Third World Debt Crises - The Jamaican Experience

Though the background noted above presents the crisis as an unavoidable catch 22, there were clearly demarcated roles of Most Developed and Less Developed Countries (MDCs and LDCs) in exacerbating its effects. The most important charge facing developed countries was their obsessive and lax lending policy after the first oil price shock that occasioned little due process in establishing the credit worthiness of the recipient country. This is by no means, however an argument against western banks recycling or on-lending the oil exporting surplus. According to Richard Bernal in an article entitled 'Resolving the International Debt Crisis,' "the fact is that the international banking system fulfilled a necessary function." Thus simply lending at higher rates and in larger volumes was not the major fault of MDCs, the crux of the matter was that Banks continued this process in the late 1970's and early 1980's when as Holley (1987) recognized, the world economy had changed dramatically for the worse especially in Developing Countries. Thus banks were slow to correctly ascertain the increasing credit risk of their recipients and more importantly they failed to lend (both initially and after the second price shock) based on some proposed project or viable end use of funds.

As the crisis became more apparent in early 1980's international Commercial banks began to experience some of the negative repercussions of their actions. Due to the changing monetary policy of industrialized countries (because of the second oil price shock) banks began to lend at increasingly high and variable interest rates. Bernal (1987) reports that interest rates moved from 12% in 1978 to 17.5% in 1981 and then to 13% in 1985. Thus banks had begun to reconsider what Stambuli (1998) recognized as the 'Sovereign Risk Hypothesis', which assumed that countries were insulated by their inherent nature from default Risk. These increasingly volatile interest rates were also accompanied by shorter maturities for loans. The picture further worsened as MDCs also diminished direct aid and investment to developing countries and increased protectionist policies that severely stunted LDC prospects for acquiring foreign exchange to continue servicing their debt.(2) These troubling facts have caused many to ascribe total blame on developed countries for causing the crisis. However though their role was decisive, the developing countries themselves also should shoulder some of the responsibility.

LDCs could have emerged out of the crisis relatively without blame if they were indeed simply passive victims of the seemingly uncanny chain of events alluded to above. Authors like Levitt and Bernal have however highlighted that LDCs did contribute to their own demise. Though less developed countries had legitimate reasons to borrow to continue their expansion or growth (in Jamaica for example GNP was at a height of US $2376 million in 1973) and to address the declining nature of their current accounts alluded to previously, it became painfully obvious that there was no 'debt led growth.' This is what Stambuli (1998) rightly terms as the 'economic mismanagement factor' since borrowed funds were not invested in foreign exchange generating ventures but were instead used in most cases to buy political power and to pursue import substituting industries. The latter, which is the least debatable factor, had the negative effects of ironically increasing imports of raw materials and capital. This created what was recognized as 'import led growth' and as such acted as a drain on the necessary foreign exchange to service debt.

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