Global debt for low-and middle-income economies runs into the hundreds of billions of dollars. The World Bank reported in World Development Report 1987 that the ABM countries (Argentina, Brazil and Mexico) accounted for more than $250 billion of external debt in 1985. Of this sum, $38 billion was private nonguaranteed debt and $212 billion was public and publicly guaranteed debt, including International Monetary Fund (IMF) credit.
Other major debtors read like a Who's Who of the Third World countries that have turned in a disappointing economic performance since gaining independence after World War II. The list includes Bangladesh, Mali, Burma, Madagascar, Niger, India, Somalia, Kenya, Tanzania, Senegal, Pakistan, Sri Lanka, Bolivia, Liberia, Indonesia, the Philippines, Egypt, Ivory Coast, Papua New Guinea, Zimbabwe, Honduras, Nigeria, Thailand, Jamaica, Peru, Turkey, Ecuador, Tunisia, Colombia, Venezuela, and the socialist economies of Eastern Europe. In 1985, these and other developing countries owed another $400 billion to foreign banks and governments. Precious few dollars were in the form of private, nonguaranteed debt.
Servicing the hundreds of billions of dollars of external debt has encumbered Third World and East bloc governments with enormous problems. Economists use the term debt service ratios to indicate the percentage of goods and services exported from any country that must be allocated just to meet debt service payments. In 1970, debt services ratios were relatively modest, consuming less than 10 percent of export proceeds in all but 24 debtor nations. In 1985, only about a dozen developing countries basked in such fortunate economic circumstances. Thirty-one countries had debt service ratios from 10 to 20 percent, 15 from 20 to 30 percent, and 11 from 30 to 40 percent; 5 countries had staggering debt service ratios exceeding 40 percent (up to a maximum of 55 percent). The explosive rise in debt service ratios between 1970 and 1985 reflects an enormous expansion in lending to developing nations over this period and the trend toward higher interest rates of the 1970s and 1980s.
In many of these countries, increases in exports are literally mortgaged to meet interest payments. New loans are required simply to service past loans. The proceeds of exports are thus unavailable to finance new investment. To make matters worse, past loans were rarely invested in self-financing productive enterprises that would earn the income required to repay principal and interest. Rather, these loans were often squandered by the governments that received them on such items as public consumption, the creation of state-owned enterprises that invariably lost money and required a constant stream of subsidies, urban consumer subsidies to quell potential unrest, the building of magnificent national monuments to honor political leaders, and the formation of money-losing state-owned airlines and shipping companies.
Nor does this roster include the philosophy and practice of kleptocracy by self-styled authoritarian leaders, who voraciously acquired foreign villas and Swiss bank accounts. An unexpected consequence of some of this lending is that Western banks found themselves seriously exposed with nonperforming loans as Third World economies stagnated and interest rates rose.
Results of Lending
The story on IMF
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