When I began my last series of Sunday columns (September 2, 2012) on the topic ‘Revisiting the political economy of the Guyana sugar industry’, which I concluded last weekend (December 23), I did not anticipate it would take as many as 17 weekly columns for a reappraisal of the industry with recommendations for its reform. More to the point, my original intention was to follow the reappraisal with an examination of the mining sector, with emphasis on small-scale gold and diamond mining. This is because of the leading role this sector now plays in Guyana’s earnings of foreign exchange, as well as in generating livelihoods, income and wealth for important swathes of the population.
However, this year also marks the thirtieth anniversary of the Third World Debt Crisis (TWDC). And, because of the little known role of Guyana in this event I did not want 2012 to pass without some public acknowledgement in Guyana of its role in this remarkable interlude in the economic and financial history of not only the Third World, but the entire world!
In the interest of full disclosure I should also inform readers that I have written an academic paper on the subject, which is expected to be published early in the New Year entitled ‘30 Years After the Third World Debt Crisis: Sovereign Debt Stress in Caricom’, with special reference to Guyana. For the next few columns, I shall address some of the issues on this topic as they hopefully relate to the wider public’s appreciation of sovereign debt crises then and now.
By universal acknowledgement the TWDC is treated as having started in August 1982, when Mexico publicly announced that it was defaulting on its external debt obligations. By ‘default’ I mean that Mexico declared its inability to find the funds needed to service its debt, in whole or in part, on time.
What is not so widely recognized in the international literature on the TWDC is that 1982 also marked the year when Guyana publicly announced that it too was defaulting on its external debt obligations.
To understand this situation clearly readers should recognize at this point of my presentation that country defaults such as those announced by Guyana and Mexico in 1982 are not uncommon.
They have been occurring for centuries. However, what is not so widely appreciated is that creditor countries, whose debts have been defaulted on, have resorted in the past to inordinate levels of violence against defaulting states to secure the payments which are due to them.
This violence has included territorial invasions, wars, forcible seizure of the defaulting country’s assets, and ‘gunboat diplomacy,’ in order to enforce their claims as creditor states against debtor states.
The state of the international system after World War II (particularly the Cold War and the presence of the United Nations system) resulted in situations where country defaults were leading to international measures aimed at restructuring sovereign debt.
Restructuring the debt refers to two distinct procedures. One is to lengthen the time for the repayment of the debt (that is, its life or maturity); and the other is to seek to reduce the interest that has to be paid on the debt.
The latter can take the form of a grace period (a period of time when the debt is not required to be serviced) or a cut in the interest rate to be applied to the debt or even a reduction of the principal amount owed.
Readers would appreciate that the direct consequence of any sovereign debt restructuring is a reduction in the face value of the outstanding debt. In the news media this is usually reported as the creditors taking a ‘haircut’ on their loans.
Or, in other words, they are taking a loss on the net present value of their outstanding creditor claims.
For readers’ information there have been more than 600 individual cases of debt restructuring in about 100 countries since the end of World War II.
The debt crisis today
To be sure Guyana’s role in the inception of the Third World Debt Crisis is not even widely known in Guyana or for that matter in the wider Caricom. Perhaps the reason is that compared to Mexico, Guyana does not have the same international presence, mainly on account of its small size and minimal influence in global affairs.
In stark contrast to the 1980s, today we find that the image of global debt crisis evokes interest mainly in the First World, where Japan (which as we shall see is the world’s most highly indebted nation), Europe (especially the Eurozone area) and the United States, (because of its ‘fiscal cliff’) hold centre stage.
Next week I shall examine briefly the indebtedness of these countries and indeed show how the level of indebtedness is determined.
For the benefit of those readers who do not recall or know of the worst of times in Guyana, I conclude this column by briefly summarizing the spread of the TWDC started in Mexico and Guyana.
The spread of the virus
Writers have aptly compared the spread of the TWDC throughout the Third World to the spread of a virus in a host body. After 1982 and by the end of the 1990s or early 2000s, the data show there were 54 Third World countries in all the continents, which had defaulted.
Thus in Africa there were twenty-one; in Latin America twenty-three; and, in Asia ten public debt defaults accompanied by debt restructurings!
So intense was the crisis that about one half of these countries had either multiple defaults, or their default and restructuring episodes were very prolonged.
Of these latter type of countries, nine were in Africa, thirteen in Latin America, and five in Asia.
Next week I shall continue from this point.