Debt Crisis, Commodity Prices, Transfer Burden and Debt Relief

Abstract

The period of the 1970s experienced a tremendous growth of debt of the less developed countries (LDCs). Between 1970 and 1980, the debt of the LDCs grew fivefold to $580 billion. Much of this growth of debt was accounted for by liberal lending of transnational commercial banks (TNBs). The turning point came in 1982 as Mexico announced that it could not pay its debt. This signalled banks to stop their lending operations in the LDCs. Already OPEC deposits had started falling with falling oil prices. Besides, banks found other borrowers as 'the recovery of the industrial countries from the recession of 1982 has been strong and so far without interruption.This Herculean debt burden posed a great challenge to the LDCs. This led to import compression, lower investment and reduction in per capita consumption.The debt crisis has become a growth crisis for the debtor LDCs.This immiserisation of poor debtor nations in spite of 'steady and prolonged growth' in the OECD countries points to some inherent defects of the world economic system. This paper discusses the details of causes and consequences of the crisis.

Keywords: debt crisis, transfer burden, less developed countries, IMF, World Bank

JEL Classification: F01, F02, P16, N10, N20, O19, O50