The developing world experienced the worst financial crises during the 1980s and the 1990s (Herman, Ocampo and Spiegel, 2010). However, the nature of the problems differed between the two periods. During the 1980s the Latin America and other developing countries underwent a serious debt crisis. It all started in mid 1982 when Mexico Publicly declared its inability to repay its international debt, and the problem spread to other countries (Herman, Ocampo and Spiegel, 2010). This debt crisis was attributed to many factors which can be divided to both Internal and external. The internal factors which led to the crisis include unsustainable budget deficits, economic mismanagement and the maintenance impractical exchange rates. The mismanagement was the main internal cause which contributed to the global debt crisis. For example, the former Congolese president Denis Nguesso lived an extravagant life at the expense of his country’s economy (Bosco, 2007). The external factors which contributed to the crisis comprise of harsh terms of trade, increasing international rates of interests, the increase in protectionism in the global market and negligent lending by international finance institutions.
At the beginning of 1980s, the world economy experienced a shift from inflation to recession. This occurred when Mr. Paul Volcker was selected to be the head of the US Federal Reserve board. Upon his appointment, he came up with an anti-inflation battle by tightening the money supply (Herman, Ocampo and Spiegel, 2010). Consequently, the dollar rates went up leading to the reduction in the inflation but caused a big problem to the heavily indebted countries.
The debt crisis brought so many problems to the affected countries (Bosco, 2007). The problems faced by these countries during the period include low levels of capital, low Gross Domestic Product, weak currencies, low living standards, high levels of poverty and thus underdevelopment. The problem not only affected those who obtain the loan but also the generations that followed.
As a result of the crises the world development Institutions, World Bank and the International Monetary fund came up with mechanisms to deal with the vast debt faced by the heavily indebted countries (Herman, Ocampo and Spiegel, 2010). These policy mechanisms aimed at reducing the fiscal imbalances in the indebted countries. These policies are called the Structural Adjustment Programs (SAPs). According to Easterly (2007) these programs were meant to allow the indebted countries to be market oriented thus forcing them to put more concentration on production and trade thus boosting their economies. However, these policies brought more harm than help because of their conditionality, thus increasing the poverty levels in the indebted countries. For example, the structural adjustments failed to address the Nicaragua problem (Easterly, 2007) .The policy package by the IMF and the World Bank campaigned for reduction in spending by the government, privatization and abusive foreign investments thus leading to increased poverty in the developed countries. In addition, it led to wealth and income inequality thus widening the social class gap between the rich and the poor in the heavily indebted nations.
Ways in which Structural Adjustment Programs increased Poverty.
Privatization.
The adjustment programs preferred the ownership of enterprises by private owners rather than the government. This led to governments selling off its enterprises to private investors. Consequently, this led to wage cuts for the workers and others were retrenched (Herman, Ocampo and Spiegel, 2010).
Government Spending Cuts
The reduction in the spending by governments led to reduction in basic services available to the citizens, for example education and the health services.
User fee Imposition
The fee imposition by the World Bank and the IMF on the services provided by the government resulted in denial of use of these services by the poor.
Export Promotions
The structural Adjustment programs called for countries to take measures in promoting its exports at the expense of producing domestic needs. The export orientation also led to displacement of people in the rural areas and their lands taken over by government to be used for growing of crops to be exported (Herman, Ocampo and Spiegel, 2010).
High Interest Rates.
The high interest rates led to recession in their economies thus increased unemployment and difficulty in accessing affordable credit by small entrepreneurs (Herman, Ocampo and Spiegel, 2010).
Trade Liberalization
The removal of tariff protectionism for the developing countries industries led to layoffs. A good example is Mozambique, the World Bank and the IMF ordered the elimination of export tariffs levied on Cashew nuts. Therefore, close to 10,000 workers in the cashew nuts factories lost their jobs (Herman, Ocampo and Spiegel, 2010).
In the recent past, the world development aid has experienced a power shift from the Organization for Economic Co-operation and Development (OECD) countries to emerging economies like China. The China’s assistance programme to the developing countries has been as a result of continuing expanding relationships with the developing countries especially in Africa. According to Brautigam (2009) the Chinese government expenditure in 2006, on external aid was over $ 1 billion.
The reason why the Chinese assistance has led to the trample of the OECD assistance is because of non- conditionality nature. This makes the China’s trade, investment and assistance more favorable to the developing countries than the trade, investment and the aid from the OECD countries (Brautigam, 2009). The China assistance programme has been linked with its diplomatic activities in the developing countries for example, the development of FOCAC (Forum on China-Africa Cooperation). Apart from the non- Conditionality, another factor which has led to the shift in assistance power from OECD countries to China is the nature of its assistance. Chinese assistance is always in form of technical assistance and infrastructure which has been a declining focus from the OECD countries (Brautigam, 2009).
Reference List
Brautigam, D. 2009. The Dragon’s Gift: The Real Story of China in Africa
Oxford: Oxford University Press.
Easterly, W., 2007.The ideology of Development. Foreign Policy Articles. Available at
http://www.foreignpolicy.com/articles/2007/06/11/the_ideology_of_development
[Accessed 12 June 2012]
Bosco, D., 2007.The Debt Frenzy.Foreign Policy Articles. Available at
http://www.foreignpolicy.com/articles/2007/06/11/the_debt_frenzy [Accessed 12
June 2012]
Herman, B., Ocampo, J. and Spiegel, S. 2010. Overcoming Developing Country Debt
Crises. Oxford University Press
.
