International Debt and Poverty Case Study Bolivia & Poland Bolivia In 1980, the Bolivian government was

printing money to finance a large budget deficit. The Bolivian government was not credit worthy enough to sell bonds to the private sector at home or abroad. Instead, it had to sell its bonds directly to the Central Bank of Bolivia in return for fresh cash to pay the army, miners, and teachers. The Bolivian hyperinflation was in this sense no different from others from economic history. Like those before it, the government was printing money to pay its bills, and as it printed the money it was driving down the value of the currency and driving up the price of goods. As the government paid the salaries, the injection of new money into circulation fueled the precipitous rise of prices. With each injection of Bolivian currency people would take their money to the black market to buy dollars. The price of a dollar in terms of Boliviano soared: about 5,000 Boliviano per dollar in June 1983, 10,000 by January 1984, 250,000 by December 1984, and 2,000,000 by July 1985. Hyperinflation can be ended rapidly. This would only happen only if the government could end its dependency on borrowing from the Bolivian Central Bank. Although no hyperinflation had ever been stopped that way, some economic consultants like Jeffery Sachs had recommended such policy. Budgetary key of Bolivia lay in the price of oil. Government revenues depended heavily on taxes on hydrocarbons, mainly paid by the state petroleum company. The company sets the price of the oil and gasoline in terms of Bolivianos. Generally, the oil price fell sharply in comparison with other prices and in terms of the US dollar during the period in which the Boliviano price was held constant. The low price of oil, in turn, was destroying the budget. The actual situation regarding oil prices was more dramatic. By August 1985, the US dollar price of a liter of gasoline in Bolivia had plummeted to around $0.03 per liter. Whole truckloads of gasoline were being smuggled over the border to Peru. In result, the budget revenues had collapsed. The budget deficit was on the order of 10% of GDP, all financed by printing money. From then on Bolivia and its financial advisors drafted a plan. The draft plan was revolutionary; calling for Bolivia to move from a statist and closed economy typical of third world countries of the day to a market based open economy. The plan prefigured the changes that would take place later in the decade in Eastern Europe, although on a more limited scale. Bolivia then came out with the Supreme Decree 21060. A blueprint not only for ending the hyperinflation but also for a thorough transformation of Bolivias

economy. The program was initiated on August 1986, starting with a sharp rise of oil prices. As gasoline prices soared, the budget deficit closed. Money poured into the state oil company and from the state oil company into the budget coffers. The sudden stabilization of the Bolivianos dollar exchange rate meant an equally sudden stability in Boliviano prices. Some time after Bolivia was facing debt crisis. The Bolivian government was bankrupt. It could not service its foreign debts owed to international banks and to foreign government, and had, in facet suspended payments more than a year earlier. Now that Bolivia has stabilized, the IMF was pressing for a resumption of debt servicing. Bolivia now has the possibility to face political crisis and possibly go back to hyperinflation. By 1987, with the help of foreign advisors, Bolivia remained in suspension of its debt. Thus, this became a template for later debt cancellation operations. The concept was radical but it was the only sensible and realistic way to face the economic circumstances of the country. It has made sense in the long term for the creditors as well as the debtors, since it has allowed countries to get back on their feet and either repay part of the debt or at least be less of a burden to the international system in terms of future foreign assistance. The strategy of debt cancellation has now been applied in dozens of countries, but far too often the international community has been too late and too grudging in the debt relief to enable really impoverished, debt torn countries to reestablish economic growth and development. Poland Poland had long ago partially suspended its in rising inflation, and there was a deepening political crisis. Poland had long been known as the most liberal of the communist states, but after the rise of Solidarity in 1980 and the military crackdown the year afterward, it was the only Soviet dominated country of Eastern Europe under martial law. But even during martial law between 1981 and 1989, Poland was a kind of freewheeling, almost chaotic country though many people were arrested and jailed, there were still dissident voices being heard. Polands political turning point was June 4, 1989. On the same day as the Tiananmen massacre in China, Poland held its first partially free things happened: first, an upper chamber of the parliament was added to create a new senate. And second, one third of the seats of the lower chamber, the, Sejm, went up for election. The result was a political earthquake: a partial political opening and a public scream in unison, We want the communist out. Polands challenges had some similarities to the problems in Latin America, but also some profound differences. The similarities were mainly macroeconomic. Like Latin America, Poland had high inflation, a large budget deficit, and a large overhang of foreign debt. As in parts of Latin America, Polands currency was unstable and not

