The International Debt Crisis

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The International Debt Crisis
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Discussion What do you think the term
International Debt Crisis means?
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Do these cartoons help to understand it?
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Try this video,Drop the Debt to see if it helps
make sense
http//www.makepovertyhistory.org/video
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It must make sense when you look at the
facts.right?
FACT From 1970-2002, Africa received some 540
billion in loans and paid back 550 billion in
principal and interest. Yet Africa remains today
with a debt stock of 295 billion. FACT Debt
relief is conditioned on requirements that
countries limit government spending, private
basic services, and/or change trade and
investment rules. FACT Much of the debt is a
result of "bad faith" lending including The
practice of pushing loans on developing nations
because banks had too much money and had to lend
it
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How do we define a developing country???

• 1. Common colonial history
• Most have been colonized by European nations,
  either politically, economically, or both.
• 2. Poverty
• Massive inequities between the countrys rich and
  poor
• 3. Stereotypes
• Often seen as disorderly and threatening.
• 4. Debt

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Colonialism / Imperialism

• Colonialism
• Domination of one country by another through
  control of the countrys political system.
• Imperialism
• Domination of one country by another through
  territorial expansion or the control of the
  markets.

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Reasons for colonialism

• 1. Business
• Need to gain overseas markets for manufactured
  goods and to gather supplies of inexpensive raw
  materials for factories.
• 2. Religion
• Christian missionaries went to save souls, and
  required military protection against resentful
  natives.

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Cont

• 3. Strategic and Military Advantage
• i.e. Suez Canal (shortest route to India)
• 4. International pride and the search for
  prestige
• 5. Population settlement
• Colonies provided a good place to settle surplus

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European attitude towards colonialism in the 1800s

• Cecil Rhodes (1890)
• We must find new lands from which we can easily
  obtain raw materials and at the same time exploit
  cheap slave labor that is available from the
  natives of the colonies. The colonies will also
  provide a dumping ground for the surplus goods
  produced in our factories.

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So why didnt the countries do well after the
colonizers left?

• What were the disadvantages that the colonies
  began with once their colonial invaders left?
• Empire nations picked up and left without leaving
  any real infrastructure that could be managed by
  the indigenous population.
• Empire countries had, for the most part, stripped
  and profited from their colonies resources.
• Empires had provided all forms of governance and
  expertise without allowing the education or
  training of the occupied indigenous people.

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Did you know????

• The term Third World Countries was coined in
  the early 1950s to describe those countries that
  did not belong to either the Western/Capitalist
  bloc, or the Communist/Eastern bloc of countries
  who were engaged in the Cold War. It also
  suggests that the expanding split between rich
  and poor nations was not as evident and obviously
  less prominent prior to the 1950s

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Developed Countries

• There are only 26 countries in the world that are
  not considered to be developing / Third World
  countries. These countries are the members of the
  OECD (Organization for Economic Cooperation and
  Development). They contain 20 of the worlds
  population, control 80 of the worlds wealth,
  and have an average GNP (Gross National Product)
  of USD 18,00.

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OECD Countries

• 1. Australia 8. France 15. Luxembourg 21. Spain
• 2. Austria 9. Germany 16. Mexico 22. Sweden
• 3. Belgium 10. Greece 17. Netherlands 23.
  Switzerland
• 4. Canada 11. Ireland 18. New Zealand 24. United
  Kingdom
• 5. Czech 12. Iceland 19. Norway 25. United
  States
• Republic 13. Italy 20. Portugal 26. Turkey
• 6. Denmark
• 7. Finland

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Why isnt Canada indebted like most southern
colonial countries in the Caribbean or in Africa?

1. European Settlement
2. Self government
3. No population replacement (slave)
4. Manufacturing
5. Climate
6. Expansion of empire not just a resource pool.

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What escalated the debt in the developing
world after the 1950s?

• Opec Oil Crisis
• In response to their profits, the OPEC nations
  had vast sums of money to invest, and deposited
  it in banks in North America, Europe, and Japan.
  These banks had to find customers to borrow this
  cash. The worlds developing countries became
  more than willing customers for loans that had
  low, but floating, interest rates. In reality, a
  major reason why these countries had to borrow
  money was to pay for the oil they needed, which
  was dramatically more costly. When a country uses
  loans to pay for day-to-day needs like oil,
  little capital is left over for economic
  development. These oil purchases, of course,
  enriched the oil exporters even more.

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What is OPEC?

• OPEC is an organization of eleven developing
  nations, whose economies rely on oil export
  revenues.
• OPEC countries
• Algeria, Indonesia, Iran, Iraq, Kuwait, Libya,
  Nigeria, Qatar, Saudi Arabia, United Arab
  Emirates, Venezuela.
• See interactive map
• http//www.opec.org/library/Annual20Statistical2
  0Bulletin/interactive/FileZ/worldmapz.htm

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2. Loans, not grants

• In 1957, the U.S. decided that, instead of
  providing grants, it would provide low-interest
  loans as a form of aid to developing countries.
  The rationale for this decision was that these
  investments would generate sufficient wealth to
  than pay for themselves. Many other countries
  followed suit with this form of aid.

