Third world debt has long been recognized as a major obstacle to human development. Many other problems have arisen because of the enormous debt that third world countries owe to rich countries. Debt has impeded sustainable human development, security and political or economic stability. How has this happened?
The historic causes of third world debt is introduced in a working paper from the development organization, the South Centre. It summarizes how the developing countries’ debt is partly the result of the unjust transfer to them of the debts of the colonizing States:
The working paper continues by questioning the legality of such a system that pushes many developing countries into extreme poverty.
Odious debt is unfair debt resulting from illegitimate loans. A useful summary from Jubilee USA:
Jubilee USA continues on to note that this principle has been used by the US to prevent Spain imposing debts on Cuba in 1898, as the US pointed out to Spain that those loans were imposed on Cuba by force, for Spain’s interest. Great Britain was also denied similar claims against Costa Rica in 1923).
Many poor countries today have started their independent status with heavy debt burdens imposed by the former colonial occupiers. South Africa as another example, has found it now has to pay for its own past repression: the debts incurred during the apartheid era are now to be repaid by the new South Africa.
But it is not just South Africa paying for this; surrounding countries that have been destabilized from this are paying debts incurred to deal with it. The organization Action for Southern Africa summarizes this clearly, albeit in a report from 1998:
The report also adds that countries further away, such as Tanzania, also felt the effects and had invested substantial sums (about $800 million for Tanzania) to appose apartheid.
Various other nations have found that they have to pay debts incurred by their previous military dictators (many of which were installed as clients of the rich countries.
As Steve Mandel, of the New Economics Foundation argues, because so much of these loans were knowingly given to unaccountable and corrupt leaders, there should be a shift in discussion from odious debt to odious lending, and thus there should be more of a spotlight on the banks who made large loans to illegal regimes, in effect, sustaining them.
Mandel also notes the scale to which odious debt has been overpaid, and is quoted at length here:
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.
Economists often refer to a moral hazard of forgiving debts, because it may encourage people to take on new loans and refuse to pay. Yet, as Action for Southern Africa also noted in the above-mentioned report about Southern Africa’s odious debt, the problem is not necessarily with borrowers, but with lenders:
It is not just the debt that is an issue for poor countries; it is the harsh conditions that come with it, that for years, have been known to make things worse, not better.
The well-respected Martin Khor, director of the Third World Network describes this further in a 3-minute video clip:
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:
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: