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Economic Research Institute Study paper


Utah State University

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The availibility of international capital plays a crucial role in the economic development of many third world countries. Since the early 1980s, successful economic development of many developing countries has been threatened by a continuing financial crisis. The origins of this financial crisis can be traced to the doubts about the willingness and ability of debtor countries to meet their existing debt obligations. The main problem for many debtor countries is their inability to generate enough net foreign income to pay the interest and the principal due on foreign loans. In this respect, the world recession as well as severe economic difficulties of many debtor countries have aggravated this problem. The world recession experienced in the early 1980s led to the decline of many of the export prices of the debtor countries, which strained their ability to earn sufficient foreign incomes to service their external debts. Furthermore, many debtor countries have encountered severe econonomicdifficulties since 1980, particularly rising unemployment and falling output. This situation usually precludes pursuing restrictive domestic economic policies which would enhance the debtor countries' capacity to meet their external debt obligations.