What is third world debt?

Third World Debt

• I am interested in the causes, consequences and any possible solutions to the third world debt problem, specifically that of Argentina.

• Answer:

  Hello the_brickster-ga, I have read through several articles and have selected some to take out excerpts from. I recommend that you read through all of the ones I have cited and you will certainly be able to gain a good understanding of all three parts of your question. I found an interesting article by Kenneth Rogoff at http://www.econlib.org and will be summarizing some of the mail points here. I recommend that you read through the entire article as it contains a wealth of information: -The article was written in 1991 and says that by the end of 1990, the worlds developing countries owed more than $1.3 trillion to industrialized countries, Argentina owing $61 billion by itself. During the 70s, bankers became eager to lend money to developing countries, even though many third world countries defaulted their loans in the 30s. -Some causes of world debt are 1) The “sharp rise in world interest rates in the early eighties greatly increased the interest burden because most of their borrowing were indexed to short-term interest rates”, 2) the export receipts of developing countries started to fall, and 3) “sluggish growth in the industrialized countries made debt servicing much more difficult.” -The article says that many governments in the 70s made the situation worse by mismanagement of their economies. -“Not enough money was invested in productive projects that could be used to service the debt.” As for one possible solutions, the article says to: -“force private creditors to forgive part of their debts or use large doses of taxpayer resources to sponsor a settlement” SOURCE: Third World Debt (by Kenneth Rogoff) http://www.econlib.org/library/Enc/ThirdWorldDebt.html As of February 4, 2002 debt to third world countries had risen to $1.8 trillion. A very obvious problem wish such a staggering amount of debt owed by poor countries, usually to rich countries, is that the interest rates are making it all but impossible for poor countries to get ahead. A court in Brazil has found that the crippling debt that third world countries have is “illegitimate, unjust and unsustainable, ethically, legally or politically.” Argentina, which has defaulted on $141 billion in public debt after it suffered four years of recession and a cut off from further loans is often viewed as an example “of the failure of free-market economies.” The article also quotes an individual saying that: “The more we pay, the more we owe and the less we have.” SOURCE: Third World Debt Deemed Illegal (by Harold Olmos) http://www.commondreams.org/headlines02/0204-05.htm One solution to the third world debt problem is to cancel the debt itself allowing the countries to breathe again. “The foreign debt imposed on the Third World is not a relation among equals. It is based on the relationship between a handful of oppressor powers—whose headquarters is in Washington—and the majority of nations oppressed by imperialism. The most industrialized countries, which enjoy a greater productivity of labor, extract huge profits by imposing unequal terms of trade on the semicolonial nations, whose economies are subjected to and distorted by the domination of these imperialist powers. The debt squeeze on Argentina and other semicolonial countries is simply a vehicle to suck enormous amounts of wealth into the coffers of the imperialist banks.” The article continues in saying that Argentina, although it was paying massive interest rates, their debt continued to grow. In July 30, 2001 it had $130 billion in debt, but its annual gross domestic product was only $374. “The only solution proposed by the wealthy bondholders […] make working people pay – to slash wags and social benefits, and similar measures.” Source: Cancel Third World Debt http://www.themilitant.com/2001/6529/652901.html Another article talks about the awful instability Argentina has gone through, partially because of the staggering debt that country has. It notes that Argentina, with $140 billion in debt has 20 percent of its population unemployed. The banks had only 15 percent of the cash needed to return savings of Argentina, so people were unable to withdraw their money from banks. Source: Leadership Vacuum in an Economic Black Hole (by Alfred Hopkins) http://www.worldpress.org/Americas/370.cfm In theory at least, loans to poorer countries could work, and it could bring a boost to the economy. In some places such as South Korea, loans have worked to boost the economy, but in many places such as Argentina, the interest on these loans and their mismanagement has been a disaster. The economy, government and social stability quickly collapsed as soon as they were unable to pay off the interest on their loans, and thus they were unable to secure more loans to keep their country running. You can read some more about the instability caused by the massive debt in Argentina here: http://www.worldpress.org/Americas/370.cfm With mismanagement and a bad economy, the World Bank refused to loan Argentina more money, because it could not pay its interest, and required payment of interest before new funds would be issued (which of course will lead to even more interest): http://news.bbc.co.uk/1/hi/business/2471617.stm Here is another quote from an excellent article worth reading: “For most of the 20th century, Argentina was considered one of the most developed countries in South America, however poor economic decisions, political instability, and endemic corruption have contributed to Argentina's decline from the 10th richest country in the world in 1913 to the 36th in 1998. Argentina now finds itself bankrupt with an external debt of US153 billion. This constitutes one seventh of all the debt of developing countries.” The fourth paragraph discusses how there was a 13% cut in public service salaries, pensions etc., to pay interest on the loands. Source: http://www.cafod.org.uk/latinamerica/argentina_background.shtml Also adding to the problem is that aid from other governments, and sometimes loans too come with conditions, such as that they must be used to purchase products or services from the loaning country. This can lead to significant disadvantages for the country receiving the money, because they are not in full control of the funds. On the other hand, if foreign government were required to be more accountable, there would be less mismanaging of the funds and perhaps change is possible. The easiest solution to the debt crisis would be to simply eliminate the need of all third world countries to repay their debt. Unfortunately, private and public organizations who have loaned the money to third world countries do not want to see their money simply disappear, especially when, in many cases it has been so mismanaged and in some cases stolen by corrupt politicians. There is no easy answer to solving the debt problem, should we cut the debt in half and require countries to be accountable? Should we demand that poor citizens be forced to take pay cuts so that they can fully repay the loans? Should we eliminate the debt completely giving everybody a fresh start? What then? In conclusion, here is a link to an article entitled “The Third World Debt Crisis: Facts and Myths” (by David Roodman) Here is one excerpt: “Many poor countries are using new loans to pay off the old. Among the poorest countries (GNP per capita less than $885 a year) in 1999, of every dollar received in new loans, 83 cents went right back to pay old ones.” http://www.worldwatch.org/pubs/paper/155facts_myths.html Please let me know if you need any clarifications to this answer and I will respond as soon as possible. tisme-ga Search Strategy: "third world debt" argentina ://www.google.com/search?q=%22third+world+debt%22+argentina debt argentina protests ://www.google.com/search?q=debt+argentina+protests debt argentina corruption ://www.google.com/search?q=debt+argentina+corruption