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NI: Global Issues for Learners of English > The Issues > Money & Debt > Third World Debt Crisis

The Third World Debt Crisis

In May 1998, the leaders of the rich G8 countries went to Birmingham, England, for their yearly conference. When they arrived, they found a chain of 50,000 people around the conference hall.

They wanted the Third World Debt to be cancelled.

THE THIRD WORLD: the poor, developing countries of the world.

DEBT: an amount of money you owe.
CRISIS: an emergency, a very serious situation.
The G8 COUNTRIES: USA, Canada, Japan, France, UK, Germany, Italy, Russia

What is the Third World Debt Crisis?

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 and education.

 

 

DEBT SERVICE: 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.

GLOBAL: Worldwide

A RECESSION is a time when there is much less business than usual.

A COMMODITY is a product of farming, forestry, or mining that is bought and sold.

DRAMATICALLY: very greatly.

 

Why does the debt keep growing?

Developing countries find it difficult to get out of debt because:

  • Loans must almost always be paid in hard currency.
    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 currency.

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 down.
    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.

  • Interest rates in other countries rise.
    If interest rates go up by 1% in the USA, for example, about $4 billion is added to the debt bill of the debtor countries.
  
  • Refinancing.
    This 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 these loans 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.

Debt swaps:
Some organisations have thought of clever ways to help developing countries lessen their debts.

For example: UNICEF's Debt for Child Relief:
Banks 'donated' some of their high-risk debts to UNICEF in return for tax deductions. UNICEF collected the debt repayments in local currency (not hard currency) and used the money for child welfare programmes inside the country.

 

SWAP: to exchange one thing for another.

Cancel the debts:
Quite simply, the debts would no longer exist. The developing countries would not have to repay the loans or pay the interest. After all, the developing countries do not owe the developed world anything. And they have repaid their loans many times over in interest payments. It is often the case that the developing countries pay the First World more (in debt-servicing) than the Northern countries give 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, 1999

NI: Global Issues for Learners of English > The Issues > Money & Debt > Challenging the System

Last Modified: 7 March 2000