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3. Abolition of U.S. Gold Standard

• In the 1970s, the United States went off the gold
  standard. This meant that the value of the dollar
  was no longer tied directly to the value of gold,
  and created a great deal of uncertainty in world
  financial markets.
• As a result, the Organization of Petroleum
  Exporting Countries (OPEC) felt that the lower
  value of the dollar was costing them too much
  money. In response, they increased the price of
  oil by 70 per cent. Additional significant oil
  price increases occurred in 1979. These price
  jumps were a big problem for a wealthy country
  like Canada, but proved to be even more
  economically devastating in the nations of the
  developing world.

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4. The Trojan HorseSpiraling Inflation

• During the 1970s and early 1980s, the world
  experienced spiraling inflation that drove up
  interest rates. Loans that might have been
  affordable when the cost of borrowing was 5 per
  cent became totally unsustainable with rates
  between 10 and 15 per cent.
• Inflation - a rise in the general level of
  prices, as measured against some baseline of
  purchasing power.

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5. Declining Currency Value

• To make matters worse, throughout this whole
  period, as the economies of debtor nations
  declined, their currencies lost value compared to
  hard currencies like the US dollar and the
  Japanese yen. If the currency lost half of its
  value compared to US dollars (and many lost much
  more than that), the debt load doubled in terms
  of local currency.

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6. Falling commodity prices

• To add to the growing economic mess, the price of
  many of the commodities that the developing
  countries relied on for export earnings
  (agricultural, forestry, and mining products)
  declined in the 1970s and early 1980s. Hence,
  these countries had to pay higher prices for
  their imports (especially oil) with less income.

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7. Cold War

• To add to all of this, the two major world powers
  of the day, the U.S and the USSR, were playing
  geo-political chess. They made available even
  more money to allies of their regimes, even if
  such allies were ruled by a Flavor of the Day
  ruler. In many cases, these countries would have
  a rebellion funded by one of the Superpowers.
  They would then get some money through the
  Superpowers influence froim banks in Europe and
  North America. Then once they had spent the money
  on frivolous items while the population starved,
  they would be overthrown by a rebellion funded by
  the other Superpower. The process woul simply
  repeat itself for the most part. It allowed the
  Superpowers to jockey for position in areas of
  the world that were considered strategic (Middle
  East, Asia, South America, Africa, etc)

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Results of the International Debt Crisis

• In response to the inflation of the developing
  countries debts, many nations threatened to
  default their loans. However, if this were to
  occur, it would put into jeopardy many of the
  North American, European, and Japanese banks who
  lent them the money. This would lead to an
  economic crisis in the developed world.
• For this reason, organizations such as the World
  Bank and the International Monetary Fund were
  established to allow the developing countries to
  reschedule their debts.

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Three types of loans given to nations /
victims of the International Debt Crisis

• In the year 2000.
• 57 - Private loans from various financial
  institutions.
• 27 - Bilateral loans (country-to-country)
• 16 - Multilateral loans from international
  agencies (World Bank, International Monetary Fund)

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What is the World Bank?

• A specialized agency that furthers the economic
  development of member nations, chiefly through
  guaranteed loans. The Bank obtains most of its
  funds through borrowing, and the remainder
  through government subscription. Since voting
  power is proportional to the amount of money
  received from each government, the Bank is
  essentially controlled by the richer countries.

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What is the International Monetary Fund?

• The IMF is an organization of 184 countries,
  working to foster global monetary cooperation,
  secure financial stability, facilitate
  international trade, promote high employment and
  sustainable economic growth, and reduce poverty.
  Since their inception they have developed loan
  initiatives which are coupled with S.A.P.
  (Structured Adjustment Plan) criteria

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What do S.A.P.s ask developing countries to do??

• Devalue their currency to make imports expensive
  and encourage exports.
• Increase their exports (cash crops).
• Limit spending on social and education (more
  money for loan re-payments).
• Increase their military spending and protection
  standards.
• Eliminate trade barriers with OECD countries.

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Discussion Questions

• 1) Not a single International Monetary Fund or
  World Bank program has demanded that indebted
  countries make cuts to military or police
  expenditures. In fact, some debtor nations have
  been told to increase spending in this area to be
  eligible for loans (SAP). Why do you think this
  is?
• 2) These countries received the money. The
  citizens of those nations obviously benefited
  from this. Why shouldnt the citizens, workers,
  business owners and governments today be made to
  repay these loans?
• 3) We are not considered to be in overwhelming
  debt. Why should paying the debt in other
  countries be a concern for us? How does
  international debt affect us at all?

