International Economic Issues | RBI Grade B Phase 2 Preparation - Bank Exams PDF Download

 Page 1


UNIT 19 INTERNATIONAL
ECONOMIC ISSUES
Structure
19.0 Objectives
19.1 Introduction
19.2 The Scale of the Debt Crisis
19.3 Causes of the Debt Crisis
19.3.1 A Continuing Legacy of Colonialism
19.3.2 Mismanaged Lending
19.3.3 The World's Poor are Subsidising the Rich
19.3.4 Backbone to Globalisat1on
19.4 What are the Costs of the Debt Crisis?
19.5 Terms of Trade
19.5.1 Concepts and Significance
19.5.2 Foreign Trade in India
19.5.3 India's Trade with Different Countries/Alliances and Terms of Trade
19.5.4 India's Trade with Different Countries/Alliances
19.5.5 India-Europe Trade and Terms of Trade
19.5.6 Globalisation and Emerging Trends in Terms of Trade
19.5.7 Trade and Inequality
19.5.8 Emergence of North American Free Trade Agreement (NAFTA)
19.6 Exchange Rate Volatility
19.6.1 Exchange Rate Risk for Traders
19.6.2 Volatility and the Choice of Exchange Rate System
19.7 Let Us Sum Up
19.8 Self Assessment Questions
19.9 Key Words
19.10 Answer and Hints to Check Your Progress
19.11 Further Readings
19.0 OBJECTIVES
After going through this unit, you should be able to:
• understand the key international economic issues like debt crisis, terms of
trade deterioration, volatile exchange rates and capital flows; and
• explain causes and remedial measure of debt crisis, terms of trade deterioration
and volatile exchange rates.
19.1 INTRODUCTION
To be fully accurate, one should refer to the multiple debt crises that exist in the
world today because of different reasons. For our purposes, however, the "debt
crisis" will refer to the external debt, both private and public, of developing
countries, which has been growing enormously since the early 1970s. Our focus
15
I
I
Page 2


UNIT 19 INTERNATIONAL
ECONOMIC ISSUES
Structure
19.0 Objectives
19.1 Introduction
19.2 The Scale of the Debt Crisis
19.3 Causes of the Debt Crisis
19.3.1 A Continuing Legacy of Colonialism
19.3.2 Mismanaged Lending
19.3.3 The World's Poor are Subsidising the Rich
19.3.4 Backbone to Globalisat1on
19.4 What are the Costs of the Debt Crisis?
19.5 Terms of Trade
19.5.1 Concepts and Significance
19.5.2 Foreign Trade in India
19.5.3 India's Trade with Different Countries/Alliances and Terms of Trade
19.5.4 India's Trade with Different Countries/Alliances
19.5.5 India-Europe Trade and Terms of Trade
19.5.6 Globalisation and Emerging Trends in Terms of Trade
19.5.7 Trade and Inequality
19.5.8 Emergence of North American Free Trade Agreement (NAFTA)
19.6 Exchange Rate Volatility
19.6.1 Exchange Rate Risk for Traders
19.6.2 Volatility and the Choice of Exchange Rate System
19.7 Let Us Sum Up
19.8 Self Assessment Questions
19.9 Key Words
19.10 Answer and Hints to Check Your Progress
19.11 Further Readings
19.0 OBJECTIVES
After going through this unit, you should be able to:
• understand the key international economic issues like debt crisis, terms of
trade deterioration, volatile exchange rates and capital flows; and
• explain causes and remedial measure of debt crisis, terms of trade deterioration
and volatile exchange rates.
19.1 INTRODUCTION
To be fully accurate, one should refer to the multiple debt crises that exist in the
world today because of different reasons. For our purposes, however, the "debt
crisis" will refer to the external debt, both private and public, of developing
countries, which has been growing enormously since the early 1970s. Our focus
15
I
I
Emerging Cballanges and
Issues of Development in the
21th Century
16
should obscure, however, the other debt crises that trouble much of the global
economy: the budget deficits of the United States government, its balance trade
deficits, and the insolvency of many of its savings and loans institutions. These
crises are highly interconnected, particularly as they relate the issues of interest
rates, export values, and confidence in the international banking system. The "debt
crisis", then, is a global phenomenon, and an attempt to understand it fully needs
a global perspective. Thus, when a nation finds it difficult to meet its repayment
obligations on continued basis leads to the stage of debt crisis.
