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Assignment Two Individual Research Paper P38162 Globalisation: Environment And Development

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THE CRISIS OF THIRD WORLD DEBT AND THE SOLUTION TO PROBLEM

Prepared By: Sarah Izzati Binti Abdul Monir Faculty Of Design, Technology And Environment Oxford Brookes University

P38162 - Globalisation: Environment & Development The Crisis Of Third World Debt And The Solution To Problem

THE CRISIS OF THIRD WORLD DEBT AND THE SOLUTION TO PROBLEM

by Sarah Izzati binti Abdul Monir Faculty of Technology, Design and Environment Oxford Brookes University __________________________________________________________________________________ Many developing countries have very large debts, and the amount of money they owe, not surprisingly, is increasing from year to year. Trying to pay off the debt has become a crucial problem and giving such a hard time for their people. Take the region of Sub-Saharan Africa, for example; the region pays $10 billion every year in debt service. This is about 4 times as much money as the countries in the region spend on health care and education (New Internationalist Magazine, 1998). Even though now there is a consensus about debt relief towards the debtor nations of the Third World countries, but there is no guarantee or agreement over the degree of relief and their measures. Since the establishment of such criteria requires identifying the causes for the debt problem, therefore includes the major factors that contributed to the conception and growth of the debt. The oil price shocks of the 1970s are one of the major source of the developing countries' external debt crisis, but they are more factors contributed to such horrible debts. The "recycling" policies of petrodollars, the policies responses of the advanced capitalist countries, of the lending institutions and of the borrowing governments are factors that leading to the accumulation of the Third World countries "neverending" debts. The major bulk of the immense Third World debt has escalated as a result of factors derived externally to their economies. These factors included excessive interest charges by the commercial banks, capital flight from these countries, rise in the value of the dollar and the loss of their export earnings due to the depressed prices of and demand for their exports (Rueter, 1994). Debt repudiation, debt swaps and debt reduction are some of the alternatives of debt relief towards the problems; but in reality, not of all the measures contributing to a successful solution. Debt repudiation, simply means, cancelling the debt, do disrupt global economic relations despite of the freedom from being tangled with debt. Debt swaps, in which swapping the payment of debt towards the development of the countries (ie health, physical development, educations) yet not entirely sound. Some of the swaps can actually increase the drain on the capital of the country, particularly if profit remittances on successful investments turn out to be very high. And reduction of 20% of the debt might be recognized, but the plan clearly does not go far enough. What can be done, and is there any way out? Yes it is, if every policies, either by nations or organizations, being carried in such a right manner, none of these problems will occur and yet, it helps solving the debt problem of the Third World countries. _________________________________________________________________________________

P38162 - Globalisation: Environment & Development The Crisis Of Third World Debt And The Solution To Problem

The Origin of Third World Debt

The origins of the debt crisis are complex. 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 1973-1974 and 1979-1980, high interest rates in 1980-1982, declining export prices and volume associated with global recession in 1981-1982, problems of domestic economic management, and adverse psychological shift in credit market (Cline, 1983).

1.0 Introduction

1.1

The Role of Oil Price Shocks

The 1980s debt increase were clearly seen in the 1974-1979 period, when there was great acceleration in international lending, provoked by the first major OPEC oil prices increase. By 1974, developing countries had begun playing a larger role in the world economy, having averaged growth rates of 6.6% in 1967-1973 (Todaro et al, 2009). Developing countries, especially Latin America, had begun importing heavily and following outward-looking development, they expanded their exports aggressively. The increase in oil prices and deep global recession, in which the growth rates of the individualized countries fell from an average of 5.2% in 1967-1974 to an average of 2.7% for the rest of 1970s, many developing countries sought to sustain their high growth rates through extension of borrowing. Although lending from official sources, particularly non-concessional lending, increased significantly, it was still inadequate to meet growth needs. Furthermore, countries that did not manage to maintain trade balance were reluctant to approach official sources, such as IMF, that might subject them to painful policy adjustments. So, newly industrializing developing countries began issuing general-purpose loans from commercial banks and other private lenders, to provide balance of payments backup and assumed that loans were an intelligent way to ease trauma of the high oil prices. Many commercial banks found themselves awash with petrodollars from the bulk of OPEC surplus (which had jumped from $7 billion in 1973 to $68 billion in 1974 and ultimately in this period at $115 billion in 1980), and these private banks were eager to put this windfall capital to productive use. OPEC petrodollars were recycled, starting with Middle Eastern oil export earnings being deposited in U.S and European banks, which then lent these dollars balances to developing world public-and-private-lenders. Over $350 billion were recycled from OPEC countries between 1976 and 1982. Figure 1 portrays the mechanism which OPEC petrodollars were recycled.

