The International Debt Crisis

Discussion: What do you think the term “International Debt Crisis”

means?

Do these cartoons help to understand it?

Try this video,“Drop the Debt” to see if it helps make sense

http://www.makepovertyhistory.org/video

It must make sense when you look at the facts….right?

FACT: From 1970-2002, Africa received some $540 billion in loans and paid back $550 billion in principal and interest. Yet Africa remains today with a debt stock of $295 billion. FACT: Debt relief is conditioned on requirements that countries limit government spending, private basic services, and/or change trade and investment rules. FACT: Much of the debt is a result of "bad faith" lending including:The practice of pushing loans on developing nations because banks had too much money and had to lend it

How do we define a developing country???

1. Common colonial historyMost have been colonized by European

nations, either politically, economically, or both.

2. PovertyMassive inequities between the country’s rich

and poor3. StereotypesOften seen as disorderly and threatening.4. Debt

Colonialism / Imperialism

Colonialism:Domination of one country by another through

control of the country’s political system.

Imperialism:Domination of one country by another through

territorial expansion or the control of the markets.

Reasons for colonialism

1. BusinessNeed to gain overseas markets for

manufactured goods and to gather supplies of inexpensive raw materials for factories.

2. ReligionChristian missionaries went to “save souls,”

and required military protection against “resentful” natives.

Cont…

3. Strategic and Military Advantage

i.e. Suez Canal (shortest route to India)

4. International pride and the search for prestige

5. Population settlement

Colonies provided a good place to settle surplus

European attitude towards colonialism in the 1800s

Cecil Rhodes (1890):

“We must find new lands from which we can easily obtain raw materials and at the same time exploit cheap slave labor that is available from the natives of the colonies. The colonies [will] also provide a dumping ground for the surplus goods produced in our factories.”

So why didn’t the countries do well after the colonizers left?

What were the disadvantages that the colonies began with once their colonial invaders left?

Empire nations picked up and left without leaving any real infrastructure that could be managed by the indigenous population.

Empire countries had, for the most part, stripped and profited from their colonies’ resources.

Empires had provided all forms of governance and expertise without allowing the education or training of the occupied indigenous people.

… Did you know????

The term “Third World Countries” was coined in the early 1950s to describe those countries that did not belong to either the Western/Capitalist bloc, or the Communist/Eastern bloc of countries who were engaged in the Cold War. It also suggests that the expanding split between rich and poor nations was not as evident and obviously less prominent prior to the 1950’s

Developed Countries

There are only 26 countries in the world that are not considered to be developing / Third World countries. These countries are the members of the OECD (Organization for Economic Cooperation and Development). They contain 20% of the world’s population, control 80% of the world’s wealth, and have an average GNP (Gross National Product) of $USD 18,00.

OECD Countries

1. Australia 8. France 15. Luxembourg 21. Spain

2. Austria 9. Germany 16. Mexico 22. Sweden

3. Belgium 10. Greece 17. Netherlands 23. Switzerland

4. Canada 11. Ireland 18. New Zealand 24. United Kingdom

5. Czech 12. Iceland 19. Norway 25. United States

Republic 13. Italy 20. Portugal 26. Turkey

6. Denmark

7. Finland

Why isn’t Canada indebted like most southern colonial countries in the Caribbean or in Africa?

1. European Settlement

2. Self government

3. No population replacement (slave)

4. Manufacturing

5. Climate

6. Expansion of empire – not just a resource pool.

What escalated the debt in the developing world after the 1950’s?

1. Opec Oil Crisis

In response to their profits, the OPEC nations had vast sums of money to invest, and deposited it in banks in North America, Europe, and Japan. These banks had to find customers to borrow this cash. The world’s developing countries became more than willing customers for loans that had low, but floating, interest rates. In reality, a major reason why these countries had to borrow money was to pay for the oil they needed, which was dramatically more costly. When a country uses loans to pay for day-to-day needs like oil, little capital is left over for economic development. These oil purchases, of course, enriched the oil exporters even more.

What is OPEC?

OPEC is an organization of eleven developing nations, whose economies rely on oil export revenues.

OPEC countries:Algeria, Indonesia, Iran, Iraq, Kuwait, Libya, Nigeria,

Qatar, Saudi Arabia, United Arab Emirates, Venezuela.

