3 Causes of Third World Debt

3 Causes of Third World Debt What is Third World Debt?

Third World Debt or the debt of developing countries is an external form of debt incurred by governments of developing nations, typically in quantities beyond the government’s political ability to repay. “Unpayable debts” are a general characteristic of Third World Debt; the interest attached to the nation’s debt exceeds what the country’s policy makers and politicians think they can collect from taxpayers, based on the country’s gross domestic product, thus impeding the repayment of the debts from ever being fulfilled. 

Third World Debt occurs for a variety of reasons, but as a result of the struggling economy, meager wages of its citizens and limited Gross Domestic Product the majority of Third World Debts go unpaid or unsatisfied and result in the further destruction of an already struggling economy. 

To help mitigate this problem, a number of impoverished nations have recently received partial or full cancellation of loans from foreign governments and international financial institutions, such as the World Bank and IMF. Sources of aid are allocated to struggling nations to help propel those developing economies into a position where they can benefit the global marketplace. 

Additionally, a 2004 World Bank and IMF study found that those impoverished countries receiving debt relief, were able to reduce impoverished marketplaces and educational systems by nearly 50 percent between 1999 and 2004. Countries such as Tanzania, for example, used such funding to eliminate school fees, hire more teachers and build advanced school systems. 

Causes of Third World Debt:

Third World Debt arises for the following reasons:

Legacy of Colonialism: This occurs when the developing nation’s debt is partly the result of the transfer to them of the debts of colonizing states. These debts typically amass billions of dollars and are attached with exorbitant interest rates.

Odious Debts: This cause of Third World Debt is incurred when wealthier nations loan funds to nations with corrupt leaders or dictators with the understanding that the money would be wasted. For example, this type of debt arose in South Africa, shortly after freedom was earned from the apartheid regime. 

Mismanaged Spending: Numerous developing nations operate with a faulty governing body, thus causing the nation to succumb to massive debts as a result of faulty spending habits and irresponsible investing strategies. 

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