europe and Central Asia (in $US billions)

The net transfer became negative in 1985 and remained negative through to 2004 apart from the years 1992-1993 and 1998. In spite of the extremely large negative transfers between 2000 and 2003, the external public debt continued to rise.

Population of Eastern Europe and Central Asia in 2004: 470 million

List of countries: Albania, Armenia, Azerbaijan, Belarus, Bosnia-Herzegovina, Bulgaria, Croatia, Estonia, Georgia, Hungary, Kazakhstan, Kyrgyzstan, Latvia, Lithuania, Macedonia, Moldavia, Uzbekistan, Poland, Romania, Russia, Serbia Montenegro, Slovakia, Slovenia, Tajikistan, Czech Republic, Turkmenistan, Turkey, Ukraine

• Total external public debt in 1970: 3 billion US dollars
• Total external public debt in 2004: 310 billion US dollars

Footnotes :