The debt crisis that plagues much of the global south was brought about by two main factors: the foreign exchange constraint and the continual drain on the global south’s economy by institutions like the World Bank and the International Monetary Fund (IMF). These factors were exploited by the US political and economic elite to dismantle the national-developmentalist project in the global south in order to economically benefit first world, or core countries. This exploitation has caused increased poverty and debt in the global south, along with many serious social side effects.

In order to understand the debt crisis and its factors, one must first understand the world system theory and the national-developmentalist project. The world system theory is a way to divide up labor in order to determine relationships between different regions of the world as well as labor conditions within each region. These regions are broken up as follows: the core countries, which are made up of advanced industrialized nations; the semi-periphery, which is made up of less developed countries not quite at the core level of industrialization; and lastly the periphery, which is made up of third world, underdeveloped countries subordinate to the core. The national-developmentalist project was originally started by the core countries (US, England, Japan) as a benevolent way to support the periphery. This project outlined ways to deal with common peripheral problems: it set up protective tariffs to support a peripheral country’s own industries, it subsidized credit with low interest loans to help its economy, and most importantly it set up controls on foreign domestic investments (FDI). These controls forced foreign companies to return profits and goods taken from a country back to that countries economy.

The core and the periphery have a relationship governed by what is known as the foreign exchange constraint. This constraint is the external foreign domination of agro-export and extractive industries in a peripheral country. In essence, a peripheral country would design itself from the ground up so that they could develop goods for a core country more efficiently; this practice strongly benefits any core country, because an advanced infrastructure in a peripheral country meant a cheaper and more easily produced product. One institution, the World Bank, would lend money to a peripheral country so that it could beef up its infrastructure to speed along production. Once highways, factories, power plants, dams, and other sorts of infrastructure were built, all on a loan to a core country, the affected peripheral country was in a tight situation: they could go bankrupt under the weight of the debt, or produce cheap products and goods to sell to a core country in an attempt to pay it off.

This foreign exchange constraint gave rise to a problem in core countries: over accumulation. Over accumulation happen when what a country exports does not make up for what a country imports. Specifically, in the US, we export very little, while importing a great deal. In most countries this would be impossible: to import most goods, dollars are required as payment. Here in the US, where dollars are created, we can simply print more and more as we need them. This means that the US economic and political elite need to keep foreign countries continually supplying the US with cheap labor and goods, thus calling for a way to financially manage these countries and keep their import and export balance equal, or their balance of payments.

This need for an institution to manage the foreign balance of payments helped to create the International Monetary Fund (IMF). The IMF was set up at a United Nations conference in Bretton Woods, New Hampshire, in July of 1944. Its stated purpose was to build a framework so that all countries could avoid financial ruin and to promote the health of the world economy. However, the IMF helped to drive countries in the global south even further into debt, using what are called adjustment loans. These loans, meant to even out a countries balance of payments (imports vs. exports), had strict conditionalities with them. When the IMF loaned a country money, that country had to lower its interest rates, causing the country’s economy to contract, thus slowing imports down. Next, government spending had to be cut, affecting all aspects of the government, from the military to education. Lastly, after these two conditionalities were met, devaluation would occur. Devaluation meant that a country’s currency would begin to become worth less and less. Since payments to the IMF to pay off adjustment loans had to be in “hard currency” or currency that is from a financially stable country (the US), countries with a devalued currency found it very, very hard to overcome their debts. For example, if Mexico borrowed money for an adjustment loan from the IMF, their peso would be devalued. So if 1 peso equaled 1dollar before devaluation, after devaluation, 1 peso equaled a 1/2 dollar. Mexico would have to pay twice as much to pull themselves out of debt.

These tactics taken by the US economic and political elite to dismantle the national-developmentalist project in the global south have had highly negative effects on peripheral countries, causing a dependence of the periphery on the core. The debt crisis, brought about by institutions like the World Bank, the IMF, and the foreign exchange constraint, is being perpetuated by these institutions by keeping countries in the global south in a state of constant, unrecoverable debt.

Sources:
The International Monetary Fund (2003)
www.imf.org

National Developmentalist Article (1997)
www.soci.canterbury.ac.nz/courses/ anthropology/anth204/204May26.pdf

3rd World Debt Crisis (2001)
http://www2.gol.com/users/bobkeim/money/debt.html

Summary of Wallerstein on World System Theory (1997)
http://www.fordham.edu/halsall/mod/wallerstein.html