P38162 - Globalisation: Environment & Development The Crisis Of Third World Debt And The Solution To Problem

OPEC countries export oil

Europe, Japan, and the United States send dollars to OPEC countries to pay for imported oil

OPEC countries deposit dollars in U.S and European banks

Europe and U.S banks lend OPEC's petrodollars to developing country borrowers, lending to debt expansion

Developing-country debtors pay debt service (interest and principal)

Eurodollar market Figure 1 : Recycling Of Petrodollars (source from Economic Development, Tenth Edition, Todaro et al,, 2009)

This process were solid between 1973-1979, but then, the situation changed when oil embargo began to escalate. The proof of the wrongheadedness of the lending in 1970s became dramatically apparent. International lending was still available, but there was a change in the international economic climate during that period. The large increase in real interest rates from the late 1970s on as developed countries very properly followed monetarist prescriptions for controlling the rate of inflation; these policies led to a world recession in early 1980s and also produced a fall in world commodity prices. This effectively spelt disaster for developing nations which had borrowed large amounts of money.

P38162 - Globalisation: Environment & Development The Crisis Of Third World Debt And The Solution To Problem

2.0 The Rise of The Third World Countries Debt Problem

2.1 Climax On the 'So-Called' Debt Crisis

The global implications of the emerging debt crisis were missed until August 1982, when Mexico closed its foreign exchange market and announced that it could not even service its $62 billion debt to the US. Shortly after Mexico decision, Brazil and Argentina later joined in, similarly unable to meet servicing deadlines. Defaulting on loan payments was thought to be the fault of the debtor countries, resulting from corrupt and overly bureaucratic governments rather than an uncontrollable economic climate (Corbridge, 1993; 2008).

Figure 2 : Total Latin American Debt Outstanding (source from World Bank, World Bank Debt table, 1990-1991 e.d)

Figure 3 : Total Outstanding Less-Developed-Countries (LDC) Loans by the Largest U.S Banks, 1977-1989 (source from FFIEC Country Exposure Report, year-end reports, 1977-1989)

P38162 - Globalisation: Environment & Development The Crisis Of Third World Debt And The Solution To Problem

2.2

Structural Adjustment Programme (SAP) : Ineffectual Remedy ?

To help ensure "stability" of the global capitalist system, international financial institutions have coordinated their efforts through multilateral bodies to collect outstanding loans. Debt renegotiation and restructuring are normally considered after the Third World countries agrees to structural adjustment. As the IMF chairman noted in 1985; "Appropriate adjustment policies in debtor countries are clearly needed to foster what Directors [of the IMF] called the normalization of debtor-creditor relationships, which in turn encourage the restoration of debtors' creditworthiness, greater spontaneous bank lending, official credit flows, and official development assistance." (IMF 1985a, p.116) Translated, this statement reads, unless an "appropriate adjustment policy" is implemented, Third World countries will not receive any credit or loans from the international financial community. The programs of structural adjustment are designed to address balance of payment 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 structural adjustment programs highlight "productive capacity as critical to economic performance" and "measures to raise the economy's output potential and to increase the flexibility of factor and good markets" (Ferraro et al.,1994). The overall debt strategy are imposed with "conditionality" medicine of tough stabilization policies which include; trade liberalization, privatization, and tax reform; which believed that it will eventually brought both growth and investment to LDC nations. Not so long after the programme were announced, numerous debtor countries with greatly depleted foreign reserves, including Latin America, Bangladesh and Ghana, had arranged to borrow total of $37.2 billion in special drawing rights from the IMF. By the end of 1980s, the World Bank had approved 52 structural adjustment loans and 70 sectoral adjustment loans (Chant et al., 2009), and as stated above, in order for the countries to receive the loans and negotiate additional credit from private banks, they were required to adopt the enumerated stabilization policies. But, do the Structural Adjustment Programme really eases the debt burden on the LDC's shoulder?