See interactive map:http://www.opec.org/library/Annual%20Statistical

%20Bulletin/interactive/FileZ/worldmapz.htm

2. Loans, not grants

In 1957, the U.S. decided that, instead of providing grants, it would provide low-interest loans as a form of aid to developing countries. The rationale for this decision was that these investments would generate sufficient wealth to than pay for themselves. Many other countries followed suit with this form of aid.

3. Abolition of U.S. Gold Standard

In the 1970s, the United States went off the gold standard. This meant that the value of the dollar was no longer tied directly to the value of gold, and created a great deal of uncertainty in world financial markets.

As a result, the Organization of Petroleum Exporting Countries (OPEC) felt that the lower value of the dollar was costing them too much money. In response, they increased the price of oil by 70 per cent. Additional significant oil price increases occurred in 1979. These price jumps were a big problem for a wealthy country like Canada, but proved to be even more economically devastating in the nations of the developing world.

4. “The Trojan Horse”Spiraling Inflation

During the 1970s and early 1980s, the world experienced spiraling inflation that drove up interest rates. Loans that might have been affordable when the cost of borrowing was 5 per cent became totally unsustainable with rates between 10 and 15 per cent.

Inflation - a rise in the general level of prices, as measured against some baseline of purchasing power.

5. Declining Currency Value

To make matters worse, throughout this whole period, as the economies of debtor nations declined, their currencies lost value compared to hard currencies like the US dollar and the Japanese yen. If the currency lost half of its value compared to US dollars (and many lost much more than that), the debt load doubled in terms of local currency.

6. Falling commodity prices

To add to the growing economic mess, the price of many of the commodities that the developing countries relied on for export earnings (agricultural, forestry, and mining products) declined in the 1970s and early 1980s. Hence, these countries had to pay higher prices for their imports (especially oil) with less income.

7. Cold War

To add to all of this, the two major world powers of the day, the U.S and the USSR, were playing geo-political chess. They made available even more money to allies of their regimes, even if such allies were ruled by a ‘Flavor of the Day’ ruler. In many cases, these countries would have a rebellion funded by one of the Superpowers. They would then get some money through the Superpowers influence froim banks in Europe and North America. Then once they had spent the money on frivolous items while the population starved, they would be overthrown by a rebellion funded by the other Superpower. The process woul simply repeat itself for the most part. It allowed the Superpowers to jockey for position in areas of the world that were considered strategic (Middle East, Asia, South America, Africa, etc)

Results of the International Debt Crisis

In response to the inflation of the developing countries debts, many nations threatened to default their loans. However, if this were to occur, it would put into jeopardy many of the North American, European, and Japanese banks who lent them the money. This would lead to an economic crisis in the developed world.

For this reason, organizations such as the World Bank and the International Monetary Fund were established to allow the developing countries to reschedule their debts.

Three types of loans given to nations / ”victims” of the

International Debt Crisis

In the year 2000…. 57% - Private loans from various financial

institutions. 27% - Bilateral loans (country-to-country) 16% - Multilateral loans from international

agencies (World Bank, International Monetary Fund)

What is the World Bank?

A specialized agency that furthers the economic development of member nations, chiefly through guaranteed loans. The Bank obtains most of its funds through borrowing, and the remainder through government subscription. Since voting power is proportional to the amount of money received from each government, the Bank is essentially controlled by the richer countries.

What is the International Monetary Fund?

The IMF is an organization of 184 countries, working to foster global monetary cooperation, secure financial stability, facilitate international trade, promote high employment and sustainable economic growth, and reduce poverty. Since their inception they have developed loan initiatives which are coupled with S.A.P. (Structured Adjustment Plan) criteria

What do S.A.P.’s ask developing countries to do??

1. Devalue their currency to make imports expensive and encourage exports.

2. Increase their exports (cash crops).

3. Limit spending on social and education (more money for loan re-payments).

4. Increase their military spending and protection standards.

5. Eliminate trade barriers with OECD countries.

Discussion Questions

1) Not a single International Monetary Fund or World Bank program has demanded that indebted countries make cuts to military or police expenditures. In fact, some debtor nations have been told to increase spending in this area to be eligible for loans (SAP). Why do you think this is?

2) These countries received the money. The citizens of those nations obviously benefited from this. Why shouldn’t the citizens, workers, business owners and governments today be made to repay these loans?

3) We are not considered to be in overwhelming debt. Why should paying the debt in other countries be a concern for us? How does international debt affect us at all?

Debt cancellation is the key right?

$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.

