THE DEBT CRISIS AND DEVELOPMENT
Richard J. Estes
University of Pennsylvania
The global economy of the second half of the 1980s was characterized by
considerable instability. Double-digit inflation, once thought to be under
control, again surfaced; unemployment was on the increase nearly
everywhere; trade protectionism, with its deeply divisive political
consequences, was being widely practiced; interest rates were rising; and
significant imbalances in trade between otherwise friendly nations produced
overt animosity and threats of economic reprisal. Affluent nations became
more dependent on international loans to finance their current expenses;
the deepening national debts of these countries added to internal
political tensions and, early in the decade, resulted in the election of
more financially conservative governments. In Western nations, as
elsewhere, pressures existed for increased nationalism, for greater
economic protectionism, and for withdrawal from all but essential
international activities. Some countries denied continuation visas and
work permits to foreign workers living within their borders; in some cases
visas have been withdrawn from persons on whose relatively cheap labor many
Western nations, especially in Europe, have depended for decades. Some
nations sealed their borders to foreign workers entirely; other countries
attempted to locate and expel workers who entered their borders illegally
in search of work.
Since the mid-1980s the United States, the world's largest economy,
has become a major "debtor nation." In 1989, for example, imports to the
United States exceeded exports by $144.6 billion, or by 71 percent of
exports ($346.9 billion in exports versus $491.5 billion in imports). The
country's gross international reserves, as measured in months of import
coverage, fell to 2.9 months in 1989 from 4.0 months of coverage in 1983
(World Bank, 1991:239). Both inflation and unemployment are increasing in
the United States, as are interest rates. Economic growth for the period
1980-1989 averaged only 3.3 percent, higher than that of many other DME
nations but well below what is needed to promote economic recovery. A
recent survey of investment in the United States found that foreign
individuals and companies owned the equivalent of all the wealth of the
country's top 100 corporations. As with other nations experiencing high
levels of external indebtedness, slow rates of economic growth, and
increasing trade imbalances, rapidly increasing pressures exist in the
United States for greater protectionism in the international marketplace.
Continuing economic problems in the United States contributed to a
sharp decline around the world in the value of the dollar. Some of this
decline was intentional, but much of it was not. Used for decades as the
primary medium for settling international accounts, the dollar lost in
excess of 30 percent of its international purchasing value between 1981
and 1986. Increasingly, many nations have turned away from dollars to
conduct international business to a "basket" of more financially stable
European and Japanese currencies. Some economists and political leaders
have even advocated at least a partial return to the use of gold and other
precious metals in international exchanges. Lack of confidence in the U.S.
economy was fueled by the mid-October 1987 crash of the New York Stock
Market. The most precipitous decline since "the Great Crash" of 1929, the
paper value of stocks listed on the New York exchange plummeted by more
than 500 points in a single day. Panic was felt around the world. Within
hours, equally dramatic losses were reported by exchanges in London,
Tokyo, Hong Kong, Sydney, and elsewhere. Most observers regarded the crash
"one popular weekly magazine referred to it as the "meltdown of 1987")
as the start of an expected new worldwide recession. The stock markets
were regarded as merely reflecting the underlying instabilities that
characterized the majority of Western economies. Despite the partial
recovery of pre-crash prices that occurred in the days that followed the
catastrophe, the financial crisis of "Black Monday" made clear the need
for a new approach to international finance, at least among the world's
economically advanced nations. As of this writing, neither the essential
elements nor the direction of that new
course has been chartered.
As problematic as global economic trends have been for the economies
of advanced nations, the impact of these trends on the fragile economies of
developing countries has been nothing short of devastating. As a group,
the Dcs and the LDCs have fallen steadily into deeper debt, much of which
has resulted from development loans and related financial obligations to
Western nations. Trade imbalances stemming from a combination of declines
in exports and increases in imports have added substantially to their
economic problems. Shortfalls in productivity, drops in the value of oil
exports, inflation, rising interest rates, an overdependence on
food imports, and significant reductions in levels of financial assistance
from richer countries have also compounded the economic problems of
developing nations. So, too, have recurrent natural disasters, the
persistence of now decades-long civil and regional wars, continuing
internal unrest and, currently, the rapid spread of AIDS and other highly
contagious diseases with their extraordinary
financial and human costs.
Table 5 identifies those 28 nations with 1989 external debt levels
exceeding $10 billion. All of the countries identified in the table are
developing nations; those with asterisks (*) after their names are "least
developing countries" (LDCs), the so-called "Fourth World of Development"
or the "poorest of the poor." High levels of international indebtedness
imposes serious problems for all countries, but for the LDCs, high levels
of foreign indebtedness makes it all but impossible for them to move
forward in providing more adequately for the basic social and material
needs of their rapidly increasing populations. Table 6 reports national and
per capita debt levels for 84 countries, including the number of months on
a per capita basis required to dispose of their debt.
