Global Debt and Third World Development
By Vincent Ferraro and Melissa Rosser
From: World Security: Challenges for a New Century, edited by Michael Klare and Daniel Thomas (New York: St. Martin's Press, 1994), pp. 332-355


In 1919, writing about a massive debt imposed upon Germany by the Allied Powers as reparations for a catastrophic war, John Maynard Keynes expressed contempt for the wisdom of the policy:

The policy of reducing Germany to servitude for a generation, of degrading the lives of millions of human beings, and of depriving a whole nation of happiness should be abhorrent and detestable - abhorrent and detestable, even if it were possible, even if it enriched ourselves, even if it did not sow the decay of the whole civilized life of Europe. Some preach it in the name of justice. In the great events of man's history, in the unwinding of the complex fates of nations Justice is not so simple. And if it were, nations are not authorized, by religion or by natural morals, to visit on the children of their enemies the misdoings of parents or of rulers.1

Twenty years later, the debt, partially responsible for the rise of the Nazis, had been repudiated and Keynes's views had been confirmed.

Seventy-four years later, the world confronts another massive debt, although not one imposed by a treaty of peace. Indeed, this debt, totaling $1.362 trillion in 1991, has no identifiable demons: One cannot point to the vindictiveness of a Clemenceau, or the opportunism of a Lloyd George, or the naive idealism of a Wilson. Nonetheless, this debt has had the effect of plunging millions of people into conditions of economic despair and desperation. Most tragically, this debt will jeopardize the chances for the happiness of millions of children who will have committed no crime other than that of being born into a poor society. Ultimately, this debt, like the German debt, will not be repaid in full.

This chapter will examine the causes and consequences of the global debt crisis. It begins by first defining the crisis and then develops an explanation for the crisis from two perspectives: first, a general explanation based upon the desperate economic conditions that characterize developing countries; and second, an explanation of the more specific reasons why poorer countries expanded their debt burdens so dramatically in the 1970s. The chapter then examines the costs of the debt crisis to both developing and developed countries, and pays some close attention to the possibility of an international banking collapse in the early 1980s. Finally, the chapter reviews some general solutions to the debt crisis and offers suggestions for future responses.

What is the "Debt Crisis?"

To be fully accurate, one should refer to the multiple debt crises that exist in the world today. For our purposes, however, the "debt crisis" will refer the external debt, both private and public, of developing countries, which has been growing enormously since the early 1970s. Our focus should obscure, however, the other debt crises that trouble much of the global economy: the budget deficits of the United States government, its balance trade deficits, and the insolvency of many of its savings and loans institutions. These crises are highly interconnected, particularly as they relate the issues of interest rates, export values, and confidence in the international banking system. The "debt crisis," then, is a global phenomenon, and a attempt to understand it fully needs a global perspective.

However, the greatest suffering thus far in the crisis is found within developing countries, and therein lies the justification for our focus. But even within the developing world, our attention can be directed toward a variety of problems depending on how one chooses to think about debt. One can focus on the integrity of the international financial system, in which case one's emphasis is on the countries with the largest debts, such as Mexico or Brazil. Alternatively, a primary concern can be on the desperate human costs of the debt, which would direct attention to sub-Saharan Africa, for example. Yet another perspective, the strategic dimensions of the problem, would concentrate on debtors such as Turkey or South Korea.

We will pay primary attention to what have been termed the most heavily indebted nations within the developing countries. This focus is not neutral, since it generally refers to those nations with the largest debts a whose threat of default represents a serious concern to lending agencies.2 The bias of the focus, however, should not divert attention from the smaller countries, particularly those in Africa, whose debts are crushingly large to their people, even though the banks and international lending agencies consider them less important or less threatening.3

The accelerating magnitude of debt for the most heavily indebted nations is staggering. In 1970, the fifteen heavily indebted nations (using the World Bank classification of 1989 - see note 2) had an external public debt of $17.923 billion - which amounted to 9.8 percent of their GNP. By 1987, these same nations owed $402.171 billion, or 47.5 percent of their GNP. Interest payments owed by these countries went from $2.789 billion in 1970 to $36.251 billion in 1987. Debt service, defined as the sum of actual repayments of principal and actual payments of interest made in foreign currencies, goods, or services on external public and publicly guaranteed debt, accounted for 1.5 percent of their GNP and 12.4 percent of their to exports of goods and services in 1970. In 1987, those figures had risen 4.3 percent and 24.9 percent, respectively.4 Table 17.1 gives the statistics using the World Bank's 1992 classification of heavily indebted countries.

Table 17.1 / Selected Debt Statistics of the Fifteen Most Severely Indebted Developing Nations

  Total External Debt
(Millions Of $
Total External Debt
(as a % of GNP)
Debt Service
(as a % of Exports)
Algeria 26,806 47.1 27.1 59.4
Argentina 61,144 48.4 37.3 34.1
Bolivia 4,276 93.3 35.0 34.1
Brazil 116,173 31.2 63.1 20.8
Bulgaria 10,927 1.1 0.3 56.9
Congo 5,118 98.0 10.8 20.7
Cote d'Ivoire 17,956 58.8 28.3 38.6
Ecuador 12,105 53.8 33.9 33.2
Mexico 96,810 30.5 49.5 27.8
Morocco 23,524 53.3 32.7 23.4
Nicaragua 10,497 112.1 22.3 4.1
Peru 21,105 51.0 46.5 11.0
Poland 49,386 16.3 17.9 4.9
Syria 16,446 27.1 11.4 26.9
Venezuela  33,305 42.1 27.2 20.7

Source: World Bank, World Development Report, 1992 (Washington, DC: The World Bank, 1992) Tables 21 and 24, pp. 258-259, 264-265.

For the developing world as a whole, in 1991, the total external debt was $1.362 trillion, which was 126.5 percent of its total exports of goods and services in that year, and the ratio of debt servicing to the gross domestic product of the developing world reached 32.4 percent.5

The Causes of the Debt Crisis: (1) Poverty as a General Motive for Borrowing

The economic debts of the developing world will not be fully repaid, quite simply because the people who live in the developing world cannot afford to repay them. The harsh reality of poverty in poorer countries was an initial stimulus for the loans. As we shall see below, economic conditions suggested that borrowing money was a reasonable course of action in the 1970s, particularly for poor countries, which perceived few, if any, alternative ways to address the economic plight of their citizens. Those who live in the rich countries of the developed world can readily observe profound poverty: all who live in the wealthy, industrialized nations do not have equal access to education, health care, good nutrition, and housing. The fact that these deprivations exist alongside great wealth is shocking, but they pale when compared to the scale of global poverty. The hunger, homelessness, illness, and suffering of the poor in the developed countries must be multiplied a thousand times, in some respects a million times, to begin to reflect the scope of poverty in the world's poorest nations. In 1987, the average per capita income for people living in the poor countries in the South was only 6 percent of the income in the developed countries of the North. In Africa, one-fifth of the population lives in poverty, with those in sub-Saharan Africa bearing the heaviest burden.6 A child in the developing world suffers a risk of death four to ten times greater than that of a child in Western Europe or North America. A pregnant woman in the developing world is 50 to 100 times more likely to die in childbirth than women in the wealthy, developed nations.7

