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The International Debt Crisis

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The International Debt Crisis Name Position Funds embezzled (in U.S. $) 1 Mohamed Suharto President of Indonesia (1967 1998) $15 to 35 billion 2 Ferdinand Marcos ... – PowerPoint PPT presentation

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Title: The International Debt Crisis


1
The International Debt Crisis
2
Discussion What do you think the term
International Debt Crisis means?
3
Do these cartoons help to understand it?
4
Try this video,Drop the Debt to see if it helps
make sense
http//www.makepovertyhistory.org/video
5
It must make sense when you look at the
facts.right?
FACT From 1970-2002, Africa received some 540
billion in loans and paid back 550 billion in
principal and interest. Yet Africa remains today
with a debt stock of 295 billion. FACT Debt
relief is conditioned on requirements that
countries limit government spending, private
basic services, and/or change trade and
investment rules. FACT Much of the debt is a
result of "bad faith" lending including The
practice of pushing loans on developing nations
because banks had too much money and had to lend
it
6
How do we define a developing country???
  • 1. Common colonial history
  • Most have been colonized by European nations,
    either politically, economically, or both.
  • 2. Poverty
  • Massive inequities between the countrys rich and
    poor
  • 3. Stereotypes
  • Often seen as disorderly and threatening.
  • 4. Debt

7
Colonialism / Imperialism
  • Colonialism
  • Domination of one country by another through
    control of the countrys political system.
  • Imperialism
  • Domination of one country by another through
    territorial expansion or the control of the
    markets.

8
Reasons for colonialism
  • 1. Business
  • Need to gain overseas markets for manufactured
    goods and to gather supplies of inexpensive raw
    materials for factories.
  • 2. Religion
  • Christian missionaries went to save souls, and
    required military protection against resentful
    natives.

9
Cont
  • 3. Strategic and Military Advantage
  • i.e. Suez Canal (shortest route to India)
  • 4. International pride and the search for
    prestige
  • 5. Population settlement
  • Colonies provided a good place to settle surplus

10
European attitude towards colonialism in the 1800s
  • Cecil Rhodes (1890)
  • We must find new lands from which we can easily
    obtain raw materials and at the same time exploit
    cheap slave labor that is available from the
    natives of the colonies. The colonies will also
    provide a dumping ground for the surplus goods
    produced in our factories.

11
So why didnt the countries do well after the
colonizers left?
  • What were the disadvantages that the colonies
    began with once their colonial invaders left?
  • Empire nations picked up and left without leaving
    any real infrastructure that could be managed by
    the indigenous population.
  • Empire countries had, for the most part, stripped
    and profited from their colonies resources.
  • Empires had provided all forms of governance and
    expertise without allowing the education or
    training of the occupied indigenous people.

12
Did you know????
  • The term Third World Countries was coined in
    the early 1950s to describe those countries that
    did not belong to either the Western/Capitalist
    bloc, or the Communist/Eastern bloc of countries
    who were engaged in the Cold War. It also
    suggests that the expanding split between rich
    and poor nations was not as evident and obviously
    less prominent prior to the 1950s

13
Developed Countries
  • There are only 26 countries in the world that are
    not considered to be developing / Third World
    countries. These countries are the members of the
    OECD (Organization for Economic Cooperation and
    Development). They contain 20 of the worlds
    population, control 80 of the worlds wealth,
    and have an average GNP (Gross National Product)
    of USD 18,00.

14
OECD Countries
  • 1. Australia 8. France 15. Luxembourg 21. Spain
  • 2. Austria 9. Germany 16. Mexico 22. Sweden
  • 3. Belgium 10. Greece 17. Netherlands 23.
    Switzerland
  • 4. Canada 11. Ireland 18. New Zealand 24. United
    Kingdom
  • 5. Czech 12. Iceland 19. Norway 25. United
    States
  • Republic 13. Italy 20. Portugal 26. Turkey
  • 6. Denmark
  • 7. Finland

15
Why isnt Canada indebted like most southern
colonial countries in the Caribbean or in Africa?
  1. European Settlement
  2. Self government
  3. No population replacement (slave)
  4. Manufacturing
  5. Climate
  6. Expansion of empire not just a resource pool.

16
What escalated the debt in the developing
world after the 1950s?
  • Opec Oil Crisis
  • In response to their profits, the OPEC nations
    had vast sums of money to invest, and deposited
    it in banks in North America, Europe, and Japan.
    These banks had to find customers to borrow this
    cash. The worlds developing countries became
    more than willing customers for loans that had
    low, but floating, interest rates. In reality, a
    major reason why these countries had to borrow
    money was to pay for the oil they needed, which
    was dramatically more costly. When a country uses
    loans to pay for day-to-day needs like oil,
    little capital is left over for economic
    development. These oil purchases, of course,
    enriched the oil exporters even more.

