International debt crisis Flashcards
causes of the international debt crisis
in the 1970s and early 1980s, large commercial banks from the US, Europe and Japan made substantial international loans to the governments of Brazil, Mexico and LICs, including sub-Saharan African countries.
How much did LIC’s owe by 1982
over $500bn
Why did HIC’s lend so much money/have so much money to lend?
oil prices quadrupled in the early 1970s which created unprecedented wealth for the world’s oil-rich states, particularly Saudi Arabia, Iran, Iraq and Kuwait (members of the OPEC cartel)
Why did LIC’s borrow so much money?
gov officials who were educated in Western universities promoted the benefits of large-scale investments by the state to accelerate economic progress (western economies)
interest rates were low
what did LIC’s spend their loans on?
money was wasted on grandiose projects, such as HEP schemes, airports and jungle roads, that represented political priorities but were not a priority for the majority of citizens
Why did these loans become an issue?
A worldwide recession occurred in the early 1980s, and interest rates rose sharply. The recession also caused commodity markets and prices to collapse, hitting the export value of the primary products that most LICs depended on.
Were these loans risky?
yes, banks had been prepared to lend money to countries with poor governance, corrupt leaders and limited democracy. Corruption often diverted funds into the pockets of politicians and business people.
example of corruption of government loans:
Mobutu Sésé Seko, leader of DR Congo, siphoned off much of the country’s international loans, enabling him to amass a personal fortune of at least $4 billion
