Monetary Fund and World Bank
The dilemma did not arise from the simple fact that third world countries received economic aid in lieu of their support of the US and free world interests8. Rather, the dilemma arose from the fact that the economic aid in the form of loans, were of an unsustainable nature. To help illustrate this concept, knowledge of the original Ponzi scheme engineered by Charles Ponzi of Illinois, Ohio in 1919 is necessary. Charles Ponzi, a young man of 19 years of age offered to double the capital of investors in his company.
He argued that by purchasing International Postal Coupons and redeeming them in a country with a higher exchange rate, he could provide fabulous returns9. As a result, the initial few investors received just that: fabulous returns on their investment. Unbeknownst to them and later – more unfortunate investors – was that Ponzi was paying the initial investors not from profits derived from the actual business, but from the investments of later investors. Henceforth, all situations in which the initial payments are made through further investment are termed as Ponzi schemes.
The third world debt dilemma could be known as the largest Ponzi scheme of all time. The trait of the Ponzi
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As stated above, the international debt crisis developed through stages embodying characteristics of a Ponzi scheme. When debt levels were low and the payments became due on the initial loans, more creditors offered their assistance. Thus, the net flow of capital increased and total public debts soared dramatically. With increased debts came increased debt servicing payments. As more money was directed towards interest payments, public spending budgets were slashed. The drops in public sector investment resulted in adverse effects on private investment and consumer spending11.
Gradually, basic services saw a decrease until the situation became dire and attracted some international attention, but the creditors remained heedless to the suffering of average citizens. In 1982, the Mexican government defaulted on their payments and refused to pay anymore, arguing that they were in no position to do so. Other countries in South America followed suit; Argentina, Brazil, and Bolivia are only some of the many examples12. The International Monetary Fund and World Bank made efforts to restructure debts, help with the payments and extend maturity dates on bonds.
However, none of these efforts resulted in any significant gain or improvement regarding the sustainability of the debts. The slight variations in interest rates and small percentages of debt deduction proved to be inadequate in relieving the situation, but resulted in only a respite between crises13. And in certain cases, as with Bolivia, total debts following the debt restructuring were greater then the preceding figure. During these critical times, US Senator Bill Bradely devised a solution to the woes of debt sustainability.
Bradely proposed cuts to the principle and interest rates so as to allow the countries to repay their loans. Bradely argued that such a measure should be enacted by the creditors, especially the American government, on the basis that for every dollar spent on debt service payment, there was one less dollar spent on purchasing American imports. This plan met with little success in the US government and was collectively regarded as a failure, even though the Bradely Plan could be a solution to the challenge of debt sustainability14.
A broad spectrum of solutions have been devised and proposed by various organizations. Although to date, none have succeeded in resolving the problems. This is in part due to the fact that multilateral creditors such as the IMF and World Bank do not agree to resolutions in which a substantial degree of goodwill is involved. Their only concerns for their clients arise from the fact that the clients owe them money. During the onset of the new millennium, a new movement called the Millennium Jubilee was initiated to lobby creditors into forgiving the third world debts for the most severely indebted countries15.
It is surprising that in our present day society there are still those who believe that lobbying is a viable option in persuading organizations such as the IMF in pursuing a course of action that is consistent with the interests of humanity and public opinion. Therefore, in order to resolve the current dilemma regarding the sustainability of debt by under-developed countries, immediate and effective solutions have to be executed for the benefit of the entire world, both economically and environmentally.
Debt sustainability has become the root for almost all other aspects of sustainable development for many countries in the world. Aspects of sustainability such as fishing practices, forestry management, wildlife preservation, and environmentally friendly development all depend on the issue of debt sustainability. Without the challenges encountered by developing nations caused by heavy debts, they would be in a better position to deal with the dire and urgent needs of their citizens that account for roughly one third of the world’s population.