Analysis of the Third World Debt Crisis and Its Causes

Introduction

Economic development requires investment by the government in infrastructure and other sectors that will help in propelling growth. Unfortunately, less developed countries most of the times are unable to raise the required capital for development from the local savings because their saving rates are low. Therefore, these countries always borrow money from either developed countries or international financial institutions to fund the deficits in their budgets.

However, due to industrial inability and technological deficiency, third world countries export mostly raw materials which generate low income that fully repay the loans these countries receive. Consequently, the debt level of the less developed countries has been escalating year in year out making this countries use larger and larger proportions of their budgets each year to service debts.

Causes of the Debt Crisis

Debt crisis of the developing countries can be attributed to many issues both internal and external. Much as the developed nations and the international donors are to blame for the problems facing the developing countries, third world countries also share the blame due lack of proper debt management policies. To begin with, most third world countries have very poor economic management policies making these countries invest in unworthy projects (Reitan 67).

It is prudential that when a project is financed by borrowed funds, then returns from the project should be able to service the loan. However, this is not the case in developing countries due to poor investment decisions compelling the government to pay the loans using money from other sources.

On top of that, most third world countries are governed by leaders who usually put their personal interests first as opposed to national interests. It has been proved that corruption levels in Africa and Latin America are high and keep on increasing each year. Consequently, it is not unusual for borrowed funds that were meant to finance various national projects to be diverted into the pockets of few politicians or influential people in the government (Jochnick and Fraser 37).

Therefore, the country continues to pay for loans that were never invested in any project or if they were invested then the project stalled on the way and requires more money to be completed. Furthermore, the problem of corruption escalates because the stolen funds are usually not invested in the third world countries to boost their economy but are instead stuck in European countries.

Furthermore, most developing nations export raw materials either due to lack of industries to process the raw material or lack of technology. The raw products are highly undervalued in the international markets thus fetching very low income for these countries, which cannot fund the loans let alone the countries’ whole budgets.

This problem is worsened by the fact that third world countries import finished products from the developed nations which are very expensive, and drain up all the income from the exports thus limiting the ability of these countries to save any money (Reitan 68). On the same note, third world countries are technologically behind and they do not produce most commodities which make them net importers further exacerbate the situation.

In conjunction with that, the debt crisis that is facing developing nations has also been precipitated by some external forces which are even strong and beyond the control of these countries. Firstly, there have been very poor lending policies that have placed the interests of the developed nations, especially Europe and unite states of America, in the forefront disregarding the effects that this may cause to developing nations.

The international monetary institutions have, in the name of determining the ability of a country to pay back their loans, imposed tough conditions which have reduced developing nations to being subjects of foreign forces both politically and economically (Rajagopal 34).

Using this as a weapon, developed nations have manipulated third world countries to become entirely dependent on loans from them. Additionally, since 1979 and more significantly from 1982, international monetary institutions including the IMF and World Bank imposed one sided lending conditions as prerequisites for them to offer loans to third world countries.

This served only to escalate the indebtedness of the sub-Saharan African nations and other third world countries. The servicing of these debts not only exhausts the earnings from exports but also makes developing countries to allocate portions of national incomes to debt servicing.

On the same note, the developed nations through international monetary authorities compelled developing nations to devalue their currencies drastically in 1980s. This action not only made imports very expensive for developing countries, but also made loan repayments very costly. To fund the deficit that this caused in the budgets of developing countries, governments were forced to increase borrowing which further increased the indebtedness of these countries.

In addition to that, the Oil crisis of 1973 created surplus income for developed nations of Europe and United States of America (Jochnick and Fraser 39). In order to eliminate the surplus that was present in their banks, Europe and America invested this money in form of loans to developing nations at generously low but fluctuating interest rates.

Third world countries took advantage of this and borrowed in large amounts. However, this money was either misappropriated or poorly invested in projects whose economic returns would not service the loans thus increasing the loan burden.

On the other hand, the repayment of the loans from the oil crisis was seriously hindered in the 1980’s due to the devaluation of the third world countries’ currencies as a result of fluctuating interest rates, and the sharp increase in interest rates. On top of that, terms of trade of developing countries, especially sub-Saharan Africa, deteriorated while at the same time developed nations implemented protectionist policies that condensed markets for raw products exported by developing countries.

Moreover, the World Bank and the international monetary fund implemented Structural adjustment program, during 1980s, in what was termed as efforts to help developing nations catch up with their developed counterparts. This involved eliminating of controls on retail and producer prices, restructuring of public institutions, liberalization of trade and exchange systems as well as broadening the tax base.

Contrary to the expectations, this increased the burden on the poor person and instead of alleviating the economic problems of developing nations, the programs only protected economies of rich countries (Rajagopal 36). This placed the rich countries in a position to set rules about loans while the entire burden was shifted to developing countries.

