Sociology Plus
Debt Crisis Definition
The debt crisis refers to the situation, emerging in the early 1980s, in which many developing countries found themselves unable to repay the massive loans they had taken on from Western banks during the 1970s, with far-reaching economic and political consequences for the global South.
Origins
In the post-colonial period, developing countries struggled to raise enough capital to build an industrial base and supporting infrastructure. Inviting foreign firms brought capital in, but those firms tended to keep the money and know-how to themselves; international funding bodies, meanwhile, were reluctant to lend for steel mills, power stations, and harbours, let alone schools and hospitals. Everything changed in the 1970s, when windfall profits from high oil prices left petroleum-exporting states with vast deposits in Western banks. Needing to put these funds to profitable use, the banks lent heavily to developing countries — particularly those, like Brazil and the Philippines, thought ripe for economic “take-off.”
The Crisis Breaks
Lending raced ahead of prudence, with lax policies compounded in some cases by corruption. Within a few years many borrowers could not meet their repayments, and in the early 1980s Mexico became the first country to threaten default. Across Latin America, debt service came to absorb half or more of many countries’ foreign earnings. The consequences were twofold. Economically, development appeared to stall: while the developed world grew richer each year, debtor nations only grew more indebted. Politically, the International Monetary Fund assumed the role of financial policeman, offering help with loans in exchange for economic reforms — cuts in government spending, the ending of food subsidies, the sale of nationalised assets — an arrangement that struck many as a new form of imperial rule.
Aftermath
Lower inflation through the 1990s gradually reduced many countries’ debts as a proportion of their exports, yet by the end of the millennium numerous “heavily indebted poor countries,” in the IMF’s phrase, remained. Proposals to write off their debts were tabled but stalled amid wrangling between the richer nations.