2.3

Adjustment Effects : Study of Asian Economic Crisis

July 1997 - the date that will forever being remembered by the Asian countries, the time when the grim financial crisis infected most of the Asian nations and raised fears of a worldwide economic meltdown due to financial contagion. The crisis started in Thailand with the financial collapse of the Thai baht caused by the decision of the Thai government to float the baht, cutting its peg to the U.S. dollar, and acquired a burden of foreign debt that made the country effectively bankrupt even before the collapse of its currency. Foreign debt-to-GDP ratios rose from 100% to 167% in the four large Association of Southeast Asian Nations economies in 19931996, then shot up beyond 180% during the worst of the crisis (Kauffman, 1999).

P38162 - Globalisation: Environment & Development The Crisis Of Third World Debt And The Solution To Problem

Although most of the governments of Asia had seemingly sound fiscal policies, the International Monetary Fund (IMF) stepped in to initiate a $40 billion program to stabilize the currencies of South Korea, Thailand, and Indonesia, economies particularly hard hit by the crisis. The efforts did stabilized the domestic situation in Indonesia, however. After 30 years in power, President Suharto was forced to step down on 21 May 1998 in the wake of widespread rioting that followed sharp price increases caused by a drastic devaluation of the rupiah. The effects of the crisis lingered through 1998. The question is, whom to blame for this tragic economic failure; is it the stabilization programme that intended to help LDCs to improve their economic growth, or the poor governance by the debtor countries? Taking Malaysia as an example, the country also experienced the recession in 1997, the financial rules were relaxed and private sector foreign debt also rose rapidly. However, Bank Negara retained one key regulation - private companies that wanted to borrow foreign-currency loans must first obtain bank's approval. And according to Datuk Paul low, president of the Federation of Malaysian Manufactures, this ruling saved Malaysia from falling into the kind of foreign debt crisis faced by Thailand, Indonesia and South Korea and enabled the country to survive without having seek an international rescue (Khor, 1998).

3.0 alternative deliverance to stabilization measures

3.1 Jubilee Movement, *HIPC & The Architecture of Governance
(*Highly Indebted Poor Countries)

Concerns that adjustment was an economic failure and even cause of the poor economic performance of Southern countries, had already been expressed by range of non-IFI development organizations and NGOs a decade earlier. Taken from Susan George, from her book - A Fate Worse Than Debt - clearly criticized the impacts of the adjustment programme to the debtor nations; "Debt is an efficient tool. It ensures access to other peoples raw materials and infrastructure on the cheapest possible terms. Dozens of countries must compete for shrinking export markets and can export only a limited range of products because of Northern protectionism and their lack of cash to invest in diversification. Market saturation ensues, reducing exporters income to a bare minimum while the North enjoys huge savings. The IMF cannot seem to understand that investing in [a] healthy, well-fed, literate population is the most intelligent economic choice a country can make." (Susan George, 1990, p. 143, 187, 235)

P38162 - Globalisation: Environment & Development The Crisis Of Third World Debt And The Solution To Problem

Following an ideology known as neo-liberalism, and spearheaded by these and other institutions known as the Washington Consensus (for being based in Washington D.C.), Structural Adjustment Policies (SAPs) have been imposed to ensure debt repayment and economic restructuring. But the way it has happened has required poor countries to reduce spending on health, education and development, while debt repayment and other economic policies have been made the priority. In effect, the IMF and World Bank have demanded that poor nations lower the standard of living of their people. In the beginning of twenty-first century, there are some real progress has been made to mitigate the debt crisis in the world's poorest countries. The call from Oxfam and other influential charities and NGOs for urgent attention to be given to the debt problem was taken forward by targeted anti-debt pressure groups, most notably 'Jubilee 2000'. The idea of Jubilee 2000 was first articulated by Martin Dent, a retired lecturer at the University of Keele, who linked the biblical Jubilee to a modern debt relief programme and beginning the campaign in early 1990s (Carasco, 2007). Jubilee 2000 is an umbrella organizations bringing together a broad coalition of faith-based organizations, NGOs, trade unions, press and general public and started to lay their foundation in 1996, when a number of major development focused charities decided to petition political leaders in rich countries 'to cancel the unpayable debts of the poorest countries by the year 2000 under a fair and transparent process' (Jubilee 2000, 2002). The tipping point of the campaign is the issue was of Third World debt was brought to ordinary people across the world and 24 million signatures had been collected for this first ever global petition. Because of the eminence of the campaign and the pressure from the world's most powerful leaders, the World Bank and the IMF, therefore the launch of the significant HIPC initiative in 1996.

