Developing Countries: Dangerous Times for the Internal Public Debt

Since the second half of the 1990s, the internal public debt of the world’s developing countries has increased significantly.  This increase is now reaching alarming proportions in a number of middle-income countries.  While some very poor countries have not yet been affected, the historical trend indicates a continuing rise in the debt level for developing countries.  At enormous cost to the countries concerned.

According to the World Bank, the internal public debt of all developing countries rose from $1,300 billion in 1997 to $3,500 billion in September 20051 (2.5 times the external public debt, which reached $1,415 billion in 2005).  In addition, servicing of the internal public debt in 2007 amounted to $600 billion — in other words triple the cost of servicing the external debt.  Total servicing of external and internal public debt exceeds the astronomical sum of $800 billion — the amount repaid each year by public authorities in developing countries.

Yet it would take only $80 billion a year over a period of 10 years — a total of $800 billion — for the entire population of these countries to have access to essential social services, such as basic health care, drinking water and primary school education.2  This would bring a fundamental improvement to the lives of the large majority of the world’s inhabitants.

Colombia’s Public Debt: a Ticking Time Bomb

Let’s take a concrete example.  Colombia, like the other Latin American countries, went through a debt crisis in the 1980s, and then “benefited” from a massive and highly transitory influx of capital in the early 1990s.  The neo-liberal model seemed to be working from 1991 to 1994, but in reality it was leading Colombia into the trap of financial structuring and public over-indebtedness.  The country’s internal public debt rose steeply.

Colombia’s Internal and External Public Debt

Year Internal share
(% of GDP)
External share
(% of GDP)
(% of GDP)
Share of internal public debt in total public debt (in %)
1990 1.90 12.87 14.76 12.9
1991 1.55 12.48 14.03 11.0
1992 2.93 12.06 14.99 19.5
1993 4.47 10.08 14.55 30.7
1994 4.58 8.08 12.66 36.2
1995 5.75 8.14 13.89 41.4
1996 6.62 7.81 14.43 45.9
1997 8.83 8.93 17.76 49.7
1998 10.60 11.51 22.11 47.9
1999 14.45 15.07 29.52 48.9
2000 18.65 18.25 36.90 50.5
2001 22.02 22.14 44.16 49.9
2002 24.97 25.35 50.32 49.6
2003 25.63 25.09 50.72 50.5
2004 25.73 20.70 46.43 55.4
2005 29.90 16.68 46.57 64.2
2006 28.48 16.38 44.85 63.5
Source: Banco de la República de Colombia y Ministerio de Hacienda y crédito público

The percentage of internal public debt in Colombia’s GDP increased fifteen-fold between 1990 and 2006, while the percentage of external public debt also increased, but to a much lesser extent (it was multiplied by 1.5).

A similar policy was applied in Brazil, Argentina and Mexico.  Throughout the developing countries, there was a substantial increase in public debt, mainly internal.  The figures published in April 2005 by the World Bank speak for themselves.3  Taking all the developing countries together, the internal and external debt, which in 1990 represented 46% of GDP, rose to 60% of global GDP in 2003.  In actual fact, the external public debt as a percentage of GDP decreased slightly between 1990 and 2003, from 31% to 26%. O n the other hand, the percentage of internal public debt more than doubled, rising from 15% to 34% of GDP.

The financial crises affecting developing countries between 1994 and 2002 as a result of the deregulation of capital markets and the private financial sector — measures recommended by the World Bank and the IMF — led to a marked increase in the internal debt.  In short, application of the Washington consensus led DC governments to lift exchange and capital movement controls.  This move coincided with deregulation of the banking sector in several countries.  Private banks were encouraged to take more and more risks.  This led to a number of crises, beginning with the Mexican crisis of December 1994.  Capital poured out of Mexico, causing bank after bank to go bankrupt.  The Mexican government, supported by the World Bank and the IMF, converted the banks’ private debt into an internal public debt.  The same chain of events occurred elsewhere, in countries as diverse as Indonesia (1998) and Ecuador (1999-2000).

