Essay on "Political and Economic Implications of International Debt"

Essay 6 pages (1677 words) Sources: 10 Style: Harvard

[EXCERPT] . . . .

Political and Economic Imlications of International Debt

International debt can be seen as an element part of the international financial infrastructure. At its surface, one can consider it as a way by which governments add money to their budgets in order to be able to increase their governmental spending on projects which will benefit the population. However, this is an extremely one-sided, positive perspective.

Sometimes, as was the case with Argentina, international debt and foreign borrowing is used as a mean to finance governmental deficits rather than concrete projects. At other times, the macroeconomic imbalances that these debts create bring less rather than more to the country. Finally, some argue, and history seems to provide examples in this sense, that international debt is often used simply to create and exercise political influence over the recipient state. The book Confessions of an Economic Hit Man, by John Perkins, gives good arguments along this path, following his experience with World Bank.

Historically, international debt has been used as an instrument of political pressure. For example, many of the former colonies have purchased their independence either by having to pay off a large some of money, which usually had to be borrowed from the recipient state as well, or by accepting all or part of the colony's international debt (as was the case with the independence of Indonesia from Holland, for example). This meant that these newly independent states would start off with a heavy financial burden, which was nothing of their doing.

On the other hand, John Perkins makes firm accusations as to how international debt was used as a political pressure and instrument against the recipient government. First of all, one needs to remember that most of the international debt was issued in the period of the Cold War, during a time when the United States and the Soviet Union were battling for world domination and, especially, for splitting up the world into spheres of influences.

International debt could be well used in this conflict. Take the example of the United States, a country able to export capital into developing and third world countries. The capital export could have been done either through the U.S. multinationals or in the form of governmental loans, including through financial institutions like the IMF or the World Bank. As the developing country would accumulate more and more debt, the macroeconomic imbalances that were created meant that, at some point, it would default on its credit. The case of Argentina is eloquent in this sense, but the debt crisis of 1980s really showed how the developing countries had really overextended their capacity to absorb foreign loans in a sustainable manner.

Not being able to repay international loans meant several things from a political perspective. First of all, it meant that the country lost its credibility on the international financial markets. The loss of credibility would mean that, for a certain period of time, the country would be denied access on the international market. It would not be able to either borrow or participate in any way to the international circulation of capital. This was the case with Argentina after its default in 2002, when the country was excluded from the international financial markets for 4 years.

Second, the retainers of the country's foreign debt can impose political pressures on the receiving country, in different forms. The most obvious form, advocated by John Perkins in his book, was that they would request political favors in exchange for financial facilities or for accepting the fact that the country would not be able to pay off its debt. As mentioned, especially in the context of the Cold War, this was essential. On the other hand, with instruments that allow for the debt to move around owners, the political pressure could come from third parties and other interest groups as well, not only governments.

Third, the political pressures were also internal. Romania could be a good example in this sense, a case where the problem of international debt had an impact several years after being paid off by toppling the Ceausescu regime. The Romanian regime had acquired important loans on the international markets during the 1970s, however, this was generally done with variable interest. Following the trend of the international markets, the interest rate went up during the late 1970s, causing the necessary payment and annuities to increase. The reaction of the Communist government was typical: it declared that a state policy would be the complete payoff of the loan (this actually occurred in 1989) and much of the 1980s was used in this sense, with most of the exports and money from exports being used to payoff the international debt.

However, this accumulated in a large deficit of products on the internal market and the population was obviously the first to really feel this. The 1980s were marred by electricity cutouts, lack of consumer products and a constant degradation of the standard of living in Romania. In 1989, the population rose and toppled the regime, exactly because of the economic problems. The international debt produced a political effect in the country long after it had been contracted and even after it had been paid off, months before the revolution.

We have presented some of the political implications of international debt and these are all negative.

However, that is not necessarily always the case. In all the situations previously described, the recipient government generated its own problem by bad national financial management. The fact that the country had to default on its debt was let the fault of those that had given the debt as of those who were incapable of evaluating the right levels of debt and of keeping a healthy financial situation that would have not run huge budgetary deficits.

International debt can have positive implications as well. It assures the participation of the recipient government on the international financial markets and allows it do identify the best option for the country by creating a network of links and contacts.

From an economic perspective, the implications of international debt for the national economy depend, in fact, on the way the debt is used and on the macroeconomic stability of the country incurring the debt. For example, in Argentina and numerous other developing countries, international debt contracted on the financial markets was used to finance the budgetary deficit. What this meant, from a macroeconomic perspective, was, in fact, that the country was spending much more than it was gaining. Additionally, pegging the national currency to the U.S. dollar, in order to combat the rampant inflation during the late 1980s, meant that the internal currency could not be devalued in order to finance the deficit in this manner.

However, as mentioned, it always depends on the way the recipient government uses the funds from international debt and how viable and efficient the projects being developed are. According to John Perkins, many of the projects in developing countries, including dams and other such infrastructure, were not really viable, under either economic or financial conditions. They cost more than the market average, generally because the companies contracted were imposed within the loan agreement.

At the same time, many of them could not be continued after some point because they were requiring recurrent payments, which the country and government often could not afford. Finally, if and when they were completing, usually way over the initial budget, they were not providing the expected returns or simply not enough to cover the costs of the production. In countries where the international debt was used to finance viable projects, these ended up usually paying the loan itself.

Nevertheless, in many of the developing countries, the impact of international debt was a thoroughly negative one. The reason for this was also given by the position that these… READ MORE

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