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Causes of Debt Crisis
Causes of Debt Crisis
Causes of Debt Crisis
OF THE AFRICAN D E B T C R I S I S
Alex Danso
tries. Needless to say, the debt crisis has become the central issue in
North-South relations. It has stimulated a voluminous literature which has
tended to focus on the plight of large Latin American debts and the
possible effects on the international economy if one or more of them were
to default. Recently, however, there has been a growing international
awareness that Africa is also suffering from increasingly severe debt
problems. Although Africa's debt is much smaller than that of other
continents, it is the most serious in the world because it is based on
smaller economies. 2 The purpose of this article, therefore, is to discuss
the causes and impact of Africa's external debt.
The causes of Africa's debt are neither single nor simple; they are the
result of the complex interaction of many factors. There are those writers
who perceive the debt problem as a free-standing financial problem with
purely financial causes and solutions) Suffice it, however, to say that the
causes as stated before are several and interlinked, making it difficult to
attempt to assign appropriate weights to them. Some writers isolate the
causative factors into their respective camps: the debtor nations, private
lending institutions, creditor nations, and the structure of the international
financial system. 4 Other examiners of causality take the 1970s as the
point of departure and ascribe the causes to the international surplus
liquidity conditions resulting from adjustments to oil prices and increases
in U.S. interest rates. 5 The contribution of these factors notwithstanding,
it should be pointed out that the ultimate causes lie beyond these. They
are both exogenous and endogenous! The discussion begins with the
exogenous factors.
The deeper cause of the debts can be traced to the historical appearance
of colonialism and the emergence of western capitalism in developing
countries. Here, Samir Amin contends that the colonialists forged and
sustained economic regimes which cast the colonies into permanent pro-
ducers of raw materials with the sole purpose of satisfying the economic
demands of the metropoles. Each colonial economy became characterized
and dominated by one primary product. The colonial economy was struc-
turally linked to the metropolitan economy because each produced for and
sold to companies in the metropolitan countries and thus depended on the
economy of the metropolitan countries to purchase and dictate the prices
of its products. 6 Thus, the international division of labor bequeathed a
Danso 7
legacy of raw material production and export to the colonies without any
infrastructural base for processing them. The concomitant result was that
the colonies produced what they did not consume and consumed what
they did not produce.
Attendant to this paradox is also the serious fluctuation in the prices of
the commodities. They continued to fall while at the same time, the prices
of the products of the advanced countries rose steadily. This is vividly
illustrated in the case of Cuba where, according to President Fidel Castro,
in 1959, Cuba's earnings from the sale of 24 tons of sugar could buy a
60-horsepower tractor. But by 1982 and 1986, it required 115 tons and
133 tons of sugar respectively. 7 With weak economies, pressure to pro-
vide basic necessities of life, desire to invest in infrastructure coupled
with the establishment of full-pledged government administrations, the
African governments had no choice but to resort to borrowing from
abroad--upon the attainment of political independence. 8
Other writers such as Pradip Ghosh have argued that the signing of the
Bretton Woods Agreement--which first created the current world eco-
nomic system--soon after the Second World War, directly worked to
cripple the economies of African countries because the agreement estab-
lished a system which made their economies even less competitive on the
international market. 9 According to Ghosh, as primary commodities pro-
ducers, African countries have been negatively affected by some restric-
tions the agreement instituted; for example, a trade structure which al-
lowed the industrial countries to increase their tariffs on African products
if the products were processed. And then, again, African exports to the
European Economic Community for example, were subject to quotas and
minimum price rules. Ghosh notes in particular, the roles the General
Agreements on Tariffs and Trade (GATT) and the International Monetary
Fund (both creations of the Bretton Woods agreement) have played in the
exercise, lO
The General Agreement on Tariffs and Trade (GATT), established in