Even in countries that were spared the collapse of their banking sector, the World Bank urged their governments to increasingly nationalise private sector debts.  The shocking fact is that the World Bank considers this trend to be positive and advises foreign investors to invest in the fast-growing domestic debt market.  It recommends that governments of indebted countries encourage the acquisition of local banks by big foreign banks — a process that has long been underway in Latin America.  The big Spanish banks have a firm foothold in the Latin-American banking sector, while US banks dominate in Mexico.4  The World Bank also supports privatisation of pension systems and advocates using workers’ savings (their future pensions) to buy domestic debt bonds.  The Brazilian, Chilean, Colombian and Argentinean governments have applied this policy of partial privatisation of pension systems, and pension funds have become major purchasers of domestic debt bonds.

This development is not restricted to Latin America.  Asia is the continent with the highest increase in internal public debt in recent years, mainly as a result of the Southeast Asian crisis of 1997-1998 and the policies imposed on the region by the IMF and the World Bank.

As for savings in the banking sector, instead of being used for productive investment, under public or private control, they are systematically diverted to purely parasitic, income-earning ends.  The banks lend the public authorities money, which the latter then repay at scandalously high interest rates.  In fact it is less risky for these banks to lend to the State than to small or medium producers.  A State rarely defaults on its domestic debts.  In addition, the central banks of developing countries, backed by the World Bank, often apply excessively high interest rates too.  This leads to the following pattern: local banks borrow on the foreign financial markets (US, Japan, Europe) in the short term at fairly low interest rates, and make long-term loans in their country at high interest rates.  The profits pile up — until the moment when interest rates begin to rise sharply again in the countries of the North, bringing bankruptcy to many of these banks.  To aggravate matters, the State sometimes steps in and takes over these private debts, thus increasing the internal public debt.  The pernicious processes of internal and external public debt now come full circle.

Brazil: the Internal Public Debt Has Increased by 40% in Two Years

Brazil is a textbook example.  Its internal public debt is 8 times higher than its external public debt.  In 2008, its internal public debt reached the astronomical figure of $869 billion (or 1,400 billion reais5) — a 40% increase in just two years.  Repayment of Brazil’s domestic debt is 12 times higher than repayment of its external debt.  The portion of the Brazilian budget allotted to repayment of the internal and external public debt is four times more than is spent on education and health services!6  In Guatemala, the internal public debt is 4 times higher than the external debt.

Steep Increase in Argentina’s Internal Public Debt

In Argentina the government managed to force down the external public debt in 2005 thanks to a three-year freeze on repayments to private creditors, but the internal public debt increased.  As things stand, Argentina’s public debt is again on the rise.7

Argentina’s Public Debt (in $ billion)

Period Total debt External debt Internal debt
Dec-94 80.7 60.9 19.8
Dec-95 87.1 66.4 20.7
Dec-96 97.1 72.9 24.2
Dec-97 101.1 72.9 28.2
Dec-98 112.4 81.2 31.2
Dec-99 121.9 82.5 39.4
Dec-00 128.0 81.4 46.6
Dec-01 144.5 84.6 59.9
Dec-02 137.3 87.6 49.7
Dec-03 178.8 102.0 76.8
Dec-04 191.3 111.6 79.7
Dec-05 128.6 60.9 67.7
Dec-06 136.7 56.2 80.5
Dec-07 144.7 62.1 82.6
Source: Ministerio de economía y producción, subsecretaria de financiamiento,
Deuda Pública (

China’s Foreign Currency Reserves Pile Up as the Internal Public Debt Increases

Another cause of the increase in domestic indebtedness is the stockpiling of huge foreign currency reserves by developing countries that export oil, gas, minerals and certain agricultural products, the prices of which have been on the rise since 2004.  China is one of these countries, accumulating vast foreign currency reserves as it floods the world market with manufactured goods, thus maintaining a permanent trade surplus.  The central banks of these countries invest a large part of these reserves in US Treasury bonds (or other treasury securities, in particular European ones).  In other words, they lend money to the US government to cover its enormous deficits.