Conclusion

Developing countries continue to struggle with servicing loans that were advanced to them as early as 1980s, yet the projects that were funded using the money are nonexistent.

However, much as many countries are trying to find a way out of the debt predicament, this requires the joint efforts of the international monetary institutions, the developed nations and the political will of the third world countries. Unfortunately, changes might take long to be realized especially in Africa, because though elections are carried out regularly, leaders remain the same corrupt ones who have for years mismanaged public funds.

Works Cited

Jochnick, Chris, and Fraser Preston. Sovereign Debt at Crossroads: Challenges and proposals for Resolving the Third World Debt Crisis. Oxford: Oxford University Press, 2006. Print.

Rajagopal, Balakrishnan. International Law from Below: Development, Social Movements, and Third World. Cambridge: Cambridge University Press, 2003. Print.

Reitan, Ruth. Global Activism. New York: Taylor and Francis, 2007. Print.

Can Microcredit Save the Third World?

The term micro-credit can be defined as small loans directed towards the very poor or marginalized who need money for self-employment projects in order to generate income or for urgent family needs such as health issues and basic education. It is designed to lend small amounts of money for a short tenor. Hence the money which is lent is in small proportions and the borrower is supposed to repay within a short time frame, usually with a year at most. Microloans thorough micro-credit programs help reduce dependency among the poor, alleviate poverty, empower women and create long-lasting benefits for future generations. There are however critics to the system which raise concerns regarding the micro-credits ability to address the deep-rooted cause of poverty. There are concerns regarding micro-credits sustainability from the economic perspective as it fails to address or attempt to improve the economic indicators, income levels to rise or poverty to reduce significantly. ‘Nevertheless, microcredit has proved to be an effective and popular measure in helping to alleviate poverty, enabling those without any collateral to borrow at bank rates from various financial institutions and start small businesses.

While it is relatively easy to obtain credit in developed or western countries, through large commercial banks and financial institutions, in the developing world where people lack the necessary collateral or strong credit history, access to credit although one of the most desirable financial tools for the poor, is also the most difficult to secure.

Credit leverages the human capital with the physical capital and serves as a means to increase income among the poor, but due to the problems arising from moral hazard and adverse selection the lender needs to trust the borrower before enhancing any loan, thus hinders the poor people from accessing credit (Hollis, 1999).

Microfinance, in many ways, has tried to overcome these difficulties in obtaining loans. Generally defined as an extension of small loans or microloans to the poor entrepreneurs, the unemployed, and others in poverty and who are considered nonbankable since they are unable to meet even the minimal requirements for a loan extension, like stable employment, basic collateral, and certifiable credit history. Microfinance is a broad field that basically involves the extension of different types of financial assistance, thus one of the branches of microfinance is known as microcredit which extends small loans to the low-income households (Krieger, 2004).

The origin of micro lending

Although the term microcredit or micro-lending got its boost recently, its origin can be traced out in all parts of the world even back to the 17th century (Hollis, 1999). These saving clubs have been operating from one region to another and had developed their own names in history. For example, they developed as “tontines” in West Africa, “pasanaku” in Bolivia, and “tandas” across Central America and Mexico (Hollis, 1999). All these alien words represent microcredit in one way or the other, for example in Spanish the word “tandas” means “shift. This refers to a group of people who contribute money which shifts to that person in the group who is in most need. The traces of “tontines”, named after the famous Italian banker Lorenzo de Tonti, can be traced back to the 17th century in the region of West Africa.

Thus the concept of small group-based lending has been with us for centuries. Small but formal saving and loan associations have also existed in our society for decades providing an opportunity to the poor, who are neglected by the banking system to obtain collateral-free loans. Introduced in the early 1700s, one of these earlier lending institutions was known as the Irish Loan Fund system. Introduced by Jonathan Swift, a nationalist and a writer, it helped many Irish people who were living in improvised conditions. Swift worked around the idea of providing credit to impoverished but honest tribesmen, who had been facing hard times, yet maintained a respectable position in the society.

Another factor that contributed to the success of micro-lending was that the other alternatives available were usually exploitative of the poor. These alternatives were pawnshops and private money lenders. The two major problems associated with these alternatives were, first that money lenders provided loans similar to that of loan funds but a comparably much higher rate which the poor were sucked up any additional profits these poor people earned. Second that the pawnshops provided credit up to £1, which greatly restricted the number of investments that could be financed, and the borrowers, mostly agricultural laborers didn’t even possess assets greater than £1 which they would be able to pawn.

Swift at first established a fund out of his own pocket worth around £500. His criteria to assess the credit rating required the borrower to obtain a guarantee for that loan from at least two neighbors. The reason behind this criterion according to Swift was that if a man is honest, industrious and respectable in the society would easily secure such a guarantee while the dissolute would be eliminated by this exercise. In this way Swift was able to draw on social capital, similar to the way of group lending we see today by Grameen bank. This lending strategy proved to be very successful (Hollis, 1999).

