Robert E. Wood, "Making Sense of the Debt Crisis," Socialist Review 81 (Vol. 15, No. 3) May-June 1985.

Main Point:  To aid socialists develop a perspective on the debt crisis that the third-world is experiencing.  First describes what the debt crisis is and is not.  Then analyzes why third-world debt accumulated so quickly.  Finally, looks at how this crisis has affected the circumstances and options of the third world. 

What is the Debt Crisis?

The debt crisis is an era to which both the international environment and the domestic politics of third-world countries have been transformed.

States that the debt crisis didn’t begin with Mexico in 1982 but rather in 1979 when the majority of creditors were governments not private banks. 

The debt crisis is not just countries repudiating or defaulting on their debts.  All countries (except Korea) has taken responsibility of their debts and only suspended debt payments for defined periods of times. 

The debt crisis is not the “MBA problem” (Mexico, Brazil, and Argentina).  Although these three countries have a significant enough of debt to threaten the health of major banks, almost all of the third world is in the same situation.  Almost all the countries have had to reschedule their debts. 

In the capitalist countries, focus is on the health of major commercial banks.  Loans to third-world far surpass the equity of major banks.  This is refereed to as a bomb waiting to go off. 

In the third-world this “bomb” has already gone off.  “Social devastation” accompanied the debt crisis.  In all these countries facing debt, per capita income dramatically fell, unemployment and underemployment skyrocketed and inflation ensued.  Food riots and attacks on government storage facilities ensued as IMF—sponsored food prices increases were initiated.  

The Buildup of Debt:  The Search for Villians

The increase of oil prices by OPEC has been blamed for the over half of the external indebtedness of the third-world countries.  What has made this situation even worse arises from the fact that advanced capitalist countries reduce demand of the third-world imports while promoting their own exports. 

The banking system has also been blamed for the build up of debt.  As petro-dollars flowed into banks, banks were more and more eager to loan to countries.  These loans did not carry any restrictions commonly found in government or international institution loans.  All that mattered was that the loans be repaid.  The problem has arisen from the terms of the loans. 

The Debt Servicing Crisis:  Changing Terms and Contexts

The constraint, with regards to external indebtedness, to countries was the ability to earn foreign exchange in order to service the debts.  Therefore countries had to emphasize on the export markets.  In the 1970s interest rate was negative as inflation kept increasing and export prices increased as well.  There would not have been a debt crisis if this trend continued.  However, this emphasis on exports left the countries vulnerable to policy changes of other governments. 

The major capitalist countries increased interest rates in order to curtail the inflation rates.  The burden of debt increased for the countries as their ability to service the debt was decreasing.  Since the loans were secured at a floating rate, the cost of borrowing skyrocketed for the third-world.  Infrastructural and industrial projects that were once profitable at the previous interest rates were now highly unprofitable. Therefore, the majority of the borrowing of the late 70’s was used to refinance previous loans rather than adding new resources.   

Debt Restructuring:  Tightening the Screws

Debt restructuring involved three elements:  rescheduled debt, new loans, and agreement to abide by an IMF “adjustment” program.  By restructuring the loans, banks have been able to increase profitability.  Banks used the debt crisis as a reason to increase spreads and fees to all new loans to third-world countries.  

The ability to impose new fees and spreads associated with the new loans presupposes three things.  1.  Discipline—countries should give a higher priority to servicing debt, this includes putting debt payments above maintenance of domestic living standards.  2.  Adjustment—reorient production towards exports, in order to earn foreign exchange to service debt.  3.  New financing—necessary to pay immediate debt servicing and also to finance adjustment. 

A Restructured Environment:  Repressive Reintegration

At the very beginning of the debt crisis, there have been calls for the reform of the international political economy. However, these calls fell to deaf ears.  “While radical reform has been rejected, Western governments, official institutions, and banks have altered their behavior in ways that have restructured the international environment of third-world countries.  The result has been a serious weakening of the position of third-world countries, and a repressive reintegration of third-world countries into the international system”. 

There are two components to this restructuring:  1) a greatly increased linkage between capital flows and the decision-making power of major international institutions, and 2)  an aggressively expanded definition of the strings, “conditionality”, attached to those flows. 

Emerging Contradictions and the Politics of Debt

Western governments and International institutions have kept a lid on the debt crisis all while turning the situation to their advantage.  However, their ability to continue to do so could be undermined if industrial-country growth rates remain low and protectionism becomes extensive.  If those two situations occur “catastrophic consequences” could result.  Third-world countries would not be able to export as needed to repay debt.  And the crisis would reappear.

--Chang, Gary