Last Updated: Friday - 09/24/2010
February 22, 1999
How poorer nations became indebted to the wealthy
Since 2000 is the year of jubilee and forgiveness of debt we should first face the origins of this disastrous global mismanagement and the consequent failure of the global economic system to deliver social justice and the basic needs of the poor.
The '70s were still marked by postwar optimism. Development was the way to achieve lasting peace. Some considerable headway was made towards lowering infant mortality rates, raising literacy rates and combatting crippling diseases.
Former colonies became nations and soon they formed the majority in the UN. Global conferences were held to dialogue about the state of the world.
In 1974 there was even a call for a new economic order to replace the colonial model. This model envisioned greater equity between Third World commodity prices and First World prices for manufactured goods.
For some time, people like Julius Nyrere had argued that the industrialized nations were the price-setters and the poor nations were the price-takers.
In 1973, OPEC, the Oil Producing Export Countries, took matters in their own hands and quadrupled their price per barrel. This became a heavy burden for developing nations which did not export oil.
The consequences were most felt by the poor through increasing unemployment, and cutbacks on social services, since governments had to reserve money to pay their energy bills. Oil price hikes plunged the world into recession while Arab potentates stashed their windfall in private European and U.S. banks.
Bankers, embarrassed by their bulging vaults, started to hand out loans at low-interest rates to any developing country whose budgets were strained by the high price of oil.
The terms were so attractive that it made good economic sense to purchase petroleum products that way. But loans were pushed on fledgling nations for other purposes as well.
About a quarter of the money went to pay for oil, another quarter was squandered on mega-development projects such as hydro dams, a quarter was wasted on the military and the last quarter landed in the pockets of corrupt leaders and from there back to the Swiss banks.
With each transaction the rich became richer and the poor poorer.
The second shock came in 1979 when oil prices were doubled again. The IMF was blocked by Reagan to hand out further loans, but commercial banks continued to foist truckloads of cash on all comers. The share of loans to the Majority World from private banks increased in the period of 1965 to 1976 from 12 per cent to 47 per cent. In 1980 this share was more than 70 per cent.
The commercial banks loaned so much money unwisely that their existence was threatened by the developing countries' inability or unwillingness to pay.
The crisis became acute when interest rates on repayment were raised from six per cent in the seventies to 19 per cent in 1981.
The crunch came when commodity prices started to tumble. Between 1980 and 1982 prices for raw materials fell 35 per cent.
With the declining value of exports, an increasing share of export earnings had to be earmarked for debt servicing. The income of developing nations declined rapidly while their expenses increased proportionally.
By the mid-'80s the developing nations paid out more in debt charges to foreign banks than all incoming capital in terms of loans, foreign investment and foreign aid combined.
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