In 1837, this system was standardized and the Loan Fun Board took control over many independent loan funds after which in accordance with the law loans could not exceed a limit of £10 and had to be repaid within a term period of 20 weeks. As compared to other local profiteers the interest rates charged on these loans were lower and settled at approximately 8 percent (Hollis, 1999).

This idea of microlending given by Swift emerged slowly, but by 1840 it had emerged as a widespread institution spreading over all of Ireland with about 300 funds. The aim was to provide short-term loans at a lower interest, which at their peak stretched out to almost 205 of all households in Ireland annually (The History of Microfinance, 2006).

In the 1800s there emerged various types of financial institutions in Europe were mostly organized around the urban and the rural poor. Some of these institutions were known as Credit Unions, Savings and Credit Cooperatives, and People’s Banks.

Initiated by Friedrich Wilhelm Raiffeisen, the altruistic determination behind the credit unions was to help the poor break free the chains of the money lenders reduce their dependence on the money lenders, and thus improve their own welfare. This movement helped the unions expand over to other German states by 1870. It also spread over Europe and North America as a cooperative movement supported by these countries and eventually reached the developing countries. With almost 9000 units, Indonesian People’s Credit Banks (BPR), opened in 1985, became the largest system of microfinance (The History of Microfinance, 2006).

In 1900, several adaptations of the models defined above began to surface. The goal of this intervention in rural financing was based on the modernization of the agricultural sector, which in turn could be achieved through two objectives. One was to commercialize the agricultural sector by lending easy credit which can be invested and idea savings can be mobilized for new investments and repayment of loans. The second objective was to reduce the dependency on feudal lords and the oppressive relations that were reinforced through indebtedness.

These banks were not owned by the poor, but by government or private commercial banks, and with time they became abusive as well as inefficient. The loans were mostly targeted for provided agricultural credit to increase the productivity of farms, and hence increase income. However, these subsidized agricultural loans were not very successful and rural banks witnessed the erosion of their capital base due to poor management of loan repayments.

Pioneers of modern day micro credit

Meanwhile, there were other experiments being carried out in Brazil and Bangladesh where small loans were being extended to women, for the purpose of starting a micro business. This type of credit facility was structured around a group-based lending system, where each member of the group served as a grantor of the loan, guaranteeing the repayment of loans of all the other group members. Thus we see that in this type of “microenterprise lending” program, the focus shifted from agricultural lending to “income-generating activities” (The History of Microfinance, 2006) and whose target audience was not farmers but very poor borrowers, which were mostly women.

The entire concept of microloans to help the poor took a huge leap when the process was institutionalized by Yunus’s Grameen Bank and ACCION International in Bangladesh and Venezuela respectively.

  • Established as one of the premier microfinance organizations, ACCION International was a volunteer student program, initiated by Joseph Blatchford, a student of law in Caracas by raising $9000 from private organizations. Today, its network of lending partners spreads over Latin America, Africa, and the United States.
  • Established as a trade Union in 1972 in India, to improve the income and social security access of women, the Self Employed Women’s Association (SEWA), went on to form a bank of its own in 1973 to address the issue of scarcity of financial services available to its members. The contribution of four thousand women helped to form the Mahila SEWA Co-operative Bank. With more than 30, 000 clients, the bank extends microloans to illiterate, self-employed, and poor women.
  • Professor Muhammad Yunus, in 1976, designed a credit extension program to address the problems faced by the poor in obtaining credit, with the help of its students of Chittagong University. This experimental research-based program was so successful; it spread quickly to a large number of villages. Although this venture with the rural banks was very successful in disbursing and recovering thousands of loans, the banks were reluctant to adopt this project after the pilot phase was completed, arguing that it was a risky venture. But with the endless efforts of Professor Yunus and the help of some donors, The Grameen Bank came into existence serving more than 4 million borrowers today (The History of Microfinance, 2006).

According to Professor Yunus, credit was the key to unlock the door to a poverty-free world. He believed that the answer to poverty did not lie in providing food aid to the poor, or the extension of loans from donor agencies to the governments of these poor countries or welfare payments, instead the solution lied in providing small loans to the poor people directly which would help them invest in return generating businesses (Jolis., 1998).

As an economics professor at the University of Chittagong, in Bangladesh, Mr. Yunus was deeply appalled to witness the severe conditions of the poor people in the area surrounding the university. What was more disturbing to Mr. Yunus was the fact that all theories of development failed to provide a solution when it came to alleviating the poverty faced by these poor people. Committed to finding a solution to the problem, Mr. Yunus decided to conduct a survey and explore the real difficulties faced by the poor. Among his first interviewee was a woman who borrowed credit in order to purchase raw materials and make bamboo stools. But these stools had to be sold to the moneylender only at a price below the market price, leaving the woman with barely any money after repayment of the loan and interest, to feed her family. Thus for the next batch of stools, she had to return to the moneylender and this exploitative cycle continued.