There have been many headline-grabbing promises by world leaders for third world debt cancellation or relief for the poorest and most ravaged countries, and yet those past promises have hardly been kept. For example:

The debt cancellation doesn’t actually happen; The debt cancellation is very slow to happen; The amount of money or cancellation promised is actually far

less due to fancy spin and adding in money that has already been earmarked for this purpose

How bad can the interest really be?

Their debt (Developing World) has been compounding at twice the ‘normal’ rate - over 20 percent per year. Between 1973 and 1993, their debt went from from $100 billion to $1.5 trillion [only $400 billion of the $1.5 trillion was actually borrowed money. The rest was runaway compound interest]. If Third World debt continues to compound at 20 percent per year, their debt will be over $150 trillion in twenty years and $13 quadrillion in thirty years.

— J.W. Smith, The World’s Wasted Wealth 2, (Institute for Economic Democracy, 1994), p. 143.

But everybody has to pay interest

The South has already repaid its external debt to the North. Since the onset of the global debt crisis, precipitated in 1979 by a sharp increase in the Federal Reserve’s interest rates by Paul Volcker, the devel-oping/emerging market economies as a whole have paid in current dollars a cumulative $7.673 trillion in external debt service.1 However, during the same period their debt has increased from $618 billion in 1980 to $3.150 trillion in 2006, according to figures published by the International Monetary Fund (IMF)

Current Situations of Countries in Debt http://www.jubileedebtcampaign.org.uk/?lid=2647)

Top Ten Reasons for Developing Nations Debt– Colonialism– Poverty– Lack of infrastructure– Incapable/Untrained/Greedy leaders– Misguided use of funds– SAP restrictions– Military regimes– Uneducated workforce– Unpayable principles– Uncontrolled population

  Name Position

 

Funds embezzled (in U.S. $)

1 Mohamed Suharto President of Indonesia (1967–1998) $15 to 35 billion

2 Ferdinand Marcos President of the Philippines (1972–1986) 5 to 10 billion

3 Mobutu Sese Seko President of Zaire (1965–1997) 5 billion

4 Sani Abacha President of Nigeria (1993–1998) 2 to 5 billion

5 Slobodan Milosevic President of Serbia/Yugoslavia (1989–2000) 1 billion

6 Jean-Claude Duvalier President of Haiti (1971–1986) 300 to 800 million

7 Alberto Fujimori President of Peru (1990–2000) 600 million

8 Pavlo Lazarenko Prime Minister of Ukraine (1996–1997) 114 to 200 million

9 Arnoldo Alem n� President of Nicaragua (1997–2002) 100 million

10 Joseph Estrada President of the Philippines (1998–2001) 78 to 80 million

Discussion Question

We are not considered to be in overwhelming debt. Why should paying the debt in other countries be a concern for us? How does international debt affect us at all?

The Debt Boomerang

International debt is not only a developing world problem. It costs developed nations billions of $/year

1. Lost Jobs through lost markets2. International epidemics through reduced health

standards3. Global warming4. Inconsistent governments and insecurity5. Immigration pressures (government expenditures)

What is being done to relieve the debt?

Approach I – Highly Indebted Poor Countries (HIPCs)An initiative by the World Bank and International

Monetary Fund to reduce the debt of the 41 poorest nations in the world.

However:To be eligible for this initiative, nations must be willing to

implement a Structural Adjustment Plan (SAP) approved by the World Bank or IMF. SAPs often require these nations to make controversial adjustments such as restricted social spending.

Approach II: Jubilee 2000 / Jubilee+ Campaign

An initiative to mark the new millennium by forgiving the debt owed by the 50 poorest countries of the world.

Rationale:1. The debt of these countries is ruinous.2. The debtor nations have paid more than a fair amount for

loans forced upon them.3. Many of the nations are paying for unfair debts that are at least

2 decades old (i.e. odious debts)

Odious debts – created by corrupt leaders (i.e. Philippines – hundred of shoes owned by the wife of former president, Imelda Marcos.

Approach III – Canada

Canada is a significant creditor to many of the HIPCs. To assist in relieving the debt of these countries, Canada has:

1. Forgiven bilateral international debt

2. Provided relief in lieu of forms of government development assistance

3. Cancelled debts

4. Encouraged other members of the IMF & World Bank to make HIPC initiatives more generous.

What has happened since 2001?

http://www.dailymotion.com/video/x9sqbn_drop-the-debt-2009_news