1947, ostensibly sought to regulate and promote international trade among
nations. The most significant principle of the GATT was the principle of
reciprocity which required that a country that benefited from another
country's lowering of trade barriers should reciprocate to an equivalent
extent. But, Finlayson and Zacher have observed that the GATT worked
to sustain the continued domination of the developed nations and to the
disadvantage of the young economies of the Least Developed Countries
(LDCs), including those in Africa.ll This was so because reciprocity
dictated that states receiving tariff reduction for exports be able to offer
The Review of Black Political Economy/Summer 1990
coffee, tea, sugar, ground nuts, sisal, phosphate, and uranium produced
by African countries catapulted and then dropped steeply. Several of the
affected countries responded to the initial commodity price increases by
expanding public expenditure. When the commodity prices came tum-
bling down, expenditures were not curtailed commensurately, and pre-
vious loans were often supplemented with new Eurodollar loans to main-
tain expenditure levels. 22 Lending on the part of the unregulated banks to
the African countries was a blessing for both sides. The banks sought new
loan markets which were readily available in developing countries. To
them, developing countries presented a tremendous capitalist growth po-
tential. Also, as Walter Wriston, Chairman of Citibank opined, "Loans
to developing countries could never go bad because countries do not fail
to exist. ,,23 They could tax their citizens and also requisition their assets
as a last resort to pay the debts. 24 The governments of developing coun-
tries welcomed the loans for several reasons: they needed funds to pay the
huge costs of oil imports. Secondly, they needed funds to finance pro-
ductive development projects. Finally, they borrowed because, at least in
the beginning, the money was cheap. In the 1970s, interest rates were
never much higher than, and often below, the rate of price inflation.
Therefore, developing countries that borrowed could repay their debt
obligations at a "real" interest--borrowing costs minus the inflation
rate--that at the time was zero and often times negative. The fact of the
matter is that these loans were contracted under floating interest rate
agreements under which debtors' payment obligations fluctuate along
with changes in market interest rates. It needs to be pointed out here that
beyond the apparent low cost of borrowing, the other obvious attraction
for debtors in Africa was simply having so much money to spend. As
Albert Wojnilower of Wall Street put it, "few could resist the narcotic
attraction to borrowing. ,,25 The African elite, living in poor countries,
courted and feted by the world's biggest bankers, succumbed readily. So
successfully did the international financial system cope with the flood of
Eurodollars that the OPEC surplus had dwindled from more than $68
billion in 1974 to $3 billion in 1979. It is generally estimated that the
magnitude of Africa's borrowing was a small fraction of Latin America's
$272.9 billion. The problem, however, was that in Africa's case, the
extent of waste and corruption was proportionately higher. 26 This expan-
sion of the external indebtedness contributed to the rapid growth of de-
veloping countries more so than that of the large industrial countries. The
loans, taken primarily for purposes of expanding export capacity, pro-
vided the additional foreign exchange necessary for servicing the result-
Danso 11
ing external indebtedness. Between 1975 and 1979, Africa's debt ex-
panded by 25 percent annually, while exports stood at 22 percent.27
The fortunes of African economies ran short with the 200 percent
increase in world oil prices in 1978-79. Even though the percentage
increase was smaller in comparative terms than that of 1973-74, the
dollar effects were much greater, primarily because the increase started at
a much elevated level, at roughly $13 per barrel in 1978, as opposed to
$3 per barrel in 1973. Penelope Hartland-Thunberg sums up the devas-
tating impact thus:
The second oil price shock produced the most severe recession in
the industrialized countries in nearly half a century. The tragedy of
this recession was that it should never have happened. It was totally
avoidable. The second oil price increase was not the result of an
OPEC initiative; rather, it was the result of panic among oil buyers
in countries highly dependent on oil imports. Those in Germany and
Japan first, (but quickly followed by all of the others) fearing for the
security of their oil supplies, started to purchase oil in the spot
market despite the fact that inventories at the time were ample.
