What Are the Causes of a National Debt in Third World Countries?
According to the Library of Economics and Liberty, by 1990 developing countries owed more than $1.3 trillion to industrialized countries. Of the developing country debts, approximately half is owed to private creditors and commercial banks by "middle income" countries, particularly in Latin America. African and South Asian countries, which make up the world's poorest countries, are unqualified for private or commercial loans. Instead their debts are owed to the International Monetary Fund, the World Bank and other Western government entities.
Other People Are Reading
-
Causes
-
The debt of Third World countries is a legacy of colonial rulers who transferred their debts to their former colonies. The debts were to be repaid at high interest rates that were set unilaterally by international institutions. Newly independent Third World countries formed governments that were already burdened with debt. Third World debt continued to grow during the 1970s as the world's oil-exporting countries began to earn large sums of money from their oil revenues, which they deposited into Western banks. The excess deposits in Western banks were lent to Third World countries at low interest rates.
Consequences
-
In the late 1970s, as interest rates for loans started to rise, Third World debtor nations were on the verge of bankruptcy and could not meet their loan repayments. At the recommendation of financial institutions such as the International Monetary Fund and the World Bank, Third World countries increased their cash crop production to pay off their loans. However, due to fierce competition from countries that produced the same cash crops, prices of export commodities fell, making debt repayment impossible; Third World countries were earning less from their exports and paying more on their loans.
-
Considerations
-
Countries in sub-Saharan Africa pay $10 billion every year in debt services; this amount is four times what countries in the region spend on health and education. In addition, Third World loans must be repaid in hard currencies like the U.S. dollar or the Japanese yen, which are stable forms of currency. Developing countries, on the other hand, hold soft currencies that are more vulnerable to market fluctuations and lose their value quickly. In other words, as the value of Third World currencies decrease, their debts increase.
Solutions
-
To maintain their debt payments, some countries opt for debt refinancing. However, borrowing more money to pay off previous loans leads to a greater debt burden. In addition, financial institutions such as the International Monetary Fund make conditional loans to Third World countries by requiring borrowers to adhere to strict terms such as cutting national health care and education costs, which increases poverty in developing nations. To alleviate the crisis of Third World poverty and indebtedness to industrialized nations, advocates have called for debt cancellations, which would relieve developing nations from having to pay back their loans or interest on their debts.
-