After studying certain cases Mr. Yunus came to the conclusion that if these poor people are given small amount of loans and allowed to sell their goods at market prices, they would be able to feed their families, service their debts and eventually even earn profits. But these poor people posed the greatest default risk to the banks and hence the banks were reluctant to extend credit to them.

Mr. Yunus argued against this, stating that the poor had greater incentives to pay back the loans and get rid of destitution. He proved his claim by establishing his own bank known as the Grameen Bank with a less than 1% default rate, much lower than many commercial banks. Most of the borrowers of the Grameen bank around 94% are women, as according to the founder they are the world’s poorest people and more reliable than men

The bank’s strategy of group-based lending helps to keep the number of defaults under control as according to this requirement if one group member defaults the other cannot get a loan.

Today, microcredit is not limited to the Grameen Bank and has spread beyond Bangladesh to other developing countries like India and even America, and Europe. The efforts of Mr. Yunus have helped changed the lives of many poor, as will be illustrated with some of the examples below but on the whole, it has only scratched the surface of world poverty. To eliminate poverty from the world, much more effort and determination like that of Mr. Yunus is needed.

Microcredit programs can serve as a basis to save third-world countries from the severity of poverty that exists within them. One argument in favor of microcredit programs as a solution to the problems of capital deprived third world countries can be viewed in the light of the two.

Alleviation of poverty

The provision of credit to purchase capital or raw materials, empowering the poor by providing access to factors of production to carry out income-generating activities, promotes self-employment among the developing countries, fosters enterprise rather than dependency. This can help reduce dependence on money lenders or aid from other countries.

The purpose of microcredit programs to lend out to the poor for them to expand their business is indeed an effective way to reduce poverty in poor countries. These businesses are usually breathtakingly simple and satisfy the credit hunger of poor people less brutally as compared to loan sharks. Taking the example of a successful entrepreneur Pakmogda Zarat, from one of the poorest African countries, Burkina Faso. She owns a small restaurant in Ouagadougou the capital of Burkina Faso. As it’s a very small venture and the outlook of the restaurant is such that it does not have any walls and is made of roughly-hewn logs which support the ceiling made of thatch, it cost her nothing to build that restaurant. Even the menu is very unpretentious as the restaurant only serves rice. But with the help of microloans, from a local branch of the countries microlender, Fédération des Caisses Populaires du Burkina Faso, Ms. Zarata, the owner of the restaurant was able to buy rice at a lower price at wholesale rather than the retail price (Kampala, 2001). This resulted in small profits which grew with time, and today Ms. Zarata has enough money to employ seven people, pay her children’s education fees and own a second-handed motorcycle to swagger across town.

The second aspect of this approach is that microcredit programs also contribute towards improving social capital by vocational training, information about civil responsibilities, and in areas of health. These contributions though costly are very effective in achieving the success of these programs. According to a study measuring the effectiveness of microcredit programs towards alleviating poverty and increasing productivity among third world countries, it was proven that there is a positive impact of these programs and can be used as a viable strategy to improve productivity among the poor by 175 % for the landless poor (McKernan, 2002).

The additional role of microcredit organizations towards improving social capital is also very important. It has been observed in poor countries that, the severity of killer diseases such as AIDS and diarrhea also makes it difficult and sometimes impossible for people to work, or repay loans taken to start a small business. In Africa alone, a survey of micro borrowers in 14 African countries should that as much as 95% of these borrowers found it difficult to pay medical bills, usually arising from AIDS and around 77% were unable to pay for funerals for those who had died of disease. It was also observed that these people had an extra burden to take care of the children of their relatives who had died of disease. Thus microlenders can make a difference in the life of these people by conducting health educational programs, to create awareness among these people regarding the importance of hygiene, washing their hands before eating, and promote the usage of condoms (Kampala, 2001).

Another argument in favor of microcredit as a solution to poverty in third world countries is based on the argument that encouraging the availability of small scale to the poor, it promotes the latent capacity of the entrepreneurs to utilize this credit in the small enterprise sector. This effort would further create employment opportunities, endorse a feeling of self-reliance among them, and most importantly since microcredit in the Grameen model lends out mostly to the poor women, his exercise helps to include women in productive activities in the poor countries where the women population accounts for more than or equal to half of the total population.

Another reason why lending out small sums, as much as $25 to women groups is that women are more likely to use any additional income to feed and clothe their children, while men might just blow the extra income on booze, as seen in certain parts of Otim in Africa (Kampala, 2001).

