Third World Debt Resolutions

Topics: Economic growth, Debt, World Bank Pages: 5 (1643 words) Published: August 12, 2013
Solutions/ Recommendations

[1]One fact is undeniable: Someone is going to have to pay for past debts. It could be the people in debtor countries, or the banks, or the people in advanced industrial countries. Most likely it will be some combination of these three groups. In the last ten years, there have been a variety of proposals which, unfortunately, usually reflect only the special interests of the groups proposing them. Generally speaking, these solutions fall into three categories: repudiation, minor adjustments in repayments, or reduction.

Debt repudiation, in the sense of a unilateral cessation of repayment, occurred in a number of countries: Bolivia, Brazil, Costa Rica, Dominican Republic, Ecuador, Honduras, Nicaragua, Panama, and Peru.With the exception of the Peruvian cessation, however, most of these actions have been taken with assurances that the stoppages were only temporary. Peru announced that it was unilaterally limiting its debt repayments to a percentage of its export earnings; and since Peru took this action, other nations have indicated that they will act similarly. There have been no serious proposals for a widespread and coordinated repudiation of global debt.

The economist Jeffrey Sachs offers several reasons for this absence of a general repudiation.First, debt repudiation is a dramatic and abrupt act. Most nations would prefer to defer such decisions as long as there are advantages to muddling through, and growth prospects are sufficiently ambiguous to make this muddling a viable course. Second, debtor countries fear retaliation from commercial banks. If the banks were to cut off nondebt related activities, such as trade credits, the situation could be made even worse. Third, the debtor countries fear retaliation from creditor governments and multilateral lending agencies. Grants from development banks could be affected, and trade relations would probably be seriously disrupted. Finally, the leaders of most of the debtor countries have interests in maintaining good relations with the richer countries, and repudiation would jeopardize these interests.

Repudiation would also seriously disrupt global economic relations, probably far beyond the immediate losses of the debts themselves. Retaliations would follow, because it would be politically impossible for lenders not to react, and because there would be a conscious effort to warn other potential defaulters against similar action. The escalation of economic warfare would have the effect of sharply reducing international economic interactions in trade, investment, and exchange. Such an outcome is in no one's interest.

The vast bulk of activity since 1982 has involved adjusting the timing and method of repayment. The number of specific proposals is bewildering.One can read about debt-equity swaps, in which businesses or properties in the debtor country are purchased at a discount by the banks as partial repayment; debt-for-debt swaps, where bonds are offered as discounted repayments; exit bonds, which are long-term bonds tendered essentially as take-it-or-leave-it offers to creditors who have no interest in investing any further and wish to cut their losses; or cash buy-backs, where the debtor country simply buys back its loan at a deep discount. Some of these proposals, notably the debt-for-nature swaps, where the debtor country promises to protect the environment in return for purchases of the debt by outside groups, are creative and could have important effects.

This array of proposals is referred to as a "menu" approach to debt repayment, and its logic is superficially sound. It was the logic of the plan offered by Secretary of the Treasury James Baker in 1985. By providing a number of different options, repayments can be tailored to the specific circumstances of a country, thereby easing the burden. Critical to the success of the menu approach is the assumption that countries will "grow out of" their debt. Yet, the evidence suggests...
Continue Reading

Please join StudyMode to read the full document

You May Also Find These Documents Helpful

  • Third World Debt Essay
  • The Third World Dept Chrisis Essay
  • Third World and Hyper Globalization Essay
  • Cities of the Third World Research Paper
  • Absolute Poverty in the Third World Essay
  • Third-Party Conflict Resolution Essay
  • into the world Essay
  • Essay about Third Party Conflict Resolution

Become a StudyMode Member

Sign Up - It's Free