Is it possible to identify who is to blame for the debt crisis Essay Example

Is it possible to identify who is to blame for the debt crisis Essay Example Is it possible to identify who is to blame for the debt crisis Essay Is it possible to identify who is to blame for the debt crisis Essay Essay Topic: Economics The debt crisis, a term used for discussing the situation of third world debt, is an extremely complex issue, with multiple factors affecting the constantly fluctuating and increasing problem that many of the least developed countries (LDCs) are still facing today. One of the key aspects of the debt crisis is not necessarily the loans themselves all countries have some deficit, but rather the sustainability of the debt; that is whether or not a country can afford to repay the loans it has taken out (if a debt is over 40% of a countries GDP it qualifies as nsustainable). Questions that comes to mind when looking at the debt crisis today, and indeed the crisis that has been developing since the 1960s, is how can creditors be happy to lend money to developing countries whose situation indicates a high improbability of being able to repay the loans without immense damage to their economy for which the loans are meant to be beneficial? Are these decisions calculated? And why are the loans harming not helping? It is the nature of a capitalist, consumerist economy for loans to be encouraged whether on a huge scale uch as those faced by LDCs in the debt crisis, or small scale loans such as credit cards and mortgages. (I feel that it should be noted that loans between countries is not a new concept and has a history of over 175 years (Sachs, 1989:4) around the same time as capitalism took stronghold across the world). Although theoretically these debts are supposed to be an investment which will be beneficial in the long term, it has become the case in many countries that loans can in fact prohibit the scale of progress that can be made due to the many restrictions of repaying the ebts (which are often crippling amounts), meaning LDCs find it very hard to catch up to more developed countries no matter the amount they loan. Within the modern culture of international super powers and a macroeconomic climate that feeds off the economic situation of all the countries involved in trade, it is difficult to assign blame to a single element or financial body, as is often the case when trying to pinpoint responsibility for crisis. Indeed as many of the readings emphasise (Sachs, Whaites, Jain) it is the creditors blame the debtors for having bad economic olicies, whilst the debtors blame the creditors on the unfair advantage the bankers hold. However, this is a very oversimplified view of assigning blame, and in this essay will explore the variety of explanations of how such a debt crisis emerged and who, if anyone, can be thought of as responsible. To understand more fully the origins of the debt crisis it is essential that we understand the economic situation at the time of the first loans, in other words why did certain countries need to borrow huge amounts of money which would come to cripple their hopes for successful development. Many of the first loans to LDCs were made in the 1960s following the economic robbery (Whaites, 1991) that was colonialism. Following their independence after years of exploitative and self-interested policies implemented by colonial powers (which included the countries that would become the creditors), many of todays LDCs were granted freedom without the consideration of how they would proceed to successfully develop after so many of their resources had been taken without re investment from colonial power; the tools needed for significant development had been taken and used before these countries had reedom and the opportunity to set up an infrastructure capable of achieving economic and social progress, for example countries such as Zambia were unable to tackle problems such as health and education amongst others, many of which are still prominent problems today (see list of MDGs on UN website). However, in the wake of finally being given freedom many countries facing these troubles decided borrowed huge amounts to fund highly ambitious goals, and also to get over the holes within the economy (World Ban k website) such as the need to import goods such as petroleum and iron due to lack of industrialisation. This, in turn led to a high dependency on basic commodity exports (Whaites 1991), which would have been ok so long as the economy continued to be prosperous and there remained buyers for the exports. These factors led to the point at which a number of countries faced critical situations (Easterly, 2002:2) in regards to their debt service payments. However a serious crisis did not emerge until the 1970s, when the price of oil had an untold effect on the next 40 years of debt. In the early 70s and again later in the decade oil prices rose dramatically, leading to mass amounts of oney being loaned to many LCDs with oil reserves, who obviously thought economic successes would be made rapidly. However the economic situation took a turn for the worse and soon inflation and interest rates rose and those creditors who had raced (Eichengreen Lindert 1992:1) to lend money for potential petro dollars (Whaites 1991), left many countries not only with a much higher debt and much higher interest rates, but also a world market facing a recession, meaning economies that relied on highly on trade would find fewer buyers and lower prices for their exports. Countries that had invested all their hopes and borrowed inance in the oil trade now faced debts that were completely unsustainable and those without reserves faced economic growth that was too slow to repay the money that had been borrowed. This situation has been viewed in two different ways, the creditors see such rash investments as a bad choice of economic policy, placing the blame on the debtors for their economic situation, whereas the debtors point the finger at the banks that were so keen to lend copious (Sachs 1989: 2) amounts of money out even after prices for oil had dropped for they were preoccupied with the large returns they were etting from previous loans, one leading bank was looking at 72% of the overall earnings coming from international operations in 1976 (Sachs 1989:8), meaning lenders were blind sighted to the fact that it was dim that the debt incurred in the 1970s ver paid back in full (Eichengreen Lindert 1992:3). The events in the 1970s set the precedent for the next 20+ years, in which problems were faced largely by a variety of cause and effect situations, meaning blame could be circulated over and over, there is no clear cause. However some countries such as Indonesia and South Korea success fully managed to gain some economic prosperity hrough loans, raising the question of whether they made wise investments opposed to the so called bad economic policies of some indebted countries, or