Third World Debt

Third World Debt THIRD WORLD DEBT For most of the Developing countries, the need to exploit their resources, increase their GDP up to an acceptable level and overcome their inability to cope with the necessary imports to cover domestic wants, caused a major increase in their external debt. Prior to the Third World debt crisis in 1982, Developing countries managed to keep the levels of external borrowing at low points, mainly due to the fact that the loans they were receiving had comparatively low interest rates, and their purpose was to increase imports of capital goods. Additionally, their mail loaners were Developed countries and financial institutions, such as the World Bank. However, in the period between 1982 and 1989, a major increase in Third World counrties’ external debt led to economic difficulties and even high political instability. During the 20-year period between 1970 and 1989 the external debt of Developing countries grew from $68.4 billion to $1283 billion, an increase of 1846 % . The main reasons for which Third World Debt rose dramatically during the 80’s have their roots to the late 70’s.The most significant ones are: Rise in oil prices. It led most of the OPEC countries to stock their oil surplus in order to face the crisis and benefit from increasing demand. Therefore, profit-purpose banks were encouraged from governments to grant loans to LDC countries, in order to avoid the effects of the increase in oil prices.

A significant number of Developing countries took advantage of this effect by borrowing uncontrollably, mainly due to the lack of purpose criteria, and for both development and non-development purposes. International Economic recession. During the end of the 70’s,governments in western countries, including the United Kingdom, decided to follow monetary policy, including high interest rates, in order to fight inflation. This forced many other countries to decrease their imports from Third World countries. As a result, Developing countries faced a direct need to increase their external borrowing so that they could at least cover their necessary domestic needs.

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High interest rates. An important percentage of the Third World Debt was borrowed under different interest rates. Therefore, the early 80’s rise in rates, caused a further aggravation in the payback obligations of the Third World. Having to face this critical situation, Third World countries had two main policy options. They would either minimize imports of goods and rely on their domestic products, as well as set development and industrial-growth aims, or support their increasing foreign debt through further borrowing.

Lack of ability, and sometimes will, to follow the first option, many countries entered a vile circle of borrowing and paying. Since the beginning of the Third World debt crisis, many academic analysts have proposed a variety of ways to succeed debt relief over those countries. The two main opinions were that the LDC’s were facing either a liquidity or a solvency problem. 1. Followers of the liquidity view argued that the debt crisis was a short-term problem and proposed that indebted countries should be granted access to further external borrowing until they could succeed in balancing their debts.

2. Followers of the solvency view, in contrast, tended to point at the fact that, that Third World highly indebted countries were unlike to repay their debts, for a large proportion of the money were not invested, but consumed. They suggested that ways should be fount in order to share the costs and lower the interest rates. Those early proposals have been proven though to inaccurate, for two main reasons: Firstly, countries are illiquid, and secondly, countries may be unwilling to repay the debts, if they were not given the proper incentives. A later view suggested that specific LDCs have absorbed so much debt that creditors no longer expected that they would be fully repaid. Additionally, since at such high levels of indebtness, it was practically impossible for countries to find new lenders, the only way would be to forgive portions of the debt instead.

For it is more than obvious that the market value of the amount due would stop rising through forgiveness, and it might even start declining, up to the point where creditors will find that it would be of their interest to forgive part of their claims. In conclusion, it is widely accepted that it is essential for the Third World debt problem to be solved, for economic development but mainly for social policy reasons. Though it might be stated that creditors do not usually operated under humanistic criteria, it is a common point that a significant debt relief will highly improve both the social and the economical status of a country, leading it to an increase of investment ability and to the necessary quality of life that is needed for a human society to exist and progress properly. Bibliography Hardwich,Langmead,Chan:An itroduction to Economics Economics Essays.