Problem

External debt crisis

Other Names:
Disproportionate external public debt
Over-indebted countries
Excessive foreign public debt
Increasing foreign debt of vulnerable countries
Inadequate external debt management capacity
National solvency crisis
Nature:

Governments may borrow funds on foreign money markets to finance developments within their country. Foreign-held debt gives a claim by foreigners against national output in the sense that payment of interest and principal by the capital-poor nations requires export of goods to earn national income. To the extent that foreign debt continues to rise, taxation may rise, and economy in terms of public services and the standard of living in general tend to fall. Increasing foreign debt may open the way to greater transnational corporation ownership of production facilities or greater penetration of the financial infra-structure. Excessive foreign debt leads to impoverishment until obligations are paid or until they are defaulted upon or until they are repudiated. Unpaid debt leads to being barred from the world capital markets, and can lead to peaceful or violent change in government or to war.

Incidence:

[Developing countries] In 1993, the World Bank listed 51 low- and middle-income countries as having encountered severe debt servicing difficulties (based on 1989-91 data for those economies reporting detailed debt data, where severely indebted meaning either the present value of debt service to GNP is above 80 percent or the present value of debt service to exports is above 220 percent) "Severely indebted low-income countries" were: Afghanistan, Burundi, Cambodia, Egypt, Equatorial Guinea, Ethiopia, Ghana, Guinea-Bissau, Guyana, Honduras, Kenya, Liberia, Lao PDR, Madagascar, Mali, Mauritania, Mozambique, Myanmar, Nicaragua, Niger, Nigeria, São Tomé and Principe, Sierra Leone, Somalia, Sudan, Tanzania, Uganda, Viet Nam, Zaire, Zambia. 21 "middle-income" developing countries also severely indebted were: Albania, Algeria, Angola, Argentina, Bolivia, Brazil, Bulgaria, Congo, Côte d'Ivoire, Cuba, Ecuador, Iraq, Jamaica, Jordan, Mexico, Mongolia, Morocco, Panama, Peru, Poland and Syrian Arab Republic.

In 1986 debt service payments of all developing countries reached $101 billion. At the end of 1983, the major Latin American debtor countries had interest payments which alone consumed 40% of all their export revenues (every percentage point of USA interest rates costs Latin American countries around $3 billion); it exceeded 50% in four of them. In Turkey and the Philippines it is also about 50%.

In 1990 it was estimated that 16 of the largest debtor countries alone owed $22 billion at the end of August, more than triple the amount they owed in early 1989. The total debt of all developing countries at the end of 1992 was estimated at $1,662 billion, a 3.5% decrease on the previous year, but with a predicted rise of 6.5% to $1,770 billion by the end of 1993. In 1994 it was estimated that Zambia owed foreign creditors about £515 for every Zambian citizen, namely more than double the average Zambian annual wage of £220. Similarly Jamaica owed £1,095, namely well above the average earnings of every individual on the island.

Statistics from the United Nations Development Programme (UNDP, reported to Rio+5 conference in 1997, are that the debt burden on the developing world continues to mount, now reaching US$2.1 trillion. Sub-Saharan Africa's debt payments are larger than its expenditures on health and education.

 

 

Claim:

When debtor countries have to borrow in order to pay interest, an unsustainable economic and political threshold has been reached, which could result in economic and political catastrophe. What is at stake in the debt crisis is the nature of the relationship of developed to developing countries and of democracy to communism. The world is interdependent, and creditors and debtors may serve only to ruin each other by their own tests of strength and obstinacy.

 

Problem Type:
D: Detailed problems
Related UN Sustainable Development Goals:
GOAL 8: Decent Work and Economic GrowthGOAL 10: Reduced InequalityGOAL 13: Climate ActionGOAL 16: Peace and Justice Strong Institutions
Date of last update
22.05.2019 – 17:04 CEST