Economic development requires investment by the government in infrastructure and other sectors that will help in propelling growth. Unfortunately, less developed countries most of the times are unable to raise the required capital for development from the local savings because their saving rates are low. Therefore, these countries always borrow money from either developed countries or international financial institutions to fund the deficits in their budgets. However, due to industrial inability and technological deficiency, third world countries export mostly raw materials which generate low income that fully repay the loans these countries receive.
Consequently, the debt level of the less developed countries has been escalating year in year out making this countries use larger and larger proportions of their budgets each year to service debts.
Debt crisis of the developing countries can be attributed to many issues both internal and external. Much as the developed nations and the international donors are to blame for the problems facing the developing countries, third world countries also share the blame due lack of proper debt management policies. To begin with, most third world countries have very poor economic management policies making these countries invest in unworthy projects (Reitan 67).
It is prudential that when a project is financed by borrowed funds, then returns from the project should be able to service the loan. However, this is not the case in developing countries due to poor investment decisions compelling the government to pay the loans using money from other sources. On top of that, most third world countries are governed by leaders who usually put their personal interests first as opposed to national interests. It has been proved that corruption levels in Africa and Latin America are high and keep on increasing each year. Consequently, it is not unusual for borrowed funds that were meant to finance various national projects to be diverted into the pockets of few politicians or influential people in the government (Jochnick and Fraser 37). Therefore, the country continues to pay for loans that were never invested in any project or if they were invested then the project stalled on the way and requires more money to be completed. Furthermore, the problem of corruption escalates because the stolen funds are usually not invested in the third world countries to boost their economy but are instead stuck in European countries.
Furthermore, most developing nations export raw materials either due to lack of industries to process the raw material or lack of technology. The raw products are highly undervalued in the international markets thus fetching very low income for these countries, which cannot fund the loans let alone the countries’ whole budgets. This problem is worsened by the fact that third world countries import finished products from the developed nations which are very expensive, and drain up all the income from the exports thus limiting the ability of these countries to save any money (Reitan 68). On the same note, third world countries are technologically behind and they do not produce most commodities which make them net importers further exacerbate the situation.
In conjunction with that, the debt crisis that is facing developing nations has also been precipitated by some external forces which are even strong and beyond the control of these countries. Firstly, there have been very poor lending policies that have placed the interests of the developed nations, especially Europe and unite states of America, in the forefront disregarding the effects that this may cause to developing nations. The international monetary institutions have, in the name of determining the ability of a country to pay back their loans, imposed tough conditions which have reduced developing nations to being subjects of foreign forces both politically and economically (Rajagopal 34). Using this as a weapon, developed nations have manipulated third world countries to become entirely dependent on loans from them. Additionally, since 1979 and more significantly from 1982, international monetary institutions including the IMF and World Bank imposed one sided lending conditions as prerequisites for them to offer loans to third world countries. This served only to escalate the indebtedness of the sub-Saharan African nations and other third world countries. The servicing of these debts not only exhausts the earnings from exports but also makes developing countries to allocate portions of national incomes to debt servicing.
On the same note, the developed nations through international monetary authorities compelled developing nations to devalue their currencies drastically in 1980s. This action not only made imports very expensive for developing countries, but also made loan repayments very costly. To fund the deficit that this caused in the budgets of developing countries, governments were forced to increase borrowing which further increased the indebtedness of these countries. In addition to that, the Oil crisis of 1973 created surplus income for developed nations of Europe and United States of America (Jochnick and Fraser 39). In order to eliminate the surplus that was present in their banks, Europe and America invested this money in form of loans to developing nations at generously low but fluctuating interest rates. Third world countries took advantage of this and borrowed in large amounts. However, this money was either misappropriated or poorly invested in projects whose economic returns would not service the loans thus increasing the loan burden. On the other hand, the repayment of the loans from the oil crisis was seriously hindered in the 1980’s due to the devaluation of the third world countries’ currencies as a result of fluctuating interest rates, and the sharp increase in interest rates.
On top of that, terms of trade of developing countries, especially sub-Saharan Africa, deteriorated while at the same time developed nations implemented protectionist policies that condensed markets for raw products exported by developing countries. Moreover, the World Bank and the international monetary fund implemented Structural adjustment program, during 1980s, in what was termed as efforts to help developing nations catch up with their developed counterparts. This involved eliminating of controls on retail and producer prices, restructuring of public institutions, liberalization of trade and exchange systems as well as broadening the tax base. Contrary to the expectations, this increased the burden on the poor person and instead of alleviating the economic problems of developing nations, the programs only protected economies of rich countries (Rajagopal 36). This placed the rich countries in a position to set rules about loans while the entire burden was shifted to developing countries.
Developing countries continue to struggle with servicing loans that were advanced to them as early as 1980s, yet the projects that were funded using the money are nonexistent. However, much as many countries are trying to find a way out of the debt predicament, this requires the joint efforts of the international monetary institutions, the developed nations and the political will of the third world countries. Unfortunately, changes might take long to be realized especially in Africa, because though elections are carried out regularly, leaders remain the same corrupt ones who have for years mismanaged public funds.
Jochnick, Chris, and Fraser Preston. Sovereign Debt at Crossroads: Challenges and proposals for Resolving the Third World Debt Crisis.
Oxford: Oxford University Press, 2006. Print. Rajagopal, Balakrishnan. International Law from Below: Development, Social Movements, and Third World. Cambridge: Cambridge University Press, 2003.
Print. Reitan, Ruth. Global Activism. New York: Taylor and Francis, 2007.