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 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 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 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.
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.
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