ABSTRACT
The current debt problems have their origins in the 1970s. After the 1973 oil price hike, in particular, developing countries started to borrow money on a large scale from banks in industrialized nations. The literature describes extensively how both demand and supply factors played a role in this situation. The oil-rich nations deposited their sudden wealth with western banks, causing surplus liquidity among them. The rich countries were then in recession, so that the banks had few possibilities of investing their petrodollars at home. Developing countries, on the other hand, faced considerable balance-of-payments deficits due to the higher oil prices and exerted a powerful demand for credit. Moreover, the predominant development paradigm at the time was that poor countries should invest in industry, particularly import substitution industrialization, and in infrastructure and that governments must play a leading role in that respect. Consequently, money was borrowed chiefly by states (and state enterprises).
