43 – The Third World Debt Crisis

In the 1980s, Brazil was the ranked the world’s eighth largest economy (Canada was number seven). It had a trade surplus which was only surpassed by those of Japan and West Germany. It appeared poised to become a major economic force and had been a preferred customer of the northern banks seeking to unload petro-dollars. But when interest rates started to go up, Brazil’s economy went into a dive. During 1987 and 1988, inflation was running at 20% a month; consumer prices between 1985 and 1990 rose 22,000%.

The government tried a variety of means to respond to the situation. The currency was devalued, and a wage and price freeze was put into effect. Measures such as these halted inflation for a while, but then forces within the country began to resist them. When cattle ranchers found that the prices they could charge for their beef were frozen, they withheld their livestock from the market, and Brazil–the world’s second largest producer of cattle–had to import meat. These pressures forced the government to allow prices to rise again, and soon inflation was running at about 600% a year.

Finally, in 1987, the Brazilian government determined, as Mexico had, that it could no longer afford to pay the interest due on their foreign debt, and those payments were suspended. Now pressure came from outside the country–from creditors. The loans were eventually renegotiated, and Brazil agreed to resume making payments but in order to do so had to borrow further money–a plan US bankers agreed to, although it didn’t appear to make much sense, because their only other option would have been to declare the debt uncollectible. So, the Brazilian debt continued to increase as they borrowed more money in order to make interest payments on old loans.

That is how the Third World debt crisis came about.

That debt probably remains the single greatest factor hindering development in most Southern countries today–a debt so large that many nations can’t even meet their interest payments, let alone have any real hope of ever being able to pay it off.

Just like Brazil, nation after nation in the Third World has had to borrow money in order to make their debt payments to commercial banks. But now those banks are unwilling to incur further debt from developing countries, so nations have to turn to the International Monetary Fund–an international institution set up to assist nations in crisis.

The IMF will loan money to developing countries, but usually only if the borrowing countries agree to certain conditions. These are the “structural adjustments” I mentioned earlier. Borrowing countries are expected to demonstrate what the IMF considers fiscal responsibility. So they might be required to devalue their currencies and allow interest rates to go up, although this usually results in higher unemployment. Then the IMF might insist on reductions in government spending, reductions in food subsidies for the poor, health services, and so on. The type of conditions which resulted in the 1984 Santo Domingo riots.