Developing Countries Responded to Debt

¶ … developing countries responded to debt crises in the interwar period and the post-Bretton Woods era?

Debt crises

During the period of 1929-1933, the world faced its most severe economic recession. Known in history as the Great Depression, the crisis shook the economic stability of countries across the entire globe. Each state strived to develop and implement the best policies to overcome the crisis and some differences in these approaches are observable at the level of the developing states. Still, there were also commonalities in the approaches.

A general response to the debt crises was the freeing of the national currencies from gold. Previous to the depression, most developed and developing economies had pegged the value of their national currencies to the gold, but as the crises deepened, the pegging to the gold increased the intensity of the crisis. In such a context then, most countries strived to move away from the precious metal.

While this approach was generally common across the developing countries, differences were observed in the moment at which the policy was adopted by the domestic governments. Scandinavia for instance freed its national currency from under the dollar as early as 1931 and was as such better able to overcome the crisis in a shorter period of time. Belgium on the other hand had prolonged the pegging of its national currency to the dollar and this made is more difficult for the European country to overcome the crisis. Another example is offered by the case of China, which had maintained its currency pegging to the silver, rather than gold, and who was as such only limitedly impacted by the crisis (Bernanke, 2004).

"The finding that the time at which a country left the gold standard is the key determinant of the severity of its depression and the timing of its recovery has been shown to hold for literally dozens of countries, including developing countries. This intriguing result not only provides additional evidence for the importance of monetary factors in the Depression, it also explains why the timing of recovery from the Depression differed across countries" (Bernanke, 2004).

Within the American continent, countries such as Mexico, Argentina or Brazil were running staggering national debts and their economies virtually collapsed. The stocks of money plunged and, in the absence of an international monetary regulatory institution -- which is today the International Monetary Fund -- the restructuring of the debts was not a viable option (Saint-Etienne, 1984).

The countries in Latin America were export states, selling most of their output to the more economically developed countries. The onset of the crisis decreased the purchase powers and the demand for Latin exports, driving down these prices. As the Second World War commenced, the Latin states were further pressured by the U.S. To keep down the prices of their exports.

The countries in the southern part of the American continent relied heavily on their trade advantages in overcoming the crisis and placed little emphasis on policies to overcome the crisis (Robinson, 2009). The states which had a diversified palette of export products managed to overcome the crisis in relatively short periods of time due to the advantages of diversification. But the countries which had smaller economies, strictly dependent on one or two export products faced more challenges in defeating the crisis. These countries include Honduras, El Salvador, Nicaragua, Uruguay, Panama and Paraguay (LaRosa, Mejia, 2006).

All in all, the approaches implemented by each country in the management of the Great Depression of the 1930s revealed both differences as well as similarities. The differences included diverse policy approaches, monetary decisions and the capitalization on the export advantages. The differences in the approach of the depression were given by a multitude of issues, most of them derived from the country-specific features. For instance, China, due to its currency pegging to the silver rather than the gold, faced little impediments in revival. The countries in Europe renounced their currency pegging to the gold and the countries in Latin America based their revival on export strategies. The actual success in overcoming the crisis was directly linked to the national strengths and weaknesses of each developing state.

As the global leaders met at Bretton Woods and formed the International Monetary Fund and the International Bank of Reconstruction and Development, the management of the debt crises moved on to a new level. The developing countries gained access to more funds and expertise to help them overcome the crises.

While the general approach became more integrated due to the collaboration with international institutions, differences still existed and they were mostly pegged to the leadership styles in the developing states. In the democartic countries for instance, which had elected leaders, the international funds were used in a more transparent manner, whereas in the cases of states with abusive and self declared leaders, the funds were spent in less sensible manners (Vandaele, 2007).