This survey showed that (contrary to popular perception) the oil price shocks of the 1970s were not the major source of the developing countries' external debt crisis, although they greatly accelerated that crisis. To the extent that petrodollars contributed to the debt crisis, the blame lies not with those dollars as such, but with the policy responses to them (i.e., policies of "recycling" those dollars). This included policy responses of the advanced capitalist countries, of the lending institutions, and of the borrowing governments. The survey further showed that the major bulk of the immense Third World debt has snowballed as a result of factors exogenous to their economies. These factors included excessive interest charges by the commercial banks, capital flight from these countries, rise in the value of the dollar and the loss of their export earnings due to the depressed prices of and demand for their exports. Debtor nations are not responsible for this portion of the debt, i.e., the portion that can reasonably be attributed to factors exogenous to their economies, and it should therefore be repudiated as "illegitimate."
(...) Whereas in the earlier part of this period the major bulk of those receipts consisted of official capital flows from industrial countries and international agencies, in the later part, especially after the late 1960s and early 1970s, commercial bank lending became the dominant source of those receipts. For example, in the 1960-78 period the official development assistance (ODA) to developing countries decreased from 58 percent of their total external financial receipts to 30 percent, while private bank lending rose from about two percent to about 33 percent. Contrary to private bank loans, the official capital flows consisted largely of grants, concessional loans, and other official loans that were based on long-term, low-interest, or project-related financing. This shift away from official to private bank lending played a major role in the development of the present crisis of the Third World debt.
(...) No doubt the oil price shocks of the 1970s greatly accelerated the process of private bank lending and the accumulation of Third World debt. But to view this accelerating (or contributory) effect as the cause for commercial bank lending, hence for the debt problem, is challenging the reality of those developments. Evidence shows that the shift away from official financing to private commercial lending--the major culprit in the debt crisis, in our opinion--took place prior to the oil price shocks. That is, the expansion of bank lending as a result of these oil shocks took place within the general context of the expansion of bank lending. For example, Kristin Hallberg, using the official data of the Federal Reserve Board of Governors, shows that "real private bank lending grew 144%" between the years 1970-1973. Citing Charles Kindleberger's private correspondence (a renowned authority on international finance), she further shows that the expansion of commercial lending "coincided with the 'cheap money' push of 1971, when bankers looked to developing countries for riskier investments to maintain their income."
(...) To the extent that the resulting petrodollars from those price hikes contributed to the debt crisis, the blame lies not with those dollars per se, but with the policy responses to them, the so-called "recycling" policies of petrodollars. In fact, with policies concerned with the health of global economy those massive petrodollars could be viewed as a blessing in disguise: the tens of billions of dollars that were generated as a result of the oil price hikes of the 1970s constituted the potential for the largest primitive accumulation of capital to date which could be used for the industrialization and development of developing countries. That potential could be realized through a combination of measures: (a) direct equity investment from "surplus" countries in "deficit" countries--industrialized countries could provide the necessary technology for this strategy and thus make it a truly trilateral cooperation; (b) development grants from "surplus" countries to "deficit" countries, and (c) recycling the surplus not through the commercial banks but through independent international agencies that would grant long-term, low-interest, development-related loans to non-oil developing countries. Instead, the massive amounts of petrodollars (along with Eurodollars and the so-called "cheap money" of the early 1970s) found their way into the coffers of the big commercial banks and the pockets of corrupt "leaders" of the borrowing countries, which triggered their external debt problem.
(...) Several factors prompted the switch away from multilateral, official lending to commercial bank lending. Most significant among these factors was what might be called a weakening of Bretton Woods objectives... [WHY OFFICIAL LENDING, EARLIER?] Under these circumstances, where the Third World seemed at a cross-roads between capitalism and socialism (or something other than capitalism), the United States set out to block the latter road and coax, coerce, or force these countries to move along the former road. [Of course, this does not mean that the U.S. has now abandoned this policy, but that the policy was more urgent at that time.] Thus its financial assistance to the Third World during this period was primarily based on geo-political and long-term economic considerations rather than short-term, cost-benefit calculations. And this is why the financial flows to these countries at that time were largely in the form of grants, concessionary loans, and other forms of "soft" or development-related loans. The fate of Third World economies at this stage was too precarious to be entrusted to commercial banks...