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Debt cancellation is the key right?

• 550 billion has been paid in both principal and
  interest over the last three decades, on 540bn
  of loans, and yet there is still a 523 billion
  dollar debt burden.
• There have been many headline-grabbing promises
  by world leaders for third world debt
  cancellation or relief for the poorest and most
  ravaged countries, and yet those past promises
  have hardly been kept. For example
• The debt cancellation doesnt actually happen
• The debt cancellation is very slow to happen
• The amount of money or cancellation promised is
  actually far less due to fancy spin and adding in
  money that has already been earmarked for this
  purpose

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How bad can the interest really be?

• Their debt (Developing World) has been
  compounding at twice the normal rate - over 20
  percent per year. Between 1973 and 1993, their
  debt went from from 100 billion to 1.5 trillion
  only 400 billion of the 1.5 trillion was
  actually borrowed money. The rest was runaway
  compound interest. If Third World debt continues
  to compound at 20 percent per year, their debt
  will be over 150 trillion in twenty years and
  13 quadrillion in thirty years.
• J.W. Smith, The Worlds Wasted Wealth 2,
  (Institute for Economic Democracy, 1994), p. 143.

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But everybody has to pay interest

• The South has already repaid its external debt to
  the North. Since the onset of the global debt
  crisis, precipitated in 1979 by a sharp increase
  in the Federal Reserves interest rates by Paul
  Volcker, the devel-oping/emerging market
  economies as a whole have paid in current dollars
  a cumulative 7.673 trillion in external debt
  service.1 However, during the same period their
  debt has increased from 618 billion in 1980 to
  3.150 trillion in 2006, according to figures
  published by the International Monetary Fund
  (IMF)

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Current Situations of Countries in Debt
http//www.jubileedebtcampaign.org.uk/?lid2647)

• Top Ten Reasons for Developing Nations Debt
• Colonialism
• Poverty
• Lack of infrastructure
• Incapable/Untrained/Greedy leaders
• Misguided use of funds
• SAP restrictions
• Military regimes
• Uneducated workforce
• Unpayable principles
• Uncontrolled population

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  Name Position  
  Name Position Funds embezzled (in U.S. )
1 Mohamed Suharto President of Indonesia (19671998) 15 to 35 billion
2 Ferdinand Marcos President of the Philippines (19721986) 5 to 10 billion
3 Mobutu Sese Seko President of Zaire (19651997) 5 billion
4 Sani Abacha President of Nigeria (19931998) 2 to 5 billion
5 Slobodan Milosevic President of Serbia/Yugoslavia (19892000) 1 billion
6 Jean-Claude Duvalier President of Haiti (19711986) 300 to 800 million
7 Alberto Fujimori President of Peru (19902000) 600 million
8 Pavlo Lazarenko Prime Minister of Ukraine (19961997) 114 to 200 million
9 Arnoldo Alem?n President of Nicaragua (19972002) 100 million
10 Joseph Estrada President of the Philippines (19982001) 78 to 80 million
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Discussion Question

• We are not considered to be in overwhelming debt.
  Why should paying the debt in other countries be
  a concern for us? How does international debt
  affect us at all?

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The Debt Boomerang

• International debt is not only a developing world
  problem. It costs developed nations billions of
  /year
• Lost Jobs through lost markets
• International epidemics through reduced health
  standards
• Global warming
• Inconsistent governments and insecurity
• Immigration pressures (government expenditures)

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What is being done to relieve the debt?

• Approach I Highly Indebted Poor Countries
  (HIPCs)
• An initiative by the World Bank and International
  Monetary Fund to reduce the debt of the 41
  poorest nations in the world.
• However
• To be eligible for this initiative, nations must
  be willing to implement a Structural Adjustment
  Plan (SAP) approved by the World Bank or IMF.
  SAPs often require these nations to make
  controversial adjustments such as restricted
  social spending.

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Approach II Jubilee 2000 / Jubilee Campaign

• An initiative to mark the new millennium by
  forgiving the debt owed by the 50 poorest
  countries of the world.
• Rationale
• The debt of these countries is ruinous.
• The debtor nations have paid more than a fair
  amount for loans forced upon them.
• Many of the nations are paying for unfair debts
  that are at least 2 decades old (i.e. odious
  debts)
• Odious debts created by corrupt leaders (i.e.
  Philippines hundred of shoes owned by the wife
  of former president, Imelda Marcos.

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Approach III Canada

• Canada is a significant creditor to many of the
  HIPCs. To assist in relieving the debt of these
  countries, Canada has
• 1. Forgiven bilateral international debt
• 2. Provided relief in lieu of forms of government
  development assistance
• 3. Cancelled debts
• 4. Encouraged other members of the IMF World
  Bank to make HIPC initiatives more generous.

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What has happened since 2001?

• http//www.dailymotion.com/video/x9sqbn_drop-the-d
  ebt-2009_news