freely convertible at the official exchange rate and the black market rate. That gap, in turn, led to massive smuggling and tax evasion The differences were perhaps even more important. Poland was a literate and ethnically homogeneous society. The ethnic and class tensions that divided Bolivia were, mercifully, not present. Poland was also not impoverished. Yes, its infrastructure was in a dilapidated state and needed a massive overhaul; its air and water were polluted after decades of energy intensive industrialization and lack of environmental control; and its Soviet era factories were uncompetitive in Western markets. But still, Poland was largely urban, literate, and equipped with basic infrastructure. Geography was also favorable. Polands proximity to Germany, for once in its modern history, would be a big plus because it would ease the two way trade between Poland and the largest economy in Western Europe. (Sachs 2005) Polands economic crisis was very deep, that a hyperinflation was brewing and the socialist system was collapsing. Poland was going to have to move with boldness and urgency to the market system. During that time the biggest thing in everyones mind was the crushing of $40 billion of foreign debt that Poland owed to the world. Many people feared that this debt would become the real barrier separating Poland from Europe and from prosperity. Poland aimed for a negotiated cancellation of a significant part of its external debts to ensure that its future was not held hostage to Soviet era debts and that the polish people themselves would be the beneficiaries of their brave plunge into democracy and a globally integrated market economy. The economic debts of the developing world will not be fully repaid, simply because the people who live in the developing world cannot afford to repay them. The harsh reality of poverty in poorer countries was an initial stimulus for the loans. Economic conditions suggested that borrowing money was a reasonable course of action in the 1970s, particularly for poor countries, which perceived few, if any, alternative ways to address the economic plight of their citizens. Those who live in the rich countries of the developed world can readily observe profound poverty: all who live in the wealthy, industrialized nations do not have equal access to education, health care, good nutrition, and housing. The fact that these deprivations exist alongside great wealth is shocking, but they pale when compared to the scale of global poverty. The hunger, homelessness, illness, and suffering of the poor in the developed countries must be multiplied a thousand times, in some respects a million times, to begin to reflect the scope of poverty in the world's poorest nations. In 1987, the average per capita income for people living in the poor countries in the South was only 6 percent of the income in the developed countries of the North. In Africa, one-fifth of the population lives in poverty, with those in sub-Saharan Africa bearing the heaviest burden.

The poverty trap of external debt and inequitable development policies is likely to impoverish many more unless it is dismantled soon, Durning said. "Poverty and ecological decline have formed a vicious circle that endangers rich and poor alike. If global threats such as the greenhouse effect are not averted, half of humanity perhaps 5 billion people could live in destitution by the third quarter of the next century." This can be broken if governments join hands with the thousands of grassroots antipoverty organizations that have formed around the world and if international action is taken soon on debt and the environment. In 1980, 22.3 percent of humanity lived in absolute poverty a state in which income is too low to meet basic needs for food, clothing, and shelter. Despite substantial reductions in poverty in China and India during this decade, the global figure stands at 23.4 percent in 1989. (Durning 1989) If a country has too much debt, it cannot be creditworthy. Rational investors will not make new loans. If debt cancellation is warranted by financial realities, is negotiated in good faith, and the country pursues sound economic policies afterward, then debt cancellation raises creditworthiness rather than reduces it. After all, a wellgoverned country with low debts can afford to take on new debts. And according to Jeffrey Sachs, the author of the Common Wealth and The End of Poverty, debt cancellation must reflect true social, economic, and political realities. Under those circumstances, a negotiated cancellation of debt can give new hope and worthiness. This is what happened with Poland, which returned to the capital markets in the 1990s.

Works Cited Sachs, J. D., (2005). THE END OF POVERTY: ECONOMIC POSSIBILITIS FOR OUR TIME. 80 Strand, London WC2R 0RL., Penguin Books, England. Durning, A. D., (1989) POVERTY AND THE ENVIRONMENT: REVERSING THE DOWNWARD SPIRAL. 1400 16th St. NW, Ste. 430, Washington, DC 20036. Penguin Books, USA.