would come to cripple their hopes for successful development. Many of the first loans to LDCs were made in the
1960s following the “economic robbery” (Whaites, 1991) that was colonialism. Following their independence after
years of exploitative and self-interested policies implemented by colonial powers (which included the countries that
would become the creditors), many of todays LDCs were granted freedom without the consideration of how they
would proceed to successfully develop after so many of their resources had been taken without re investment from
colonial power; the tools needed for significant development had been taken and used before these countries had
freedom and the opportunity to set up an infrastructure capable of achieving economic and social progress, for
example countries such as Zambia were unable to tackle problems such as health and education amongst others,
many of which are still prominent problems today (see list of MDGs on UN website). However, in the wake of finally
being given freedom many countries facing these troubles decided borrowed huge amounts to fund highly ambitious
goals, and also to “get over the holes within the economy” (World Bank website) such as the need to
import goods such as petroleum and iron due to lack of industrialisation. This, in turn led to a high
dependency on “basic commodity exports” (Whaites 1991), which would have been ok so long as the
economy continued to be prosperous and there remained buyers for the exports. These factors led to “the point at
which a number of countries faced critical situations’’ (Easterly, 2002:2) in regards to their debt service payments.
However a serious crisis did not emerge until the 1970s, when the price of oil had an untold effect on the next 40
years of debt. In the early 70s and again later in the decade oil prices rose dramatically, leading to mass amounts of
money being loaned to many LCDs with oil reserves, who obviously thought economic successes would be made
rapidly. However the economic situation took a turn for the worse and soon inflation and interest rates rose and
those creditors who had “raced” (Eichengreen & Lindert 1992:1) to lend money for potential “petro dollars”
(Whaites 1991), left many countries not only with a much higher debt and much higher interest rates, but also a
world market facing a recession, meaning economies that relied on highly on trade would find fewer
buyers and lower prices for their exports. Countries that had invested all their hopes and borrowed
finance in the oil trade now faced debts that were completely unsustainable and those without reserves
faced economic growth that was too slow to repay the money that had been borrowed. This situation
has been viewed in two different ways, the creditors see such rash investments as a bad choice of
economic policy, placing the blame on the debtors for their economic situation, whereas the debtors
point the finger at the banks that were so keen to lend “copious” (Sachs 1989: 2) amounts of money
out even after prices for oil had dropped for they were preoccupied with the large returns they were
getting from previous loans, one leading bank was looking at “72% of the overall earnings” coming
from international operations in 1976 (Sachs 1989:8), meaning lenders were blind sighted to the fact
that it was “dim that the debt incurred in the 1970s… ever paid back in full” (Eichengreen & Lindert
1992:3). The events in the 1970s set the precedent for the next 20+ years, in which problems were faced largely by a
variety of cause and effect situations, meaning blame could be circulated over and over, there is no clear cause.
However some countries such as Indonesia and South Korea successfully managed to gain some economic prosperity
through loans, raising the question of whether they made wise investments opposed to the so called bad economic
policies of some indebted countries, or whether their investments were lucky and caught the economy at the right
time, highlighting again the difficulty of assigning blame.
Whilst OECD states recovered from the recession reasonably easily, the heavily indebted countries fell further and
further behind. In the case of Latin America the financial situation reached such a severe problem that Mexico
defaulted on their loan, having a massive knock on effect on the willingness of creditors to lend. Leaving struggling
countries with no money to invest, no substantial demand for the export products they relied on so heavily and a
disadvantage in the trade market, due to OECD states adopting protectionist policies, driving a wedge between
market and shadow prices (Sachs 1989:13) and resulting in LDCs having little or no money for investment and
development of welfare as it was being used for consumerism. Creditors had lost faith temporarily in lending out
money (although lending was restored within a few short years) feeling debtors had dug themselves in a hole they
could not get out of, with no escape from the service debt they were struggling to afford. Perhaps it is possible that
ill thought out, unrealistic economic policies were applied in this period that did nothing but further widen the gap
LDCs were desperately trying to close, various bad investments were made, which resulted in little economic
benefits from the large loans undertaken. I feel it is debatable whether or not the banks had been ignorant to the
massive risk they were taking through lending money (perhaps they even felt they had to do so as to give countries a
chance?) or whether the risk was always expected to end badly meaning the LDCs remained subordinated to rich
powerful countries that already existed, the former colonial powers that had given countries freedom only due to the impossibility of retaining their empire successfully, ensuring more cheap labour and opportunities for cheap
trade and exploitation of the third world countries who were trapped in their economic situation. Even recent debt
relief programs that have been set up have to be questioned, whilst it is too soon to tell what effect the multilateral
debt relief initiative will have, as Easterly comments, the last 3 years have seen debt ratios drop and per capita
income rise in countries that had been deemed at “completion point” in the HIPC initiative of which the benefits are
still as yet unclear. In order to gain help HIPC countries must comply with strict “fiscal disciplines” (Jubilee USA brief
2008) and allow the IMF to control key policies regarding financial spending supposedly to insure avoidance of any
more bad policies being made. However, policies implemented by the IMF have prolonged austerity, reduced public
spending and even driven the price of cotton in Mali down to an artificially low price in order to compete with other
markets with a variety of advantages, meaning little profit is being made (Jubilee USA brief 2008), contradictory of
this information of the IMF website which claims to be increasing social spending amongst many other successes.