Despite the overwhelming number of statistics and indicators, global poverty is as hard to measure as it is to conceptualize. Although it is simple to characterize abstractly the living conditions of the world's impoverished population, there is no widely accepted, standard method of identifying the poor, and, therefore, of measuring the exact extent of global poverty. Economists, social scientists, politicians, and agencies for international aid each advocate their own particular definition of poverty depending upon the interests, whether noble or self-serving, which they are protecting or pursuing. Nonetheless, whatever the bias of the analyst or the method used to estimate the number of global poor, the statistics are appallingly high, almost beyond comprehension. Consider, for example, these estimates taken from the September 1990 UN Chronicle (p. 46):

The central debate concerning the definition of poverty centers around the two most prominent types of measurements: income analysis and basic needs analysis. Income analysis, the most common measure of poverty, assumes that poverty is a direct function of income and individual purchasing power within nations. It argues that citizens with a higher income should have greater access to goods and services that will satisfy their basic needs. The countries with a higher GNP and GNP per capita presumably will have a proportionally higher standard of living for all their citizens. Consequently, the income analysis approach uses a cross-national comparison of GNP, GNP per capita, and GDP (gross domestic product) statistics to define poverty. In 1990, the World Bank's definition of poverty was all of the world's population living on less than $370 a year; a figure derived from the average of the poverty lines of the poorest nations in the world. By this criteria, over 20 percent of the world's population live in poverty.

The relative ease with which GNP and related economic indicators can be calculated, and the ability to set an actual "poverty line" based upon these "hard" figures, are attractive features of the income analysis method. However, the method has many hidden weaknesses. First, despite the seemingly accurate nature of the income definition of poverty, it is, in fact, based upon averages. For instance, the GNP per capita indicator measures the average income of each person in a nation by dividing the total gross national product by the total population. It is a highly inaccurate measurement because it does not consider the unequal distribution of wealth within the country. Many people in developing nations do not live within the organized market economy, and, in many countries, a rigid class and social structure prevents the integration of the poor into the economic activity of the country as a whole. Most of the very poor meet their needs through subsistence methods, such as farming, hunting, and bartering. The national income has no direct, or even indirect, effect on their existence, and a money income definition of poverty will not reflect their standard of living whatsoever.

The basic needs approach to the definition of poverty conceptualizes poverty differently. It is not a lack of money that causes people to live impoverished lives, it is a lack of food, shelter, education, sanitation, safe drinking water, and health care. Basic needs analysis sets a minimum standard for each of these life-sustaining variables and classifies as poor those who have access to less than a minimum allowance. The picture of the impoverished, according to the basic needs analysis, is one who is malnourished, illiterate, short-lived, sickly, and lacking proper shelter and sanitation. The poorest nations, as ranked by a basic needs index, are those who do not provide for the basic needs of their people. Significantly, they are not always the nations with the lowest GNP. For example, Sri Lanka is ranked 120th in the world by per capita GNP, but is listed as 75th in the United Nation's 1990 Human Development Report (which ranks countries by the HDI or Human Development Index), well above the United Arab Emirates, whose real GDP per capita is six times that of Sri Lanka.8

Although the basic needs analysis illustrates the living conditions of the world's poorest people better than a simple income definition, it, too, has its drawbacks as a method for measuring the extent of poverty in the world. The data for basic needs analysis is extremely difficult to collect. An accurate study is a time-consuming, expensive, and meticulous undertaking. Consequently, basic needs analysis often relies upon rough estimates and averages and even some income-related data. In addition, the categories of basic need and their importance relative to one another are somewhat subjective.

Creating a definitive way of calculating global poverty is much more than merely a matter of precision or exactitude. The way one defines poverty has a decisive impact on the kinds of policies that are chosen to combat it. Those who use income analysis regard economic growth as the answer to world poverty. This method of analysis depends on the theory of "trickledown economics," that is, any increase in the productivity and relative wealth of a nation will eventually trickle down to benefit every sector of a country's economy and, consequently, each family unit and individual. The World Bank, for instance, implements economic recovery programs and internal structural readjustments to help poor nations increase the rate of growth in their GNPs, and ostensibly raise the standards of living in their society. Those who favor the basic needs analysis do not think that national economic growth is enough to eradicate world poverty, and, rather, emphasize questions of how that growth is distributed. They cite evidence that few of the benefits of increased productivity ever reach the most disadvantaged in low-income countries, and, therefore, advocate programs that directly target the poor and their suffering by subsidizing and redistributing basic needs and services. Such programs include vaccination and health outreach services, nutritional supplements, campaigns against illiteracy, infant and maternal mortality, and the problems of sanitation and clean water resources.

Regardless of the method of calculation, it is clear that many people in the world are suffering needlessly and living lives of wretched deprivation. This is especially true for women and children in the developing world. Women and children are the most vulnerable members of any society, but they are the principal victims of poverty. Females as a group, in poor regions, regardless of age, receive less education, less health care, and less food than men or male children. The female literacy rate in the developing world is three-quarters that of the male literacy rate. Women work, on average, twice as many hours, including the unpaid labor of subsistence farming, gathering, and caring for the young, the old, and the ill.9 Due to poorer nutrition, hard labor, lack of professional health care, and unsanitary living conditions, women in the developing world account for 99 percent of maternal deaths worldwide.10 The health of children is even more threatened. Every six seconds, a child dies and another is disabled by a disease for which there is already an effective immunization. Each year seventeen million children die from the combined effects of poor nutrition, diarrhea, malaria, pneumonia, measles, whooping cough, and tetanus, diseases that are rarely fatal in the developed countries. One in twenty of these impoverished children dies before reaching the age of five."11

These are the conditions that cause nations to borrow. There were, however, specific economic conditions in the 1970s that led to a massive explosion of the debt burden of developing countries. The tragedy of the debt crisis is that this borrowing only made the suffering significantly worse.

The Causes of the Debt Crisis: (2) The Specific Economic Conditions of the 1970s

The conventional explanation is that the debt crisis of the 1980s was due to a number of highly contingent circumstances that were essentially unpredictable at the time many of these loans were made. For example, William R. Cline of the Institute for International Economics summarized the causes as follows:

The external debt crisis that emerged in many developing countries in 1982 can be traced to higher oil prices in 1973-74 and 1979-80, high interest rates in 1980-82, declining export prices and volume associated with global recession in 1981-82, problems of domestic economic management, and an adverse psychological shift in the credit markets.12

The story actually begins earlier than 1973 because debt has been solidly entrenched in the finances of developing countries for many years. The United States was a heavily indebted country in the nineteenth century, and poorer countries have always needed outside infusions of investment capital in order to develop their resources. The logic of indebtedness is commonplace and not especially arcane: one incurs a debt in hopes of making an investment that will produce enough money both to pay off the debt and to generate economic growth that is self-sustaining. An important characteristic of developing-country debt prior to 1973 was that it was largely financed through public agencies, both bilateral and multilateral. These agencies, such as the World Bank, presumably guided the investments toward projects that held out genuine promise of economic viability and success.

After the oil crisis of 1973-74, however, many commercial banks found themselves awash with "petrodollars" from some oil-producing states, and these private banks were eager to put this windfall capital to productive use. The banks assumed that sovereign debt was a good risk since there was a prevalent belief that countries would not default.13 Many developing countries, reeling from oil price increases, were eager to receive these loans. These countries assumed that loans were an intelligent way to ease the trauma of the oil price increases, particularly given the very high inflation rates at the time. Other developing countries, the oil-exporting ones (Colombia, Ecuador, Mexico, Nigeria, and Venezuela, for example), saw the loans as a way to capitalize on their much-improved financial status, and they assumed that oil prices would remain high in real terms for an extended period of time.

