Third World Debt Crisis
What is the Third World Debt
Many developing countries have very large debts, and the amount of
money they owe is quickly increasing. Trying to pay off the debt (debt
service) has become a serious problem for these countries, and it causes
great hardship for their people.
Take the region of Sub-Saharan Africa, for example. This region
pays $10 billion every year in debt service. That is about 4 times
as much money as the countries in the region spend on health care
The amount of borrowed money and interest that you must regularly pay.
How did the Debt Crisis start?
At the end of the '70's, many oil-exporting countries had large amounts
of extra money. They put this money into Western banks. The banks then
loaned a lot of money to Third World countries for big development projects.
However, several factors (a rise in world interest rates, a global recession,
and low commodity prices) caused the size of these debts to start growing
very fast; several countries began to fall behind in their payments.
The amount of money owed by developing countries has increased dramatically
since the early 1980's. These countries now owe money to commercial
banks and also to organisations like the World Bank, the International
Monetary Fund, and to First World governments.
A RECESSION is a time when there is much less business
A COMMODITY is a product of farming, forestry, or mining
that is bought and sold.
DRAMATICALLY: very greatly.
Why does the debt keep growing?
It is especially difficult for developing
countries to repay loans:
- Loans must almost always be paid in hard
Most loans to the Third World have to be repaid in hard currencies.
Hard currencies are stable currencies; that means their value
does not change very much. The Japanese yen, the American dollar and
the Swiss franc are examples of hard currencies.
Developing countries have soft currencies - they go down in
value. Therefore, when the value of a developing country's money goes
down (as it often does), the cost of its debt rises. It takes more
of the country's own currency to pay back the same amount of hard
A HARD CURRENCY has a very stable value. It doesn't change
very much as time passes. A SOFT CURRENCY goes down in value.
- The value of a country's exports goes
The value of the commodities that a Third World country exports can
go down by large amounts. This makes it much more difficult for the
country to repay its loans. In Latin America, for example, debt is
growing faster than earnings from exports.
A COMMODITY is a product that is sold.
Refinancing loans can get
countries into even more troubles
Refinancing is when more money is borrowed to pay off earlier loans.
In theory, refinancing is a measure to help developing countries with
their debt problems and sometimes it does this. However, it does not
make good sense to take on new debts in order to service existing
debts. If this happens, the result is that countries get deeper and
deeper into debt. (This is called a 'debt spiral.')
In addition, many of the loans to developing countries are made by
governments or organisations like the IMF. These loans often carry
strict conditions with them, like cuts in spending on health care,
education and food subsidies. This makes life even worse for people
in the indebted countries.
REFINANCING: changing the time when debts need to be paid
or changing the amount of the interest rate on a debt.
A DEBT SPIRAL is a process in which debts get
worse and worse.
The IMF: the International Monetary Fund, a special financial
agency of the United Nations, established to stabilize the World Economy.
FOOD SUBSIDIES are the money that governments pay to
keep the price of food low.
What can be done?
Reschedule the debts:
This is when the terms of repaying the loan are changed and more time
is allowed to repay the loan.
TERMS: The conditions of an agreement.
Some organisations have thought of clever ways to help developing countries
lessen their debts.
UNICEF's Debt for Child Relief is an example of how an organization
helped some developing countries with debt problems.
In this program, UNICEF and international banks made a deal. Some
of the money that poor countries owed the banks was not paid to the
banks but was paid to UNICEF. Instead of the money, the banks received
tax deductions. UNICEF collected the debt repayments in local currency
(not hard currency) and then spent this money for programmes to help
children inside the country.
SWAP: to exchange one thing for another.
TAX DEDUCTIONS: A lowering of taxes. The banks had to
pay less taxes because they had given something valuable to a charity.
Cancel the debts:
Quite simply, the debts would no longer exist. The developing countries
would not have to repay the loans and they would not have to pay the
After all, what do the developing countries really owe the developed
world? They have repaid their loans many times over in interest payments.
In addition, in many cases, developing countries have paid the First
World more (in debt-servicing) than the Northern countries have given
in aid, loans and investment.
To CANCEL a debt is to say that the debt does not need
to be paid.
From 1983-1989 a surplus of $165 billion went FROM countries receiving
aid TO the countries who were 'giving' it. Again in 1994, the less
developed countries paid out $112 billion more than they received.
Of course, cancelling Third World debts now will not solve the problem
in the future. To do that, we must change the present financial system,
which is based on debt and interest payments; a system that keeps control
in the hands of those who are rich and powerful.
|SURPLUS: an amount extra or left
over. Here: 'surplus' shows how much MORE money ($112 billion) went from
poor countries to rich countries than from rich countries to poor countries.
Information comes from the article, 'Currencies of Desire', by
Vanessa Baird (NI October 1998) and The A to Z of World Development (1998)
edited by Wayne Ellwood (New Internationalist Publications Ltd)
Copyright New Internationalist Magazine 1998,
Last Modified: 7 March 2000
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