Chapter 4


In attempting to tackle the problems of macro-economic disequilibria, the governments of
many developing countries introduced a series of production, market and price regulating
measures, such as foreign exchange, capital and trade restrictions, controls of producer,
consumer and/or input prices, administered marketing channels, etc. The distortions on
product and factor markets resulting from such policies have created production and market
inefficiencies and compounded the structural imbalances from the production side. The
vicious circles of growing structural imbalances as illustrated in Figure 4.1 were set in
motion.

As a consequence of various factors, economic growth and domestic production fell more
and more behind the demand for goods and services (also called absorption), and the gaps
between domestic production and demand were filled with increased imports being financed
with external borrowings. The need for substantial policy reform remained largely ignored or
even unperceived as long as external credits to finance the imports were readily available.

However, external credits inevitably resulted in increasing foreign debts and debt service
burdens. The debt services have been absorbing a significant and increasing share of the
meagre export earnings, as shown in Table 4.1.

Table 4.1: External debt ratios of low and middle income countries


 Total external debt as a percentage of GNP Total debt service as a percentage of exports
 of goods and services
 1970 1980 1990 1970 1980 1990
 Low- and middle income 12.5 26.6 40.2 10.3 20.5 19.4
 economies
 Sub-Saharan-Africa 12.5 28.5 109.4 5.3 10.9 19.3
 East Asia 15.0 16.8 26.9 5.9 13.5 14.6
 South Asia 14.3 17.3 30.7 18.1 12.2 25.9
 Europe, M.East, & N.Africa 13.6 31.1 52.6 10.2 16.4 24.4
 Latin America & Caribbean 10.5 35.2 41.6 13.1 37.3 25.0
 Severely indebted 10.2 34.4 46.4 12.0 35.1 25.3

 Source: World Bank, World Development Report, various issues.

 On average, countries in most regions are having to use about 20% of their export earnings to
 service their debts, with the most severely indebted having to allocate up to 30% and more of
 earnings for this purpose. These are averages. A few countries are spending well over 50% of
 their export earnings on debt repayment. Although interest rates are not as high as at the
 beginning of the 1980s, often 40-50% of public loans are variable interest, linked to
 international interest rates, and therefore potentially volatile.

 The process of growing external deficits, debts and debt service burdens culminated in the
 debt crisis of the eighties, when, starting with the prominent Mexican case in 1982, many
 debtor countries failed to comply with their debt service obligations and, as a result, the flow
 of further credits dried up. Eventually, it became evident that the structural imbalances were
 unsustainable.


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