Wednesday, October 30, 2013

Debt cycles, underdevelopment and debt forgiveness

Laurent Dubois argues in a very good op-ed in the NYTimes that Caribbean countries should receive reparations for slavery. It also raises the question of the responsibility for the accumulation of foreign debt, and the fact that lender countries might be the ones to blame. For example, Dubois tells us that:
"Haiti won its freedom 1804, but in 1825 it agreed to pay an indemnity to France in return for diplomatic recognition. The money was used to compensate French plantation owners.
In 2003, Haiti’s president, Jean-Bertrand Aristide, called on France to repay the 1825 indemnity, which he blamed for his country’s poverty. The argument was historically sound: to pay France, Haiti had had to borrow money from French banks, entering a century-long cycle of debt."
Long cycles of indebtedness have in fact reduced the ability of developing countries to grow. They reinforce the limits imposed by the external constraint, that is, the need to export enough to import the intermediary and capital goods needed for productive activities, plus the need to service the foreign debt.

More often than not developing countries (when interest rates in the center rise, or when terms of trade collapse) are forced to grow less to curtail imports and/or default given the inability to service foreign debt. Christian Suter's Debt Cycles in the World Economy provides an interesting analysis of the long debt cycles in peripheral countries based on the World Systems and Long Wave cycle theories. Ginzburg and Simonazzi provide a Sraffian framework here. My paper on long term debt cycles and economic development (written in 2005) is available here.

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