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Thursday, April 14, 2011

Third World Debt and the Global Financial Crisis

The current global economic crisis is a tragedy of epic proportions. It has ruined countries, communities and families, and its effects are still not completely understood.

Though created by the First World countries of the Western world, it is also having an impact on Third World countries. The Third World countries have a significant amount of debt, and this debt may be impacted severely by this current global financial crisis. An article by Klaus Schwab in The Guardian provides one possible solution to at least ease the problem.

First, a look at global debt is in order. The amount of total global debt is simply staggering in its magnitude. In the early part of the 1970s, global debt stood around $100 billion.

Less than 15 years later, that number had more than tripled. This explosion in world debt was brought about mainly by the oil price shock of 1973. This rapid rise in oil prices brought in an enormous amount of cash for the oil producing countries.

These countries deposited this cash in various financial institutions, who in turn lent the money to developing countries in the form of huge loans that were risky propositions at best. These loans were variable interest rate loans, which were doomed for failure with any rise in interest rates.

This rise in interest is exactly what came about in the beginning of the 1980s with the Reagan Administration. There was at the time a worldwide economic recessions, which led to a decrease in demand and prices for the materials exported by Third World countries.

Therefore, the Third World countries cash flow dried up, and they were unable to keep up with the interest payments of the now high interest loans. For example, from 1982-1983 more than 30 Latin American countries announced they were unable to pay their debts.

It would be thought that these events would have stopped financial institutions from engaging in speculative, risky loans to Third World countries. However, in the 1990s the world was undergoing one of the most rapid economic expansions in history.

Suddenly cash was plentiful, so plentiful that financial institutions were looking for all the avenues they could find to invest it. One of the places a lot of this cash was invested was Third World countries, including many African countries with despotic leaders.

The next decade brought on some warning signs that the global economy was in trouble, especially during the brief dip following 9/11. However, the economy recovered strongly, and shaky lending to developing countries quickly resumed. By the time the global financial crisis arrived at the end of the decade, the amount of Third World debt had risen to more than $500 billion.

The health problems of the Third World are being seriously impacted by the global financial crisis. Africa is one of the Third World regions that will be the most severely impacted by the global financial crisis.

They are receiving less foreign aid, as well as increasing calls to pay off their debts. This is having a very unfortunate side effect. Many of the African countries are cutting money to public health projects, which are very important in this region of epidemics of AIDS, malaria and tuberculosis. This was one of the topics up for discussion in the World Economic Forum Annual Davos Meetting this year.

There is another Third World crisis that is being severely affected by the financial crisis. There is a global food crisis that is increasing the prices for staple foods by 20% to 100%.

This food crisis is leading to outrage by poor people in the developing countries, leading to pressure on their government to spend money on lowering food prices instead of paying off debt.

This leavers the financial institutions that created these odious debts in the first place in the highly questionable position of calling for Third World leaders to pay off their debts by keeping their people hungry.

Human rights abuses are also being fueled by this global economic crisis. As the poor protest their economic state, many Third World governments are using extremely harsh tactics to crack down on dissidents.

As seen, the global financial crisis is causing social upheavals in the poorest countries of the world. This is a major cause for worry in this age of global terrorism.

The saddest part of this situation is that the taxpayer financed bailouts of the United State alone are enough to wipe out all Third World debt many times over.

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