19.2 THE SCALE OF THE DEBT CRISIS
Consider the following:
• In 1970, the world's poorest countries (roughly 60 countries classified as low-
income by the World Bank), owed $25 billion in debt. By 2002, this was $523
billion,
• For Africa, In 1970, it was just under $11 billion By 2002, that was over half,
to $295 billion.
• Debts owed to the multilateral institutions such as the IMF and World Bank is
currently around $153 billion.
• For the poorest countries debts to multilateral institutions is around $70 billion.
$550 billion has been paid in both principal and interest over the last three decades,
on $540bn of loans, and yet there is still a $523 billion dollar debt burden.
For poor countries, third world debt is a crucial issue. Crippling third world debt
kills:
• Rich countries have pressured these poor countries to sacrifice health and
education spending and prioritise on debt repayment;
• Rich countries have protected their agricultural markets while forcing poor
countries to open theirs, leading to dumping and flooding of products, driving
local people out of businesses and livelihoods.
• For rich countries, the debt figures involved are tiny;
• . For poor countries, these same figures are a matter of life and death:
o Extrapolating from UNICEF data, as many as 5,000,000 children and
vulnerable adults may have lost their lives in sub-Sharan Africa as a result
of the debt crunch since the late 1980s.
o The United Nations fears another 3 million children will die in the poorest
countries of sub-Saharan Africa by 2015, the target for the Millenium
Development Goals to cut poverty by half.
o Some 11 million children die each year around the world, not just Africa,
due to similar conditions of poverty and debt.
o These statistics typically define childeren as those under the age of five.
What about 6, or 7, for example?
Check Your Progress 1
1) For poor countries, third world debt is a crucial issue. Why?
..............................................................................................................................
I
Page 3


UNIT 19 INTERNATIONAL
ECONOMIC ISSUES
Structure
19.0 Objectives
19.1 Introduction
19.2 The Scale of the Debt Crisis
19.3 Causes of the Debt Crisis
19.3.1 A Continuing Legacy of Colonialism
19.3.2 Mismanaged Lending
19.3.3 The World's Poor are Subsidising the Rich
19.3.4 Backbone to Globalisat1on
19.4 What are the Costs of the Debt Crisis?
19.5 Terms of Trade
19.5.1 Concepts and Significance
19.5.2 Foreign Trade in India
19.5.3 India's Trade with Different Countries/Alliances and Terms of Trade
19.5.4 India's Trade with Different Countries/Alliances
19.5.5 India-Europe Trade and Terms of Trade
19.5.6 Globalisation and Emerging Trends in Terms of Trade
19.5.7 Trade and Inequality
19.5.8 Emergence of North American Free Trade Agreement (NAFTA)
19.6 Exchange Rate Volatility
19.6.1 Exchange Rate Risk for Traders
19.6.2 Volatility and the Choice of Exchange Rate System
19.7 Let Us Sum Up
19.8 Self Assessment Questions
19.9 Key Words
19.10 Answer and Hints to Check Your Progress
19.11 Further Readings
19.0 OBJECTIVES
After going through this unit, you should be able to:
• understand the key international economic issues like debt crisis, terms of
trade deterioration, volatile exchange rates and capital flows; and
• explain causes and remedial measure of debt crisis, terms of trade deterioration
and volatile exchange rates.
19.1 INTRODUCTION
To be fully accurate, one should refer to the multiple debt crises that exist in the
world today because of different reasons. For our purposes, however, the "debt
crisis" will refer to the external debt, both private and public, of developing
countries, which has been growing enormously since the early 1970s. Our focus
15
I
I
Emerging Cballanges and
Issues of Development in the
21th Century
16
should obscure, however, the other debt crises that trouble much of the global
economy: the budget deficits of the United States government, its balance trade
deficits, and the insolvency of many of its savings and loans institutions. These
crises are highly interconnected, particularly as they relate the issues of interest
rates, export values, and confidence in the international banking system. The "debt
crisis", then, is a global phenomenon, and an attempt to understand it fully needs
a global perspective. Thus, when a nation finds it difficult to meet its repayment
obligations on continued basis leads to the stage of debt crisis.