In retrospect, it is easy to point out that these actions did not conform to the typical logic of indebtedness. These loans were being used to pay for current consumption, not for productive investments. The money was not being used to mobilize underutilized resources, but rather to maintain a current, albeit desperate, standard of living. Moreover, these loans were being made in an unstable economic environment: since the unraveling of the Bretton Woods Agreement in 1971 (precipitated by the U.S. termination of the gold standard), global economic relationships had been steadily worsening. The developing countries began to experience a long-term, secular decline in demand for their products as the developed countries tightened their economic belts in order to pay for oil and as they initiated tariffs and quotas to reduce their balance of payments deficits.

The proof of the wrongheadedness of the lending in the 1970s became dramatically apparent in 1981. Interest rates shot up, and global demand for exports from developing countries plummeted. The very deep global recession of 1981-82 made it impossible for developing countries to generate sufficient income to pay back their loans on schedule. According to the United Nations Conference on Trade and Development (UNCTAD), commodity prices (for essentially foodstuffs, fuels, minerals, and metals) dropped 28 percent in 1981-82, and between 1980 and 1982 interest payments on loans increased by 50 percent in nominal terms and 75 percent in real terms.14 In 1982, Mexico came to the brink of what everyone had thought impossible just two years earlier - a default.15 This critical situation marked the beginning of what is conventionally termed "the debt crisis." Private banks abruptly disengaged from further lending because the risks were too great. In order to prevent a panic, which might have had the effect of unraveling the entire international financial system, a number of governmental and intergovernmental agencies, led by the United States, stepped in to assure the continued repayment of the Mexican loans.

At this same time, the International Monetary Fund (IMF) emerged as the guarantor of the creditworthiness of developing countries. The IMF had performed this role in the past, but primarily with regard to its "own" money - that is, money lent by the IMF to assist countries in addressing balance of payments problems. This new emphasis on creating conditions primarily to assure payments to private institutions, while in theory not a new undertaking, was different in character and content from what the IMF had done in the past, largely because of the enormous amount of money involved. Unfortunately, the IMF, in spite of the unprecedented situation, did not perceive that its responsibilities had changed in any significant way, and gave its seal of approval for additional loans only to those countries that accepted its traditional policies, which are generally referred to as stabilization programs of "structural adjustment."

Programs of structural adjustment are designed to address balance of payments problems that are largely internally generated by high inflation rates, large budget deficits, or structural impediments to the efficient allocation of resources, such as tariffs or subsidies. The IMF structural adjustment programs highlight "productive capacity as critical to economic performance" and emphasize "measures to raise the economy's output potential and to increase the flexibility of factor and goods markets."16 A fundamental assumption in a structural adjustment program is that current consumption must be suppressed so that capital can be diverted into more productive domestic investments. A further assumption of an IMF stabilization program is that exposure to international competition in investment and trade can enhance the efficiency of local production. In practice, these programs involve reduced food and transportation subsidies, public sector layoffs, curbs on government spending, and higher interest and tax rates.17 These actions typically affect the poorer members of society disproportionately hard.18

When one is dealing with a particularly inefficient economic system, structural adjustment is perhaps acceptable medicine; and there were many examples of gross inefficiency, not to mention outright corruption, in many of the countries that were soliciting IMF assistance. In this respect, the IMF programs were probably regarded as the correct approach by the public and private agencies that were being asked to reschedule or roll over loans. But the critical difference between the traditional IMF role and its new role as guarantor of creditworthiness is that the suppression of demand, previously designed to free capital for domestic investment, simply freed capital to leave the country.

Moreover, the approach assumes that it was primarily inefficient economic management in the developing countries that led to the debt crisis. From this point of view, the developing countries had gorged themselves on easy money in the 1970s, with the debt crisis being the rough equivalent of a fiscal hangover. Indeed, according to Stephen Haggard, the IMF believed that a large majority of the failures of adjustment programs were due to "political constraints" or "weak administrative systems," as opposed to external constraints that were largely beyond the control of the developing countries, for example, high interest rates.19

It is extraordinarily difficult to determine the validity of this perspective. Clearly, some loans have been used in inappropriate ways.20 Nonetheless, developing countries cannot be accused of fiscal irresponsibility in such matters as the increase 'in interest rates or the global recession in 1981-82. The assessment of culpability is in some respects crucial and in other respects irrelevant: crucial, because one would like to understand the crisis so that a repetition of a similar crisis can be avoided in the future; irrelevant, because the current situation is so desperate that solutions must be found no matter where the blame for the crisis actually lies. In the final analysis, blame rests on a system of finance that allowed developing countries and banks to engage in transactions reasonable only in the context of wildly optimistic scenarios of economic growth. Additionally, much blame rests on policies of the United States government that were undertaken with insufficient regard for their international financial implications.

William Cline attempted to distinguish between the internal and external causes of the debt crisis by looking at figures for the effects of oil price and interest rate increases in order to determine the degree to which each were responsible for the crisis. His figures, reproduced in Table 17.2, should be treated as only suggestive because there is a high degree of "double counting" (loans were taken out in some cases to cover earlier loans) in many of these figures. Nonetheless, as a rough approximation, the data suggest that external factors were significantly more important than the internal causes of inefficiency and corruption.

The IMF stabilization programs, with their nearly exclusive emphasis on the internal economic policies of heavily indebted countries and relative disregard for the factors that Cline identifies, have failed to encourage the very type of economic growth that might have helped the developing countries to grow out of their indebtedness. In fact, these programs have had exactly the opposite effect: they have further impoverished many of the heavily indebted countries to a point where their future economic growth must be seriously doubted. Many observers have come to share Jeffrey Sachs's assessment of structural adjustment programs: "The sobering point is that programs of this sort have been adopted repeatedly, and have failed repeatedly."21

Table 17.2 / Impact of Exogenous Shocks on External Debt of Nonoil Developing Countries (Billion $US)

Effect Amount
Oil Price Increase in Excess of US Inflation (1974-82 cumulative) 260
Real Interest Rate in Excess of 1961-80 Average: 1981 and 1982 41
Terms of Trade Loss, 1981-82 79
Export Volume Loss Caused by World Recession, 1981-82 21
Total 401
Total Debt Increase, 1973-82 482

Source: William R. Cline, International Debt: Systemic Risk and Policy and Policy Response (Washington, DC: Institute for International Economics, 1984), p. 13.

This failure of traditional techniques to alleviate the debt problem suggests that perhaps the conventional interpretation of the debt crisis is incomplete or misleading. Indeed, much evidence suggests this inference. Perhaps the most compelling evidence is the fact that periodic debt crises seem to be endemic to the modern international system. There have been cycles of debt and default in the past, and some of the same debtors have experienced similar crises in almost regular cycles.22 Thus, the debt crisis of the 1980s cannot be ascribed solely to the contingent circumstances of oil prices and U.S. monetary and fiscal policy, at least as the conventional perspective portrays these factors. This explanation must be supplemented by factors that are more structural and deep-seated.

There are at least two issues relatively unexplored by the conventional explanation of the debt crisis that deserve greater attention, and they both relate to the vulnerability of the developing countries to changes in the world economy over which they have little direct control: their sensitivity to monetary changes in the advanced industrialized countries, and their dependence on primary commodities as sources of their export earnings. The first consideration is perhaps the more dramatic.

