1. Trade, Development & Sustainability
  2. International Trade and Corporations
  3. Roadblocks to Development
  4. The Debt Crisis in Developing Countries
  5. Free Trade and the Environment
  6. Trade and National Boundaries
  7. A Case Study: the Bushmeat Crisis
  8. "Sundown on the Unions"
  9. What's Wrong with Fair Trade?
  10. A Peek at the US Tariff Schedule

The Debt Crisis in Developing Countries

Almost all 

of the world’s Less-Developed Countries were once colonial possessions of one or more of the great European powers: England, France or Spain (or, to a lesser extent, Portugal, Italy, Germany or Belgium). Their independence was mostly obtained at some point in the 20th century. India removed itself from British rule in the 1940s; many of the nations of West Africa became independent in the 1960s. The former Spanish colonies of South and Central America became independent in the 19th century — however, many argue that colonial rule there was, in effect, transferred from Spain to the United States. Colonial powers were not at all interested in economic development in the territories they controlled — indeed, it was the robust prosperity of England’s North American colonies that enabled them to break free and become, in time, an imperial power in their own right. Colonial powers had a strong incentive to block movement toward that kind of autonomy in their territorial possessions. England, for example, had a thriving textile industry long before the colonies did. While Britain exported lots of manufactured goods to the New World, the export of industrial technology was strictly forbidden. The designs of New England’s first textile mills were smuggled across the ocean, bit by bit, at great risk and expense. Colonial powers thought of territorial possessions as sources of raw materials and commercial opportunities that enhanced prosperity at home. The zeal of Christian missionaries to convert the "natives" to Christianity played very conveniently into the hands of the imperialists, because it created an impression of lands full of backward, inferior people who needed the civilizing influence of European religion and culture.

Most of the newly-independent nations came to be governed by elites who had held powerful positions under the old colonial rulers. And, in most cases, these governments (though they adopted Constitutions, held elections, and claimed to be democratic) continued to rule their territories along the old colonial lines. There was great shifting of rhetoric, as some governments proclaimed democratic values in order to curry favor with the anticomminist United States, while others initiated land reforms and allied themselves with the anticapitalist Communist Bloc. In either case, old colonial economic patterns remained almost completely unchanged.

The "Bretton Woods Institutions"

The term "Bretton Woods" is often mentioned, in connection with international economics. What does it mean — and what are the roles of the two "Bretton Woods Institutions", the World Bank and the IMF?
       Bretton Woods, to begin with, is the name of the resort in New Hampshire where represntatives of the World War II Allies met just before the end of the war. The meeting set up, under the tutelage of the renowned economist J. M. Keynes, a new world monetary system. The United States adopted a gold standard, and agreed to exchange its currency for gold at the rate of $35 per ounce. Other nations either adopted the gold standard as well, or pegged their currencies' values to that of the US dollar, with minor adjustments permitted.
       The system facilitated trade among the Western nations (among whom the newly-rebuilt economic powerhouses of West Germany and Japan soon became included). However, the United States pursued inflationary policies in the 1960s, spending heavily on both the Vietnam War and domestic programs. It became apparent that the US dollar was undervalued; gold reserves were being drained out of the United States. In 1973 the gold standard was officially dropped, and currency values were allowed to float on international markets, which they have done ever since. The major international currencies, however, have been cushioned with a "managed float" policy: nations have agreed to use their central banks to help stabilize sharp fluctuations in exchange rates.
       Two international financial institutions were set up as part of the Bretton Woods agreements. Although both have most of the world's nations as members, they are both headquartered in Washington DC, and because influence is ranked according to financial input, the US and its allies effectively govern their policies. The World Bank was set up mainly to lend funds to developing nations; since the 1940s it has loaned more than $330 billion. Most of these loans have failed to achieve their objectives, and have little chance of ever being repaid. In the 1980 the World Bank began to make many so-called "structural adjustment" loans to developing countries; in effect these were the restructuring of bad debts, often carrying conditions requiring harsh "austerity policies" in the debtor nations.
       The International Monetary Fund was set up to monitor international currency exchanges and to make short-term loans to nations having temporary problems meeting their balances of payments. In recent years the IMF has expanded its functions into areas that overlap the mandates of the World Bank — for example, it has made large loans to "bail out" investors caught up in speculative debt crises in Mexico and East Asia, and to avert debt crises in Russia.
Agriculture and mining, therefore, were the industries that were carried on in the colonies, and little or no investment was made in capital, education or infrastructure, beyond what was needed to provide docile workers, or get the raw materials to the ports. These were the economic conditions inherited by the colonized nations when they gained their independence. And, to make matters even more difficult, the boundaries of emerging nations were almost always those that had been drawn by the old colonial powers. These boundaries bore little or no relation to how territories had been divided among the tribes and nations that the colonial powers had conquered. Large sums of money were borrowed from Western banks in the name of industrial development. Huge public works projects were undertaken, such as the gigantic dams that were built in Egypt and Ghana. But in most cases the benefits, if any, were garnered and squandered by the ruling elites (often with the active support of whichever Cold War Superpower favored them at the moment). Much of the borrowed money was spent on weapons and armies; most of the rest was spent on sheer consumption. The borrowing seldom resulted in any meaningful enhancement of productivity or welfare for most of the people.

