What ever happened to the Third World debt problem? It was front-page news in 1982 when countries unilaterally declared a moratorium on interest payments or threatened nonpayment of principal.
Despite media neglect, it is still a huge problem, as "developing countries" owe a whopping $1.2 trillion to industrialized nations. Half is owed by governments to official bodies, such as the World Bank, the International Monetary Fund (IMF), regional public banks, and national governments. Of that a big fraction is government-to-government debt. The other half is owed to large private banks in Europe, Japan, and the United States--with the latter holding about a third of the bank debt.
A conference at Stanford's Hoover Institution in September 1987 examined Latin America. Senior research fellow Robert Wesson noted that most of the world debt problem centers on Latin America, where roughly $400 billion is, or has been, subject to rescheduling or threatened with default. About 60 percent of the Third World debt is "troubled"--payments have not been made as originally scheduled.
African debt is as troubled as the Latin American, and several Asian countries are also having difficulties, including Southeast Asia's most troubled economy, the Philippines, which has a $29 billion foreign debt.
A major cause of the over-borrowing was rising prices of oil and other commodities. The roaring inflation of the 1970s caused debtor and creditor alike to miscalculate. Wesson wrote that "inflation [in the 1970s] was seemingly permanent, and commodity prices kept going up. Mexico should be easily able to handle $100 million of debt if oil were to go to $40 per barrel, as seemed likely." Exports from Brazil were growing at a 20 percent annual rate, and economic growth in other debtor nations was similarly robust.
Several other factors exacerbated the problem. In many countries, loans from industrialized countries were more than offset by large-scale capital flight. This was particularly true in Venezuela, Mexico, and Argentina. Also, nonproductive state enterprises in Latin America frequently were the recipients of foreign loans.
The First Bubbles Burst
However, the "debt boom" quickly turned to the "debt bust" in 1982 when the industrialized nations moved seriously to curtail inflation with draconian measures. Over the intervening six years, governments and banks have acted gingerly and successfully to prevent massive defaults, the collapse of the Western banking system, and general economic chaos.
While it is so easy and pleasant to arrange an initial loan, it is so painful to cope with loans that have become troubled. In this regard, the IMF is almost as unpopular in Third World debtor nations as it is in the United States. They both invariably recommend difficult and painful domestic policy reforms. The United States has generally supported the IMF conditions for loan relief, and also has emphasized privatization and increased lending by multilateral and private banks.
Of course, the preferred solution would be sufficient progress in the
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