THE INTERNATIONAL DEBT CRISIS

KEY TERMS

Hard Currency

Debt service charges

World Bank

Human Development Index

Debt/export ratio

Highly indebted poor countries (HIPC)

Odious debt

Sovereign default

International Monetary Fund (IMF)

Debt relief

HIPC initiative

Poverty Reduction Strategy Paper (PRSP)

Jubilee 2000 Campaign

KEY QUESTIONS

How are the economies of Periphery nations negatively affected by decisions made in the Old Core?

How are the quality of life and job prospects of poor people linked to the global economy?

How did many poor countries come to have so much external debt?

Should these countries be excused of all or much of their debt? If so, how should this happen?

WHAT EXACTLY IS DEBT?

Debt is money that is owed.

Personal debt

Government debt

THE BURDEN OF INTERNATIONAL DEBT.

Let’s do some acting…go to page 215.

BURDEN OF INTERNATIONAL DEBT

Old core countries have huge amounts of debt.

The US is at the top of that list.

They choose to borrow from outside the country because it is cheaper.

Loans help the economy. They are taken to pay for things.

Their economies are strong…they can afford the interest and principal costs, so the debt does not grow.

BURDEN OF INTERNATIONAL DEBT

Periphery countries are not in the same situation.

Their economies have not grown as quickly as Core countries.

Debts keep increasing. Costs to pay that debt keep rising.

$2.9 trillion

$513 billion

BURDEN OF INTERNATIONAL DEBT

Banks and other lenders treat some regions as “safer” than others.

Developing world's debt.

World Bank Bilateral loans Private lenders

Where the Debt Comes From

Sub-Saharan Africa South Asia, Middle East, North AfricaEastern Europe and former USSR East Asia and Latin America

EFFECTS OF DEBT

2004 HDI rank

Total debt Debt per capita

Debt/Export ratio

Debt service %

Education %

Angola 161 9521 614 0.7 10.4 2.6

Burundi 169 1385 190 28.9 1.3 5.1

Cameroon

144 9496 594 3.6 4.1 1.8

Ethiopia 170 6574 91 11.0 1.0 5.0

Ghana 136 7035 324 2.7 2.7 5.4

Kenya 152 6826 204 2.6 2.3 6.7

Malawi 166 3418 271 7.3 3.2 5.8

Mauritania

153 2297 766 5.6 3.8 2.3

Niger 177 1950 144 5.0 1.6 2.3

Nigeria 159 30315 279 0.8 3.3 0.9

Senegal 156 3938 345 2.7 4.4 5.4

Sierra Leone

176 1723 325 9.9 2.5 3.8

Sudan 141 19332 545 5.1 1.4 6.0

Uganda 145 4822 174 8.0 1.5 5.2

Zambia 165 7279 633 4.0 7.9 2.0

HOW DID THE DEBT CRISIS HAPPEN? (LOANS, NOT GRANTS)

Until 1957, most governments simply gave aid in the form of grants.

The US switched to loans this year.

They wanted to make money on their loans.

Other governments followed the US.

So…poor countries needed to accept these loans if they wanted money. They had to be paid back.

HOW DID THE DEBT CRISIS HAPPEN? (HIGH OIL PRICES)

In 1973 and for a couple years, oil prices were extremely high (for the time).

The US dollar was high, and OPEC felt that they were losing money.

They raised the price by 70%.

There were problems and inconveniences in rich countries, but poor countries were ruined.

HOW DID THE DEBT CRISIS HAPPEN? (GROWTH IN PETRODOLLARS)

Because OPEC increased their prices, they made a huge amount of money in the early 1970s..

They invested the money in banks all throughout the developed world.

This meant that banks had money they had to lend.

There was a lot of cheap money to be loaned. Developed countries were very interested.

The interest rates were floating. This means that they changed with the market.

Loans were used for needs (like oil). It was a never-ending circle.

HOW DID THE DEBT CRISIS HAPPEN? (HIGH INFLATION)

During the 1970s and 1980s, the world economy experienced very high rates of inflation.

This meant that a loan at a rate of 5% in 1970 could be as high as 15% in 1980.

HOW DID THE DEBT CRISIS HAPPEN? (FALLING COMMODITY PRICES)

Most poor countries need to export goods so they can get hard currencies.

If the prices of commodities fall, they receive less money to pay off their loans.

Commodities include agricultural products, forestry products, and mining products. These all decreased during the 1970s and the 1980s.