Main causes of 1982 debt crisis:
- Non productive investments: GATT stated that the loans
that were taken by the developing countries mainly were used for
unproductive sectors of poor countries, thus not giving rise to
real investments.
- Oil price: Oil price began to skyrocket after 1971.
Developed countries were able to cushion the effects but developing
countries turned to foreign borrowing, resulting in debt.
- Interest rate : There was a new policy which suggested
to keep the interest rate above inflation. New loans contracted in
order to pay off maturing loans carried a higher rate of interest
which raised average rate of interest on the portfolio of
developing countries. The third world borrowers had two choices. It
was either to increase debt in order to keep inflation-adjusted
debt stock constant or to borrow less to avoid high interest rates
and thus,observe a fall in the real value of the inward
transfer.
- Exchange rate: There was exchange rate detoriation
with US dollar. Latin American Governments owed a huge amount of
national currency and also lost their purchasing power. Trade was
affected.
Consequences:
- Stagnation of economic growth.
- Massive unemployment.
- Increase in rate of crimes.
- High rate of inflation.
- Increase in poverty gap.
- Fall in per capita incomes
- Fall in imports.
- Investment which could have been used for productive purposes
were now being used to pay off debt.