Increased demand in the spot market caused spot prices to rise. The
OPEC countries then raised their official prices, trailing the spot
price upward. If measures had been taken in the industrialized coun-
tries to curtail these panic induced spot purchases, the second oil
price shock and the consequent deep world recession could have
been avoided. 28
Students of the debt crisis have noted that the primary reason for the
severe recession resulting from the second price shock was the different
U.S. policy reaction. 29 Basically, by 1979, the United States was no
longer in a position to choose between fighting unemployment or infla-
tion. Consequent to the second oil price hike, inflation, which had been
galloping in the United States, jumped into the double digits. This pro-
duced an almost unanimous public opinion about the danger of further
price increases. Macroeconomic policy, especially monetary, was tight-
ened, interest rates started to rise, GNP declined and unemployment
mounted. Other industrialized countries more or less willingly followed
essentially the same policies. The world settled into recession. 3~
This recession, the most severe since the Great Depression meant, first
of all, that export markets for developing countries' non-oil raw materials
crashed; falling by an average of 30 percent in 1981-82. What is more,
12 The Review of Black Political Economy/Summer 1990
rica's ability to feed itself. Since the early 1960s, the production of food
per person has been falling in Africa. It declined in thirteen countries
during the 1960s, and in thirty-two during the 1970s. Since Africa's
nutritional levels have always been inadequate, the result of falling food
production per person has inevitably been a rise in imports financed
largely through foreign borrowing. Between 1961 and 1971, Sub-Saharan
Africa imported an average of 1.2 million tons of food grains a year; in
1977-79 the imports doubled to 2.4 million tons a year and then peaked
at 8.7 million tons annually in 1980-82. In monetary terms, Africa spent
$1.1 billion a year in 1969=71 on agricultural imports; by 1980-82, the
average annual cost had reached $6.8 billion over and above food aid
received. 37
Another important link in the chain of endogenous factors of causality
is the absence of statutory taxes, the lack of a tax base, and the notori-
ously inefficient tax administration in African countries. This state of
affairs has led to the serious lag behind spending of public income,
culminating in sharp rises in public sector deficits which have had to be
financed through foreign borrowing and domestic bank credit and infla-
tionary monetization of the debt. 38 It is common knowledge that the
accumulation of savings is a sine qua non for further investment. How-
ever, several African countries lack a savings base. Others do not have
efficient and cost-efficient national banking systems--indispensable in-
gredients for the cheap and quick transfer of savings to productive in-
vestments. Suffice it to say that the more national investments that can be
financed by domestic savings, the less the need for foreign savings and
foreign credits.
Scholars have emphasized the factor of inadequate domestic economic
management, partly reflected in inappropriate fiscal and monetary poli-
cies of African countries. 39 These countries, for political reasons, main-
tain overvalued national currencies which have the effect of making im-
ports cheaper and encouraging the expatriation of capital. Estimates by
the African Centre for Monetary Studies showed that real exchange rates
rose in eighteen of nineteen African countries between 1963 and 1977-
78. The International Monetary Fund, too, later estimated that between
1980 and 1983, sixteen out of thirty-two countries had an appreciation in
their real exchange rates, nine of them by 20 percent or more. Five
countries, however, had a depreciation of 20 percent or more--a sharp
contrast to the 1970s. 4~Writing for the Twentieth Century Fund, Pennant-
Rea argued that the exchange rate issue cannot be understood except in a
wider political context. He succinctly explained that just like most de-
14 The Review of Black Political Economy/Summer 1990
Scarce resources which could have been used for productive ventures are
diverted to unproductive and ambitious projects. Other mishaps, man-
made and nature's, such as drought and famine have all contributed to the
debt crisis.
As we have seen, several factors have contributed to the debt crisis
facing Africa--forcing it to divert whatever paltry funds it once devoted
to health, education, employment, and welfare into debt servicing and
budget balancing. The next section discusses the impact of the debts on
Africa.
famine relief programs, for every British pound given in famine relief to
Africa in 1985, the West claimed two pounds in debt payment. 53 The
current scenario is that for every pound put in a charity tin, the West's
financial institutions take out nine pounds. 54 Consequent to this debt, the
IMF has imposed so-called fund arrangements on several African coun-
tries. In early 1987, of 42 countries world-wide with Fund arrangements,
25 were from Sub-Saharan Africa, compared to late 1984, when 14 out
of 45 countries belonged to the region. The total IMF loan facilities
extended to the region as of 1987 amounted to $1.8 billion as opposed to
$2 billion in late 1984. At the same time, undrawn balances on such
facilities amounted to $1.4 billion as against $1 billion in late 1984.
