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 1st and 3rd
world
– Finance economic growth
– Lack of domestic savings
– Unequal and declining terms of trade
Temporal and Regional
Patterns of Lending
Regional Patterns
 Latin America
largest borrower
 Asia (NICs) 2nd
largest
 Africa lowest
Temporal shifts

Largest increase late
1970s to mid 1980s
(see graph)
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


Implementation
1) Deflationary
policies
Economic reform
Push for free trade and
market competition
– Versus state control
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