(...) [WHY COMMERCIAL LENDING, LATER?] By the late 1960s and early 1970s, this pattern of Third World financing changed as private banks began to lend to these countries on a commercial basis. A number of factors precipitated this switch: (a) the Cold war atmosphere and the fierce "East-West" rivalry in the Third World had subsided by this time, (b) most of the socio-political upheavals in the former colonies and other less developed countries had also ebbed by the late 1960s, and (c) most of the developing countries had by now adopted a capitalist path of development. Whereas prior to this time private banks were reluctant to lend to developing countries because their economies were considered too volatile and their financial markets too unstructured, and thus unworthy of credit, these banks now began to lend as most of these countries emerged as sovereign nations whose economies and financial markets appeared capable of absorbing substantial debt on a commercial basis. These favorable economic conditions for private bank lending were further reinforced by favorable political and legislative conditions as OECD countries relaxed barriers that previously hampered commercial lending to developing countries. "Bank lending could [now] be expanded fairly rapidly, without the need to go through the legislative and budgetary processes of national governments."
(...) Commercial bank lending was further accelerated by a "natural" or "evolutionary" process of the accumulation of huge sums of finance capital in the coffers of Western big banks during the three decades of economic expansion and stability since WW II. This accumulation of bank capital was a culmination of several developments: the post-war expansionary cycle of the advanced capitalist economies; the Korean and Vietnam wars, which led to the flow of huge sums of dollars and/or Eurodollars into the hands of banks; the U.S. inflationary monetary policy that began under President Johnson, which led to the emergence of the so-called "cheap money" in the early 1970s; and, finally, the petrodollars of the 1970s. Part of the massive finance capital that resulted from these developments was bound to find its way to foreign lending, especially from the United States, where the Glass-Stegal Act prevented commercial banks from underwriting and selling corporate securities at home. (This also explains why commercial banks there have expanded into all kinds of consumer loans, be they mortgages or credit card.)
(...) As these developments led to bank loan officers roaming the Third World pressing their wares, they also created favorable conditions and big appetites for borrowing in the non-oil developing countries. For the inflationary/expansionary cycle and the accompanying "cheap money," mentioned above, positively affected the economies of these countries: On the one hand, it raised the volume and the price of their exports, on the other, it reduced the cost of their borrowing. "Dollars borrowed today could be paid back tomorrow in cheaper dollars, as inflation ate away their value."
(...) This brief overview refutes the claim that the oil price shocks of the 1970s were the major cause for the global debt problem--although it does not deny their contributory or accelerating impact--as it shows that the process of commercial bank lending and the proliferation of Third World debt started before those shocks took place.
(...) Although the oil price shocks contained the potential for an immense international financial imbalance, and hence the debt crisis, this crisis was not inevitable. The policy responses to the oil price hikes contributed more to the crisis than did the price hikes as such. As far as the policies of the OECD countries are concerned, the flip-flop character of those policies was more responsible for the crisis than the policies themselves. Policy responses of these countries to the first oil shock (1973-74) were diametrically opposed to their reactions to the second oil shock (1979-80).
(...) [RESPONSE TO 1973-1974 SHOCK] The first major concern of these countries in the face of the 1973-74 oil shock was to maintain economic expansion "through joint expansionary policies which would maintain growth....This argument reached its peak in the Bonn summit of July 1978 when the summit countries decided to adopt a locomotive theory of growth, with the major OECD countries agreeing to take action to help stimulate demand." The second major concern was that the surplus resulting from the oil price hikes should be recycled toward the "deficit countries" so that their growth, started since the late 1960's, could also be maintained...To be sure, there was some opposition to the involvement of private banks on the grounds that these banks were not trustworthy in the matters of international trade and finance, and that therefore the recycling of the surplus ought to be accomplished through official, multilateral financing. But the views that favored the involvement of commercial banks prevailed. These included the views of most OECD countries and the international organizations under their control, as expressed through the voices of their finance ministers or central bank officials.