Thus, by empowering the majority of the population, microcredit can serve as an important factor to alleviate poverty among third world countries (World Summit for Social Development, 1995). According to the World Summit Report, the impact of these microcredit programs on the overall incomes of households showed that these households reported higher and more stable incomes after receiving loans through these programs (World Summit for Social Development, 1995)

A characteristic as observed in third world countries is that the poor people are so empty-handed that they have no money to invest in their children. As a result, the future of the nation remains illiterate and is unable to improve its standard of living or contribute towards the growth of the nation. Thus, The third argument in favor of microcredit for the poor of the third world countries is that putting capital in the hands of these poor people allows them to invest in small businesses, reduce dependency, earn profits, although small in the beginning but they grow as the business expands, and invest in their children with the extra money they have earned. As a result, the provision of small loans creates enormous benefits for the future of both the nation and the poor people. This education will open up various choices and opportunities for the upcoming generation for better employment and a better standard of living (Krieger, 2004).

According to a report by the Australian Bureau of Statistics, in 2003-2004, micro-credit facilities provided by the Agency for International Development helped around 143,000 people to take advantage of microloans, and further pass on the benefits to approximately 410,000 dependants. An example of such a household is that of Ms. Nguyen Thi Hoang who lives in Vietnam in Ho Chi Minh City. Three mentally ill brothers and two old parents are dependent on Ms. Nguyen. Their household income came by peeling cashews for which Ms. Nguyen’s mother was paid only, 4,000 Vietnamese dollars ($AUS 0.34 for every kilogram of peeled cashews. Ms. Nguyen applied for a microloan of $2,000,000 Vietnamese ($AUS 170.00) which was granted by an Australian government microcredit project. Ms. Nguyen used the money from the loan to buy a sewing machine and earns as much as $30,000 Vietnamese or $AUS 170.00 per day making her the bread earner of the family. This money also suffices to the basic needs of Ms. Nguyen and her family members who are dependent on her (Australian Bureau of Statistics, 2005).

The limitations of microcredit are greatly overlooked because of various underlying assumptions the economists have incorporated into their studies on the subject. Firstly it is assumed that the poorest wish to be self-employed when most seek fixed income steady wage jobs. Secondly, it is assumed that credit is the main financial service that the very poor of society needs. However in reality there is a need for a sense of security which can be derived from emphasizing savings and insurance to protect the marginalized and the very poor of the society against any unexpected crisis.

Thirdly providing easy access to credit is not sufficient for successful micro-enterprises but other factors mainly identifying opportunities, training, and establishing market linkages are equally important.

The fourth assumption is that people falling just above the poverty line don’t need micro-credit. However, it is this segment that will benefit this segment more. David Holme and Paul Mosley have discussed and proved in their book titled “Finance against poverty” that the increase in income of the borrowers under the micro-credit scheme is directly proportional to their starting income. Hence the vast majority of the population lying below the poverty line does not benefit from the microcredit and they end up with less incremental income even after getting the loan (Roth, 1997).

According to David Holme and Paul Mosley, the upper and middle-income poor tended to benefit more than the ‘poorest of the poor. This according to them can be attributed to factors such as the wealthy individuals and households have a wider range of investment avenues as opposed to the poorest households with limited and less lucrative investment options.

Secondly the richer poor could take some risk without putting their survival at stake and venture into riskier investments in pursuit of higher gains. Thirdly if the purpose of the loan is not specified, the very poor will spend a significant proportion of the loan on consumption as compared to the middle and the upper segment of the poor.

Under the micro-credit programs, a lot of effort has been directed towards uplifting the economic well-being of women. Hence female micro-credit borrowers hold a pivotal position as far as the elimination of poverty from society is concerned. Women were specifically focused because they make up the major portion of the poorest of the poor residing in the rural areas and are responsible for the economic welfare of the family. Ideally, most of the microcredit schemes aim to increase the economic independence of women and thus increasing their status in society. However, there is a lack of evidence to support if these micro-credit programs will empower women to release them from the clutches of poverty.

The size of the loans is not significant enough to enable women to make any long-lasting income change for the household. Moreover increased access to easy credit in the same geographical area leads to market saturation of the products made mostly by women. This is primarily because poor women generally tend to get involved in similar businesses, such as food vending and petty trading, etc. This leads to more competition in an already limited market and decreases the overall share of income for each woman.

Conclusion

Thus we conclude that although microcredit programs due to their underlying assumptions come with certain criticism, the over benefits to the third world countries out with these criticisms. There are concerns that credit is only one element necessary for the establishment of a successful enterprise. To respond to potential demand for a good or service, an entrepreneur will need easy access and support in terms of transport, communications, power, water and storage facilities, etc. Moreover to the poor high-interest rates of 2 to 4.5 percent per month hardly give them any chance of improving their economic conditions. ‘Nevertheless, microcredit has proved to be an effective and popular measure in helping to alleviate poverty, enabling those without any collateral to borrow at bank rates from various financial institutions and start small businesses.

