Money Matters: An IMF Exhibit -- The Importance of Global Cooperation

Debt and Transition (1981-1989)

Part 1 of 7


Conflict &
(1871 - 1944)

Destruction &
(1945 - 1958)
The System
In Crisis

(1959 - 1971)
the System
(1972 - 1981)
Debt &
(1981 - 1989)
Globalization and Integration
(1989 - 1999)

Countries Don't Go Bankrupt

Reinventing the System Next-->

"If you owe your bank a hundred pounds, you have a problem. But if you owe your bank a million pounds, it has." - John Maynard Keynes

"If you owe your bank a billion pounds everybody has a problem." - The Economist

During the 1970s, Western commercial banks had loaned billions of recycled petrodollars to the developing countries, usually at variable, or floating, interest rates. So when interest rates began to soar in 1979, the floating rates on developing countries' loans also shot up:

  • Higher interest payments are estimated to have cost the non-oil-producing developing countries at least $22 billion during 1978-81. At the same time, the price of commodities from developing countries slumped because of the recession brought about by monetary policies.

The time bomb was set.


Time bomb was set


What Went Wrong?

  • Between 1979 and 1982, interest rates more than doubled worldwide, dramatically raising the cost of loans.
  • The U.S. dollar exchange rate improved, making the dollars needed to repay loans more expensive.
  • Widespread recession dried up the markets for the exports of developing countries.
  • Real prices for the export commodities that were essential to the developing economies fell to their lowest levels since the Great Depression.


"The time bomb was the debt burden and grotesquely high interest rates being carried by the Third World to the profit of the Western banks."

Les Gibbard

"Countries don't go out of business....The infrastructure doesn't go away, the productivity of the people doesn't go away, the natural resources don’t go away. And so their assets always exceed their liabilities, which is the technical reason for bankruptcy. And that's very different from a company."

Walter Wriston
Citicorp Chairman



Who Was to Blame?

Why did Western banks loan so much money to the developing countries?
Many developing countries were good loan prospects in the 1970s:
  • Many produced raw materials, foodstuffs, or manufactured goods that were in demand.
  • Growth rates looked even better than for industrial countries.
  • From 1960 to 1980, Latin America's economic growth rate was nearly twice the U.S. rate.
  • Even Eastern European countries seemed a good risk, because of the climate of détente and growing East-West trade.


Why did developing nations borrow such huge amounts?
As long as interest rates were low and inflation was high, the loans fueled their economies at little cost:
  • With high inflation, by the time the dollars had to be repaid, their real value had decreased.
  • Meanwhile, the borrowers could invest the money in economic development.

It worked. Between 1973 and 1980, the economies of oil-importing developing countries grew an average of 4.6%, compared with 2.5% for the industrial world.


Oil Tanks


Man cuts timber

Loading huge roll of steel

Countries Don't
Go Bankrupt
Time Bomb Explodes Solving the Problem Attempted Rescue
Regional Economic Integration The Power of Private Capital Thaw in the East

Reinventing the System Next-->