19.2 THE SCALE OF THE DEBT CRISIS
Consider the following:
• In 1970, the world's poorest countries (roughly 60 countries classified as low-
income by the World Bank), owed $25 billion in debt. By 2002, this was $523
billion,
• For Africa, In 1970, it was just under $11 billion By 2002, that was over half,
to $295 billion.
• Debts owed to the multilateral institutions such as the IMF and World Bank is
currently around $153 billion.
• For the poorest countries debts to multilateral institutions is around $70 billion.
$550 billion has been paid in both principal and interest over the last three decades,
on $540bn of loans, and yet there is still a $523 billion dollar debt burden.
For poor countries, third world debt is a crucial issue. Crippling third world debt
kills:
• Rich countries have pressured these poor countries to sacrifice health and
education spending and prioritise on debt repayment;
• Rich countries have protected their agricultural markets while forcing poor
countries to open theirs, leading to dumping and flooding of products, driving
local people out of businesses and livelihoods.
• For rich countries, the debt figures involved are tiny;
• . For poor countries, these same figures are a matter of life and death:
o Extrapolating from UNICEF data, as many as 5,000,000 children and
vulnerable adults may have lost their lives in sub-Sharan Africa as a result
of the debt crunch since the late 1980s.
o The United Nations fears another 3 million children will die in the poorest
countries of sub-Saharan Africa by 2015, the target for the Millenium
Development Goals to cut poverty by half.
o Some 11 million children die each year around the world, not just Africa,
due to similar conditions of poverty and debt.
o These statistics typically define childeren as those under the age of five.
What about 6, or 7, for example?
Check Your Progress 1
1) For poor countries, third world debt is a crucial issue. Why?
..............................................................................................................................
I
19.3 CAUSES OF THE DEBT CRISIS
Third world debt has long been recognised as a major obstacle to economic, social
and 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. ThIs has happened
because of the following things:
19.3.1 A Continuing Legacy of Colonialism
The history of third world debt is the history of a massive siphoning-off by
international finance of the resources of the most deprived peoples. This process
is designed to perpetuate itself thanks to a diabolical mechanism whereby debt
replicates itself on an ever greater scale, a cycle that can be broken only by canceling
the debt.
Many poor countries today have started their independent status with heavy debt
burdens imposed by the former colonial occupiers. South Africa, as an example,
has found that 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.
Check Your Progress 2
1) Give an example to show that a Continuing Legacy of Colonialism is a cause
of debt crisis.
19.3.2 Mismanaged Lending
. Further debt resulted from mismanaged spending and lending by the West in tfie
1960s and 1970s.
1960s saw the US spends 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 into 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 help Mexico and other nations facing
similar problems, prescribing their loans and structural adjustment policies to
ensure debt repayment.
I
International Economic Issues
17
1
Page 4


UNIT 19 INTERNATIONAL
ECONOMIC ISSUES
Structure
19.0 Objectives
19.1 Introduction
19.2 The Scale of the Debt Crisis
19.3 Causes of the Debt Crisis
19.3.1 A Continuing Legacy of Colonialism
19.3.2 Mismanaged Lending
19.3.3 The World's Poor are Subsidising the Rich
19.3.4 Backbone to Globalisat1on
19.4 What are the Costs of the Debt Crisis?
19.5 Terms of Trade
19.5.1 Concepts and Significance
19.5.2 Foreign Trade in India
19.5.3 India's Trade with Different Countries/Alliances and Terms of Trade
19.5.4 India's Trade with Different Countries/Alliances
19.5.5 India-Europe Trade and Terms of Trade
19.5.6 Globalisation and Emerging Trends in Terms of Trade
19.5.7 Trade and Inequality
19.5.8 Emergence of North American Free Trade Agreement (NAFTA)
19.6 Exchange Rate Volatility
19.6.1 Exchange Rate Risk for Traders
19.6.2 Volatility and the Choice of Exchange Rate System
19.7 Let Us Sum Up
19.8 Self Assessment Questions
19.9 Key Words
19.10 Answer and Hints to Check Your Progress
19.11 Further Readings
19.0 OBJECTIVES
After going through this unit, you should be able to:
• understand the key international economic issues like debt crisis, terms of
trade deterioration, volatile exchange rates and capital flows; and
• explain causes and remedial measure of debt crisis, terms of trade deterioration
and volatile exchange rates.