The 38 states recognized as the Heavily Indebted Poor Countries (HIPC) : Countries qualifying for full HIPC relief Countries qualifying for partial HIPC relief Countries eligible for HIPC relief but not yet meeting necessary conditions Figure 4 : The Highly Indebted Poor Countries (source from the World Bank, 2010)

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The World Bank, IMF and other development agencies have since changed their policies to make them more socially aware and orientated towards poverty reduction and social justice. The thought of SAPs needed to be revaluate and on 1996, the World Bank and the IMF has launched HIPC Initiatives and represented a recognition of the significant effort needed to bring about a once and for all reduction in the debts of some of the world's poorest countries (Potter et al., 2008). According to the World Bank (2001): "It was the first comprehensive approach to reduce the external debt of the world's poorest, most heavily indebted countries, and represented an important step forward in placing debt relief within an overall framework of poverty reduction" (World Bank, 2001b: 1). HIPC is the material basis for the construction of governance architecture. It was supported by leader of Group of Seven (G7) and in September, the World Bank and IMF approved an 'enhanced initiatives' as an integral part of the new poverty reduction strategy (Potter et al.,2008). Being accepted as a HIPC country enabled a country to receive a write-off of outstanding debt and capital stock to what international finance organizations judge as a 'sustainable' level. Gaining HIPC status begird around donor evaluations of an indebted country, and these evaluations are based on the level of indebtedness, indicators of poverty, and the track record of a country in implementing the structural adjustment programmes. In response to problems with the original initiatives, the enhanced HIPC Initiatives has three key components, which the first is the calculation of the debt relief based on the debt sustainability analysis, followed by Poverty Reduction Strategy Papers (PRSPs) and lastly, Poverty Reduction and Growth Facility (PRGF) of the IMF. The governance architecture portrayed is represented by donors and creditors as evidence that the international community is taking country ownership seriously; the new phrases that pervade donor documents are of governments in the lead, of 'smart partnerships', government-led reform, of a move away from the tense stand-offs of the conditionality period. (Harrison, 2004). Likewise, the synchronised and integrated process behind the creation of HIPC and PRSP provide the cadence for governmental action and planning. These integrated mechanisms are also seen as the focal point for a set of donor funding programmes which will accommodate their own lending priorities and timeframe. This resembles 'joined-up' governance led by the Bank and other external agencies which are now involved in detailed aspects of governance - tax raising, expenditure management, land reform, judicial reform, and administrative reform. With the Bank's and other donor's support for administrative reform and anti-corruption strategies; promise a foreseen high levels of economic growth and a persistence allocation of multi-dollar grants and soft lending programmes. At every point in the architecture, government officials have an eye on donor-creditor desires and designs, aiming to key initiatives into the global consensus most appropriate: pro-poor growth, governance, administrative reform and so on.

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Figure 5 : Characteristic of 'Good Governance' (Source from United Nations: Economic and Social Commission for Asia and the Pacific, 2011)