References

  1. . (2005). Web.
  2. Hollis, A. (1999, September). Women and Microcredit in History: Women and Microcredit in History.
  3. Jolis., A. (1998). Banker to the Poor.
  4. Kampala, O. (2001). How to lend small sums to poor Africans to set up small businesses. 358 (8204).
  5. Krieger, R. (2004). . Web.
  6. McKernan, S.-M. (2002). The impact of microcredit programs on self-employment profits: do noncredit program aspects matter. 84.
  7. Roth, J. (1997). The limits of micro credit as a rural development intervention. Institute for development policy and management manchester university.
  8. Sandals to suits. (1997). The Economist.
  9. Shuffling off the buffalo. (2004). The Economist , p. 71.
  10. The History of Microfinance. (2006).
  11. Tripathi, S. (2006). . Web.
  12. World Summit for Social Development. (1995). Role of microcredit in the eradication of poverty .

Third World Countries Development: Pieterse and Escobar Views

Both Pieterse and Escobar are in agreement when it comes to the “crisis of development” in Third World countries. Both are in agreement, that the disparity between the First World countries and the Third World countries in terms of GDP, and other economic factors are substantial. Both are in agreement that something has to be done to rectify the problem. However, the similarity ends here, because Escobar proposes a radical approach on how to resolve the said issue.

Escobar asserted that a Western style of development must be rejected. Escobar said that it is best to revisit what has worked in the past. He said that Third World countries suffered due to the indirect effects of colonialism. He also asserted that poverty was the result of a Western style of managing resources that was introduced to the said countries. Escobar pointed out that in the past, these societies survived through the efficient use of social networks, and the efficient sharing of resources. Escobar, therefore, calls for a nexus with grassroots movements, as a viable solution to the inequality problem.

Pieterse disagrees with Escobar’s view. Pieterse asserted that Escobar had an overly simplistic view of development. Pieterse argued that development in Third World countries is not merely the direct result of Western influence. Pieterse said that Escobar’s view is nothing more than nostalgic romanticism with conservative overtones.

Pieterse’s view of development as opposed to Escobar’s

Pieterse believes in the power of alternative development to solve the socio-economic problems in Third World countries. He said that alternative development promotes alternative practices of development. This idea focuses on local development. Alternative development can also be viewed as an overall institutional challenge. For example, in a normative approach to development, the focus is on economic change. However, in an alternative development framework, the focus is on the people’s capability to affect social change within their own society.

Pieterse is developing a way to critique conventional views about development. His primary concern is to discredit the popular view called developmentalism. He said that it stems from a Eurocentric approach to development. It is founded on the assumption that development must follow a certain pattern. It follows that there are certain gatekeepers. These are people that are privileged enough to discern the logic, and unilateral direction of economic and social development. Therefore, Europeans and Americans believed that they are more advanced than others with regards to economic strength.

In other words, Pieterse created a framework to critique mainstream development. Thus, he was able to determine that development from a Western point of view follows a secularized Christian narrative of redemption. In this particular narrative, the colonizers are credited for transforming primitive societies into civilized societies.

Thus, it is important to introduce an alternative view of development. A good example of this approach is to go beyond the discussion of macro-economic change. Pieterse argued that it is time to question the goals, agents, and methods of development. In Pieterse mind, mainstream development is unwilling to go down to the local level. He believes that it is by re-focusing on the local level that one can truly determine if positive change has occurred. It is also the means to determine if a chosen methodology is effective when it comes to improving the lives of people.

Escobar on the other hand does not propose a method that will bring about change. Escobar proposes to redefine the concept of development. Escobar fails to make the distinction, because Escobar was not following the normal discourse when it comes to the discussion of development in Third World countries. In other words, Escobar engages in an ideological discussion as opposed to a discussion based on normative economic language. Pieterse said that Escobar failed to make the distinction, because Escobar resorted to creating an overly simplistic view of development. In addition, Escobar fails to distinguish the different types of changes that have occurred in a particular country.

A View of the Traditional Life in Ladakh

Esteva will argue that Ladakh does not need any form of development. This assertion is based on a radical interpretation of the meaning of development. Esteva equates development to modern civilization. In this perspective, development will inevitably create pollution; the obliteration of indigenous languages; destruction of indigenous learning; and the introduction of lifestyle-related diseases such as diabetes, and cardio-pulmonary ailments.

Esteva will oppose the entry of Western-style development to Ladakh because he believes this action will only create counterproductive institutions. Esteva will argue that this type of development will only create a dependency on products and services that will make life difficult for members of the Ladakh community.

Pieterse will espouse an alternative form of development. He will encourage human development. He will favor the introduction of reading and writing. He will favor higher education for the people of Ladakh. Pieterse will focus on solving the needs of the people. He will question the creation of institutions that will only favor the investors. He will try to find out the end goal of every action that is made in the name of development.

