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SOSC 188

Lecture 8Dependency Theory (IV): Financial Dependency

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Seriousness of the debt problem

The Origins: How it got started?

Impacts

Possible scenarios

Policy Implications

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Seriousness of the Debt Trap

Third world pays around 20% of export earning toward debt payment

By 1999, third world debt was $2,060 billionBrazil Mexico

Early 1970s US$ 4 billion US$ 7 billion

Late 1970s US$ 50 billion US$ 38 billion

Early 1980s US$104 billion US$ 54 billion

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Origins of the Debt Problem

Government overspending and deficit, balance of payment problem, miscalculation of oil profit

Compound interest & debt addiction-keep on borrowing just to pay the interest

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Impacts The danger of loan default -

lead to more IMF controls & financial dependency

IMF’s famous Austerity Plan Cut social spending (health, educ, welfare, food)Get more revenue (increase taxes, export earnings, sell domestic resources like mines and forests)

Domestic impacts - currency devaluation, massive inflation, flight of

capital, economic decline, protests and the food riot

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Possible Scenerios

Default: Not honoring the debt

Beg for mercy - ask for interest reduction and longer repayment period

Generosity - The G 8 wrote off 40 billion debt in 2005. Why? Afraid of Global Economic crisis,

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Policy Implications

Redefine development – emphasize the human side of development, not GNP

Advocate de-linking, cut the links with the G 8, need a rupture (revolution) to do this