Third World Money and Debt in the Twentieth Century

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Why is much of the Third World bedevilled by weak currencies and wracked by inflation? Can orthodox Western economic remedies work in countries undergoing a Population Explosion?

Monetarism and the Silent Explosion

Is inflation merely a matter of printing too much money?


"There is an additional factor, 'real' as opposed to 'financial', which helps to explain the sustained strength of worldwide inflationary forces and yet remains unmentioned in most modern works on money and inflation, viz the pressure of a rapidly expanding world population on finite resources - virtually a silent explosion as far as monetarist literature is concerned. Thus nowhere in Friedman's powerful, popular and influential book Free to Choose is there any mention of the population problem, nor the slightest hint that the inflation on which he is acknowledged to be the world's greatest expert might in any way be caused by the rapidly rising potential and real demands of the thousands of millions born into the world since he began his researches."


The quotation above is from page 5 of the book by Glyn Davies discussing the entire time span of recorded monetary history:

Davies, Glyn. A history of money from ancient times to the present day, 3rd ed. Cardiff: University of Wales Press, 2002. 720 pages. Paperback: ISBN 0 7083 1717 0. Hardback: ISBN 0 7083 1773 1.

Other causes of inflation affecting both developing and industrialized countries are discussed in the document on the Pendulum Metatheory of Money.

Bridging the Gap between Poverty and Wealth

The author describes the task of "enabling millions of the world's poorest men and women to earn a decent living for themselves" as the greatest problem facing mankind (page 596). Despite the magnitude of the problem the gaps between rich and poor nations should not be unbridgable since, as he points out "if all the countries of the world were arranged in ascending order [of wealth] there would be a continuous gradation from the poorest to the richest without any perceptible gap - more like beads on a string rather than shaky stepping stones across a stormy river. This important fact, plus the successful experience of a number of quite different countries that have been able to achieve high rates of growth over a considerable period, offers sound prospects for sober optimism, even among economists." (page 599).

Nigeria, India, and South East Asia

In chapter 11, entitled Third World Money and Debt in the Twentieth Century, developments in Nigeria receive particular attention because in the author's opinion Nigeria affords one of the best examples of the process whereby former colonies established and nurtured their own central and commercial banking systems followed by their own money and capital markets. By way of contrast India and South East Asia, where several nations are in the process of leaving the ranks of the Third World, also receive fairly detailed attention. (The experience of Japan in moving from being a developing country to a financial superpower is described in the previous chapter).

The International Debt Crisis and Currency Stabilization

The geographical focus of chapter 11 becomes more diverse when the evolution of the Debt Crisis is discussed, ranging over many other parts of the developing world too, e.g. Latin America where many of the worst cases of hyperinflation in recent years are found. The author notes the fears of some people that the problems of the former command economies of eastern Europe and their need for restructuring will divert investment by wealthy countries that would have gone to the developing countries and says that although these worries may have some validity in the short run, the assumption smacks too much of the 'fixed sum of capital' fallacy or the false assumption of a zero-sum game.

Although some less developed countries (LDCs) , e.g. India, Indonesia and South Korea have managed remarkably well in controlling inflation, in much of the Third World hyperinflation has strongly distorted development. Consequently Glyn Davies concludes this chapter by suggesting that "if the LDCs, in an effort to swing the secular monetary pendulum away from its inflationary extreme, were to anchor their currencies firmly once again to one or other of the northern currency blocks - the US Dollar, the Japanese Yen, or one of the strong European currencies, it would be an act, not of neo-colonialism, but of plain commonsense, soundly based on the hard-learned lessons of their own experience. Reanchoring their runaway currencies is a prerequisite for development to reach its true, more equitable, long-run potential." (page 641).

The Relevance of History

Countries that are today wealthy once faced problems that were similar in certain respects to those of developing countries today (conversely some countries in the Third World were once much wealthier than northern Europe) and therefore there may be lessons to learn from their experience. As the author points out in his preface "around the next corner there may be lying in wait apparently quite novel problems which in all probability bear a basic similarity to those that have already been tackled with varying degrees of success or failure in other times and places."

The contents of chapter 11 of A History of Money are listed below.

Introduction: Third World poverty in perspective              596
Stages in the drive for financial independence                601
  Stage 1: Laissez-faire and the Currency Board System,
    c.1880-1931                                               603
  Stage 2: The sterling area and the sterling balances,
    1931-1951                                                 607
  Stage 3: Independence, planning euphoria and banking
    mania, 1951-1973                                          610
  Stage 4: Market realism and financial deepening, 1973-1993  616
  The Nigerian experience                                     616
  Impact of the Shaw-McKinnon thesis                          619
  Contrasts in financial deepening                            622
Third World debt and development: evolution of the crisis     632
Conclusion: reanchoring the runaway currencies                639
For the contents of other chapters see the complete Table of Contents

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Roy Davies - Last updated 25 May 2005.