Developments in the 1970s and 1980s showed how economically interdependent today’s world is — and severely worsened the plight of the indebted developing nations. First, the oil crisis of 1973-74 caused a sudden sharp rise in oil prices. This affected the situation of the LDCs in two related ways: first, the increased oil prices meant LDCs needed to borrow more. Second, the windfall profits caused by the high oil prices were deposited in banks, who were eager to loan them to someone. Loans to sovereign nations were thought to be very safe. Debt levels of LDCs were ratcheted up — and most of the loans were at variable rates of interest.

Then, in 1981, the United States was experiencing a troublesome period of high inflation. The Federal Reserve responded aggressively, raising interest rates. The inflationary trend was replaced by a sharp, worldwide recession. This carried a "double whammy" for the indebted poor countries. The higher interest rates drastically increased the cost of new loans — and the global recession drastically reduced demand for the LDCs’ exports, creating the need for increased new borrowing, at vastly higher rates! Nations in Latin America and Africa were now spending as much as 50% of their exports on debt service.

Since the 1980s a new acronymic class of nation has emerged, the HIPC, or "Heavily Indebted Poor Country". Negotiation is continually under way for restructuring of debts, under the auspices of the International Monetary Fund. Frequently, new loans are conditioned on adopting programs of "structural adjustment" aimed at making the debtor government as efficient (and therefore as credit-worthy) as possible. These "structural adjustments" entailed that governments undertake "austerity programs" designed to control inflation, root out government graft and corruption, and scale back public services. These programs tended to worsen economic situations that were already quite bad, and engendered great resentment and protest. Now, heavily-indebted nations, desperate for the foreign exchange they need to keep their economies functioning at all, had to export whatever they could, even if it meant depriving their people of food and medicine — and even if much of their export revenue had to be paid right back out in debt service.

When indebted nations are forced to export what they can to gain foreign exchange, they become vulnerable to the vicissitudes of world markets for those goods. Various West African nations, for example, depend largely on exports of cocoa, coffee and rubber. Decreased global demand for those commodities will drastically cut their national income, sometimes forcing new borrowing merely to meet their debt-service obligations.

Many advocate wholesale forgiveness of the debts owed by the world’s poorest nations, on the grounds that they cannot be paid back anyway, and that they cause undue suffering among people who never chose to contract the debts in the first place, and who got no benefits from the borrowed money. But the international financial community has been reluctant to consider losing the vast amount of asset value involved (for all the debts are seen by the banks holding them as assets, unless they are in default). And, they have been unwilling to set a precedent for what would effectively amount to bankruptcy on a national level. Most people agree that the current burden of foreign debt places an unsupportable burden on many of the world’s developing nations. Indeed, it may be asked why, if these debts are insupportable and unjust, nations do not simply default on them. The sad fact of the matter is that such nations' controlling regimes see no hope of remaining in power unless they continue to play the game of international finance, regardless of how poorly such policies serve the needs of their people. This unfortunate situation casts a harsh light on the fact of who really benefits from a "favorable balance of trade" — the owners of land and other privileges.