If development strategies are implemented, Pieterse will insist that related activities must be done through the community. He will make sure that the members of the community are involved in the process. Pieterse will campaign for a participatory type of involvement. This means that inputs from the local community are needed to initiate any type of development plan. Pieterse will favor the use of NGOs as opposed to government agencies.

Escobar’s Paradigm Shift and Pieterse’ Non-Paradigmatic Approach

Escobar uses the language of a paradigm shift because he does not believe in the conventional definition of development. Therefore, a paradigm shift is needed to reinterpret the meaning of development. Escobar believes that the concept of development was created with a bias towards the needs of the Western world. For example, development was closely associated with science and technology. Since Third World countries lack the capacity to understand the efficient application of science and technology, they are unfairly labeled as underdeveloped.

In other words, Escobar asserts that the lack of development is only true from the perspective of the West. It is however, not true in societies that were able to minimize poverty via traditional practices of the community. Escobar also commented that the idea of development in accordance to Western standards is pointless, because it is through the introduction of Western-style of development strategies that has created extreme poverty in Third World countries. Escobar points to the deprivation of access to land, water, and other resources due to the introduction of new social norms.

Pieterse insists on a non-paradigmatic approach because he believes that there is no need to redefine development. Pieterse believes that instead of a paradigm shift, the solution to the problem requires a new mindset that is based on alternative development. In this context, development is measured using different standards. For example, instead of measuring GDP, alternative development will measure how the community benefited from the introduction of development initiatives. Instead of focusing on how farmlands have become more efficient, the focus is on how the farmer has benefited from the introduction of development strategies.

Pieterse and Escobar’s view on poverty and the role of economic growth

Pieterse and Escobar share the same view with regards to the importance of eradicating poverty. However, they differ when it comes to the specific strategies that have to be implemented to eliminate poverty in Third World countries. Pieterse believes in the effectiveness of the Swedish concept of “productivist social justice.” In this framework society benefits from a welfare state investing in enhancing its citizens’ capability to become productive. This idea is in line with Pieterse previous pronouncements that members of the community must participate in implementing development strategies in their respective society.

Pieterse also believes that development strategies must be crafted with an eye towards equal treatment of women. He believes that women possess the talent, energy, and creativity needed to foster economic growth. In addition, Pieterse will ask government leaders to go beyond conventional poverty alleviation strategies, and focus more on designing enabling institutional mechanisms. It must be made clear that Pieterse believes in the importance of an intervening force. Government still plays an important role as an arbiter. However, the focus is on the people and not the end result.

Pieterse will speak against social injustice. Escobar will share the same view regarding the impact of social injustice and economic efficiency. However, it is not easy to develop an argument on the importance of social injustice based on Escobar’s ideas. The problem can be seen in Escobar’s tendency to blame poverty issues on Western colonizers, without examining evidence regarding social problems within a particular country, even before the advent of colonization.

Escobar on the other hand will insist in the eradication of any form of Western influence on Third World countries. Escobar believes that a Western style of civilization is the root cause of poverty in Third World countries. Therefore, poverty alleviation is an impossible goal even if the government will invest in economic growth. Escobar believes that Third World countries must go back to the time when ancient societies were able to counteract poverty through sharing and mutual access to resources. In other words, Escobar’s view requires the reduction of urbanization in Third World countries.

Escobar wants poor countries to go back to a time when development was rooted in local cultural traditions. Poverty alleviation is possible not so much on science and technology, but through traditional community practices, frugality and sufficiency. Therefore, members of the community must learn to help each other. It is different from the suggestion of Pieterse, because in Escobar’s view the absence of government intervention is more effective in the long run. Escobar’s suggestions focuses on the success of traditional methods before the advent of the modern age, but it ignores the evidence of the impact of technology in many parts of the world.

Product Dumping in Third World Countries

Introduction

Third World countries should not be considered as the dumping grounds of products that are not successful, hazardous, or even too dangerous for sale within the U.S. market. Even if there are no rules, regulations or bans in the countries these products are exported to, allowing the sale and export of goods that have been proven to be dangerous are to become complicit in contributing to the suffering and possible death of thousands of people (Kao & Peng, 2016). Product dumping of this nature should be outright banned due to the negative consequences that it can bring about.

Was the Dumping Ethical?

From the perspective of the local laws in the third world countries where the products were dumped, the act was lawful; however, from an ethical standpoint, it is immoral and unethical. Even if it true that various individuals in these countries would not have had access to these products in the first place if they were not dumped there, the danger is simply too high for them to be utilized. It has already been proven that these products are too dangerous for sale in the U.S. market due to the adverse consequences they could have on a person’s health.

Exporting them does not remove these harmful effects, what is occurring is simply a devaluation on the part of the U.S. government and of American based companies on the lives of people living in third world countries (Moraga-González & Viaene, 2005). By knowingly dumping these products despite the obvious health risks involved, the entities responsible for the product dumping are stating that they do not value the lives of the people in these markets.