(...) Not surprisingly, the decision to expand the role of private banks and Eurocurrency markets led to an immediate and rapid expansion of both the share of commercial bank lending and of the Eurocurrency markets. Eurocurrency markets expanded in the 1973-82 period by almost six times, from $295 billion in 1973 to 1,689 in 1982. And by 1984, "commercial banks' share of the total guaranteed medium-and long-term debt owed by non-oil developing countries to private creditors had risen to 86 percent." [ The remaining 14 percent consisted of the traditional private debt sources such as bonds and supplier's credits.]
(...) As a result of this easy monetary policy and vigorous expansion effort, the expansionary cycle that had started before the 1973-74 oil shock continued unhampered despite the recessionary or hindering effects exerted by the oil price shocks. The expansionary monetary policies (based on the locomotive theory) in the OECD countries, especially in the United States, positively affected the economies of the developing countries, even the non-oil ones. On the one hand, it kept the real interest rate very low, hence their borrowing cost very low, on the other, it raised their export earnings, both in terms of volume and prices. True, their debt was gradually building up, but there was no danger of a default as the steady growth in income, exports, and higher prices of primary goods during this period were reducing the external debt burden on these countries. Indeed, because of low real interest rates and healthy export growth their debt service ratio (the ratio of interest and amortization payments to export earnings) showed only a moderate rise, from 16% in 1973 to 23% in 1980. [CRITICAL: THE FIRST OIL SHOCK DID NOT GIVE RISE TO THE "DEBT CRISIS"] Thus, the 1973-79 period, the period between the two oil shocks, witnessed a healthy annual growth rate in the OECD countries, ranging on the average from 3.6 to 6.1 percent; in the non-oil developing countries, from 5 to 6.1 percent; and in international trade, an annual average growth of 5.5 percent.
(...) [VOLKER'S RESPONSE TO 1979 SHOCK, AND GENERAL INFLATION] As noted earlier, the policy response of the OECD countries to the 1979-80 oil price hikes was diametrically opposed to their response in 1973-74. Instead of maintaining expansionary monetary policy in order to maintain the level of growth, of income and of world trade, these countries now resorted to tight monetary policy to control inflation. The pronounced, or even dramatic, expression of this new policy was Paul Volker's departure from the 1979 Belgrade IMF/IBRD conference before it was officially over in order to prepare the new monetary policy in October. The new policy created a ripple effect in the opposite direction of the previous period: interest rates shot up, growth slowed down and the recessionary cycle (of 1980-82) set in, and the export earnings of deficit countries began to drop. Interest rates were further increased by (a) the larger U.S. budget deficits, and (b) the introduction of so-called floating rates of interest for commercial lending. The effects of the new policy on international interest rates and world economic growth are shown in Table 1. It is obvious from this Table that while this contractionary policy more than doubled the international average interest rate, it reduced the world economic growth to less than a quarter by the end of 1982.
(...) The trade deficit of the developing countries was further aggravated by the shortening of the maturity period of their debt, on the one hand, and the protectionist policies of the OECD countries (prompted by high unemployment rates), on the other. There has been no alleviation of these factors that negatively affect Third World debt: the OECD countries' protectionist policies continues, the U.S. budget and trade deficits continue, and the demand for and price of debtor nations' primary goods also continues to be very low.
(...) The cumulative effect of these factors was a jump in the debt service ratio of these countries from 20% in 1979 to 33% percent in 1982. The absolute amount of their foreign debt rose from $220 billion at the end of 1979 to 326 at the end of 1982 and 343 in 1983. Despite all the talk about solutions to the debt problem, this snowballing process of debt has continued unabated, and it now stands at about $1.3 trillion. [ARTICLE IS WRITTEN IN 1991]

(...) Only a small portion of the massive Third World debt has actually been received by (and spent in ) these countries. The rest has accumulated due to factors exogenous to the economies of these countries. These factors include the rise in the international rate of interest, the rise in the value of the dollar, the decline in foreign demand for their exports, the fall of the price of their primary goods, and, perhaps most importantly, the flight of huge sums of capital from these countries.
(...) According to Jacobo Schatan's calculations, about two-thirds of the entire Latin American debt in 1985--roughly $450 billion--could be attributed to these exogenous factors, which he appropriately calls the "illegitimate" part of the debt.