whether their investments were lucky and caught the economy at the right time, highlighting again the difficulty of assigning blame. Whilst OECD states recovered from the recession reasonably easily, the heavily indebted countries fell further and further behind. In the case of Latin America the financial situation reached such a severe problem that Mexico defaulted on their loan, having a massive knock on effect on the willingness of creditors to lend. Leaving struggling ountries with no money to invest, no substantial demand for the export products they relied on so heavily and a disadvantage in the trade market, due to OECD states adopting protectionist policies, driving a wedge between market and shadow prices (Sachs 1989:13) and resulting in LDCs having little or no money for investment and development of welfare as it was being used for consumerism. Creditors had lost faith temporarily in lending out money (although lending was restored within a few short years) feeling debtors had dug themselves in a hole they could not get out of, with no escape from the service debt they were struggling to afford. Perhaps it is possible that ill thought out, unrealistic economic policies were applied in this period that did nothing but further widen the gap LDCs were desperately trying to close, various bad investments were made, which resulted in little economic benefits from the large loans undertaken. I feel it is debatable whether or not the banks had been ignorant to the massive risk they were taking through lending money (perhaps they even felt they had to do so as to give countries a chance? or whether the risk was always expected to end badly meaning the LDCs remained subordinated to rich owerful countries that already existed, the former colonial powers that had given countries freedom only due to the impossibility of retaining their empire successfully, ensuring more cheap labour and opportunities for cheap trade and exploitation of the third world countries who were trapped in their economic situation. Even recent debt relief programs that have been set up have to be questioned, whilst it is too soon to tell what effect the multilateral debt relief initiative will have, as Easterly comments, the last 3 years have seen debt ratios drop and per capita ncome rise in countries that had been deemed at completion point in the HIPC initiative of which the benefits are still as yet unclear. In order to gain help HIPC countries must comply with strict fiscal disciplines (Jubilee USA brief 2008) and allow the IMF to control key policies regarding financial spending supposedly to insure avoidance of any more bad policies being made. However, policies implemented by the IMF have prolonged austerity, reduced public spending and even driven the price of cotton in Mali down to an artificially low price in order to compete with other arkets with a variety of advantages, meaning little profit is being made (Jubilee USA brief 2008), contradictory of this information of the IMF website which claims to be increasing social spending amongst many other successes. However it is evidently resulted in less change to the debt than expected suggesting therefore that whilst blame may be tricky to assign for such huge debts, the solution is even harder to pin point. However whilst both the creditors and the debtors are eager to assign the blame to the other party, it is commonly the case that corruption is to blame for the extreme levels of the debt crisis. Jain (1998) talks extensively about corruption in economics and the power of that to destroy even a prosperous economy whether it be corruption amongst the creditors or debtors. Kremer and Jayachandran (2002) call this type of debt odious debt by which they mean illegitimate debt, which occurs through corrupt leadership taking out debts; never having intended to invest it in the country, but to keep it for themselves. A recent example of a case such as this is Mubarak, who is reported (BBC news 2011) to have up to $70 billion dollars that he has stolen over time from the Egyptian people, an mount twice as much as their countries entire debt which stands at $34. 46 billion. This huge injustice shows that the blame for huge economic crisis can sometimes lie with a corrupt leader good at concealing what he is doing (the HIPC initiative aims to tackle problems such as this) money taken in this way will never see any investment back into the country as it is often hidden where it will yield stable and lucrative (Whaites 1991) returns, in a phenomenon known as flight capital. Although is not always a case of illicit money being taken out of a country, but sometimes ore innocently a consequence of a bad economy, investors want to store their money where they will see the highest return, resulting in a vicious circle of low investment, low growth and continuing capital flight (Whaites 1991), once more highlighting that a solution is as hard to discover as placing blame for the start of the situation. After examining some of the origins of the debt crisis, as well as looking at how the situation has progressed in the last 40 years, it is still hard to see who exactly is to blame for the crisis, and no party is prepared to accept esponsibility as that could have serious repercussions, such as the banks being forced to call off the debts, or the LDCs being denied extensive aid. Whilst Eichengreen Lindert (2002) feel that circumstances such as this have happened in history before due to the nature or the international economy, Easterly (2002) highlights the impact irresponsible lending has had in what is described as violation of prudential standards of creditworthiness i. e. lending money to a source that can quite clearly not pay the money back, at least not without serious sacrifice. For whatever motives, the banks have made serious errors resulting in uncontrollable amounts of debt. However, many miscalculations have been made on the side of the debtors too, including both accepting unrealistic loans and harbouring overambitious goals (though can they be blamed for this? ). One of the key issues surrounding this debate is that the loans were not forced by either party, encouraged unwisely perhaps, or accepted too eagerly, but not forced. Therefore blame cannot be assigned, perhaps even, it is just the uncontrollable nature of our economy that is behind the crisis reaching the level it is at today. In cases where odious debt exists however it is much easier to pin point the driving force behind unsustainable debt unconceivable selfishness, corruption and complete disregard for the country they are supposed to be in charge of. Unfortunately whatever is to account for the situation today, it is clear who it is suffering the most from it, and sadly, those who are hit the hardest by the debt crisis are also the ones with the smallest influence on how it will shape out. Sadly it seems that economic capital is more valuable than human life and development.