The LDCs with the highest debt levels are Bangladesh ($6.0 billion),
Tanzania ($3.0 billion), Arab Yemen ($1.9 billion), Ethiopia ($1.7
billion), PDR Yemen ($1.4 billion), and Mali ($1.3 billion). The LDC
nations with the highest debt/GNP ratios are PDR Yemen (135 percent), Mali
(127 percent), and Togo (121 percent). Arab Yemen (56 percent), Somalia
(45 percent), and PDR Yemen (42 percent) have the highest equivalent share
of their earnings from exports obligated to servicing long-term debt
obligations.
Given the desperate socioeconomic circumstances under which all LDC
nations exist, it seems folly indeed to expect that these countries can
meet their long-term obligations to foreign creditors and, at the same
time, increase the level of national prosperity. The majority of countries
are food-deficit nations, most have staggering rates of population growth,
and their rates of early death and infant mortality are the highest in the
world, resulting from inferior living conditions. This study and others
confirm the reality that many LDCs are in a weaker economic position today
than they were 10, 15, or even 20 years ago. The LDC debt situation,
compared to that of the rest of the world, is made all the more ridiculous
when one recognizes that many of these starving and near-starving
nations are exporting food grains as cash crops to generate the foreign
exchange required to service their foreign debts. The situation
is further compounded by an overall decline in the relative levels of
international development assistance flows to the LDCs from OECD and OPEC
nations between 1980 and 1985. Recent efforts at reducing the need for
foreign borrowing by concentrating on accelerated South-South trade and
bartering between developing countries appear to have been unsuccessful.
The reality is that the majority of the LDCs now find themselves in
the position of having to choose between paying interest on their long-term
debts or dealing with starvation (or building schools for their children,
or purchasing fertilizers needed for food production, or manufacturing
medicines that are desperately needed to treat their sick, or constructing
roads that will facilitate economic development, etc.). International
lending institutions have offered comparatively few options to the LDCs in
dealing with their debt crisis, with the exception of extending repayments
over a longer period of time. The exercise of these options, however,
will leave the LDCs even more impoverished over the long term as their
level of past and future indebtedness continues to mount. Ad hoc solutions
to the crisis will not help the problems of LDC debt.
The following suggestions are offered to help the poorest developing
countries begin to unravel their international debt problems. They do not
reflect a set of recommendations for all debtor nations. Nor are they
offered as panaceas that will solve all of the complex financing problems
confronting the LDCs.
1. Current debts owed by the LDCs to the international lending
institutions should be forgiven entirely. Instead, receipts from the
monies owed by the LDCs to these institutions should be placed in a
special account within the LDC country and administered jointly by the
loan-granting institution and the LDC for the following purposes:
a. To finance the development of new economic infrastructures at a
higher level than possible while debt repayments were being made .
b. To provide financial incentives for the development of new
product lines, food-stuffs, equipment, processes, and methods of
production that are more appropriate to the farming, industrial
development, and service development needs of the LDCs. The
notion is to encourage LDCs to develop innovative approaches to
economic development that best reflect their own needs, rather
than those of the more economically advanced nations.
c. As possible and appropriate, to finance the turning over of
state-run enterprises and monopolies to the private sector.
d. To attract foreign investment and enterprise to establish
business and other joint ventures within the LDC. These funds
should only be used to help subsidize investments however in
which the LDC itself has either a co-equal or controlling
interest in the joint venture.
e. To provide assistance to local farmers, manufacturers, and
others during periods when temporary price fluctuations threaten the
viability of their operations.
2. The LDCs need generous infusions of new capital into their economies.
These infusions should take two forms:
a. Some of this new capital should be provided as direct
grant-in-aid from donor nations.
b. The bulk of assistance should continue to be tied to the
achievement of specific economic goals and objectives. When
possible, incentives for additional amounts of goal-oriented funding
should be included in this type of assistance so as to both
ensure the likelihood of project success and reward nations for
their achievements.
c. Donor nations need to make commitments to development in the
LDCs for longer than the usual 3- to 5-year time span of most
projects.
3. The economically advanced nations of the world-both DMEs and the
ETAs-need to grant the poorest LDCs preferential status as trading
partners. Such status should include:
a. free or substantially subsidized LDC access to the technology of
the North;
b. opportunities for joint ventures and partnerships in the
exploration and exploitation of the seas, space, and other untapped
areas where needed resources are believed to be plentiful;
c. stable and more realistic currency exchange rates that better
reflect the human effort expended by LDCs to produce their goods and
services;
d. significantly increased opportunities for large numbers of
persons from LDC nations to study in and learn from the North;
e. significantly reduced or eliminated trade tariffs on
LDC-produced goods and services;
f. assistance to LDCs in promoting and finding new and expanding
markets for their products;
g. expansion, as possible and appropriate, of "debt-equity swaps"
and similar schemes that permit LDCs to settle their financial
obligations in local rather than foreign currencies.
4. Inasmuch as 80 percent of the populations of the LDCs live in rural
areas, financial assistance to the LDCs should encourage investment in
rural rather than urban development. Necessarily, an emphasis on
rural projects should include improved agricultural methods; improved
seed strains; more effective transport, irrigation, communication, and
related infrastructures; and adequate food processing, storage, and
distribution systems.
