External Influences on Third World Debt

At over one billion dollars in the late 1980s, Third World debt precipitated a variety of crises for the actors affected. On the one hand, it jeopardized the profitability of leading transnational banks. On the other, it involved a massive outflow of capital from the Third World, which endured a fall in both consumption and investment. The transnational banks and their home governments responded by demanding that the Third World impose austerity programs, which aimed to reduce consumption in order to enhance investment and maintain debt-service payments. To that end, Western creditors demanded the adoption of free-market policies. The logic of the austerity programs seemed deeply flawed, however. On the macroeconomic level, they derived from highly aggregate analyses, ignoring the sectoral disparities that define Third World economies. They also assumed away the Third World\u27s severe market imperfections. The resulting policy proposals appeared likely to succeed in cutting consumption only for the poor majority, without significantly raising investment. Thus, the austerity programs could not generate a long-term solution to the debt crisis