Paradoxically, while some of the developing countries are extremely cash-rich, this policy generally entails new borrowing.  Absurd as it may seem, while foreign currency reserves are partially invested in treasury bonds issued by industrialised countries (as per World Bank and IMF recommendations) the public authorities borrow in order to repay the public debt.  The bottom line tells the story: the returns on reserves invested in foreign treasury bonds are lower than the interest paid on borrowed money.  Hence a loss for the country’s revenue department.

In addition, the presence of abnormally high levels of foreign currency in a given country may cause the central bank to go into debt.  What happens here is that massive influx of capital in the form of foreign currency passes through the hands of resident brokers who exchange it at their banks for national currency, which, as it swells in volume, becomes a potential source of inflation.  To avoid this, the monetary authorities sterilise these reserves either by increasing the banking system’s reserve asset rate (the increase in bank credit interest rates makes the credit more costly, thus slowing down the monetary production created by a loan), or by issuing domestic debt bonds (the sale of such bonds allowing the central bank to recover national currency that is taken out of circulation).8

An overwhelming majority of governments favour this neo-liberal policy, with the result that internal public debts increase to counterbalance the high levels of foreign currency reserves.9  This is the case for China and for countries in Latin America, Asia and Europe.

A Change of Course

Rather than stockpiling huge foreign currency reserves and at the same time increasing their domestic debt, the governments of developing countries would do better to: 1) carry out an audit of their internal and external public debt with a view to cancelling illegitimate debts; 2) adopt capital movement and currency control measures (much more effective for protecting against speculative attacks and preventing flight of capital); 3) use a large portion of their reserves to invest productively in industry, agriculture (agrarian reform and development of food sovereignty), infrastructures, protection of the environment, urban renewal (urban reform, construction/renovation of housing, etc.), health care services, education, culture, research, social security, etc.); 4) pool part of their foreign currency reserves to create one or more jointly-held financial institutions (Bank of the South, Monetary Fund of the South); 5) create a unified front of indebted countries to resist payment of the debt; 6) reinforce and create cartels of countries producing staple goods to stabilise prices upwards; and 7) develop barter agreements like those operating between Venezuela and Cuba,10 and recently extended to Bolivia and Nicaragua.


1  World Bank, Global Development Finance 2006, p. 44.

2  A calculation made jointly by UN specialised agencies, namely the World Bank, WHO, UNDP, UNESCO, UNFPA and UNICEF, and published in Implementing the 20/20 Initiative.  Achieving universal access to basic social services, 1998,  The above-mentioned organisations cite the figure of $80 billion per year as the additional sum to be devoted annually to basic social services, given that present spending is approximately $136 billion.  The total annual amount needing to be covered is between $206 and $216 billion.

3  World Bank, Global Development Finance 2005, Washington DC, April 2005, p. 70.

4  See World Bank, Global Development Finance 2008, chapter 3.

5  1 US dollar = 1.61 Brazilian reais on 10 August 2008

6  See Rodrigo Vieira de Ávila, “Brésil : La dette publique est toujours bien là !”, 10 March 2008; and Gabriel Strautman, “Deuda Pública: ¿Quién Debe A Quien?” 6 August 2008.

7  It should be added that the government made the mistake of promising, in exchange for reducing the external debt, to increase the interest paid in line with inflation and GDP growth.  Thus the situation of Argentina is once again becoming untenable.  See Eduardo Lucita, “Otra vez la deuda argentina”, 4 July 2008.

8  For an explanation of this type of operation, see Eric Toussaint, Banque du Sud et nouvelle crise internationale, CADTM-Syllepse, 2008, chapter 1.

9  World Bank, Global Development Finance 2006, p. 154.

10  ALBA (meaning “Dawn” in Spanish) is an agreement signed jointly by Venezuela, Cuba, Bolivia and Nicaragua, and operating partly on a barter basis: for example, 20,000 Cuban doctors provide free health care to the Venezuelan population and 50,000 eye operations have been performed in Cuba free of charge for Venezuelan patients in exchange for oil.

Translated by Judith Harris in collaboration with Vicki Briault and published on the CADTM Web site on 11 October 2008.  To be published in 2008: 60 Questions 60 Réponses sur la dette, le FMI et la Banque mondiale (CADTM-Syllepse, 2008) co-written with Damien Millet.