19.1 INTRODUCTION
To be fully accurate, one should refer to the multiple debt crises that exist in the
world today because of different reasons. For our purposes, however, the "debt
crisis" will refer to the external debt, both private and public, of developing
countries, which has been growing enormously since the early 1970s. Our focus
15
I
I
Emerging Cballanges and
Issues of Development in the
21th Century
16
should obscure, however, the other debt crises that trouble much of the global
economy: the budget deficits of the United States government, its balance trade
deficits, and the insolvency of many of its savings and loans institutions. These
crises are highly interconnected, particularly as they relate the issues of interest
rates, export values, and confidence in the international banking system. The "debt
crisis", then, is a global phenomenon, and an attempt to understand it fully needs
a global perspective. Thus, when a nation finds it difficult to meet its repayment
obligations on continued basis leads to the stage of debt crisis.
19.2 THE SCALE OF THE DEBT CRISIS
Consider the following:
• In 1970, the world's poorest countries (roughly 60 countries classified as low-
income by the World Bank), owed $25 billion in debt. By 2002, this was $523
billion,
• For Africa, In 1970, it was just under $11 billion By 2002, that was over half,
to $295 billion.
• Debts owed to the multilateral institutions such as the IMF and World Bank is
currently around $153 billion.
• For the poorest countries debts to multilateral institutions is around $70 billion.
$550 billion has been paid in both principal and interest over the last three decades,
on $540bn of loans, and yet there is still a $523 billion dollar debt burden.
For poor countries, third world debt is a crucial issue. Crippling third world debt
kills:
• Rich countries have pressured these poor countries to sacrifice health and
education spending and prioritise on debt repayment;
• Rich countries have protected their agricultural markets while forcing poor
countries to open theirs, leading to dumping and flooding of products, driving
local people out of businesses and livelihoods.
• For rich countries, the debt figures involved are tiny;
• . For poor countries, these same figures are a matter of life and death:
o Extrapolating from UNICEF data, as many as 5,000,000 children and
vulnerable adults may have lost their lives in sub-Sharan Africa as a result
of the debt crunch since the late 1980s.
o The United Nations fears another 3 million children will die in the poorest
countries of sub-Saharan Africa by 2015, the target for the Millenium
Development Goals to cut poverty by half.
o Some 11 million children die each year around the world, not just Africa,
due to similar conditions of poverty and debt.
o These statistics typically define childeren as those under the age of five.
What about 6, or 7, for example?
Check Your Progress 1
1) For poor countries, third world debt is a crucial issue. Why?
..............................................................................................................................
I
19.3 CAUSES OF THE DEBT CRISIS
Third world debt has long been recognised as a major obstacle to economic, social
and 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. ThIs has happened
because of the following things:
19.3.1 A Continuing Legacy of Colonialism
The history of third world debt is the history of a massive siphoning-off by
international finance of the resources of the most deprived peoples. This process
is designed to perpetuate itself thanks to a diabolical mechanism whereby debt
replicates itself on an ever greater scale, a cycle that can be broken only by canceling
the debt.
Many poor countries today have started their independent status with heavy debt
burdens imposed by the former colonial occupiers. South Africa, as an example,
has found that 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.
Check Your Progress 2
1) Give an example to show that a Continuing Legacy of Colonialism is a cause
of debt crisis.
19.3.2 Mismanaged Lending
. Further debt resulted from mismanaged spending and lending by the West in tfie
1960s and 1970s.
1960s saw the US spends 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 into 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 help Mexico and other nations facing
similar problems, prescribing their loans and structural adjustment policies to
ensure debt repayment.
I
International Economic Issues
17
1
Emerging Challanges and
Issues of Development in the
21th Century
• 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 of 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 payoff.
• 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 J2ov.erty.
19.3.3 The World's Poor are Subsidising 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.
The world's poor are subsidising the rich. The net gain to the over-capitalized
countries (loss to the under-capitalized ones) of $418 billion between 1982 and
1990 is more than double what was spent to rebuild Europe after World War 11.