Examining the Dalkon Shield

Even if the Dalkon Shield helps in preventing unwanted pregnancies, the fact remains that it has serious health complications associated with its use. Yes, there are high rates of deaths during childbirth in various third world countries and it can be justified that the utilization of the Dalkon Shield, despite its potential adverse effects is a good thing. The problem though is the lower price of the Dalkon Shield in these countries is not due to altruistic reasons; it is merely companies getting rid of dangerous products that cannot be sold in markets with stricter safety controls. The actions of the U.S. government in supporting such activities are also extremely unethical since it is also not doing so for altruistic reasons; rather, it is merely helping to support a local American company at the expense of the health of the citizens of another country.

Obligation of Financial Managers

Financial managers are under the responsibility to protect the interests of their shareholders in whatever way they can that falls under legal and ethical principles. One of the current trends in operations among many global companies in the practice of Corporate Social Responsibility (CSR). CSR is a means by which a company judges how its actions contribute towards a concept known as “the general social good” wherein the operations of the enterprise are expected to help society and not be a detriment to it (McGee, 2008). The development of CSR came as a result of numerous scandals involving the actions of businesses that were shown to be damaging to both the environment and society.

Impact of Unethical Actions

Simply put, if the general public perceives the actions of a company as being harmful or socially destructive, they will likely patronize another business for their products and services. It is based on this principle that the actions of the companies in this case example are a direct violation of many CSR operational procedures. Yes, there are short-term gains for the companies when it comes to maintaining profitability, but the long term repercussions of such actions could cause many of their present and future customers to turn against them.

Evidence of this can be seen in cases where allegations of the use of sweatshops in the production of various U.S. fashion brands caused many of their customers to shift their product allegiances elsewhere. Based on this, the financial managers of this case neglected to take into account the ethical repercussions of their actions and, as such, did not adequately fulfill their obligation to their shareholders.

Examining the Ethics of Product Dumping

Just because dumping particular goods is not in violation of U.S. law does not mean that it is not immoral or unethical. For example, if a company had a stock of baby formula that was deemed as having the potential to cause brain defects in the minds of infants, is it ethical or even moral to knowingly export the milk to a third world country? The result of such actions would lead to an increase in children born with brain defects. Dumping the products would not be illegal, but the resulting number of babies born with brain defects that could have otherwise been avoided is horrifying (Xiang & Lai, 2012). Contributing to such actions is entirely immoral or unethical despite any arguments regarding giving people access to products.

What happens if they know the dangers?

Even if a country knows the risks of certain products, the fact remains that the U.S. government should take an ethical stance in preventing these tainted goods from reaching them. Yes, they are willing to accept them; however, for many of these countries, they just do not know the potential long-term consequences of these actions. The reason the FDA (Food and Drug Administration) exists in the U.S. is to prevent the possible long-term harm that could come about through the distribution of tainted food products. Third world countries sometimes do not have access to the same studies, equipment, or personnel to warn them of these dangers and, as a result, they willingly accept such items. Just because they know the risks does not mean they realize the full extent of what can come about (Wang, 2004).

The Dumpsters

Companies dump products for either maintaining their profit margins or reducing the losses they suffered from bad production decisions. Companies are not stupid; they are composed of numerous experts in their respective fields and, as such, while they know what they do is legally acceptable, they also know it is morally and ethically irreprehensible.

Discussion and Recommendation

The U.S. government cannot keep on protecting companies from the problems they developed by dumping them on other countries. New laws need to be put in place that specifically protects other nations from product dumping practices when it comes to goods that have been proven to be harmful.

Conclusion

Based on everything that has been presented so far, this paper can conclude that the product dumping of hazardous or even dangerous products should be outright banned due to the negative consequences that it can bring about. By doing such an act, a government or company contributes towards the long term suffering of potentially thousands of people that use these tainted products and develop the health risks associated with them.

Reference List

Kao, K., & Peng, C. (2016). Anti-dumping protection, price undertaking, and product innovation. International Review Of Economics & Finance, 41(1), 53-64.

McGee, R. (2008). Ethical Aspects of Using Government to Subvert Competition: Antidumping Laws as a Case Study of Rent Seeking Activity. Journal Of Business Ethics, 83(4), 759.

Moraga-González, J. L., & Viaene, J. (2005). Dumping in a Global World: Why Product Quality Matters. World Economy, 28(5), 669-682.

Wang, J. (2004). Anti-dumping Extended. Beijing Review, 47(46), 45.

Xiang, H., & Lai, M. (2012). Determining industry injury in China due to dumping: Theoretical and empirical research based on COMPAS model. Xitong Gongcheng Lilun Yu Shijian (Systems Engineering Theory & Practice), 32(9), 1871-1881.