Again, as Antonio-Gabriel Cunha commented:
Needless to say, Africa's debt crisis absorbs resources and energies that
should have been used to tackle urgent social problems. Consequently,
according to UNICEF, over 1,000 people are dying each day in Africa. 56
Infant and child deaths are increasing yearly, and projected again, by
UNICEF to total 50 million between 1985 and 2 0 0 0 . 57 The World Bank
estimates that over 280 million in the rural areas of Sub-Saharan Africa
live in abject poverty--
lost hope. They no longer believe that their struggle for survival will
make life for their children any better than it has been for them. 58
The debt crisis and its concomitant Structural Adjustment Programs (SAPs)
have created a somber picture of the human condition. Every sector of
African society has suffered. For example, in Nigeria, there were 50,000
commercial vehicles plying the Lagos metropolis in 1982. 59 However,
this figure had dwindled by more than half to less than 20,000 in February
1989, as a result of the country's Structural Adjustment Program (SAP).
The scenario is that with SAP, the hopes of buying new vehicles are thin
and the cost of repairing old ones high. Again, in Nigeria, at least fifty
people were reported to have died in Lagos and eight in other parts of the
country in student protests against the country's Structural Adjustment
Program, 6~ the primary IMF prescription for the debt crisis. There have
been similar demonstrations in North Africa, Zambia, and Senegal.
Susan George illustrates the tragi-comic character of the African situ-
ation with a story in the Zambian capital, Lusaka:
The tallest office building in the capital is 23 stories high and has
one elevator in working order. Office employees patiently wait for
their turn to stuff themselves into it. No one bothers to push buttons;
they simply shout out their floor numbers. As if by magic the
elevator stops at their floors. What they are shouting at is not the
elevator but the operator. They shout because he is standing on top
of the elevator car manipulating a jerryrigged control device, that
with frequent breakdowns, keeps the elevator moving and prevents
Zambia's most prestigious building from losing its tenants. 61
A default by African debtor countries alone will not cripple the world
economy. However, a collusive action on the part of both African and
Latin American debtor nations in forming a debtors' cartel to renounce
their indebtedness would definitely lead to an international financial Ar-
mageddon. As of now, the continued flow of interest payments to the
creditor banks has maintained the status quo, willy-nilly. However, once
the conviction [arises] that African debtor nations, and for that matter
Danso 19
CONCLUSION
The foregoing discussion has shown that the causes of Africa's debt
burden are multifaceted. A combination of external and domestic factors
have caused Africa's debt problems. The debt crisis is absorbing re-
sources and energies that should have been used to tackle urgent social
problems. Indeed, it has turned a highly unjust form of economic devel-
opment into an intolerable one which requires the attention of both cred-
itor nations/banks and debtor nations. Any further belt tightening to squeeze
funds from debtor nations to pay for the debts may be politically intol-
erable, as we have witnessed in Zambia, Senegal, Nigeria, and other
parts of Africa.
There are many options for dealing with the debt crisis. Some of them
can be initiated by creditors, others by debtors. Suffice it to say that only
remedies that stand much chance of success are those on which both
debtors and creditors agree. There is, indeed, the urgency for Africa to
tackle its numerous sociopolitico-economic problems. In so doing, we are
not saying that it is undesirable for African countries to borrow from
abroad; in our view what is undesirable is the failure to use foreign capital
to boost exports and gross domestic product. The responsibility for that
failure rests unquestionably with African political leadership. Anybody
who wants Africa, the world's poorest region, to become less poor cannot
ignore its foreign debt. It is only when Africa begins to get on top of that
debt that it will be making real economic progress.