5. Increased South-South economic cooperation must be encouraged and
nurtured. As formulated by Zhang Peiji and Cheng Yuhui at the 1983
Beijing South-South Conference, South-South economic cooperation must
occur within the context of the following principles:
a. Equality and mutual benefit must be the fundamental guidelines
on which South-South cooperation occurs, especially in respect for
national sovereignty and non-interference in the affairs of other
nations of the South.
b. Stress must be placed on practical results, especially in the
areas of technological innovation, research, and finding of
solutions to the most pressing social and economic problems
confronting the nations of the South.
c. Diversity in form, especially in response to the differing
socioeconomic conditions that exist among the nations of the
South.
d. Attainment of common development must be the ultimate goal of
South-South cooperation.
While not a complete list of all the options that are available to
assist LDCs with their staggering debt problems, the implementation of
these recommendations by the international development assistance
community would represent a solid first step toward finding more permanent
solutions.
RESOURCE MATERIALS ON
THE DEBT CRISIS AND DEVELOPMENT
BOOKS
Aggarwal, Vinod. 1987. International Debt Threat: Bargaining Among
Creditors and Debtors in the 1980's. (Berkeley: University of California,
Institute of International Studies).
Altvater, Elmar (ed.). 1990. The Poverty of Nations: A Guide to the Debt
Crisis From Argentina to
Zaire. (Atlantic Heights NJ: Zed).
Campbell, Bonnie (ed.). 1989. Political Dimensions of the International
Debt Crisis. (New York: St.
Martin's Press).
Cencini, A. and B. Schmitt. 1991. External Debt Servicing: A Vicious
Circle. (New York: Pinter).
Darity, William A. 1988. The Loan Pushers: The Role of Commercial Banks in
the International Debt
Crisis. (Cambridge MA: Ballinger).
Ghai, Dharam (Editor). 1992. The IMF and the South: The Social Impact of
Crisis and Adjustment.
(London: Zed Books).
Jay, Peter and Michael Stewart. 1987. Apocalypse 2000 (London: Sidgwick
and Jackson).
Lessard, Donald R. and John Williamson. 1987. Capital Flight and Third
World Debt. (Washington:
I.I.E.).
MacEwan, Arthur. 1990. Debt and Disorder: International Economic
Instability and U.S. Imperial Decline. (NY: Monthly Review Press).
O'Cleireacain, Seamus. Third World Debt and International Public Policy.
(New York: Praeger).
Onimode, Bade (ed.). 1989. The IMF, the World Bank, and the African Debt.
(Atlantic Heights NJ:
Zed Books).
Sachs, Jeffrey D. (ed.). 1989. Developing Country Debt and the World
Economy. (Chicago: University
of Chicago Press).
Smith, Gordon W. and John T. Cuddington. 1987. International Debt and the
Developing Countries.
(Washington, D.C.: World Bank).
Strack, Dieter and S. Schonherr. 1990. Debt Survey of Developing Countries
(Boulder: Westview).
World Bank, World Debt Tables, 1990-1991. (Washington, D.C., 1987);
BOOKS--SOLUTIONS TO DEBT CRISIS
Bird, Graham. 1989. Third World Debt: The Search for a Solution.
(Brookfield VT: Gower Pub).
Cohen, Benjamin J. 1989. Developing Country Debt: A Middle Way.
(Princeton: Princeton University,
Department of Economics).
Erzan, Refrik et al. 1986. On the Potential for Expanding South-South
Trade Through the Extension of Mutual Preferences Among Developing
Countries. Discussion Paper 16.(Geneva: United Nations
Conference on
Trade and Development).
Larrain, Felipe B. 1990. Can Swaps Solve the Debt Crisis?: Lessons From
the Chilean Experience.
(Princeton: Princeton University).
Robinson, James D. 1988. A Comprehensive Agenda for LDC Debt and World
Trade Growth.
(London: American Express Bank).
Williamson, John. 1988. Voluntary Approaches to Debt Relief. (Washington:
Institute for International
Economics).
United Nations. 1989. International Debt Restructuring: Substantive Issues
and Techniques. (NY:
United Nations), Sales No. E.89.II.A.10.
INTERNATIONAL ORGANIZATIONS
African Development Bank
Asian Development Bank
Caribbean Development Bank
Int'l Bank for Reconstruction and Development
Inter-American Development Bank
Organization for Economic Cooperation and Development
World Bank
International Monetary Fund
U.S. ORGANIZATIONS
African Development Foundation
Institute for International Economics
Inter-American Foundation
Overseas Development Council
U.S. Agency for International Development
World Policy Institute
DATA SETS
World Bank. 1991. World Development Report, 1991. (Washington: World
Bank)--publishes computerized versions of economic transfer data.
World Bank. 1991. World Debt Tables.
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Excerpted from Richard J. Estes (1992) _Internationalizing Social Work
Education: A Guide to Resources For a New Century_ (Philadelphia:
Univeristy of Pennsylvania School of Social Work).
Permission is granted to disseminate this document so long as proper has
been given to the source.