Capital flight from Mexico between 1979 and 1983 alone was $90 billion - an
amount greater than the entire Mexican debt at that time.
Check Your Progress 3
1) How is corruption and embezzlement of money by the elite in developing
countries leading to large scale debt?
" .
.............................................................................................................................
19.3.4 Backbone to Globalisation
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 globalisation. 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.
-18
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.
I
Page 5


UNIT 19 INTERNATIONAL
ECONOMIC ISSUES
Structure
19.0 Objectives
19.1 Introduction
19.2 The Scale of the Debt Crisis
19.3 Causes of the Debt Crisis
19.3.1 A Continuing Legacy of Colonialism
19.3.2 Mismanaged Lending
19.3.3 The World's Poor are Subsidising the Rich
19.3.4 Backbone to Globalisat1on
19.4 What are the Costs of the Debt Crisis?
19.5 Terms of Trade
19.5.1 Concepts and Significance
19.5.2 Foreign Trade in India
19.5.3 India's Trade with Different Countries/Alliances and Terms of Trade
19.5.4 India's Trade with Different Countries/Alliances
19.5.5 India-Europe Trade and Terms of Trade
19.5.6 Globalisation and Emerging Trends in Terms of Trade
19.5.7 Trade and Inequality
19.5.8 Emergence of North American Free Trade Agreement (NAFTA)
19.6 Exchange Rate Volatility
19.6.1 Exchange Rate Risk for Traders
19.6.2 Volatility and the Choice of Exchange Rate System
19.7 Let Us Sum Up
19.8 Self Assessment Questions
19.9 Key Words
19.10 Answer and Hints to Check Your Progress
19.11 Further Readings
19.0 OBJECTIVES
After going through this unit, you should be able to:
• understand the key international economic issues like debt crisis, terms of
trade deterioration, volatile exchange rates and capital flows; and
• explain causes and remedial measure of debt crisis, terms of trade deterioration
and volatile exchange rates.
19.1 INTRODUCTION
To be fully accurate, one should refer to the multiple debt crises that exist in the
world today because of different reasons. For our purposes, however, the "debt
crisis" will refer to the external debt, both private and public, of developing
countries, which has been growing enormously since the early 1970s. Our focus
15
I
I
Emerging Cballanges and
Issues of Development in the
21th Century
16
should obscure, however, the other debt crises that trouble much of the global
economy: the budget deficits of the United States government, its balance trade
deficits, and the insolvency of many of its savings and loans institutions. These
crises are highly interconnected, particularly as they relate the issues of interest
rates, export values, and confidence in the international banking system. The "debt
crisis", then, is a global phenomenon, and an attempt to understand it fully needs
a global perspective. Thus, when a nation finds it difficult to meet its repayment
obligations on continued basis leads to the stage of debt crisis.
19.2 THE SCALE OF THE DEBT CRISIS
Consider the following:
• In 1970, the world's poorest countries (roughly 60 countries classified as low-
income by the World Bank), owed $25 billion in debt. By 2002, this was $523
billion,
• For Africa, In 1970, it was just under $11 billion By 2002, that was over half,
to $295 billion.
• Debts owed to the multilateral institutions such as the IMF and World Bank is
currently around $153 billion.
• For the poorest countries debts to multilateral institutions is around $70 billion.
$550 billion has been paid in both principal and interest over the last three decades,
on $540bn of loans, and yet there is still a $523 billion dollar debt burden.
For poor countries, third world debt is a crucial issue. Crippling third world debt
kills:
• Rich countries have pressured these poor countries to sacrifice health and
education spending and prioritise on debt repayment;
• Rich countries have protected their agricultural markets while forcing poor
countries to open theirs, leading to dumping and flooding of products, driving
local people out of businesses and livelihoods.
• For rich countries, the debt figures involved are tiny;
• . For poor countries, these same figures are a matter of life and death:
o Extrapolating from UNICEF data, as many as 5,000,000 children and
vulnerable adults may have lost their lives in sub-Sharan Africa as a result
of the debt crunch since the late 1980s.
o The United Nations fears another 3 million children will die in the poorest
countries of sub-Saharan Africa by 2015, the target for the Millenium
Development Goals to cut poverty by half.
o Some 11 million children die each year around the world, not just Africa,
due to similar conditions of poverty and debt.
o These statistics typically define childeren as those under the age of five.
