How Developing Countries get into Foreign Debt Problems
The Legacy of Debt
Debt for most developing countries has becomes a kind of inheritance passed on from generation to generation. There are several possible reasons for this never ending cycle. First is the overlapping debts caused by threatening debtors. The desire to pay off mature external debts usually causes the country to plunge into another major loan. More often than not, principal amounts are never paid, and these borrowed figures eventually become distant memories. They have been overlapped by new loans which were arranged supposedly to pay off the original ones, snow-balling the interest sums. Countries heavy with external debts usually go through this cycle. Increasing interest debt but never actually paying of any of the principal debts. Now one would wonder why these principal sums never get paid when this is the why the country loaned again in the first place. This question will give us another possible reason for the debt crisis of developing countriesmismanaged loans.
Mismanaged lending and spending are also a primary cause of overlapping debts. According to the Jubilee research (Dembele, 2005), the mismanagement of the west during the 1970s and 60s have resulted to economic crisis that plunged developing countries into debit. Today, big private banks have also chipped in their share in this system. Eager for profit, these international banks made loans to sectors already heavy indebted, providing conditions highly profitable for the lender, eventually robbing them blind (Toussaint Millet, 2008). They provide reasonable interest rates for the first couple of years but such rose sharply thereafter. Toussaint and Millet mentioned in their article the deceptive strategy of many of these big international banks. In 2007, they assured the borrowers that the properties they are buying would surely appreciate in value thanks to the real estate boom. When the when real estate fell in 2007, prices started to go down and defaults on payments soared. To protect their own interests, these big banks refused extra credit to mortgage lenders and accepted new loans at higher and more unreasonable interest rates. Eventually, this resulted to disaster and more odious debts. Moreover, these banks refuse to grant reprieve and cancel the debts of developing countries that are in the grips of extreme poverty. For most of them, paying off this is either impossible, or will plunge their citizens into a much worse living condition.
Even with such a system, governments of developing countries cant either resist or help to loan money. But for the billions and billions of dollars loaned by the government, only a few, or worse, none of it, are more often than not trickled down to its citizens. Public health stays the same, infrastructures remain missing, and budget for education is as low as ever. The opposition and the masses always ask where the money goes. Corruption in the government makes these billion of dollars disappear in an instant. High ranking government officials usually transfer this money to their Swiss accounts, never again to be seen or used by the nation. With this kind of system, the rich becomes richer, while the poor has to suffer the consequences. Imagine how the grandchildren of your grandchild will have a debt to pay even before he or she is born.
Ironically, those who cause this debt crisis are not the ones suffering from it. The developing countries say that their poverty was caused by Western exploitation and first-world greed and opportunism but we see that they are also a victim of their own leaders. These poor citizens are now victims of economy and politics, and they have nothing whatsoever to do with it in the first place.
Debt Crisis and Global Crisis
The effects of debt to developing countries have always been devastating. The lack of public health, educational and environmental support, infrastructures and other social services depicts a life of starvation, ignorance, and lost of hope. In the distant past of the year 2000, African governments already have approximately 350 billion of foreign debt (Welch, 2000). With the present spiral cycle, how much more do they owe now, nine years after During this time, Jubilee approximated thirteen children die every minute in the forty poorest nations. These numbers represent the staggering effects of poverty across the globe.
To ease such suffering, many groups proposed debt reliefs and cancellations to the heavily indebted developing countries. Mayhap threatened by the negative consequences these debts create to the international economy, their have been increasing promises of assistance from the first world to help rebuild and develop these countries. Together with globalization at the turn of the millennium, first world countries offered helped through building infrastructures in developing countries provided that they either adhere to a certain policy or give something back in return. Globalization plunged the developing nations into another kind of loan, a type of pact, different in appearance but mayhap same in content.
