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Canada (161,877)
POLS 2080 (26)
Adam Sneyd (20)
Chapter 4

Chapter Fourteen Summary

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Political Science
POLS 2080
Adam Sneyd

POLS*2080: Chapter Fourteen Lending to Developing Countries  Lending to developed countries originated with Italians lending to England before it was “developed”  When England began lending to the US (when the US was new) many states defaulted on their loans o This began the trend of political intervention through which banks would ensure they would get their debts repaid: they would finance candidates in elections who would repay the debt  When Mexico defaulted on their debts Britain, Spain, and France invaded (1861)  Often the loans profitable for both the lender and the borrower and they are repaid  When economies start to grow their credit is expanded (meaning they can borrow more money than before) o However the economic growth does start to slow down and in an effort to spur it further governments borrow more to put into speculative ventures. Those are often linked with fraud and swindlers (this period is referred to as “bubbles” or “manias”) which is followed by some sort of crash o The past 250 years have seen four examples of these cycles  Loan pushing- bankers push developing countries to take loans they do not need and encourage borrowers to live beyond their means o At the end of the mania, borrowers are faced with taking new loans simply to repay old ones o Similar to drug pushers giving cheap heroin to hook people o Loans are on variable interest rates –caused huge issues when interest rates jumped in the 1980s Governments, Politics, The Cold War, and The Debt Crisis  The end of WWII brought about four major changes in global politics and economics: o Decolonization began, and many countries became independent o New international institutions were created (UN, World Bank, IMF)  The World Bank first lent for European reconstruction and then to the newly created European countries o Major international corporations began to arise o The advent of nuclear weapons changed the nature of war and of empire  This eliminated massive wars and left three options: overthrowing governments through state- funded coups (US in Nicaragua); larger wars but limited to one country at a time (US in Vietnam); economic power (US giving loans to people then owning them)  When the US lent to Britain after WW2 they required them to open up trade and convert to the dollar o Example of structural adjustment  There were projects where consulting firms would grossly overestimate growth predictions for a country which would encourage large infrastructure projects (funded by loans that they wouldn’t be able to pay back) o Bribes would go to foreign leaders’ bank accounts so no red flags were raised o These projects had two purposes:  The first was that US countries would be awarded with contracts for engineering services thus the money would rarely leave the US  The second was to burden developing countries with debt and use them as actors for the developed countries’ agendas  Loans helped the US prop up dictatorships The 1980s Debt Crisis  In the 1970s global interest rates were lower than global inflation, meaning that real interest rates were negative o Developing countries were told that they could pay back less than they actually borrowed  The 1970s saw a ‘mania’ period, with a sharp increase in ‘loan pushing’ to developing countries o The debt increased from US $70 billion in 1970 to US $537 billion in 1980 o Re-negotiating the debt meant new loans were issued to repay old loans  By 1984 interest rates peaked and countries (such as Mexico) began defaulting on their debt  New loans used to pay unpaid interests on old loans: interest charged on the interest  By 1990 developing countries’ debts reached US$ 1.3 trillion in spite of new loans  From 1983 to 1990 developing countries transferred US$ 154 billion to rich countries, but their total debt increased by US$ 550 billion  Since the debt could not be repaid, lenders began to sell the debts at a discount o Countries could buy back the debt owed to them at a discount o Debt-for-development ‘swaps’ o The Brady Plan: Issuing bonds in exchange for outstanding bank debt reduced foreign debt by 30 percent, or more (Nicholas Brady, US Treasury Secretary 1989)  This way banks could sell bonds to investors and write-off the unsold bonds as assets instead of debts  The North demanded that developing countries’ governments ‘nationalize’ a debt that was originally private  The 1996 Heavily Indebted Poor Countries Initiative (HIPC): Some loans and debts had to be cancelled o Debt cancellation involved three groups of creditors: the Paris Club (bilateral national leaders), the London Club (banks and commercial interest groups), and development banks (such as the IMF and WB)  Debt cancellation brought strict neo-liberal structural adjustment programs  The Jubilee 2000 called for the cancellation of unpayable debts of poorest countries
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