However it is evidently resulted in less change to the debt than expected suggesting therefore that whilst blame may
be tricky to assign for such huge debts, the solution is even harder to pin point.
However whilst both the creditors and the debtors are eager to assign the blame to the other party, it is commonly
the case that corruption is to blame for the extreme levels of the debt crisis. Jain (1998) talks extensively about
corruption in economics and the power of that to destroy even a prosperous economy whether it be corruption
amongst the creditors or debtors. Kremer and Jayachandran (2002) call this type of debt “odious debt” by which
they mean illegitimate debt, which occurs through corrupt leadership taking out debts; never having intended to
invest it in the country, but to keep it for themselves. A recent example of a case such as this is Mubarak, who is
reported (BBC news 2011) to have up to $70 billion dollars that he has stolen over time from the Egyptian people, an
amount twice as much as their countries entire debt which stands at $34.46 billion. This huge injustice shows that
the blame for huge economic crisis can sometimes lie with a corrupt leader good at concealing what he is doing (the
HIPC initiative aims to tackle problems such as this) money taken in this way will never see any investment back into
the country as it is often hidden where it will yield “stable and lucrative” (Whaites 1991) returns, in a phenomenon
known as “flight capital”. Although is not always a case of illicit money being taken out of a country, but sometimes
more innocently a consequence of a bad economy, investors want to store their money where they will see the
highest return, resulting in a vicious circle of “low investment, low growth and continuing capital flight” (Whaites
1991), once more highlighting that a solution is as hard to discover as placing blame for the start of the situation.
After examining some of the origins of the debt crisis, as well as looking at how the situation has progressed in the
last 40 years, it is still hard to see who exactly is to blame for the crisis, and no party is prepared to accept
responsibility as that could have serious repercussions, such as the banks being forced to call off the debts, or the
LDCs being denied extensive aid. Whilst Eichengreen & Lindert (2002) feel that circumstances such as this have
happened in history before due to the nature or the international economy, Easterly (2002) highlights the impact
irresponsible lending has had in what is described as “violation of prudential standards of creditworthiness” i.e.
lending money to a source that can quite clearly not pay the money back, at least not without serious
sacrifice. For whatever motives, the banks have made serious errors resulting in uncontrollable amounts of debt.
However, many miscalculations have been made on the side of the debtors too, including both accepting unrealistic
loans and harbouring overambitious goals (though can they be blamed for this?). One of the key issues surrounding
this debate is that the loans were not forced by either party, encouraged unwisely perhaps, or accepted too eagerly,
but not forced. Therefore blame cannot be assigned, perhaps even, it is just the uncontrollable nature of our
economy that is behind the crisis reaching the level it is at today. In cases where “odious debt” exists however it is
much easier to pin point the driving force behind unsustainable debt - unconceivable selfishness, corruption and
complete disregard for the country they are supposed to be in charge of. Unfortunately whatever is to account for
the situation today, it is clear who it is suffering the most from it, and sadly, those who are hit the hardest by the
debt crisis are also the ones with the smallest influence on how it will shape out. Sadly it seems that economic
capital is more valuable than human life and development.
Bibliography
Easterly, W. (2002) “How did Heavily Indebted Poor countries become Heavily Indebted? Reviewing Two decades of debt relief” World Development
Eichengreen, B & Lindert, P 2002 “The International Debt Crisis in Historical Perspective”
Jain, A (1998) “Economics of corruption”
Kremer and Jayachandran 2002 “Odious Debt”
Sachs, J 1989 “Developing country debt and the world economy”
Whaites, A 1991 “Searching for Jubilee” article inside ThirdWay
2008 “Are IMF and World Bank Economic Policy Conditions Undermining the Impact of Debt Cancellation?”