17
What is OPEC?
  • OPEC is an organization of eleven developing
    nations, whose economies rely on oil export
    revenues.
  • OPEC countries
  • Algeria, Indonesia, Iran, Iraq, Kuwait, Libya,
    Nigeria, Qatar, Saudi Arabia, United Arab
    Emirates, Venezuela.
  • See interactive map
  • http//www.opec.org/library/Annual20Statistical2
    0Bulletin/interactive/FileZ/worldmapz.htm

18
2. Loans, not grants
  • In 1957, the U.S. decided that, instead of
    providing grants, it would provide low-interest
    loans as a form of aid to developing countries.
    The rationale for this decision was that these
    investments would generate sufficient wealth to
    than pay for themselves. Many other countries
    followed suit with this form of aid.

19
3. Abolition of U.S. Gold Standard
  • In the 1970s, the United States went off the gold
    standard. This meant that the value of the dollar
    was no longer tied directly to the value of gold,
    and created a great deal of uncertainty in world
    financial markets.
  • As a result, the Organization of Petroleum
    Exporting Countries (OPEC) felt that the lower
    value of the dollar was costing them too much
    money. In response, they increased the price of
    oil by 70 per cent. Additional significant oil
    price increases occurred in 1979. These price
    jumps were a big problem for a wealthy country
    like Canada, but proved to be even more
    economically devastating in the nations of the
    developing world.

20
4. The Trojan HorseSpiraling Inflation
  • During the 1970s and early 1980s, the world
    experienced spiraling inflation that drove up
    interest rates. Loans that might have been
    affordable when the cost of borrowing was 5 per
    cent became totally unsustainable with rates
    between 10 and 15 per cent.
  • Inflation - a rise in the general level of
    prices, as measured against some baseline of
    purchasing power.

21
5. Declining Currency Value
  • To make matters worse, throughout this whole
    period, as the economies of debtor nations
    declined, their currencies lost value compared to
    hard currencies like the US dollar and the
    Japanese yen. If the currency lost half of its
    value compared to US dollars (and many lost much
    more than that), the debt load doubled in terms
    of local currency.

22
6. Falling commodity prices
  • To add to the growing economic mess, the price of
    many of the commodities that the developing
    countries relied on for export earnings
    (agricultural, forestry, and mining products)
    declined in the 1970s and early 1980s. Hence,
    these countries had to pay higher prices for
    their imports (especially oil) with less income.

23
7. Cold War
  • To add to all of this, the two major world powers
    of the day, the U.S and the USSR, were playing
    geo-political chess. They made available even
    more money to allies of their regimes, even if
    such allies were ruled by a Flavor of the Day
    ruler. In many cases, these countries would have
    a rebellion funded by one of the Superpowers.
    They would then get some money through the
    Superpowers influence froim banks in Europe and
    North America. Then once they had spent the money
    on frivolous items while the population starved,
    they would be overthrown by a rebellion funded by
    the other Superpower. The process woul simply
    repeat itself for the most part. It allowed the
    Superpowers to jockey for position in areas of
    the world that were considered strategic (Middle
    East, Asia, South America, Africa, etc)

24
Results of the International Debt Crisis
  • In response to the inflation of the developing
    countries debts, many nations threatened to
    default their loans. However, if this were to
    occur, it would put into jeopardy many of the
    North American, European, and Japanese banks who
    lent them the money. This would lead to an
    economic crisis in the developed world.
  • For this reason, organizations such as the World
    Bank and the International Monetary Fund were
    established to allow the developing countries to
    reschedule their debts.

25
Three types of loans given to nations /
victims of the International Debt Crisis
  • In the year 2000.
  • 57 - Private loans from various financial
    institutions.
  • 27 - Bilateral loans (country-to-country)
  • 16 - Multilateral loans from international
    agencies (World Bank, International Monetary Fund)

26
What is the World Bank?
  • A specialized agency that furthers the economic
    development of member nations, chiefly through
    guaranteed loans. The Bank obtains most of its
    funds through borrowing, and the remainder
    through government subscription. Since voting
    power is proportional to the amount of money
    received from each government, the Bank is
    essentially controlled by the richer countries.

27
What is the International Monetary Fund?
  • The IMF is an organization of 184 countries,
    working to foster global monetary cooperation,
    secure financial stability, facilitate
    international trade, promote high employment and
    sustainable economic growth, and reduce poverty.
    Since their inception they have developed loan
    initiatives which are coupled with S.A.P.
    (Structured Adjustment Plan) criteria

28
What do S.A.P.s ask developing countries to do??
  • Devalue their currency to make imports expensive
    and encourage exports.
  • Increase their exports (cash crops).
  • Limit spending on social and education (more
    money for loan re-payments).
  • Increase their military spending and protection
    standards.
  • Eliminate trade barriers with OECD countries.

29
Discussion Questions
  • 1) Not a single International Monetary Fund or
    World Bank program has demanded that indebted
    countries make cuts to military or police
    expenditures. In fact, some debtor nations have
    been told to increase spending in this area to be
    eligible for loans (SAP). Why do you think this
    is?
  • 2) These countries received the money. The
    citizens of those nations obviously benefited
    from this. Why shouldnt the citizens, workers,
    business owners and governments today be made to
    repay these loans?
  • 3) We are not considered to be in overwhelming
    debt. Why should paying the debt in other
    countries be a concern for us? How does
    international debt affect us at all?