(...) The remaining, "legitimate," part of the debt includes what has actually been borrowed (but not fled back overseas), plus the concomitant interest based on the pre-1976 fixed rate of 6 percent. (As pointed out earlier, after 1976 the lending institutions abandoned the previously-agreed-upon fixed rate in favor of floating rates, which ushered in the double-digit interest rates of the early1980s.)
(...) Peter Nunnenkamp's estimates of the effects of external factors on the Third World debt are equally shocking. According to his calculations, the combined effects of external factors on Third World debt in the 1974-81 period amounted to $570 billion, of which interest rate effects accounted for $133.49 billion, lost revenues due to depressed demand for their exports constituted $104.41 billion, and the terms of trade effect accounted for the remaining $297.45 billion--Nunnenkamp attributes about half of the terms of trade effect, i.e., half of the $297.45 billion, to the effects of oil price hikes.
(...) [CAPITAL FLIGHT] A big chunk of the loan money was sent back out of the debtor countries to be deposited, invested, or used to acquire real estate abroad. This has been done by both government and military officials, as well as by private middlemen and businesspersons who usually gain access to foreign currency (through government channels) in the name of project investment. According to an IMF estimate, some $200 billion may have flown out of debtor counties by the end of 1985. Time Magazine estimated that the amount of capital that flew out of three Latin American countries between 1979 and 1984 was about $63 billion (28 billion from Mexico, 23 billion from Venezuela, and 12 billion from Argentina).
(...) [USE OF LOAN MONEY, IN-COUNTRY] Data from the U.S. Federal Reserve Board show that "more than one-third of the combined debt increment of Argentina, Brazil, Chile, Mexico and Venezuela between 1974 and 1982, i.e. about $85 billion, was devoted to purchases of real estate and to banking deposits abroad."
(...) But even excluding the part of the debt that is due to external factors, the remaining part, the part that was actually borrowed and somehow spent domestically, was quite substantial, amounting to tens of billions of dollars. What happened to it? How was it spent? What are its impacts on the economic development of these countries? A major part of this money has been spent on consumption, often wasteful consumption of the military and luxury or unessential type, rather than investment and/or production. Borrowing from abroad is not good or bad per se; it all depends on how it is spent. If it is invested in development projects that will yield a rate of return higher than the rate of interest paid for the borrowed capital, then borrowing can play the positive role of initial capital formation for productive investment, without the problem of repayment. This is a pivotal point in understanding the present crisis of the Third World debt: the borrowed funds were viewed not as capital to be invested productively, but as income to be used for consumption, or for financing the government's operating deficits. To the extent that some of these funds were formally invested in development projects, investment priorities and development policies were often perverse: building huge stadiums and sports complexes, buying synfuel plants to supply depressed oil markets, buying national airlines where citizens travel on the back of animals or ox-driven carts, and so on. Some of these pompous, grandiose, show-case projects--often undertaken in the name of building economic infrastructure, or as symbols of "national pride"--went as far as building whole new cities from scratch, such as Brasilia in Brazil and Abuja in Nigeria. "Nigeria is building itself a capital, Abuja, from scratch. The cost, by some estimates exceeds the nation's total sovereign debt of about $20 billion. Yet Nigeria has trouble making interest payments."
(...) A substantial amount of these countries' resources, borrowed or otherwise, is devoted to subsidizing "national" industries and enterprises, largely in the state sector but also occasionally in the private sector. While this policy is pursued in the name of promoting "national" industries, import-substitution, and economic self-reliance, in practice it falls short of achieving these objectives. Instead, by providing easy credit and windfall finances for inefficient and unprofitable enterprises, it aggravates the pattern of inefficiency and perpetuates the lack of competitiveness. It spoils the mismanaged "national" enterprises and their corrupt and inefficient managers by financial crutches. Import tariffs, credit controls, exchange controls and similar restrictions are also often justified by this misguided (or, perhaps, hypocritical) nationalism.
(...) While the purported goal of these nationalizations is that the state sector will play a pioneering role in bringing about a speedy industrialization program, experience shows that other objectives can be detected behind the nationalization thrust: to couple or supplement the political and military power of the state with economic power, to broaden the social base of the state by vesting the interests of broad social layers in the state (through consumer subsidies as well as through employment in the state sector), to provide the state bureaucracy with the opportunity of accumulating their personal fortunes and becoming capitalists in the shadow of the public sector and state capitalism.

