Chapter 15 Chapter Summary

Lending and borrowing, and regulations to control loans and loan collections, go back some 4,000 years. International borrowing goes back at least 700 years, but it remains controversial. Charles Kindleberger proposed that the economy runs in cycles of growth, mania, and crisis and that during the mania phase, a surplus of capital leads to increasingly risky and speculative lending, particularly loan pushing to developing countries. During the crisis period, borrowers often cannot repay and therefore default.

Lending in the 1970s, both commercial loan pushing and lending to Cold War allies, precipitated a loan crisis in the early 1980s when interest rates were suddenly driven up. During the 1970s, lending did provide new money for developing countries, but since then there has been a net transfer of wealth from poor countries to rich ones through debt servicing. Developing-country debt has increased dramatically, but with no discernible benefit to borrowing countries. Further, many of the initial loans were made to political leaders who were known to be corrupt and unlikely to use the funds to improve their country’s economic or social development, such as President Mobutu of Zaire (Democratic Republic of the Congo), or to regimes, such as that in South Africa during apartheid, that used the funds to further the disempowerment of their own people. Meanwhile, the United States and other industrialized countries have been net borrowers, with developing countries. Thus, the period since 1982 has seen a huge transfer of wealth from poor countries to rich ones, and developing countries, de facto, have become major lenders to the rich industrialized countries. This chapter also explores the 2008 financial crisis.