With the recent recession, the issue of the increasing US deficit and individual loans are beginning to be of concern to governments, corporations, and individuals alike (Pettifor, 2009). According to Ann Pettifors book entitled The Coming First World Debt Crisis (2009), United Kingdoms total personal debt broke through the 1.1 trillion barrier last June of 2005 while Britains debt is increasing by 1 million every four minutes. Same thing is happening throughout the United States and Europe. The national debt of the United States has increased 34, now totaling to 64.9 of the GDP. These figures show that whereas before, the lead roles in the debt crisis have been the developing countries, the first world are inching their way to the spotlight.
As international economy becomes more crucial to national economies, so does the role of developing countries debt becomes very significant to first world nations. Now, most corporations that hugely contribute to their revenues have roots planted in the developing countries. With the increase outsourcing of business across the globe, the boundaries of economic stability goes beyond just one nation. With this in mind, steps have been taken to alleviate this crisis.
Helping Hand
With the threatened international economy, the World Bank together with the IMF and the worlds richest government launched in 1996 the Heavily Indebted Poor Countries Initiative (HIPC) to provide immediate debt relief to these poor nations. However, several years later, it didnt really provide satisfactory results because of the lack of funding and stringent terms and conditions. The debt-to-export ratios determining eligibility are too high and are based on national income and export rates rather than human needs. Thus, only a few are considered qualified and provided debt relief (Dembele, 2005).
Another helping hand that emerged is the IMFs Poverty Reduction and Growth Facility (PRGF) or what was formerly known as the Enhanced Structural Adjustment Facility. However, to qualify, the nation must have gone through with at least three years of the PRGF structural adjustment program which is very hard to complete. Thus, IMFs Poverty Reduction and Growth Facility program was also deemed as unhelpful and failed to aid majority of the poor nations (UC Atlas of Global Inequality, n.d.).
Aside from these two, there are many more adjustment programs being done to help ease or give debt relief to developing nations. However, each of this has certain flaws because either qualification is very hard or the program itself wants something in return for the debt relief. Nonetheless, most of these programs are up until now in the process of helping and reaching out to developing countries. The problem is that every second, a citizen suffers and starves but the concern is still hugely focused on what would help the international economy, not on what would alleviate their suffering.
Conclusion
One can conclude that the history of debt for developing countries have originated way down the past but have not yet disappeared until now. They say that every crisis has a beginning and an end, but one would wonder if this spiral cycle would ever end. Would the children of our children still have to pay the debts that we our grandfathers created Or would the world somehow find a way to erase this debt and offer the future a clean slate
This paper showed that some of the major causes of this debt is one, the snow-balling of debts and interest rates because of the seeming desire to pay of the original debt. Another cause of this struggle is the management of lending and spending of these loans. Opportunistic private banks, wrong decisions of governments as well as corruption are a number one reason why the system hasnt been broken for decades. The loaned money is either wasted or disappearing to Swiss account by unknown politicians. The trillion of money being loaned never reached the poor and suffering. Moreover, private banks taking advantage of the situation creates greater disaster for everyone. Those who are in debt are digging themselves a deeper grave by borrowing more and more at higher interest rates creating a deeper downward spiral.
Thus, the citizens of these indebted countries feel the effect by losing social services that should have been provided by the government like public health, educational support, environmental protection, available infrastructures and other important social services. Their national economy is not doing any better, increasing by tiny percentages or dropping by large figures.
On the other hand, first world nations are also feeling the effects of this debt crisis. Their welfare is being threatened mainly by the instability of the international economy. Some professionals believe that the incoming years will bring this crisis to these developed countries. As we speak, personal debt of countries like the United Kingdoms, United States, and Britain are plunging themselves into greater and greater debt.
Mayhap as the effect of this threat, many rich private sectors are offering programs that can help alleviate or rid the debts of the poor countries. Nonetheless, the world has yet to find one that can offer the future a clean slate. For the meantime, what the world is doing is to pull back and slowdown this downward spiral. As long as the balance of money and power is tipped off at one side, there is major doubt that such a system can be broken.