The IMF solution has always been to lend more to overcome earlier debt and open up the country more and more to external investment and imports. The IMF’s conditionallities on aid in the form of Structural Adjustment Programmes further deepened its reach into national economic policies. Apart from the stabilisation measures, it also demands privatisation of public institutions and serivces, bringing prices closer to world market levels, and the changing of a country's industrial priorities by focussing on increasing imports and increasing exports.


The growth of export earnings is supposed to solve the problem though it has never proved to be sufficient even for a substantial relief in the debt problem. Those countries which succeded in following an export-intensive strategy for economic growth have done so by maintaining stringent controls on exchange and imports. These were Taiwan and South Korea, the so-called Newly Industrialising Countries (NICs). Later, Thailand and Malaysia have tried to follow similar policies. But liberalisation was imposed in these same countries, they underwent a crisis that shook the whole world.


The flight of capital from the indebted countries in the form of illegal deposits by its citizens in offshore tax heavens has worsened the debt situation considerably. Another development completely out of third world control deepened the debt bondage. This was the monetarist turn in developed countries’ policies, which meant a higher interest rate on credits. Since a large proportion of third world debt by the early eithties was from commercial banks, for which the interest is determined on the basis of current market rates, the interest payments increased.


We have mentioned the capital flight effected by citizens of third world countries, which is made easier by the absence of capital controls, i.e., control on foreign exchange. We can also understand capital flight as the running away of capital from a country in a more general sense. A lot of foreign investment is in the form of Portofolio capital in contrast to Foreign Direct Investment. This Portfolio capital, which is invested in stocks, securities, bonds, currencies can move out quickly. That is why it is also called ‘hot money.’ So if a country wants to follow a policy not to the liking of this finance capital, it can fly out, upsetting all calculations of balance of payments. This acts as threat against governments following any policies which are going to cut into the profitability of investments. Of course, the flight of capital is possible only because foreign exchange movement has already been liberalised. As a matter of fact, the foreign exchange which third world citizens have sihphoned out of the country will be a part of  this hot money now earning profits back here. Many of the dictatorship which the West helped prop up in third world countries were notoriously corrupt and put all their money in foreign banks. Of course, dictators are not the only ones to follow this path. This money may sometime be enough to substantially reduce the country’s debts.


There are four main areas where borrowed money was spent by third world governments:

Much of the money was used to finance imports and to pay installments on earlier debts along with interests;



Many of the loans were tied to specific mega-project in mining, power etc; a part of this loan inevitably went to pay for  tools and expertise;


A portion of the money was spent on armaments;


A part of money was siphoned out by corrupt officials of the borrowing governments, which landed up in tax heavens as capital flight.


The paying back of these debts and the interests on them has led to following of policies that impoverish people and lead to distorted development. Unemployment and low wages because of the destruction of local industry, migration of small farmers to ovecrowded cities because of change in farming policies, or attempts to turn forest areas into cultivated ones, increase in the government taxes and prices of government services are some of the effects.


Since the early eighties, there has been a net flow of foreign exchange from the indebted countries back to the lenders. original debts have been paid many times over. The situation is quite similar to that of bonded labour where generations go on labouring to pay for the debt taken by their ancestors. When a business enterprise or an individual is in debt that they are unable to repay, they can throw in the towel and declare themselves bankrupt. But when a government is in debt, it can go on sqeezing the people of the country forever to pay those debts, until they rebel. However, this has not always been the case. When the U.S. took over Cuba almost a hundred years ago, it cancelled Cuba’s debt to Spain. The U.S. argued that this burden was imposed upon the people of Cuba without their consent and by force of arms. Such debts were ‘called odious debts’. There were other such instances too.


Various solutions have been proposed and various plans implemented to manage the crises. But they are precisely only that, management of crisis so that the state of affairs may continue without endangering the banking institutions and their profits, on the one hand, and not closing off of the  indebted countries markets to international imports on the other. Expressions of concern by various developed world leaders and bank presidents is enough to numb and sicken one, once you have studied the deceptions, doublespeak, cold  pursuit of profit and advantage in the history of third world debt. It is a history which enables us to understand the nature of our world system. It is also a history of folly, corruption and blindness on the part of third world governments and elites. And it is the history of the spell that the idea of catching-up development has lad on third world. It also happens to be one of the few areas of international economics on which there are excellent writings, which explain things in detail for non-experts. In any case, third world debt and accompaning developments suited the corporate agenda very nicely. It prepared the conditions for capital mobility in the third world, while also giving a weapon to ‘improve’ third world policies in the right direction.


(Excerpted from BACK GROUND to globalisation, by Avinash Jha published by, CED, Suleman Chamber, 4 Battery Street, Mumbai-400 001                      Price : Rs 150)