The Debt Trap: Foreign Aid and Structural Adjustment “As Mao Tse-Tung warned his cadres as they took power in China in 1949, the ‘sugar-coated bullets of the bourgeoisie’ are likely to prove more fatal to a revolution than real bullets” (Payer, The Debt Trap, 1974)

Review: TNCs and the global economy What are TNCs? FDI? How have they developed? Postwar growth of transnational production – geographical shifts – temporal trends – sectoral changes Types of TNCs – geographic expansion (market access) – Specialization (global assembly line) Roles in global economic development

Group exercise: Assessing the Impact of FDI Considerable debate is taking place about the impact of FDI and TNCs in third world countries. What are the benefits and/or disadvantages to this investment? How does it impact local firms, employment, infrastructure and overall development? (Write down your findings and prepare a brief report for the class.)

Overview: The Debt Trap 1. Why borrow? Why Loan? Global Finance and International Development 2. Bilateral Foreign Aid 3. Bank Lending and the Debt Crisis 4. Multilateral Funding and Structural Adjustment Programs

1. Introduction to Global Finance and International Development Context for international borrowing and lending … why loan money to the poor? – Economic disparities between 1 st and 3 rd world – Finance economic growth – Lack of domestic savings – Unequal and declining terms of trade

Temporal and Regional Patterns of Lending Temporal shifts Largest increase late 1970s to mid 1980s (see graph) Regional Patterns Latin America largest borrower Asia (NICs) 2 nd largest Africa lowest

Major Sources of 3rd World Financing 1) Bilateral foreign aid 2) Bank lending 3) Multilateral lending

1. Bilateral Foreign Aid Government-to-government lending – Development projects E.g. dams, roads, infrastructure – Food or other resource provision – Human labor e.g. Peace Corps, medical personnel

Bilateral Lending (cont.) Tied aid – Conditional lending Disadvantage to borrowing country – Reduces money spent domestically – Not necessarily best price or appropriate good – Negative for local producers – focus on large-scale vs. grassroots development

How much do they give? “On average, first world nations have provided 0.33% of their GNP as foreign aid during the last 20 years” (Porter and Sheppard, p. 514). Top givers Holland and Scandinavia (1% of GNP) Bottom givers United States (0.2% of GNP) (compare to amount spent on military)

Motives for giving … ? - Geopolitical importance E.g. military bases - Historical connections E.g. former colonies - Encourage market-oriented development - foster competition and the private sector

2. Bank Lending and the Debt Crisis Trends in private bank loans (graph) Reasons for lending (from areas of surplus to shortage) – Rising oil prices – NIC growth – Increasingly available petrodollars

High risk loans … the bubble is growing Brazil $1.5 billion per month in 1982 Rising inflation – Impact on repayments Most loans to a few countries – 4 L.A. countries and 1 Asian co. 60% of loans – Little to Africa

Origins of the Debt Crisis … the bubble bursts 1) Strengthening of dollar – $ value increased – Higher interest rates 2) Decreasing income from exports – Declining value of primary commodities – Debt burden 3) Capital flight – Money overseas in financial havens

Consequences of the Debt Crisis Request for moratorium on debt repayment – Esp. Latin America Less foreign lending in 1980s Widespread impact on global financial system

3. Multilateral Funding and Structural Adjustment Programs IMF and World Bank background – ‘Twin’ institutions – Established in 1947 with Bretton Woods – Global financial cooperation vs. national controls – fixed exchange rates

Structural Adjustment Programs (an invention of Harvard economists) Objectives Establish conditions for IMF loans Economic reform Push for free trade and market competition – Versus state control Implementation 1) Deflationary policies 2) Export oriented economy 3) Liberalize trade

In many Third World countries, “candidates for President or Prime Minister campaign for election on a platform of opposition to the IMF. Months after the election is won, the same leaders forget their campaign promises and come to terms with the IMF - having found it as impossible to live without it as to live with it” (Payer, The Debt Trap, 1974).

Implications of SAPs Reduced government spending Lower wages High unemployment Cut social services Effects on women and households

Review: The Debt Trap 1. Exploring postwar economic development 2. Foreign aid linked to historical processes 3. The Debt Crisis grew out of Diffusionist path to development 4. Serious and long-term implications for developing countries