The Debt Trap: The Debt Trap: Foreign Aid and Structural Foreign Aid and Structural

AdjustmentAdjustment

“As Mao Tse-Tung warned his cadres as they took power in China in 1949, the ‘sugar-coated bullets of the bourgeoisie’ are likely to prove more fatal to a revolution than real bullets”

(Payer, The Debt Trap, 1974)

Review: TNCs and the global economyReview: TNCs and the global economy

What are TNCs? FDI? How have they developed? Postwar growth of transnational production

– geographical shifts – temporal trends– sectoral changes

Types of TNCs– geographic expansion (market access)– Specialization (global assembly line)

Roles in global economic development

Group exercise:Group exercise:Assessing the Impact of FDIAssessing the Impact of FDI

Considerable debate is taking place about the impact of FDI and TNCs in third world countries. What are the benefits and/or disadvantages to this investment? How does it impact local firms, employment, infrastructure and overall development?

(Write down your findings and prepare a brief report for the class.)

Overview: The Debt Trap

1. Why borrow? Why Loan?

Global Finance and International Development

2. Bilateral Foreign Aid

3. Bank Lending and the Debt Crisis

4. Multilateral Funding and Structural Adjustment Programs

1. Introduction to Global Finance 1. Introduction to Global Finance and International Developmentand International Development

Context for international borrowing and lending … why loan money to the poor?

– Economic disparities between 1st and 3rd world – Finance economic growth– Lack of domestic savings– Unequal and declining terms of trade

Temporal and Regional Temporal and Regional Patterns of LendingPatterns of Lending

Temporal shifts

Largest increase late 1970s to mid 1980s

(see graph)

Regional Patterns

Latin America largest borrower

Asia (NICs) 2nd largest

Africa lowest

Major Sources of 3rd World Major Sources of 3rd World FinancingFinancing

1) Bilateral foreign aid

2) Bank lending

3) Multilateral lending

1. Bilateral Foreign Aid1. Bilateral Foreign Aid

Government-to-government lending – Development projects

E.g. dams, roads, infrastructure

– Food or other resource provision– Human labor

e.g. Peace Corps, medical personnel

Bilateral Lending (cont.)Bilateral Lending (cont.)

Tied aid – Conditional lending

Disadvantage to borrowing country – Reduces money spent domestically– Not necessarily best price or appropriate good– Negative for local producers– focus on large-scale vs. grassroots development

How much do they give?How much do they give?

“On average, first world nations have provided 0.33% of their GNP as foreign aid during the last 20 years” (Porter and Sheppard, p. 514).

Top giversHolland and

Scandinavia (1% of GNP)

Bottom givers United States (0.2%

of GNP)

(compare to amount spent on military)

Motives for giving … ?Motives for giving … ?

- Geopolitical importance E.g. military bases

- Historical connections E.g. former colonies

- Encourage market-oriented development

- foster competition and the private sector

2. Bank Lending and the Debt Crisis2. Bank Lending and the Debt Crisis

Trends in private bank loans (graph)

Reasons for lending (from areas of surplus to shortage)– Rising oil prices – NIC growth – Increasingly available petrodollars

High risk loans High risk loans … the bubble is growing… the bubble is growing

Brazil $1.5 billion per month in 1982

Rising inflation – Impact on repayments

Most loans to a few countries – 4 L.A. countries and

1 Asian co. 60% of loans

– Little to Africa

Origins of the Debt CrisisOrigins of the Debt Crisis… the bubble bursts … the bubble bursts

1) Strengthening of dollar – $ value increased– Higher interest rates

2) Decreasing income from exports– Declining value of primary commodities– Debt burden

3) Capital flight– Money overseas in financial havens

Consequences of the Debt CrisisConsequences of the Debt CrisisRequest for

moratorium on debt repayment– Esp. Latin America

Less foreign lending in 1980s

Widespread impact on global financial system

3. Multilateral Funding and 3. Multilateral Funding and Structural Adjustment ProgramsStructural Adjustment Programs

IMF and World Bank background– ‘Twin’ institutions– Established in 1947 with Bretton Woods– Global financial cooperation vs. national controls– fixed exchange rates

Structural Adjustment Programs Structural Adjustment Programs (an invention of Harvard economists)(an invention of Harvard economists)

Objectives Establish conditions for

IMF loans

Economic reform

Push for free trade and market competition – Versus state control

Implementation

1) Deflationary policies

2) Export oriented economy

3) Liberalize trade

In many Third World countries, “candidates for President or Prime Minister campaign for election on a platform of opposition to the IMF. Months after the election is won, the same leaders forget their campaign promises and come to terms with the IMF - having found it as impossible to live without it as to live with it”

(Payer, The Debt Trap, 1974).

Implications of SAPs Implications of SAPs

Reduced government spending

Lower wages High unemployment Cut social services Effects on women

and households

Review: The Debt Trap

1. Exploring postwar economic development

2. Foreign aid linked to historical processes

3. The Debt Crisis grew out of Diffusionist path to development

4. Serious and long-term implications for developing countries