It is no mere coincidence that the United States experienced its own very serious debt crisis in the same year that panic arose over the external debt of developing countries.23 The massive government debt of the United States and its related balance of trade deficit precipitated a deliberate strategy of economic contraction that had global effects. Interest rates in the United States had achieved very high levels in 1979, but the inflation rates at the time were also very high. After the deep economic recession of 1981-82, the inflation rate declined markedly, but the interest rates remained high.24 Interest rates remained high because they were necessary to attract foreign investments to finance the extraordinary U.S. budget deficits created by the tax reductions pushed by the Reagan administration and passed by the Congress. In turn, the high interest rates inflated the value of the dollar, reducing U.S. demand for developing-country exports and further diminishing the ability of the indebted countries to repay their loans.

The United States, however, did not experience a debt "crisis" because it was able to reassure its creditors that its promises to pay were plausible. But the high real interest rates forced upon the developing countries as their loans were turned over created a situation where no similar guarantees could be offered. As it became obvious that the debtor countries could not meet the increased payments, the private banks tried to pull back, bringing about the very crisis they wished to avoid. Only very persistent efforts by official governmental agencies managed to stabilize the situation enough to avoid a precipitous default. In a very real sense, however, it was the actions of the United States that created the immediate crisis, and not some event or pattern of events in the developing world itself.

Similarly, this debt crisis aggravated an already bad situation with respect to the ability of the developing countries to pay back their loans. Many of the developing countries were extremely poor prior to the crisis, which was one reason why they took out such massive debts in the first place. There was no evidence, before 1973, that this condition of relative poverty was changing in any but a few of the developing countries, such as the newly industrializing countries of South Korea, Singapore, and Taiwan. In fact, most of the traditional measures of economic development suggest that most developing countries were falling farther behind the advanced industrialized countries at an increasingly faster rate.

The developing countries will always be relatively poorer than the advanced industrialized countries as long as they rely heavily on primary commodities, such as copper and rubber, for export earnings. Trade may be a stimulus to growth, but trade is not an effective way to overcome relative poverty if the values for primary commodities fail to keep pace with the value of manufactured products. This relationship between the values of manufactured exports and the values of primary commodities exports (the terms of trade) has been carefully examined by many economists, and some of them, such as Prebisch, have argued that the international division of labor is systematically biased against the interests of countries that rely heavily on the export of primary products. This debate, which has been extended into what has been termed a theory of dependency, is a difficult one to resolve with clear empirical evidence. Some recent evidence, however, suggests that raw materials producers have indeed suffered relative economic losses in the twentieth century. Enzo R. Grilli and Maw Cheng Yang analyzed the terms of trade between primary commodities and manufactured goods since 1900 and found that "the prices of all primary commodities (including fuels) relative to those of traded manufactures declined by about 36 percent over the 1900-86 period, at an average annual rate of 0.5 percent."25

Thus, the developing countries are at a structural disadvantage compared to the advanced industrialized countries. The newly industrializing countries of East Asia are the exceptions that prove this rule. Because they have been able to expand manufactured exports, they have improved their relative economic situation tremendously in recent years. Other countries have been less successful, and the recent resurgence of protectionist measures against manufactured products from the developing world will make this type of transition only more difficult. Ultimately, the solution to the debt crisis, and the underlying poverty that spawned it, must address this terms of trade issue. This imperative will be discussed in further detail below. Clearly, however, the solutions to the debt crisis will require a perspective that looks at the problem as more than a temporary aberration precipitated by bad luck and incompetence.

What are the Costs of the Debt Crisis?

This explosion of debt has had numerous consequences for the developing countries, but this section will focus on only three consequences: the decline in the quality of life within debtor countries, the political violence associated with that decline, and the effects of the decline on the developed world. The next section of this chapter will explore separately the most publicized cost of the debt crisis, the possibility that it might have instigated a global banking crisis.

The first, and most devastating, effect of the debt crisis was, and continues to be, the significant outflows of capital to finance the debt. According to the World Bank: "Before 1982 the highly indebted countries received about 2 percent of GNP a year in resources from abroad; since then they have transferred roughly 3 percent of GNP a year in the opposite direction."26 In 1988, the poorer countries of the world sent about $50 billion to the rich countries, and the cumulative total of these transfers since 1984 is nearly $120 billion.27 The problem became so pervasive that even agencies whose ostensible purposes included aiding the indebted countries were draining capital: in 1987 "the IMF received about $8.6 billion more in loan repayments and interest charges than it lent out."28 The IMF has since reversed the flow of money in a more appropriate direction, aided principally by the global decline in interest rates, as well as by some success in renegotiating some of the loan agreements.

This capital hemorrhage has severely limited prospects for economic growth in the developing world and seriously skewed the patterns of economic development within it. The implications for growth are summarized by Table 17.3.

Table 17.3 / Effects of External Debt on Economic Growth and Trade

  Gross Domestic Product
(Average Yearly Growth)
Terms of Trade
  1965-80 1980-90 1985 1990
Algeria ** 3.1 174 99
Argentina 3.4 -0.4 110 112
Bolivia 4.4 -0.1 167 97
Brazil 9.0 2.7 92 123
Bulgaria ** 2.6 ** **
Congo 6.2 3.6 145 99
Cote d'Ivoire 6.8 0.5 110 80
Ecuador 8.8 2.0 153 109
Mexico 6.5 1.0 133 110
Morocco 5.7 4.0 88 86
Nicaragua 2.5 -2.2 111 110
Peru 3.9 -0.3 111 78
Poland ** 1.8 94 103
Syria 9.1 2.1 125 87
Venezuela 3.7 1.0 174 164
Averages 6.3 1.7 118 101

Source: The World Bank, World Development Report, 1992 (Washington, DC: The World Bank, 1992), Tables 2 and 14, pp. 220-221 and 244-245.

The decline in average growth, from 6.3 percent a year to 1.7 percent a year, is even worse than it seems. Given the rate of population increase in these countries, a 1.7 percent increase in GDP translates into a net decline in per capita GDP. In other words, the populations of these countries were significantly worse off economically during the period of the debt crisis; and this decline further jeopardizes opportunities for future economic growth given its implications for domestic demand and productive investment. The terms of trade statistics, which reflect the relative movement of export prices to import prices, are similarly grim: developing countries are getting much less in return for their exported products when compared to their costs for imported items. In short, these countries must export even more of their products in order to maintain current levels of imports. The total effects for the quality of life in the highly indebted countries were summarized by the United Nations Conference on Trade and Development:

Per capita consumption in the highly-indebted countries in 1987, as measured by national accounts statistics, was no higher than in the late 1970s; if terms of trade losses are taken into account, there was a decline. Per capita investment has also fallen drastically, by about 40 percent between 1980 and 1987. It declined steeply during 1982-83, but far from recovering subsequently, it has continued to fall.29

Jeffrey Sachs portrays the situation in even starker terms:

As for the debtor countries, many have fallen into the deepest economic crisis in their histories. Between 1981 and 1988 real per capita income declined in absolute terms in almost every country in South America. Many countries' living standards have fallen to levels of the 1950s and 1960s. Real wages in Mexico declined by about 50 percent between 1980 and 1988. A decade of development has been wiped out throughout the debtor world.30

Sachs is not overstating the case. Before the debt crisis, global poverty had reached staggering proportions, as described above. One can document the extent of poverty in the world by pointing out statistics on gross national product, per capita income, or the number of telephones per thousand in a particular country. But these statistics obscure too much in their sterility. In 1988, one billion people were considered chronically underfed. Millions of babies die every year from complications from diarrhea, a phenomenon that typically causes mild discomfort in the advanced industrialized countries. Millions of people have no access to clean water, cannot read or write their own names, and have no adequate shelter.