What about 6, or 7, for example?
Check Your Progress 1
1) For poor countries, third world debt is a crucial issue. Why?
..............................................................................................................................
I
19.3 CAUSES OF THE DEBT CRISIS
Third world debt has long been recognised as a major obstacle to economic, social
and 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. ThIs has happened
because of the following things:
19.3.1 A Continuing Legacy of Colonialism
The history of third world debt is the history of a massive siphoning-off by
international finance of the resources of the most deprived peoples. This process
is designed to perpetuate itself thanks to a diabolical mechanism whereby debt
replicates itself on an ever greater scale, a cycle that can be broken only by canceling
the debt.
Many poor countries today have started their independent status with heavy debt
burdens imposed by the former colonial occupiers. South Africa, as an example,
has found that 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.
Check Your Progress 2
1) Give an example to show that a Continuing Legacy of Colonialism is a cause
of debt crisis.
19.3.2 Mismanaged Lending
. Further debt resulted from mismanaged spending and lending by the West in tfie
1960s and 1970s.
1960s saw the US spends 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 into 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 help Mexico and other nations facing
similar problems, prescribing their loans and structural adjustment policies to
ensure debt repayment.
I
International Economic Issues
17
1
Emerging Challanges and
Issues of Development in the
21th Century
• 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 of 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 payoff.
• 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 J2ov.erty.
19.3.3 The World's Poor are Subsidising 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.
The world's poor are subsidising the rich. The net gain to the over-capitalized
countries (loss to the under-capitalized ones) of $418 billion between 1982 and
1990 is more than double what was spent to rebuild Europe after World War 11.
Capital flight from Mexico between 1979 and 1983 alone was $90 billion - an
amount greater than the entire Mexican debt at that time.
Check Your Progress 3
1) How is corruption and embezzlement of money by the elite in developing
countries leading to large scale debt?
" .
.............................................................................................................................
19.3.4 Backbone to Globalisation
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 globalisation. 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.
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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.
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19.4 ·WHAT ARE THE COSTS OF THE DEBT CRISIS?
This explosion of debt has had numerous consequences for the developing countries,
here we focus on only three consequences: the decline in the quality of life within
debtor countries, the political violence associated with that decline, and the effects
of the decline on the developed world. The first, and most devastating, effect of
the debt crisis was, and continues to be, the significant outflows of capital to
finance the debt. According to the World Bank: "Before 1982 the highly indebted
countries received about 2 percent of GNP a year in resources from. abroad; since
then they have transferred roughly 3 percent of GNP a year in the opposite
direction." In 1988, the poorer countries of the world sent about $50 billion to the
rich countries, and the cumulative total of these transfers since 1984 is nearly
$120 billion.
Per capita consumption in the highly-indebted countries in 1987, as measured by
national accounts statistics, was no hjgher than in the late 1970s; if terms of trade
losses are taken into account, there was a decline. Per capita investment has also
fallen drastically, by about 40 percent between 1980 and 1987. It declined steeply
during 1982-83, but far from recovering subsequently, it has continued to fall. In
the nineties the situation has somewhat improved.
Jeffrey Sachs portrays the situation in even starker terms:
As for the.debtor countries, many have fallen into the deepest economic crisis in
their histories. Between 1981 and 1988 real per capita income declined in absolute
terms in almost every country in South America. Many countries' living standards
have fallen to levels of the 1950s and 1960s. Real wages in Mexico declined by
about 50 percent between 1980 and 1988. A decade of development has been
wiped out throughout the debtor world.
Debt is tearing down schools, clinics and hospitals and the effects are no less
devastating than war.
Map courtesy of For a Change, (l980s)
Key
•••• SILIC: Severely indebted low-income country (or HIPe: Highly
indebted poor country)
•••• SIMIC: Severelyindebted middle-income country
MILIC: Moderately indebted low-income country
Each year developing countries pay the West nine times more in debt repayments
than they receive in grants.
International Economic Issues
19
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