(...) Interest payments are devouring a big chunk of the debtors' national income, leaving very little for growth and development. In Mexico, for example, interest payments consumed 46.23% of the government's entire expenditure in 1986 and 56.20% in 1987.
(...) [IN COMES THE IMF, WITH A PLAN!] Debtor countries facing interest payments and balance of payments problems often turn to the IMF for funds--if not for its own funds, then for its mediation to obtain money from other sources, usually from commercial banks. To obtain favorable response to their request for funds, these countries pay the price of allowing their socio-economic objectives to be shaped to meet the policy objectives of the IMF: reducing the size and the role of the public sector in these economies and shifting productive resources from industries that serve the domestic needs to those that serve the needs for foreign exchange to make interest payments. To achieve these objectives, severe austerity programs are usually put into effect in debtor countries: while government subsidies, real wages, and consumer imports are reduced, income taxes and prices are raised. Other IMF-sponsored measures include dismantling of controls that inhibit the export of foreign exchange, especially the payment abroad of interest and dividends to foreign capital, and devaluation of the currency to raise the cost of imports and reduce the price of exports. Instead of alleviating the developing countries' debt burden and other economic problems, the IMF-initiated policies have more often than not aggravated these problems. Efforts to gear national resources to meet the debt obligations have eroded both the standard of living of the majority of population of debtor nations and the industrialization aspirations and development plans of these nations. While many of the burgeoning industries of the 1960s and early 1970s are stalled because of the curtailment of the import of the necessary technology and inputs, a new emphasis is placed on the traditional export industries whose output is largely raw materials and primary goods. This policy, designed to earn maximum foreign exchange in the shortest possible time, is reviving and reinforcing the old pattern of monoculture and rapidly eating away at the natural resources of the debtor nations. Public-sector cutbacks, far from freeing space for private initiative, as the IMF argues they would, has hampered business investment by forcing governments to cut down on essential infrastructure: roads, schools for training a skilled labor force, investment in public health, and so on. Those cutbacks help generate waves of social and political unrest that encourage yet more capital flight.
(...) [INTERESTING REFLECTIONS ON RESPONSIBILITY] As noted, there are individuals and groups on the left who also disagree with the idea of responsibility and "legitimacy" as measures for debt relief, though for a different reason. Their reason is that the "peripheral" countries have for a long time been exploited by the "core" countries of the world capitalist market , and that therefore the entire debt must be repudiated. Our answer to this reasoning is that although the argument of "core-periphery" exploitation is a powerful argument for total repudiation of Third World debt under radically-changed world circumstances, it is not a good one under the present world circumstances (i.e., under the rules of world capitalist market and of the court of bourgeois justice). Under these circumstances, advocates of debtor nations need to show precisely how the debt was generated and accumulated. That is, they need to analyze the debt, to dissect it and break it down into its component parts and identify exactly the source of proliferation of each of these parts. Only in this way can they show the bourgeois judges the illegitimate parts of the debt even by their own standards (i.e., by the standards of their banking regulations and antitrust laws.

While the "core-periphery" exploitation argument correctly points out the transfer of economic surplus and resources from the "periphery" to the "core" of the world capitalist market, it suffers from a number of theoretical and empirical problems. To begin with, it is a class obfuscationist argument. Second (and for this reason) it also obfuscates the question of responsibility and accountability, and thus easily plays into the hands of demagogic national bourgeoisie who frequently point to foreign/external factors to justify their own blunders and mismanagement of the economies under their control (e.g., in the case of the debt it has provided a protective shield for the corrupt "leaders" of a number of debtor countries who are accomplices in the debt crisis). Third, this argument often fails to explain the industrialization and technological impact of the "core" on the "periphery" that takes place under the whip of capitalist accumulation on a world scale--proponents of this argument, largely associated with the Dependency School, either dismiss any such an impact altogether, or trivialize it as simply the development of underdevelopment.
(...) Schatan estimates that if "prices of raw materials had stayed at their 1980 level, export earnings for the 1976-85 period would have been some $25-30 billion higher than they actually were ; had this been the case, Latin America's borrowing needs would have declined by the same amount."