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The world witnessed and experienced a great debt crisis during the 1980s whereby Latin America and several other regions became highly indebted. As these regions were not able to repay the loans, they asked for aids and monetary help to get out of the great crisis. There was further explosion of the problem in 1982 when Mexican government declared its inefficiency to pay its international debt. The same problem spread to other regions as well. Thus, it would not be incorrect to state that the 1980s was a terrible era for a majority of countries in Latin America.
The causes of the 1980s debt crisis were plainly observable. There was a considerable collapse of growth and development in the Latin American continent. In addition, the increase in poverty and subsequent income inequality further damaged the economic development in these countries. There is no surprise in the fact that this period was truly a lost decade for the affected countries as the quick drop in development was also convoyed with macroeconomic upset and disorder (Dodhia & Johnson 13).
During the 1970s and 1980s, there were a number of international events that played a great role in contributing to the debt problem in a profound manner. In particular, the oils prices became shockingly high and there was a sharp increase in the interest rates. Moreover, industrial countries experienced recessions and reduction in prices of many commodities. These events created problems for a lot of low income countries. Poor governments had borrowed a great deal during the 1970s as it was believed that their investments in the industrial sectors would facilitate economic development. The road to industrialization was regarded to be the savior from poverty. Therefore, many low-income states and state-owned enterprises went on to take heavy loans. However, when the oil prices peaked and commodity process lessened, the industrialized countries asked for reimbursements as their imports were outstripped by the exports as a result of heavy borrowing (Lerda 17).
The domestic factors in the low-income countries of Latin America also contributed significantly in the debt accumulation. A majority of countries had adopted the practice of living and spending beyond the actual means despite the fact that they experienced deficits in trade and budgeting. As a consequence, their saving rates became extremely low. The heavy borrowing did not played any role in the countries’ development as most of the time the money was not invested in productive projects. The inability to generate returns added to the debt run-up. In addition, public sector’s poor management, selection of poor projects, and poor governance worsened the circumstances in these countries. Thus, there was no generation of money that was expected at the time of borrowing. The failure to earn foreign exchange could be noticed as these governments were not honest in developing policies for the benefit of people. The story does not end here. Natural and man-made disasters including civil wars, floods, droughts, and ineffective economic aggravated the building up of the debt. More loans were received simply for giving out service existing debt (Lerda 17).
However, certain financial operations were carried out to rescue these countries. These measures included the tightening of the macroeconomic conditions as well as adjustments in structure. Privatization and liberalization were also introduced to make countries grow and develop again. The principal creditors in the world also played a decisive role for saving the commercial banks and the international economy (Kahler).
Works Cited
Dodhia, D., and T. Johnson. Mainstreaming Gender in Debt and Development Resource Management : A Handbook for Debt Practitioners and Gender Advocates. London: Commonwealth Secretariat, 2005. Print.
Kahler, Miles. The Politics of International Debt. Ithaca: Cornell UP, 1986. Print.
Lerda, V. G. Which "Global Village"? : Societies, Cultures, and Political-economic Systems in a Euro-Atlantic Perspective. Westport, Conn.: Praeger, 2002. Print.