NOTES
1. West Africa, (7 March 1988): 412.
2. West Africa, (8 February 1988): 215.
3. Penelope Hartland-Thunberg, "Sources and Implications of the Global Debt Cri-
sis," Washington Quarterly 9 (1985): 105-108.
4. Patrick Decoodt, "The Debt Crisis of the Third World: Some Aspects of Causes and
Solutions," Columbia Journal of World Business (Fall 1986): 4-7.
5. Jeff Haynes, Trevor W. Parfitt and Stephen Riley, "Debt in Sub-Saharan Africa:
The Local Politics of Stabilization," African Affairs 86 (1987): 350.
20 The Review of Black Political Economy/Summer 1990
6. Samir Amin, Net-Colonialism in West Africa (New York: Monthly Review Press,
1974), pp. 29-30.
7. John Clark, For Richer, For Poorer: An Oxfam Report of Western Connections
With World Hunger (1986) quoted in West Africa, (29 June 1987): 1250.
8. Peter C.W. Gutkind and Immanuel Wallerstein, Political Economy of Contempo-
rary Africa (London: Sage Publications 1985), p. 36.
9. Pradip K. Ghosh, ed., Developing Africa (Westport, Conn.: Greenwood Press,
1984), p. 53.
10. Ibid. p. 60.
11. Jock A. Finlayson and Mark Zacher, "The GATF and the Regulation of Trade
Barriers: Regime Dynamics and Functions," International Organisation (July 1981):
690-715.
12. Ibid., p. 716.
13. Antonio-Gabriel M. Cunha, "African Debt: A Light at the End of the Tunnel?",
Africa Report (May- June 1987): 26.
14. Susan George, A Fate Worse Than Debt, quoted in West Africa (7 March 1988):
413.
15. Ibid.
16. Rupert Pennant-Rea, The African Burden (New York: Priority Press, 1986): 18.
17. West Africa, (3 October 1988).
18. Ibid.
19. Joshua Greene, "The Debt Problem of Sub-Saharan Africa," Finance and De-
velopment (June 1989): 10.
20. J.C. Sanchez Arnau, Debt and Development (New York: Praeger, 1982), p. 10.
21. Hartland-Thunberg, "Sources and Implications of the Global Debt Crisis," p.
107.
22. Green, "The Debt Problem of Sub-Saharan Africa," p. 10.
23. Robert Pollin, "The Abyss of Third World Debt," Monthly Review (March 1989):
58.
24. Peter T. Bauer, "Accounts Receivable," in Herbert M. Levine, Worm Politics
Debated (New York: McGraw Hill, 1987): 221.
25. Polin, "The Abyss of Third World Debt," p. 56.
26. Ibid.
27. Hartland-Thunberg, "Sources and Implications of the Global Debt Crisis," p.
106.
28. Ibid.
29. Ibid.
30. Ibid., p. 107.
31. Pollin, "The Abyss of Third World Debt," p. 57.
32. Patrick Decoodt, "The Debt Crisis of the Third World: Some Aspects of Causes
and Solutions," Columbia Journal of Worm Business (Fall 1986): 4.
33. See for example, Bahram Nowzad and Richard C. Williams, "External Indebt-
edness of Developing Countries," Occasional Paper, No. 3 (Washington, International
Monetary Fund, May 1981); E. Brau and R.C. Williams, "Recent Multilateral Debt
Restructurings with Official and Bank Creditors," Occasional Paper, No. 25 (Washing-
ton, International Monetary Fund, December 1983).
34. Robert Heller and E. Frankel, "Determinants of LDC Indebtedness," The Co-
lumbia Journal of Worm Business (Spring 1982): 28-34.
35. Robert E. Looney, "Impact of Military Expenditures on Third World Debt,"
Canadian Journal of Development Studies 8 (1986): 8.
36. West Africa, (25 May 1987): 1008.
Danso 21