How It All Began

Much of the debt of poor countries is left over from the 1970s – and often arose through reckless or self-interested lending by the rich world.

How it all began…
In the 1960s the U.S. government spent more money than it earned and to make up for this decided to print more dollars causing the value of the dollar to decrease. This was bad news for the major oil-producing countries, whose oil was priced in dollars. The money they made from exports now bought less. So in 1973 they hiked their prices. From this they made huge sums of money and deposited it in Western banks.

Banking on the Future
Then the trouble really began. As interest rates plummeted, the banks were faced with an international financial crisis. They lent out the money fast, to stop the slide, and turned to the Third World, whose economies were doing well but who wanted money to maintain development and meet the rising costs of oil.

Banks lent lavishly and without much thought about how the money would be used or whether the recipients had the capacity to repay it. Third World governments, for their part, were pleased to take advantage of loans at very low interest rates – below the rate of inflation. Some countries, like Mexico and Venezuela, took out loans to repay previous debts. But for others, this was the first time they had borrowed from commercial banks. Many intended to use the money to improve standards of living in their countries.

In the end, little of the money borrowed benefited the poor. Across the range, about a fifth of it went on arms, often to shore up oppressive regimes. Many governments started large-scale development projects, some of which proved of little value. All too often the money found its way into private bank accounts. The poor were the losers.

Heading for Disaster
In the mid 1970s, developing countries, encouraged by the West to grow cash crops, suddenly found that they weren’t getting the prices they were used to for the raw materials they sold, like copper, coffee, tea, cotton, cocoa. Too many countries – advised by the West – were producing the same crops, so prices fell.

Then interest rates began to rise, pushed further by an increase in US interest rates. Meanwhile oil prices rose again. Third World countries were earning less than ever for their exports and paying more than ever on their loans and on what they needed to import. They had to borrow more money simply to pay off the interest.

Caught in the Trap
In 1982 Mexico told its creditors it could not repay its debts. The International Monetary Fund (IMF) and World Bank stepped in with new loans under strict conditions, to help pay the interest. The IMF is a Western-dominated creditor, which in effect acts as a Receiver but unlike a Receiver makes short-term loans to help countries pay off other loans.

When Mexico defaulted on its debt repayments in 1982 the whole international credit system was threatened. Mexico owed huge sums of money to banks in the US and Europe, and they didn’t want to lose it. So they clubbed together and got the support of the IMF for a scheme to spread out or reschedule the debts.

Since then the IMF and the World Bank – the two main international financial institutions – have been involved in lending money and rescheduling debt in countries which, like Mexico, cannot pay the interest on their loans. However, their loans add to the debt burden and come with conditions. Governments have to agree to impose very strict economic programs on their countries in order to reschedule their debts or borrow more money. These programs are known as Structural Adjustment Programs (SAPs). SAPs have particularly affected the countries of sub-Saharan Africa, whose economies are already the poorest in the world.

SAPping the Poor
SAPs consist of measures designed to help a country repay its debts by earning more hard currency – increasing exports and decreasing imports. In only a few countries have SAPs appeared to have had some good effect; in most they have worsened the economic situation. In all countries applying SAPs, the poor have been hit the hardest.

SAPs generally include:

   Spending less on health, education and social services – people must pay for them or go without
   Devaluing the national currency, lowering export earnings and increasing import costs
   Cutting back on food subsidies – so prices of essentials can soar in a matter of days
   Cutting jobs and wages for workers in government industries and services
   Encouraging privatization of public industries, including sale to foreign investors
   Taking over small subsistence farms for large-scale export crop farming instead of staple foods. Farmers are left with no land to grow their own food and few are employed on the large farms.

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