Causes of the Debt Crisis
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- This page: https://www.globalissues.org/article/29/causes-of-the-debt-crisis.
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Further debt resulted from mismanaged spending and lending by the West in the 1960s and 70s. As summarized from Jubilee 2000 (and reposted here) :
- 1960s saw the US spend more than it had, resulting in the printing of more dollars.
- Oil-producing countries, pegged to the dollar were affected as the value of the dollar decreased.
- In 1973, the oil-producing countries hiked their prices as a result, earning a lot of money, which they put in to western banks.
- Interest rates started to plummet resulting in more lending by banks to try and prevent a crisis.
- A lot of the borrowed money went to western-backed dictators, resulting in little benefit for most people.
- In 1982 Mexico defaulted on its debt payment, threatening the international credit system.
- The IMF and World Bank stepped in to Mexico and other nations facing similar problems, prescribing their loans and structural adjustment policies to ensure debt repayment.
- The poor have suffered the most as a result of the harsh conditions of structural adjustment.
Most loans to the third world have to be paid back in hard currencies (which do not usually change too much in value, e.g. the Japanese Yen, the American Dollar, etc.)
- Poor countries have soft currencies (values which can fluctuate).
- Debt crises can also occur just by the value of the developing country’s money going down, which can be due to a variety of other inter-related factors.
- Paying off loans implies earning foreign exchange in hard currencies.
- Combined with falling export prices for many poor countries, debts become even harder to pay off.
- Refinancing loans implies taking on new debts to service the old ones.
- Structural adjustment advice in the past from the IMF and others, has led to the cut back on important spending such as health, education, in order to help repay loans. This has implied a downward spiral and further poverty.
The World’s Poor Are Subsidizing the Rich
Another cause for large scale debt has been the corruption and embezzlement of money by the elite in developing countries (who were often placed in power by the powerful countries themselves). These moneys are often placed in foreign banks (and used to loan back to the developing countries). Many loans also come with conditions, that include preferential exports etc. In effect then, more money comes out of the developing countries than is given in. This depresses wages even further due to the spiraling circle downwards to ensure that enough exports are produced. (See the structural adjustment section on this web site for more on that aspect.)
J.W. Smith, from the Institute for Economic Democracy, is worth quoting at length:
Backbone to Globalization
The economic decisions and influence in various international agreements, treaties and institutions by the wealthy and powerful nations also help form the backbone of today’s globalization. That such immense wealth and prosperity for some have come at a time when most nations in the world have steeped into further poverty and debt is no coincidence. The policies of those who have the power and influence have been successful to help raise standards for some in their own nations, but at a terrible cost. Rich nations as well as poor incur debts, but often the wealthier and more powerful ones are able to use various means to avoid getting into the dilemmas and problems the poor nations get into. In fact, the following summarizes it quite well using the U.S. as an example:
While many western-backed dictators borrowed and went into debt, the impact is longer lasting and the poor people of today still suffer the impacts. For additional information see:
- How It All Began from Jubilee 2000.
- Debt: A Silent War from Jubilee 2000.
- Structural Adjustment — a Major Cause of Poverty from this web site.
- Bringing it all back home from Jubilee 2000 explains why debt in developing countries affect the industrialized nations too.
- The Institute for Economic Democracy does a great job in providing a historical look at the political economy of the world and how it has led to the conditions of today.
- Beginner’s guide to debt from the debtchannel.org provides a good overview.
- Africa’s Debt is a position paper by Africa Policy with a look at the debt situation of sub-Saharan Africa in particular.
- Challenging the legitimacy and legality of Third World Debt, a web site about Odious Debt (debt incurred by regimes that were not in the interest of their people).
The following are some simple examples of the problems that the current lending schemes have caused. (They are by no means extensive or exhaustive.)
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