4.0 Debt relief

Drop the Debt!
Despite grand statements from world leaders, the debt crisis is far from over. The debtor nations still have to spend a fortune on debt repayments than on meeting the needs of their people. Rich countries and institutions must act to cancel all the abundant debt of the poorest countries, and they should not do this by alleviating these countries of new aids, but by digging in their own pockets and providing new money. Indeed, we need a fair and transparent international process to make sure that human needs takes the highest priority over debt repayments. International agencies like the IMF and World Bank must stop asking poor countries to jump through hoops in order to be qualified for debt relief. Poor countries should not bow to the hopeless command to privatise basic service or liberalise their economies as a condition for getting the debt relief they so desperately need. Unjust poor country debt must be cancelled fully and without conditions, through a fair and transparent process to end the scandal of debt repayments that killing people in poor countries. It will lead to a brighter coming in the debtor's economy and social justice. Taking Uganda as example. Uganda was among the first countries to benefit from the debt cancellation that was unveiled by IMF and World Bank in 1996 amidst much fanfare. The cancellation ameliorated the country economy by an impressive growth of 7 percent in 2008, and also gave a huge advantage in Uganda's welfare. Spending on public service has risen by 20 percent, 40 percent extra money allocate on education, 70 percent increase in healthcare, and enrolment rate increase from 62 percent to 94 percent for boys and 93 percent for girls (Foster, 2010).

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5.0 conclusion
What Can Be Done?
In summarization of the above, we can see that the debt of Third World countries leads to no ends. The global debt problem that has emerged in many developing countries in 1982, can be traced to higher oil prices in 1973-1974 and 1979-1980, high interest rates in 1980-1982, declining export prices and volumes associated with global recession 1981-1982, and with problems of domestic economic management (Hitesh, 2007). The problem has grown to large dimensions, and the nightmare started in 1982 when growth of the debt outpaced the growth of exports that sustain the debt. Due to the degree of this debt, and the widespread evidence of debt-servicing difficulties, the debt dilemma currently poses a considerable risk to the security of the international financial system. As, the debt crisis is likely to continue, and be an impediment on the growth of international trade through lower exports, investment and employment. So, what can be done? We can see how the adjustment program, created by the great financial institutions; more likely are failing to bring back the economic growth of the less developed countries and their debts are seeing no finish line. After some pressure from the non-profit organizations and also the global voices, HIPC was created to focus more on the people's need. But is that the ultimate solution to the debt? The most effective and instantaneous solution, of course, would be to cancel, or "forgive" the Third World's debt in its entirety. Others are advocating a more gradual approach which that believe that structural adjustment need not be eliminated completely, but that social and environmental impact assessments must be conducted by independent and/or non-profit organizations prior to the implementation of SAP's, to make them more sensitive to local problems and the special situation of the poor. Still others are calling attention to the need for greater popular participation in adjustment planning. By this they mean that debtor countries and their people should be given more control and leeway in designing their adjustment programs (Ferstenfeld, 2011). By all means, no reforms will ever come to actualization if the leaders of the international financial institutions are not convinced of their necessity. What is required, therefore, is a comprehensive effort on the part of everyone; political leaders, economists and common citizens alike, to let these institutions know that they must find more socially sensitive and environmentally sustainable ways to call for their debt payments.

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REFERENCES
BOOKS
Carrasco. E., McClellan, C., & Ro, J., 2007, Foreign Debt: Forgiveness and Repudiation. University of Iowa Center for International Finance and Development.

Chant, S. and Mcllwaine, C., 2009. Geographies of Development in the 21st Century. Glos: Edward Elgar Publishing Limited. George, S., 1988. A Fate Worse Than Debt: The World Financial Crisis and The Poor. Penguin Books. London. Linder, M., 1997. History of The Eighties: Lessons for the Future. Federal Deposit Insurance Corporation. Division of Research and Statistics. Federal Deposit Insurance Corporation. Potter, B., Binns, T., Elliot, J.A., and Smith, D., 2008. Geographies of Development: An Introduction to Development Studies Third Edition. Essex: Pearson Education Limited. Todaro, M.P., and Smith, S.C., 2009. Economic Development Tenth Edition. Addison-Wesley. Pearson Education.