And this misery will only continue to spread. The debt crisis has a self-reinforcing dynamic. Money that could have been used to build schools or hospitals in developing countries is now going to the advanced industrialized countries. As a consequence, fewer babies will survive their first year; those that do will have fewer opportunities to reach their intellectual potential. To raise foreign exchange, developing countries are forced to sell more of their resources at reduced rates, thereby depleting nonrenewable resources for use by future generations. Capital that could have been used to build factories and provide jobs is now sent abroad; as a result, the problems of unemployment and underemployment will only get worse in poor countries.

A second effect of the decline in living standards in the heavily indebted countries concerns the increased potential for political violence. There have been over twenty violent protests in recent years specifically against the austerity measures imposed by the IMF, with over 3,000 people killed in those protests."31 The most recent outburst occurred in Venezuela, where about 300 people were killed. Harold Lever posed the problem well in 1984:

Will it be politically feasible, on a sustained basis, for the governments of the debtor countries to enforce the measures that would be required to achieve even the payment of interest? To say, as some do, that there is no need for the capital to be repaid is no comfort because that would mean paying interest on the debt for all eternity. Can it be seriously expected that hundreds of millions of the world's poorest populations would be content to toil away in order to transfer resources to their rich rentier creditors?32

Political violence will only continue in the future, but its implications are hard to predict. Political instability may make it more difficult for democratic regimes to survive, particularly in Latin America, and may lead to the establishment of authoritarian regimes. Similarly, popular pressures may lead to regimes radically hostile to market economies, thus setting the stage for dramatic confrontations between debtor countries and the external agencies that set the terms for debt rescheduling or relief. Finally, political violence can spill over into international security issues. One can only imagine what sustained political conflict in Mexico would do to the already troubling issues of drug smuggling and immigration between Mexico and the United States. Debt-related issues complicated political relations between the United States and the Philippines over the military bases, and the extraordinary impoverishment in Peru (a decline in real GNP of between 15 to 25 percent from September 1988 to September 1989) has certainly led to an 31 increase in the drug-related activities of the Shining Path.33

Debtor governments will find themselves forced to demand certain concessions on debt repayment in order to maintain their legitimacy, and these concessions will invariably be cast at least in terms of lower and more extended payments, if not reduction or outright debt forgiveness. If the debt crisis is not resolved in terms that address the inevitable political consequences of declining living standards, then the prognosis for recovery is dim, even if debtor governments, banks, and the international lending agencies agree upon acceptable financial terms. The political dynamics of the debt crisis must be considered an integral part of the solution: to ignore the violence and protest as less important than the renegotiated interest rates will produce agreements that have little hope of success.

A final cost of the debt crisis has been one experienced by the developed countries themselves, in particular by the United States. Increasing poverty in the developing countries leads to a reduction of economic growth in the developed countries. The debtor countries have been forced to undergo a dramatic decline in imports in order to increase the foreign exchange earnings needed to pay back their debts. The decline in the average annual growth rate for imports of the seventeen most heavily indebted countries is dramatic: the average annual growth rate for these countries in 1965-80 was 6.3 percent; in 1980-87, that figure had fallen to minus 6 percent, for a total shift of minus 12.3 percent.34 One estimate is that the seventeen most heavily indebted nations decreased their imports from the developed world by $72 billion from 1981 to 1986.35

The United States has been profoundly affected by this decline in imports because most of its exports to the developing world have, historically, gone to the Latin American states most seriously affected by the debt crisis. The United Nations Conference on Trade and Development suggests that this decline in U.S. exports is a more important explanation for U.S. trade difficulties than for the deficits of other countries:

Because of this import compression by the highly-indebted developing countries, United States exports to them actually declined by about $10 billion between 1980 and 1986.... As a result, the United States recorded a negative swing in its trade balance of about $12 billion between 1980 and 1986; the corresponding negative swings for the other developed market economy countries were much smaller: about $3 billion for Japan, $2.4 billion for the Federal Republic of Germany and $1.6 billion for the other EEC countries.36

These declines seriously aggravated an already bad trade situation for the United States. The absolute declines were quite large; and if one extrapolates losses from an expected increase for export growth based on recent history, the declines are quite significant. Richard Feinberg translated the export loss to the United States in terms of lost jobs when he testified before the Senate: ". . . roughly 930,000 jobs would have been created if the growth trend [of U.S. exports to the Third World] of the 1970s had continued after 1980. In sum, nearly 1.6 million U.S. jobs have been lost due to recession in the Third World."37

This final point deserves more sustained attention than it has yet received: it is also in the interests of the advanced industrial nations to seek an equitable solution to the debt crisis. No one's long-term interests are served by the increasing impoverishment of millions of people. The financial health and stability of the richer countries depends crucially on debt-resolution terms that allow and foster the economic growth and development of the poorer countries.

How Real was the Threat of an International Banking Collapse?

The global cost most talked about in lending circles was that of a massive default by the debtor countries, which might have had the effect of unraveling the international financial system. The point at which the debt crisis actually made it to the front pages of newspapers in the advanced industrial countries was in 1982, when it became clear that Mexico was unable to meet its financial commitments. The size of the Mexican debt, coupled with the overexposure (lending in excess of capital assets) of the private banks that had provided loans to Mexico, raised the possibility of a widespread banking collapse, reminiscent of the bank failures in the 1930s. Table 17.4 gives some idea of the extent of overexposure in 1982.

Table 17.4 / Exposure as a Percentage of Capital, Major Banks, end of 1982

  Argentina Brazil Mexico Venezuela Chile Total
Citibank 18.2 73.5 54.6 18.2 10.0 174.5
Bank of America 10.2 47.9 52.1 41.7 6.3 158.2
Chase Manhattan 21.3 56.9 40.0 24.0 11.8 154.0
Morgan Guaranty 24.4 54.3 34.8 17.5 9.7 140.7
Manufacturers Hanover 47.5 77.7 66.7 42.4 28.4 262.8
Chemical 14.9 52.0 60.0 28.0 14.8 169.7

Source: William R. Cline, International Debt: Systemic Risk and Policy Response (Washington, DC: Institute for International Economics, 1984), p. 24.

