'The key to meaningful development in the Global South is debt reduction or debt write-off.' Discuss.

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‘The key to meaningful development in the Global South is debt reduction or debt write-off.’ Discuss.

The levels of debt owed by Third World countries, mainly in Africa and Latin America to its creditors has reached a critical point. The hike in interest rates in the 1980’s meant an enormous increase in the amount of debt owed, and this, coupled with the growth in awareness of poverty and famine in Africa, led many people to wonder as to the extent of the link between debt and persistent underdevelopment. This essay will investigate and assess how debt has affected Third World development, and the extent to which debt relief may provide solutions.

In order to understand the possible global implications of either debt relief or debt cancellation, we must first explore the nature of the debt, and why so much capital was lent out in the first place. The 1960s were expensive years for America. The war in Vietnam had been a costly one, and the US government spent more money than it had earned, so, in order to make up the difference, the government resorted to printing large sums of dollars, breaking out of the Bretton Woods system. The ‘dollar overhang’ had meant that there were more dollars in circulation than there was gold in Fort Knox. This inflationary measure of devaluation decreased the value of the dollar, and this helped cause the Organisation of Petroleum Exporting Countries (OPEC), whose petrodollar income had thus fallen, to increase their prices following the Yom Kippur War in 1973, in what was the first Oil Shock.

This increase in oil prices generated a vast quantity of liquid assets. The OPEC oil tycoons of the Middle East invested their billions in mainly European and US banks, who, in turn, sought to lend it out. Third world governments were more than happy to take full advantage of this low-rate lending; they needed money for investment in infrastructure and industry, as well as to pay for their oil at its now higher price. The banks lent as much as they could – they needed to pay interest on the petrodollars in the OPEC accounts, without worrying too much about what the money was going to be used for, and if the nations would eventually be able to repay it.

Little of this money actually benefited the poverty stricken populations of the Third World countries. Governments, often authoritarian regimes invested poorly in schemes and projects that later proved to be of little help in the battle with impoverishment. The ‘World March of Women’ organisation, which pushes for debt write-off, estimates that ‘the proportion of Latin American countries’ foreign debt used for arms expenditures in the 1980s is 30-40%. The personal fortunes of some dictators (in Haiti, the Philippines and former Zaire) equalled the total of their countries’ public debt.’ Corrupt and incompetent regimes had ensured that only a very small proportion of the capital actually went towards development.

Third World countries were encouraged by the West to grow cash crops like cotton and cocoa. The quantity of countries growing these crops increased to the point where the market became flooded, and prices for crops and raw materials bottomed out. The 1980s then witnessed an upsurge in interest rates, caused in part by the oil shocks of the 70’s. This growth in interest rates, from 6% to 22% meant that the states’ ability to pay had diminished to catastrophic levels. Mexico was the first of a multitude of countries to announce that it could no longer stick to its repayment commitments. The International Bank for Reconstruction and Development (World Bank) and the International Monetary Fund (IMF) intervened with new loans, under strict conditions, which meant that countries like Mexico could spread and reschedule their loans in order to maintain the credibility that would be lost by a default. These highly conditional loans, known as Structural Adjustment Lending (SAL) have added to the debt burden.

Many different strategies have been developed to deal with the debt problems faced by some of the poorest nations; the Baker and Brady Plans in the eighties, and the introduction of Poverty Reduction Strategy Papers in 1999. On June 18th 1999, one day before the start of the Group of Seven (G7) summit in Cologne, it was announced that 90% of the debt of the forty one poorest countries, some two hundred and ten billion US dollars, would be cancelled.

The decision by the leaders of the G7 most industrial nations in June 1999 was hailed by President Clinton’s national security advisor’s as likely to have ‘an enormous impact on poorer countries, perhaps more than any other single action taken by developed countries at any time,’ but for some, the measures were seen by many as ‘too little, too late,’ as the proposal was to a large extent conditional. Norbert Walter, the chief economist at Deutsche Bank said that ‘we are demonstrating that we are active and concerned, but unless we really invest in establishing civil society in these countries, we may be pouring water into sand.’ The pressure of seventeen million signatures by groups such as Jubilee 2000 had finally persuaded creditors that debt reduction is the minimum step to be taken in order to restore development to the Global South.

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However, problems do exist with debt reduction; the main one involving credibility. Money lending on a global level is perfectly healthy, if controlled and on a sensible scale. Under the hands of capable leaders, the capital can be invested and used to develop various aspects of the economy. Debt reduction could set a precedent that could have the effect on richer nations of decreasing the possibility of future bank lending. International Financial Institutions (IFIs) such as the World Bank could become burdened with the task of repaying much of the debt, which could limit its future capacity. U2’s frontman ...

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