The Ghana’s Irresistible Borrowings - THE THIRD WORLD DEBT CRISIS

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Created on Sunday, 30 March 2014 00:00

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THE THIRD WORLD DEBT CRISIS

What is the Third World Debt Crisis?

How did it start?

Why does the debt keep growing?

What can we do?

Many developing countries have very large debts, and the amount of money they owe is quickly increasing. Trying to pay off the debt (debt service) has become a serious problem for these countries, and it causes great hardship for their people. Take the region of Sub-Saharan Africa, for example. This region pays $10 billion every year in debt service. That is about 4 times as much money as the countries in the region spend on health care and education.

How did the Debt Crisis start? At the end of the '70's, many oil-exporting countries had large amounts of extra money. They put this money into Western banks. The banks then loaned a lot of money to Third World countries for big development projects. However, several factors (a rise in world interest rates, a global recession, and low commodity prices) caused the size of these debts to start growing very fast; several countries began to fall behind in their payments.

The amount of money owed by developing countries has increased dramatically since the early 1980's. These countries now owe money to commercial banks and also to organisations like the World Bank, the International Monetary Fund, and to First World governments. Why does the debt keep growing? It is especially difficult for developing countries to repay loans: Loans must almost always be paid in hard currency. Most loans to the Third World have to be repaid in hard currencies. Hard currencies are stable currencies; that means their value does not change very much. The Japanese yen, the American dollar and the Swiss franc are examples of hard currencies.

Developing countries have soft currencies - they go down in value. Therefore, when the value of a developing country's money goes down (as it often does), the cost of its debt rises. It takes more of the country's own currency to pay back the same amount of hard currency. The value of a country's exports goes down. The value of the commodities that a Third World country exports can go down by large amounts. This makes it much more difficult for the country to repay its loans. In Latin America, for example, debt is growing faster than earnings from exports.

Refinancing loans can get countries into even more troubles: Refinancing is when more money is borrowed to pay off earlier loans. In theory, refinancing is a measure to help developing countries with their debt problems and sometimes it does this. However, it does not make good sense to take on new debts in order to service existing debts. If this happens, the result is that countries get deeper and deeper into debt. (This is called a 'debt spiral.') In addition, many of the loans to developing countries are made by governments or organisations like the IMF. These loans often carry strict conditions with them, like cuts in spending on health care, education and food subsidies. This makes life even worse for people in the indebted countries. What can be done?

Reschedule the debts:

This is when the terms of repaying the loan are changed and more time is allowed to repay the loan.

Debt swaps:

Some organisations have thought of clever ways to help developing countries lessen their debts.

UNICEF's Debt for Child Relief is an example of how an organization helped some developing countries with debt problems.

In this program, UNICEF and international banks made a deal. Some of the money that poor countries owed the banks was not paid to the banks but was paid to UNICEF. Instead of the money, the banks received tax deductions. UNICEF collected the debt repayments in local currency (not hard currency) and then spent this money for programmes to help children inside the country.

Cancel the debts: Quite simply, the debts would no longer exist. The developing countries would not have to repay the loans and they would not have to pay the interest. After all, what do the developing countries really owe the developed world? They have repaid their loans many times over in interest payments. In addition, in many cases, developing countries have paid the First World more (in debt-servicing) than the Northern countries have given in aid, loans and investment.

From 1983-1989 a surplus of $165 billion went FROM countries receiving aid TO the countries who were 'giving' it. Again in 1994, the less developed countries paid out $112 billion more than they received. Of course, cancelling Third World debts now will not solve the problem in the future. To do that, we must change the present financial system, which is based on debt and interest payments; a system that keeps control in the hands of those who are rich and powerful.

Information comes from the article, 'Currencies of Desire', by Vanessa Baird (NI October 1998) and The A to Z of World Development (1998) edited by Wayne Ellwood (New Internationalist Publications Ltd)

Culled/Copyright: New Internationalist Magazine 1998, 1999

On that note, it is worth reproducing what has been said about the concerns of US’ domestic borrowings: “Yes, the projects that the present generation’s government chooses to finance, even while racking up a debt, might have a lasting value that compensates future generations by providing them with the fruits of a long-term investment they could not otherwise have, such as infrastructure or domestic oil production. But the guardian angels of the state are not very adept at selecting such services, even less so when decisions are made with the resources but without the consent of the unborn. Borrowing, then, remains the most politically feasible option for the government to finance its spending. Taxation will always be unpopular, and inflation makes its presence felt eventually. Borrowing the money, however, conveniently passes the bill to future generations- who will never realize that they have been cheated and robbed if we keep repeating the meaningless myth that we owe the debt to ourselves.” [3]

CONCLUSION

Our summary advocacy therefore, is: we must be very cautious in our debt-bondage and spending for we are just but natural or agricultural producing country, relying heavily on the mercies of God and nature, and arguably less capable not only in managing our own energy needs but also seasonal bumper harvest.

Researched and Compiled By Asante Fordjour for The OmanbaPa Research Group

JusticeGhana

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LEGENDS

GLOBAL: Worldwide

A RECESSION is a time when there is much less business than usual.

A COMMODITY is a product of farming, forestry, or mining that is bought and sold.

DRAMATICALLY: very greatly.

DEBT SERVICE: The amount of borrowed money and interest that you must regularly pay.

References

[1] Kenneth Rogoff (1991), “The Third World Debt Crisis”, http://www.econlib.org/library/Enc1/ThirdWorldDebt.html, date accessed, 29 March 2014

[2]Index Mundi, “Ghana Economy Profile 2013”, http://www.indexmundi.com/ghana/economy_profile.html, date accessed, 29 March 2014

[3] Michael Kelbaugh, “Debt and Future Generations”, http://www.americanthinker.com/2012/12/debt_and_future_generations.html, 29December 2012, accessed 29 March 2014

[4] Richard Mensah ‘We don’t borrow to buy drinks and food’ – Mahama to critics, http://www.citifmonline.com/?p=8964, 27 March 2014, accessed, 29 March 2014

[5] What is the Third World Debt Crisis? http://newint.org/easier-english/money/debt.html, date accessed, 29 March 2014