The threat of a banking collapse was perhaps overstated at the time since these types of measures only imperfectly reflect the vulnerability of banks to a profound crisis of confidence. Nonetheless, it was clear that some of the most important banks in the United States stood to lose a great deal of money if one of the major debtor nations defaulted on its loans. Under even normal conditions, a banking collapse is always possible since banks rarely have enough capital to cover their commitments. Indeed, it is generally considered inefficient to maintain this much available capital. Banks generally have nothing to fear from their overcommitment of resources since it is almost never the case that people wish to question the financial integrity of banks. In 1982, however, it became clear that psychological confidence in the banking system had lost some important underpinnings, and only the rapid intervention of governmental institutions averted events that might have completely undermined public confidence. Since that time, most private banks have stopped lending money to developing countries and have increased their reserve holdings to offset any potential losses from a major loan default. At the end of 1982, the nine major U.S. banks had lent out over 287 percent of their capital to the developing countries; by the end of 1988, that percentage had dropped to 108 percent.38

In addition, the major private lenders have increased their reserve holdings to cover possible losses on their loan accounts. Citicorp first announced that it was enlarging its loss reserve in 1987, and the other major banks quickly followed suit.39

The net effect of these two actions - the sharp reduction in loan exposure and the creation of reserves against potential losses - has insulated the major banks from any threat of a banking collapse precipitated by a widespread default on loans by developing countries. Indeed, these actions have been partially responsible for the revival of the stock prices of these banks, signaling renewed investor confidence in the banks, as well as supplying new capital to offset the equity losses generated by the creation of the reserve holdings. The strengthened position of the major banks led William Seidman, chairman of the Federal Deposit Insurance Corporation, to assert in 1989 that the banks would remain solvent even if they were forced to "write-off 100 percent of their outstanding loans" to the six largest debtor countries.40 Indeed, talk of the "debt crisis" was rarely heard in the developed world in the early 1990s, even though the total amount of debt owed by developing countries steadily increased.

The newly protected position of the banks alleviates the threat of a collapse, but leaves the developing countries with fewer sources of external assistance. Banks are not apt to enter into any new or extensive commitments to developing countries now that they do not necessarily need to protect the loans already made. If there were a serious downturn in global economic activity that would further imperil the ability of the developing countries to raise the money to pay back their debts, the only alternative for the debtors would be public assistance, either bilateral or multilateral. In short, while the gains from debt repayment will still be private, the costs will be shifted onto the public sector.

This shift now appears to be the strategy of the major banks. In response to new proposals for debt reduction, the banks, represented by an organization called the Institute for International Finance, have demanded certain conditions for accepting these proposals. In the words of Walter S. Mossberg of The Wall Street Journal, "the banks indicated they would be willing to make major debt reductions and new loans only if they receive new loan guarantees, tax breaks, and other financial sweeteners from the U.S., other countries, the World Bank and the International Monetary Fund."41 The institute also asserted that "any government effort to force debt forgiveness would be contested in the courts' as 'an unconstitutional taking of property' unless the government pays the banks compensation."42 The truculent tone of this position confirms that the banks no longer fear an imminent collapse of the international financial system.


One fact is undeniable: Someone is going to have to pay for past debts. It could be the people in debtor countries, or the banks, or the people in advanced industrial countries. Most likely it will be some combination of these three groups. In the last ten years, there have been a variety of proposals which, unfortunately, usually reflect only the special interests of the groups proposing them. Generally speaking, these solutions fall into three categories: repudiation, minor adjustments in repayments, or reduction.

Debt repudiation, in the sense of a unilateral cessation of repayment, occurred in a number of countries: Bolivia, Brazil, Costa Rica, Dominican Republic, Ecuador, Honduras, Nicaragua, Panama, and Peru.43 With the exception of the Peruvian cessation, however, most of these actions have been taken with assurances that the stoppages were only temporary. Peru announced that it was unilaterally limiting its debt repayments to a percentage of its export earnings; and since Peru took this action, other nations have indicated that they will act similarly. There have been no serious proposals for a widespread and coordinated repudiation of global debt.

The economist Jeffrey Sachs offers several reasons for this absence of a general repudiation.44 First, debt repudiation is a dramatic and abrupt act. Most nations would prefer to defer such decisions as long as there are advantages to muddling through, and growth prospects are sufficiently ambiguous to make this muddling a viable course. Second, debtor countries fear retaliation from commercial banks. If the banks were to cut off nondebt related activities, such as trade credits, the situation could be made even worse. Third, the debtor countries fear retaliation from creditor governments and multilateral lending agencies. Grants from development banks could be affected, and trade relations would probably be seriously disrupted. Finally, the leaders of most of the debtor countries have interests in maintaining good relations with the richer countries, and repudiation would jeopardize these interests.

Repudiation would also seriously disrupt global economic relations, probably far beyond the immediate losses of the debts themselves. Retaliations would follow, because it would be politically impossible for lenders not to react, and because there would be a conscious effort to warn other potential defaulters against similar action. The escalation of economic warfare would have the effect of sharply reducing international economic interactions in trade, investment, and exchange. Such an outcome is in no one's interest.

The vast bulk of activity since 1982 has involved adjusting the timing and method of repayment. The number of specific proposals is bewildering.45One can read about debt-equity swaps, in which businesses or properties in the debtor country are purchased at a discount by the banks as partial repayment; debt-for-debt swaps, where bonds are offered as discounted repayments; exit bonds, which are long-term bonds tendered essentially as take-it-or-leave-it offers to creditors who have no interest in investing any further and wish to cut their losses; or cash buy-backs, where the debtor country simply buys back its loan at a deep discount.46 Some of these proposals, notably the debt-for-nature swaps, where the debtor country promises to protect the environment in return for purchases of the debt by outside groups, are creative and could have important effects.

This array of proposals is referred to as a "menu" approach to debt repayment, and its logic is superficially sound. It was the logic of the plan offered by Secretary of the Treasury James Baker in 1985. By providing a number of different options, repayments can be tailored to the specific circumstances of a country, thereby easing the burden. Critical to the success of the menu approach is the assumption that countries will "grow out of" their debt. Yet, the evidence suggests that this assumption is not entirely sound. This approach further assumes the repayment of debts on terms that are essentially dictated by the creditors. No lender is obligated to accept any one of these possibilities. Moreover, the opportunities for swaps and buy backs are limited: there are, after all, a relatively small number of investment opportunities in poorer countries, and the debt crisis itself has further limited those possibilities. Finally, some of these swaps can actually increase the drain on the capital of a country, particularly if profit remittances on successful investments turn out to be very high.

The final proposals have to do with debt reduction, and these only became a real possibility in the spring of 1989 with the announcement of a new plan, dubbed the Brady Plan, after U.S. Secretary of the Treasury Nicholas Brady. The plan originally called for a total reduction of about 20 percent of global debt, with the IMF and the World Bank offering guarantees for the repayment of the other 80 percent of the debt.47 Since 1989, Argentina, Brazil, Costa Rica, Mexico, Morocco, the Philippines, and Venezuela have reached agreements concerning their debts under the auspices of the Brady proposal.48 This approach recognizes that many of the menu approaches were, in fact, schemes for debt reduction on a case-by-case basis. This formal recognition of the need for systematic debt reduction is a hopeful sign, but the plan clearly does not go far enough.49 In market terms, developing-country debt is already selling on the secondary market at about thirty-five cents to the dollar.50 In other words, debt reduction has already occurred in the marketplace, and any plan that incorporates reductions must take this into account.

There are some serious problems with debt reduction. Debt reduction could reduce the incentive for debtor nations to make economic changes that could lead to greater efficiency. Or, it could set a precedent that would have the effect of reducing, or even eliminating, the possibility for any future bank lending for economic development projects. Finally, debt reduction could have the effect of saddling public lending agencies, like the World Bank, with enormous burdens, thereby vitiating their future effectiveness.

These concerns are genuine. Counterposed to these possibilities, however, is the stark reality of hundreds of millions of people living in desperate conditions with no hope of relief in the near- or medium-term future. Any plan for easing the debt burden, therefore, must try to incorporate a number of legitimate, but competing, concerns of varying importance. First, the repayment of the debt itself has ceased to be the central concern. Private banks obviously have an interest in the repayment of the debt and, to the extent possible, these interests must be accommodated. But the security of the international banking system is no longer at risk, and that, as a legitimate public concern, can no longer dictate possible necessary actions. The central concerns now are the reestablishment of economic growth in the heavily indebted countries, the effective and meaningful distribution of that growth into all sectors of their societies, and their reintegration into the international economic system. Only after sustained economic growth returns to the heavily indebted countries can the international community even begin to determine manageable rates and methods of debt repayment.

Second, the International Monetary Fund must fundamentally reassess its policies. Programs of structural adjustment may be appropriate for the original purpose of the IMF-to assist nations having temporary difficulties in maintaining currency values because of transient balance-of-payments difficulties. But these programs are profoundly counterproductive in current circumstances and, indeed, are guided by a wildly inappropriate perspective. The inflows of capital to the IMF from the heavily indebted countries were more than a gross embarrassment; they were conclusive evidence of the IMF's misunderstanding of the causes of the debt crisis. The IMF should shift its perspective to more creative or appropriate ways of stabilizing or depressing interest rates rather than raising them, or ways to prevent capital flight from developing countries, or any number of issues that concern the specific conditions of economic growth. The mechanical application of a "model" of economic growth is wrongheaded."51

Third, the resolution of the debt crisis depends upon a clear recognition that much of the debt, as formally constituted, will not, because it cannot, be repaid. Some countries, such as those in sub-Saharan Africa, ought not to repay their debts. Other countries, particularly the heavily indebted ones, can pay something on their debts, and perhaps the appropriate percentage is about half. Viewed in this light, the real question becomes one of allocating the costs of this nonpayment of debts. The current emphasis of forcing the poor to pay with broken lives and broken spirits is demeaning to both rich and poor, and ill-serves the long-term interests of rich as well as poor.

Finally, there are genuine issues of responsibility that deserve to be made explicit. The debt "crisis" is only a symptom of an international economic system that tolerates growing and abysmal poverty as a normal condition. This need not, and should not, be the case. The developed countries have a responsibility to create conditions whereby the poorer countries can interact more productively in international economic activities: their single most important contribution to this end might be in the area of reducing trade restrictions on the products of poorer countries. Similarly, the developing countries have a responsibility to see that money is more effectively utilized within their own borders. The obscene personal profits accumulated by such leaders as Marcos of the Philippines and Mobutu of Zaire should not be fostered by the strategic interests of other countries. The banks should also face up to the fact that their single-minded pursuit of profits almost led them to the brink of bankruptcy. The lesson to be learned from this experience is that for economic growth to be sustained, close attention must be paid to the mutual interests of all parties involved.


We wish to thank Stephen Ellenburg, Anthony Lake, Tammy Sapowsky, Daniel Thomas, Sharon Worcester, and Diane C. Yelinek for all their assistance in the writing of this chapter.

1 John Maynard Keynes, The Economic Consequences of the Peace (London: Macmillan and Co., Ltd., 1919, reprinted in 1924), pp. 209-210.

2 There are a myriad of classifications used to describe "the most severely indebted countries." The original classification was used in the context of the initiative of U.S. Secretary of the Treasury James Baker, which identified the following nations: Argentina, Bolivia, Brazil, Chile, Colombia, Cote d'Ivoire, Ecuador, Mexico, Morocco, Nigeria, Peru, Philippines, Uruguay, Venezuela, and Yugoslavia. This classification is still used by the International Monetary Fund. The World Bank, however, added Costa Rica and Jamaica in 1989. The World Bank, in its 1992 World Development Report, lists the following countries as "severely indebted middle-income countries": Algeria, Argentina, Bolivia, Brazil, Bulgaria, Congo, Cote d'Ivoire, Ecuador, Mexico, Morocco, Nicaragua, Peru, Poland, Syrian Arab Republic, and Venezuela. The different lists make comparisons over time of the status of heavily indebted countries very difficult.

3 For an analysis of the economic catastrophe faced by many African nations, see Richard J. Barnet, "But What About Africa?: On the Global Economy's Lost Continent," Harper's, Vol. 280, no. 1680 (May 1990), pp. 43-51.

4 The World Bank, World Development Report, 1989 (Washington: The World Bank, 1989), Table 24, P. 211.

5 International Monetary Fund, World Economic Outlook, October 1992 (Washington: International Monetary Fund, 1992), Tables A46 and A48, pp. 157 and 162-163.

6 "Poverty," United Nations Chronicle, Vol. 27, no. 3 (September 1990), P. 46.

7 Beverly Winikoff, "Women's Health in Developing Countries," in Health Care of Women and Children in the Developing World, edited by Helen Wallace and Kanti Giri (Oakland, CA: Third Party Publishing Co., 1990), p. 170.

8 United Nations Children's Emergency Fund, State of the World's Children (New York: Oxford University Press, 1992); United Nations Development Programme, Human Development Report (New York: Oxford University Press, 1990), P. 128.

9 UNICEF, State of the World's Children, op. cit., P. 57.

10 Beverly Winikoff, "Women's Health in Developing Countries," op. cit., P. 170.

11Helen Wallace, "Health Care of Children in Developing Countries," in Health Care of Women and Children in the Developing World, op. cit., p. 7

12William R. Cline, International Debt and the Stability of the World Economy, Policy Analyses in International Economics, No. 4 (Washington: Institute for International Economics, September 1983), p. 31.

13 Jeffrey Sachs cites Citicorp chairman Walter Wriston as justifying the heavy bank activity with the observation that "countries never go bankrupt." Jeffrey D. Sachs, "Introduction," in Developing Country Debt and the World Economy, edited by Jeffrey D. Sachs, a National Bureau of Economic Research Project Report (Chicago: The University of Chicago Press, 1989), p. 8. Sachs also points out Wriston's self-interest in this belief, as international operations accounted for 72 per cent of Citicorp's overall earnings in 1976.

14 United Nations Conference on Trade and Development, Trade and Development Report, 1988, UNCTAD/TDR/8 (New York: United Nations, 1988), pp. 92-93.

15 For an excellent analysis of the Mexican debt crisis, see Adhip Chaudhuri, "The Mexican Debt Crisis, 1982," Pew Program in Case Teaching and Writing in International Affairs, Case #204 (Pittsburgh, PA: University of Pittsburgh, 1988).

16 International Monetary Fund, Annual Report, 1989 (Washington: International Monetary Fund, 1989), P. 17.

17 Cheryl Payer, The Debt Trap: The International Monetary Fund and the Third World (New York: Monthly Review Press, 1974), p. 33.

18 See, for example, Kathy McAfee, "Why the Third World Goes Hungry: Selling Cheap and Buying Dear," Commonweal, Vol. 117, no. 12 (15 June 1990), pp. 380-385.

19Stephen Haggard, "The Politics of Adjustment: Lessons from the IMFs Extended Fund Facility," International Organization, Vol. 39, no. 3 (Summer 1985), p. 506, citing Tony Killick, et al., The Quest for Economic Stabilization: The IMF and the Third World (New York: St. Martin's Press, 1984), P. 261.

20 The Philippines was one such example. See Penelope Walker, "Political Crisis and Debt Negotiations: The Case of the Philippines, 1983-86," Pew Program in Case Teaching and Writing in International Affairs, Case #133 (Pittsburgh: University of Pittsburgh, 1988). See also Tyler Bridges, "How Our Loan Money Went South," Washington Post, 19 March 1989, P. C2. One should not make too much out of such examples without also remembering that political corruption, such as the savings and loan scandals in the United States, afflicts the rich as well as the poor.

