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Origins of the Debt Crisis
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10856 |
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Section : |
CURRENT ISSUES
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7 / 1986 |
4,145 Words |
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Penelope Hartland-Thunberg
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The overhang of debt that threatens to suffocate much of the developing world is traceable to the two oil shocks that jolted the world economy in the 1970s. The repercussions of the rise and decline in the international price of oil after 1973 will be long in dissipating, especially in the oil-importing and oil-exporting developing countries. The last chapter has by no means been written on that disruptive episode of world economic history.
A decade after the first price shock, in 1983, a barrel of oil bought about five times more goods and services than it had 10 years before. As a consequence, producers and sellers of oil were much better off, and consumers and buyers of oil much worse off.
The increase in the real price of oil came in two giant steps, each of which was followed by a wave of worldwide inflation and by a recession in the oil-importing world. The speed and smoothness of the world's adjustment to the first shock surprised nearly everyone. In contrast, financial turmoil and economic anguish followed the second shock. The explanation for the difference between the two cases of world adjustment is to be found primarily in the economic policies of the United States.
Shock adjustment
Within 12 months of the first price shock of 1973-1974, the profit from exports of the Organization of Petroleum Exporting Countries (OPEC) was multiplied sevenfold. Unspent petrodollars were placed on deposit in the large international banks in Europe and the United States.
Although warnings of financial chaos or collapse were plentiful, the international financial system in fact successfully recycled the funds, lending them to these countries that chose to maintain growth rates rather than to oil-induced balance of payments deficits.
Those countries that chose growth did so by borrowing abroad. Among them were the non-OPEC and less developed countries (LDCs), including most of Latin America, the smaller industrial nations of Europe like Spain, Austria and Sweden, and the countries of Eastern Europe and the USSR.
At the same time, the United States, after some thrashing around, settled on a policy in the mid-1970s of fighting unemployment and recession rather than inflation. In so doing it maintained an expanding market for LDC exports. So successfully did the world economy and the international financial system cope with the flood of petrodollars that by 1979 the OPEC surplus had almost disappeared. From, more than $68 billion in 1974, the OPEC balance of payments surplus was reduced to $3 billion in 1979.
Between 1973 and 1979 the LDCs were able to grow almost three times more rapidly than the larger industrial countries, primarily by expanding their external indebtedness from less than $100 billion in 1973 to $350 billion in 1979. Nearly two-thirds of that was borrowed from commercial banks at adjustable rates of interest. Service charges on their external debt rose from 14 percent in 1973 to 18 percent of their foreign exchange receipts in 1979. More important, interest rates paid by these borrowers averaged 4 percent in 1973 but were approaching 20 percent by the end of
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