The Jamaican Experience - Third World Debt Crises

The history of mankind has been punctuated by an elusive series of booms and slumps. Historians have singled out the experience of the early 1930's as the 'Great Slump' or the more commonly termed 'Great Depression.' This undeniably humbling event, dubbed an 'economic blizzard' by historian Denis Richards, destroyed the then nascent economic stability in Europe and severely dented consumer and investor confidence around the World. Similarly the world debt crisis of the 1970's and 1980's also brought with it its own blizzard effect that engulfed both developing and developed countries. The debt position of developing countries became extremely troubling when as Stambuli (1998) notes it became obvious that there was a growing mismatch of external indebtedness and the ability of nations to service their debt. This serious disparity was ultimately characterized by numerous debt rescheduling arrangements and more importantly countries declaring default. In hindsight there have been many theories that have sought to explain the causes of this crisis, however this paper will explore specifically whether developed or developing countries should be held accountable for causing and by extension alleviating this crisis. Jamaica's debt position will also be comparatively analyzed in a bid to ascertain the extent to which there is an unusual difficulty in servicing debt or in other words a crisis exists.

In order to fully appreciate the concept of accountability we must first understand the general conditions under which third world debt became problematic. Many development economists view the substantial increase in oil prices in 1974, which saw the price of oil increase from $2.70 in 1973 to a daunting $10.00 per barrel, as a major root cause.(1) This price increase immediately elevated the surplus on the current accounts of oil producing countries from $7 billion in 1973 to $68 billion in 1974. These large surpluses created the situation cogently documented by Stambuli (1998) that prompted oil-exporting countries who had more foreign exchange than they needed to invest in western banks. In a bid to offload the subsequent liquidity these banks then sought to recycle the surplus of 'petro-dollars' with developing countries that had experienced deteriorating current accounts. In Jamaica for example Brown (1986) reports that between 1976-1980 the deficit totaled $733 million. This process of recycling was inherently aggressive since as Kenneth Hall notes in the text 'The Caribbean Community Beyond Survival' the real interest rate during the 1970's was actually negative, which implies that borrowers were actually being compensated for taking loans. Developing countries then entered into what has been described as 'an orgy of borrowing' (Hall, 2001 ppxxxiii) that left them severely exposed in 1979 when a second oil price increase occurred. The latter brought the debt service capacities of developing countries to the forefront as countries faced increasing interest rates and shorter maturities on loans that were needed to amortize previous obligations. It is in this general environment that the crisis culminated with Mexico's poignant declaration that it could no longer honor its debt requirements in August of 1982.