Confidence in third world countries



The history of mankind has been interposed by a mysterious series of booms and slumps. Historians have singled out the experience of the early 1930's as the 'Great despair.' This undeniably awesome event damaged the then promising economic stability in Europe and severely broken consumer and investor confidence around the World. Similarly the world debt crisis of the 1970's and 1980's also brought with it its own storm effects that overcame both developing and developed countries. The debt position of developing countries became particularly disturbing when as Stambuli (1998) remarks it became clear that there was a rising disparity of external indebtedness and the capability of nations to service their debt. This severe discrepancy was in the end described by several debt arrangements and more notably countries stating non-payment. (Stambuli, 1998)

In retrospection there have been many presumptions that have wanted to explain the causes of this crisis, however this paper will explore in particular whether developed or developing countries should be held responsible for causing and by extension alleviating this crisis and how investor confidence can certainly be boosted in third world countries.

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In order to entirely understand the idea of accountability we must first understand the common circumstances under which third world debt became challenging. Many development economists view the considerable increase in oil prices in 1974, which saw the cost of oil rise from $2.70 in 1973 to an intimidating $10.00 per container, as a main basis.

This rise instantly elevated the surplus on the current accounts of oil producing countries from $7 billion in 1973 to $68 billion in 1974. These large surpluses twisted the condition soundly documented by Stambuli (1998) that encouraged oil-exporting countries who had more foreign exchange than they required invest in western banks. In a bid to delegate the consequent liquidity these banks then sought to reprocess the surplus of 'petro-dollars' with developing countries that had experienced failing current accounts. The most significant charge facing developed countries was their fanatical and careless loaning procedure after the first oil prices distress that juncture little due process in establishing the credit merit of the recipient country.

As the crisis became more apparent in early 1980's international Commercial banks began to experience some of the negative impacts of their actions. Due to the change in fiscal policy of developed countries banks began lending at gradually high and variable interest rates. Bernal (1997), reports that interest rates moved from 12.1% in 1978 to 17.4% in 1981 and then to 12.9% in 1985, thus banks had begun to review what Stambuli (1998) documented as the 'Sovereign Risk Hypothesis', which assumed that countries were protected by their inbuilt character from default Risk. The picture further deteriorated as developed countries also reduced direct aid and investment to developing countries and increased protectionist policies that rigorously exploited Less Developed Countries prospects for obtaining foreign exchange to continue servicing their debt. (Bernal, 1997)

Consequently Less Developed Countries Governments have certainly contributed in changing the problem of debt into a disaster. Brown (1986) carries this contest further since he remarks that in Jamaica for example, the Government's verdict between 1976 and 1980 to protect an overrated exchange rate and to encourage communist policies influenced investor confidence and sudden capital flight. The government then found itself having to borrow not only to finance the current account deficit but also increasing levels of net capital outflows. Brown, 1986

It should therefore be clear that both Most Developed Countries and Less Developed Countries should bear the blame of causing the Debt Crisis. Less Developed Countries however uncertainly could have reduced these effects if they had managed their debt more professionally during the short period.

Investing in Third world Countries makes good business sense while there are pools of global financial resources in search of opportunities for diversification and higher returns. Besides, investment opportunities in such countries are reported to offer some of the highest rates of return on investment, even on a risk-adjusted basis.

Most Third world Countries governments have over the last fifteen years taken significant steps to create an encouraging business atmosphere. These measures include far success macro economic improvement that have condensed budget deficits and inflation levels to single digit levels and fueled economic development. A number of governments have also taken actions to reinforce the legal and judiciary system and regulatory institutions such as those for venture support.

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While sufficient investment controls and financial tools are significant to capital flows, most Third world countries have underdeveloped commodity and capital markets. Similarly, basic imitative and guarantee instruments that enable investors manage risk are partial. In addition, project supports rely primarily on bank financing, given the insufficiency of Third world countries capital markets, where market capitalization of most of the countries' equity capital markets is less than a third of Gross Domestic Product (GDP).

Despite the growth made by many countries to tackle the flaw highlighted above and the prediction for higher returns in Third world countries than in other regions of the world, most investors have not taken the time to review the investment opportunities available in Third world countries.

In recognition of the significance of dependable economic information, the Bank Group is leading a programme to improve data quality, collection, and management in all Third world countries. The Group is contributing more than half of the total project cost of USD 40 million and expects that the project will assist coordination and regional integration, and fuel capital flows by supporting investor confidence. The Group's efforts to support good control should also strengthen investor confidence. In addition to financing institutional reinforcement projects that improve the capacity of legal and regulatory agencies, the Bank provides resources to agencies such as the Organization for the Harmonization of Business Law in Africa (OHADA), whose mandate is to create conditions that assure legal security for businesses.

Similarly, the first model investment law of the African Law Institute (an institute sponsored by the Group), has been certified by key regional institutions. This will foster regional integration and further fuel investments and capital flows to Third world countries.

To conclude, I believe that each one of us has a critical role to play, as well as much to gain in increasing capital flows to Third world countries. It makes good business sense, it makes good unselfish sense. Through due diligence and partnerships, you will be rejecting the doomsday scenarios of Afro pessimists, which leads to a vision of fatalism and hopelessness for Third world countries. You will instead be supporting a vision of Third world countries that are truly wealthy offering lucrative opportunities for investments.


  • Ayittey, George B.N. (1993), Africa Betrayed.
  • Stambuli, (1998) Sovereign Risk Hypothesis, New York.
  • Bernal, (1997), peripheral Debt ,Chicago
  • Brown, (1986), within the triangle of deflation & Inflation
  • World Bank databases and UNCTAD World Investment Report, 2003