30
Debt cancellation is the key right?
  • 550 billion has been paid in both principal and
    interest over the last three decades, on 540bn
    of loans, and yet there is still a 523 billion
    dollar debt burden.
  • There have been many headline-grabbing promises
    by world leaders for third world debt
    cancellation or relief for the poorest and most
    ravaged countries, and yet those past promises
    have hardly been kept. For example
  • The debt cancellation doesnt actually happen
  • The debt cancellation is very slow to happen
  • The amount of money or cancellation promised is
    actually far less due to fancy spin and adding in
    money that has already been earmarked for this
    purpose

31
How bad can the interest really be?
  • Their debt (Developing World) has been
    compounding at twice the normal rate - over 20
    percent per year. Between 1973 and 1993, their
    debt went from from 100 billion to 1.5 trillion
    only 400 billion of the 1.5 trillion was
    actually borrowed money. The rest was runaway
    compound interest. If Third World debt continues
    to compound at 20 percent per year, their debt
    will be over 150 trillion in twenty years and
    13 quadrillion in thirty years.
  • J.W. Smith, The Worlds Wasted Wealth 2,
    (Institute for Economic Democracy, 1994), p. 143.

32
But everybody has to pay interest
  • The South has already repaid its external debt to
    the North. Since the onset of the global debt
    crisis, precipitated in 1979 by a sharp increase
    in the Federal Reserves interest rates by Paul
    Volcker, the devel-oping/emerging market
    economies as a whole have paid in current dollars
    a cumulative 7.673 trillion in external debt
    service.1 However, during the same period their
    debt has increased from 618 billion in 1980 to
    3.150 trillion in 2006, according to figures
    published by the International Monetary Fund
    (IMF)

33
Current Situations of Countries in Debt
http//www.jubileedebtcampaign.org.uk/?lid2647)
  • Top Ten Reasons for Developing Nations Debt
  • Colonialism
  • Poverty
  • Lack of infrastructure
  • Incapable/Untrained/Greedy leaders
  • Misguided use of funds
  • SAP restrictions
  • Military regimes
  • Uneducated workforce
  • Unpayable principles
  • Uncontrolled population

34
  Name Position  
  Name Position Funds embezzled (in U.S. )
1 Mohamed Suharto President of Indonesia (19671998) 15 to 35 billion
2 Ferdinand Marcos President of the Philippines (19721986) 5 to 10 billion
3 Mobutu Sese Seko President of Zaire (19651997) 5 billion
4 Sani Abacha President of Nigeria (19931998) 2 to 5 billion
5 Slobodan Milosevic President of Serbia/Yugoslavia (19892000) 1 billion
6 Jean-Claude Duvalier President of Haiti (19711986) 300 to 800 million
7 Alberto Fujimori President of Peru (19902000) 600 million
8 Pavlo Lazarenko Prime Minister of Ukraine (19961997) 114 to 200 million
9 Arnoldo Alem?n President of Nicaragua (19972002) 100 million
10 Joseph Estrada President of the Philippines (19982001) 78 to 80 million
35
Discussion Question
  • We are not considered to be in overwhelming debt.
    Why should paying the debt in other countries be
    a concern for us? How does international debt
    affect us at all?

36
The Debt Boomerang
  • International debt is not only a developing world
    problem. It costs developed nations billions of
    /year
  • Lost Jobs through lost markets
  • International epidemics through reduced health
    standards
  • Global warming
  • Inconsistent governments and insecurity
  • Immigration pressures (government expenditures)

37
What is being done to relieve the debt?
  • Approach I Highly Indebted Poor Countries
    (HIPCs)
  • An initiative by the World Bank and International
    Monetary Fund to reduce the debt of the 41
    poorest nations in the world.
  • However
  • To be eligible for this initiative, nations must
    be willing to implement a Structural Adjustment
    Plan (SAP) approved by the World Bank or IMF.
    SAPs often require these nations to make
    controversial adjustments such as restricted
    social spending.

38
Approach II Jubilee 2000 / Jubilee Campaign
  • An initiative to mark the new millennium by
    forgiving the debt owed by the 50 poorest
    countries of the world.
  • Rationale
  • The debt of these countries is ruinous.
  • The debtor nations have paid more than a fair
    amount for loans forced upon them.
  • Many of the nations are paying for unfair debts
    that are at least 2 decades old (i.e. odious
    debts)
  • Odious debts created by corrupt leaders (i.e.
    Philippines hundred of shoes owned by the wife
    of former president, Imelda Marcos.

39
Approach III Canada
  • Canada is a significant creditor to many of the
    HIPCs. To assist in relieving the debt of these
    countries, Canada has
  • 1. Forgiven bilateral international debt
  • 2. Provided relief in lieu of forms of government
    development assistance
  • 3. Cancelled debts
  • 4. Encouraged other members of the IMF World
    Bank to make HIPC initiatives more generous.

40
What has happened since 2001?
  • http//www.dailymotion.com/video/x9sqbn_drop-the-d
    ebt-2009_news
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