21 Jeffrey Sachs, "Introduction," op. cit., P. 29.

22See Peter H. Lindert and Peter J. Morton, "How Sovereign Debt Has Worked," in Developing Country Debt and the World Economy, edited by Jeffrey D. Sachs, a National Bureau of Economic Research Project Report (Chicago: University of Chicago Press, 1989), pp. 225-237; Albert Fishlow, "Lessons from the Past: Capital Markets During the 19th Century and the Interwar Period," International Organization, Vol. 39, no. 3 (Summer 1985), pp. 383-440; and Tim Congdon, The Debt Trap: The Dangers of High Interest Real Interest Rates for the World Economy (Oxford: Basil Blackwell, 1988), pp. 109-110.

23 The following discussion relies heavily on the explanations offered by Jan Joost Teunissen, "The International Monetary Crunch': Crisis or Scandal?" Alternatives, Vol. I 1, no. 3 (July 1987), pp. 359-396; and Gerald Epstein, "The Triple Debt Crisis," World Policy journal, Vol. 2, no. 4 (Fall 1985), pp. 625-658.

24 "Real interest rates charged to less developed countries (LDCS) jumped from 1% in 1980 to between 6.73 and 8.50% in 1981-84 . . ." James R. Barth, Michael D. Bradley, and Paul C. Panayotacos, "Understanding International Debt Crisis," Case Western Reserve Journal of International Law, Vol. 19, no. 1 (Winter 1987), pp. 31-52, footnote 4, as quoted in Current Readings on Money, Banking, and Financial Markets, 1990 Edition, edited by James A. Wilcox and Frederic S. Mishkin (Glenview, IL: Scott, Foresman/Little, Brown Higher Education, 1990), p. 306.

25 Enzo R. Grilli and Maw Cheng Yang, "Primary Commodity Prices, Manufactured Goods Prices, and the Terms of Trade of Developing Countries: What the Long Run Shows," The World Bank Economic Review, Vol. 2, no. 1 (1988), p. 34.

26 World Bank, World Development Report, 1989, op. cit., p. 17.

27 New York Times, 18 September 1989, p. DI.

28New York Times, 11 February 1988, p. DI.

29United Nations Conference on Trade and Development, Trade and Development Report, 1988, UNCTAD/FDR/8 (New York: United Nations, 1988), P. 101.

30 Jeffrey Sachs, "Making the Brady Plan Work," Foreign Affairs, Vol. 68, no. 3 (Summer 1989), p. 91.

31 Susan George, "The Debt Crisis: Global Economic Disorder in the 1990s" Speech given at Smith College, Northampton, MA, 10 April 1989.

32Harold Lever, "The Debt Won't Be Paid," New York Review of Books, Vol. 3 1, no. 11 (28 June 1984), p. 3. Emphasis in the original.

33The statistic on the decline in the Peruvian GNP comes from Jeffrey D. Sachs, "A Strategy for Efficient Debt Reduction," Journal of Economic Perspectives, Vol. 4, no. 1 (Winter 1990), p. 20.

34World Bank, World Development Report, 1989, op. cit., Table 14, p. 191.

35 James D. Robinson 3d, "It's Time to Plan a Third World Revival," New York Times, 28 August 1988, P. F3.

36 UNCTAD, Trade and Development Report, op. cit., p. 66.

37Statement by Richard E. Feinberg, vice president, Overseas Development Council, before the subcommittee on International Debt of the Committee on Finance, United States Senate, Washington, DC, 9 March 1987, mimeo, pp. 6-7.

38Jeffrey Sachs, "Making the Brady Plan Work," op. cit., P. 89.

39 Sarah Bartlett, "The Third World Debt Crisis Reshapes American Banks," New York Times, 24 September 1989.

40 As quoted in Jeffrey Sachs, "A Strategy for Efficient Debt Reduction," op. cit., p. 21. For statistics on how the values of bank stocks increased dramatically at this time, see Mark Fadiman, "Bad News is Good News for Big Bank Stocks," Investor's Daily, 27 September 1989.

41 Walter S. Mossberg, "Major Banks Vow to Fight Any Effort to Force Third World Debt Forgiveness," The Wall Street Journal, 12 January 1989, p. A16.

42 Idem.

43Jeffrey Sachs, "Introduction," op. cit., p. 26.

44His arguments are summarized from his "Introduction," op. cit., pp. 26-27.

45 For a comprehensive analysis of many of the proposals, see Analytical Issues in Debt, edited by Jacob A. Frenkel, Michael P. Dooley, and Peter Wickham (Washington: International Monetary Fund, 1989).

46 Peter T. Kilbourn, "Debt Reduction: Ways to Do It," New York Times, 6 April 1989, P. DI; see also International Monetary Fund, Annual Report, 1989 (Washington: International Monetary Fund, 1989), pp. 26-27.

47 Peter T. Kilbourn, "Greenspan Backs Shift on Debt," New York Times, 17 March 1989, P. DI.

48 Jonathan Fuerbringer, "Brazil and Banks Reach Agreement on Reducing Debt," New York Times, 10 July 1992, p. Al.

49 There have been debt reductions brought about in Mexico, Brazil, and Argentina (among other countries) under the terms of the Brady Plan. Nonetheless, while the economic outlook in 1992 seemed hopeful, there is still doubt about the actual effects of the Brady Plan. See Jorge C. Castaneda, "Mexico's Dismal Debt Deal," New York Times, 25 February 1990, P. F13; Nathaniel C. Nash, "Latin Debt Load Keeps Climbing Despite Accords," New York Times, 1 August 1992, p. Al; and Thomas Kamm, "Brazilian Accord Puts End to Debt Crisis in Region, but Not to Economic Troubles," Wall Street journal, 10 July 1992.

50 Jeffrey Sachs, "Making the Brady Plan Work," Foreign Affairs, Vol. 68, no. 3 (Summer 1989), P. 90. The range of discounts is quite wide. In July 1989, Peru's debts were discounted by 97 percent; Chile's by a little more than 35 percent. See Peter B. Kenen, "Organizing Debt Relief: The Need for a New Institution," Journal of Economic Perspectives, Vol. 4, no. 1 (Winter 1990), p. 9.

51 The International Monetary Fund denies that it applies a uniform "model" of structural adjustment, and, in a strict sense, this is certainly true: there is a great degree of variation in the plans agreed upon by the IMF and different countries. But, in a larger sense, the plans all stress similar objectives, which by and large conform to a general pattern of demand reduction and reduced government spending. See IMF Conditionality, 1980-91, a white paper researched and prepared by the staff of the IMF Assessment Project (Arlington, VA: Alexis de Tocqueville Institution, 1992); Karim Nashashibi, et al., The Fiscal Dimensions of Adjustment in Low-Income Countries, Occasional Paper No. 95 (Washington: International Monetary Fund, April 1992); and Francois Bourguignon and Christian Morrisson, Adjustment and Equity in Developing Countries: A New Approach (Paris: Organisation for Economic Co-Operation and Development, 1992).

Source: Klare, Michael T., and Daniel C. Thomas, World Security: Challenges for a New Century (New York: St. Martin's Press, 1994) p. 332-355.

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