The State Of Third World Debt

Debts being claimed from those developing nations today are mainly the residue of past dictatorships, leaders who pandered to investors, and corrupt governments. An editorial provided by Klaus Schwab of the World Economic Forum in The Guardian provides one possible solution. Hopefully this idea can work in reality.

In past decades, major banks have showered huge loans on such infamous regimes as those of Latin-American dictatorships, the South African apartheid government, Suharto in Indonesia, and Mobutu in Zaire. Now, these same banks are placing the weight of this debt on the shoulders of the people who still suffer the consequences of the tyrannical regimes those banks helped to fund years ago.

In addition, we should remember that the current economic crisis developing nations are experiencing today was triggered by the severe, unilateral increase in the interest rate the Federal Reserve imposed in 1982. It replaced the variable-rate loans that had previously offered to those countries that were already attempting to cope with large amounts of debt.

While the debt of Third World nations today is massive, a relatively small portion of it was actually received by those countries that are now being expected to repay it. Instead, the total owed mounted over the years because of factors such as the increase in the dollar’s value, rising international interest rates, a decline in the market for their exports and products, and the fact that huge sums of capital left those countries.

Much of the funds these developing nations did receive were spent on wasteful consumption rather than production and prudent investing. Apparently, those who were in power forgot that when the money is invested in worthwhile projects that will generate a rate of return greater than the interest rate paid for borrowing the capital, it will play a positive role in stabilizing a country’s economy, and repaying the debt will no longer be a much of a burden.

Unfortunately, the funds Third World countries’ borrowed were not considered as capital that should be invested productively. Instead, it was spent on their operating deficits or used for consumption. Although some of this money was officially invested in various developmental projects, the priorities often became skewed. As a result, it was spent on building vast sports complexes and stadiums, buying national airlines that were used infrequently, and purchasing synthetic fuel plants for a market that was already depressed, just to name a few

Often, over-blown, exaggerated projects were often undertaken as mistaken attempts to build a country’s economic infrastructure, examples of so-called “national pride.” Whole new cities were actually built from the ground up, including Abuja in Nigeria and Brasilia in Brazil.

Obviously, this debt will have to be paid, either by the banks that helped create the problem, those in more advanced countries, or the Third World nations themselves. Ideally, all three groups will work together to solve the problem in some fair way.

By: Iain Miller

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Iain Miller is a blogger with an unhealthy interest in poker and dreams of making it big in Vegas. He has been working in marketing for the past two years promoting finance and travel.