4.1.2 CAUSES, CONSEQUENCES AND MOTIVES
OF PUBLIC DEBT
4.1.2.1 Causes of
public debt
The weakness of domestic savings and the importance of funding
requirements very often justify the resort to external financing. But debt
sometimes appears as the result of a deliberate policy choice. Public debt may
come from exogenous or endogenous causes.
4.1.2.1.1 Exogenous causes
Following the economic slowdown in the late 70s in
industrialized countries, incomes in developing countries declined not only
because their growth rate slowed down but also because the prices of their
exported raw materials diminished compared to the prices of their exports. This
has led developing countries to resort to external loan to make up for the
deficit in resources.
With the oil crisis of 1973-1974, the huge surpluses
of oil-exporting countries resulting from the rise in oil prices
should be «recycled» to finance the current deficit of the rest of
the world. Oil producing countries invested their funds in developed countries
and commercial banks and the latter found it profitable to lend them in their
turn to developing countries. The resort to credit granted by commercial banks
has two advantages:
First: the loans granted by commercial banks
do not bind the transfer of funds to the implementation structural adjustment
policies.
Secondly: the freedom to allocate the funds
received.
The conditions were such that even if loan premiums were
added, developing countries would be confronted to historically low interest
rates for foreign loans: that encouraged them to borrow abroad.
4.1.2.1.2 Endogenous causes
The current deficit of non-oil producing developing countries
increased rapidly between 1974 and 1978.
These countries adopted and pursued expansionary policies:
they encouraged ambitious investment projects and maintained high growth rates.
They developed these measures by significant and persistent deficits: they
borrowed heavily abroad to maintain their spending above their incomes. Among
internal causes of the resort to foreign debt, after corruption, there are many
others.
The choice of a growth model driven by the outside could lead
to an increasing indebtedness, for this was one of the conditions of
reliability.
The continuing deficit of the balance of payments of
developing countries has been partially funded by foreign debt. Over time, the
interests paid by these countries become the major cause of the structural
deficits of their current accounts. These countries have then entered into a
vicious circle, in the sense that external debt increases the current account
deficit and hence the balance of payments, while the current account deficit
requires more foreign indebtedness.
The loans were used for the construction of infrastructures
(roads, dams, etc.) whose purpose is not necessarily to generate resources;
there are also white elephants such as oil refineries, iron and steel industry,
etc. The loans were sometimes mobilized according to the requirements of
national development but according to the needs of the leading country. The aid
was then used to create an outlet for the products of the lending country or a
market for its business (aid related).
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