JOURNALS
Bradshaw, Y.W., and Huang, J., 1991. Intensifying Global Dependency: Foreign Debt, Structural Adjustment, and Third World Underdevelopment. The Sociological Quarterly, Vol. 32, No. 3, pp. 321342. Bulow, J.,2002. Brookings Papers on Economic Activity, Vol. 2002, No. 1. (2002). The Brookings Institutions, pp. 229-255. Chossudovsky, M., 1988. Writing Off Third World Debt. Economic and Political Weekly, Vol. 23, No. 52/53, pp. 2739-2740. Clairmonte, F.F., 1988. Third World Debt: Anatomy of Genocide. Economic and Political Weekly, Vol. 23, No. 8, pp. 357-358. Cleaver, H., 1981. Notes on The Origin of The Debt Crisis. The New Enclosures, pp. 18-22. Dornbusch, R., and Fischer, S., 1986. Third World Debt. Science, New Series, Vol. 234, No. 4778, pp. 836-841.

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REFERENCES
Easterley, W., 2001. Debt Relief. Foreign Policy, No. 127 (Nov. - Dec., 2001), pp. 20-26. Khor, M., 1998. How Malaysia Avoided Debt Trap? South-North Development Monitor.

Ferraro, V. and Rosser, M., 1994. Global Debt and Third World Development. New York: St. Martin's Press, pp. 332-355. Harrison, G., 2004. HIPC & The Architecture of Governance. Review of African Political Economy, Vol. 31, No. 99, ICTs 'Virtual Colonisation' & Political Economy, pp. 125-128. Kaufman, GG., Krueger, TH., Hunter, WC., 1999. The Asian Financial Crisis: Origins, Implications and Solutions. Springer.

Marfleet, P., 1998. Globalisation and The Third World. International Socialism Journal, Issue 81, Winter 1998. Nehru, V., 2004. Third World Debt Relief: Indebtedness just a symptom of poverty. Atlanta JournalConstitution. Peters, B., 1994. Jubilee 2000. The Journal of Modern African Studies, Vol. 32, No. 4, pp. 699-700. Rogoff, K, 1991. Third World Debt. The Concise Encyclopaedia of Economics, First Edition. The United Church of Canada/L'Eglise Unie du Canada, 2006. Understanding the debt crisis. The United Church of Canada/L'Eglise Unie du Canada.

conference presentation/report
Chicago: Third World Conference Foundation, Inc., 1991. The Crisis Of Third World Debt - Is There a Way Out?. 15th Anniversary Third World Conference Foundation, Chicago. pp.27-38. World Bank, Economic Policy and Debt Department, 2005. Debt Sustainability in Low-Income Countries: HIPC and Beyond. World Bank.

ELECTRONIC RESOURCES
Ferstenfeld, M., 2011. Structural Adjustment: Time for Reform/Third World Countries Strangled By Debts. Houston Catholic Worker Newspaper. Available at http://www.cjd.org/paper/struc.html. [Accessed 14th November 2011] Foster, J., 2010. Impact of Debt Cancellation On Uganda. Debt Cancellation-Development Gap A2 Geography. Available at http://www.slideshare.net/fozzie/impacts-of-debt-cancellation-on-uganda. [Accessed 10th December 2011]

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REFERENCES

Jubilee Debt Campaign, 2010. The Debt Crisis. Jubilee Debt Campaign. [online] Available at http://www.jubileedebtcampaign.org.uk/1%20Why%20should%20we%20drop%20the%20debt%3F+ 2675.twl. [Accessed 10th December 2011] Leo, B., 2010. The Legacy of the Jubilee Debt Relief Movement: Agreements, Lessons, and Remaining Challenges. Center for Global Development. [online] Available at www.cgdev.org/content/publications/detail/1424540. [Accessed 10th December 2011] New Internationalist Magazine, 1998. The Third World Debt Crisis. New Internationalist Magazine, [online] Available at http://www.newint.org/easier-englisg/money/debt.html. [Accessed 13th November 2011] Pettinger, T., 2008. Reasons for Third World Debt. Economics Help. [online] Available at: http://www.economicshelp.org/development/reasons-for-third-world-debt.html. [Accessed 14 November 2011] Shah, A., 2010. Structural Adjustment - a Major Cause of Poverty. Global Issues. [online] Available at:http://www.globalissues.org/article/3/structural-adjustment-a-major-cause-of-poverty. [Accessed 10th December 2011]

video
George, S., 2011. How Do We Tackle The Crisis of Global Debt? [video online] Available at http://www.youtube.com/watch?v=lhP_eMGaJ8M. [Accessed 10th December 2011]