The Debt Crisis in Our Society
The most serious debt-related problem in the modern global economy, however, is the debt crisis afflicting many developing nations. Public borrowing by developing governments became common in the post-WWII period as international organizations such as the IMF and World Bank provided a secure framework for infrastructure and development loans. By 1970, the 15 mostly heavily indebted countries owed an average of 9.8 percent of their GNP in international loans. However, these loans were at preferential rates, made only for projects that were judged necessary for economic development and were held by non-profit organizations. By 1987, those same countries owed an average of 47.5 percent of their GNP. The 1970s saw radical changes in the international financial markets that were to greatly affect not only access to loans, but also the terms on which those loans were granted.
The initial impetus to increased borrowing by developing nations was the oil crisis of 1972–74, when the price of oil quadrupled over a two-year period. This increased price put tremendous pressure on the industrialization programs of countries that relied heavily on oil imports and at the same time sent a huge volume of “petro-dollars” into the coffers of the international banking community. Eager to recirculate this money, the banks began to offer low interest loans to even relatively high-risk borrowers, including many developing nation governments. For oil-importing countries, this provided capital to continue the development programs regardless of the increased cost of oil, and for those few countries that were oil exporters, the money was borrowed on the basis of the oil revenue bonanza to come. However, the second oil crisis of 1979–80 closely followed by the interest rate hikes of the early 1980s, and the deep global recession of 1981–82 left many developing countries with insufficient income to pay back their loans on schedule. These loans, often made for current consumption rather than to build economic capacity, also came at a time when the global economy had been destabilized by the ending of the Bretton Woods system and when there had been an overall decline in the terms of trade for products from the developing world. As countries came increasingly close to defaulting on their loans, the IMF emerged as the guarantor of creditworthiness for developing countries regardless of the lender. Part of the new guarantee process involved countries undergoing IMF structural adjustment programs, which were designed to address balance of payment problems generated by internal problems such as high inflation, structural inefficiencies, and large budget deficits. The IMF program was designed to reduce current consumption so that capital could be invested in future economic growth.
However, in the case of heavily indebted countries, it merely freed money to flow out of the country and back to the lenders, and led to austerity programs at home that had potentially devastating effects on human and physical capital as food and transport subsidies were reduced, health and education programs cut back, and taxes raised, even as public sector employees were laid off. In addition, requirements for increased export income often shifted agricultural production from local food supplies to export crops, increasing local food costs. Since the 1980s, the focus of the international financial community has been to restructure this debt to reduce the chances of large scale default. A wide variety of programs, including debt for nature swaps; debt for asset swaps, which give creditors the ability to buy physical assets in the debtor country at a deep discount; and cash buy backs, which allow the creditor to buy back the loan at a deep discount. More recently, as it has become apparent that such programs are only having a minimal impact on debt reduction, particularly in the poorest countries, the concept of debt forgiveness through programs such as the Millennium Development Goals is becoming increasingly common.